the auditor-general's auditing standards 2014

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B.28(AS)

The Auditor-General’s

Auditing Standards 2014

Presented to the House of Representatives

under section 23(1) of the Public Audit Act 2001

March 2014 ISBN 978-0-478-41063-1 (print)

ISBN 978-0-478-41064-8 (online)

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Foreword

Section 23(1) of the Public Audit Act 2001 (the Act) requires me as Auditor-General to publish

(by way of a report to the House of Representatives) the auditing standards that I apply (or

intend to apply) to the conduct of audits and inquiries and the provision of other audit services

under Part 3 of the Act. Section 23(2) of the Act requires me to publish those standards at

least once every three years.

I have prefaced the Auditor-General’s Auditing Standards with a discussion of:

- the position of the Auditor-General, and the role and functions of that office; and

- the special nature of public sector auditing.

Lyn Provost

Controller and Auditor-General

12 March 2014

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Contents

Page

1 - The Auditor-General 3 - 4

2 - Public sector auditing 3 - 7

3 - The Auditor-General’s Auditing Standards 3 - 13

Appendix 1 - Professional and Ethical Standards of the XRB and the additional Auditor-

General’s Auditing Standards and Statements 3 - 15

Appendix 2 - Relationship between the applicable XRB standards, and

the Auditor-General’s Auditing Standards and Statements, and the

provisions of the Public Audit Act 2001 3 - 16

Appendix 3 - The Auditor-General’s Auditing Standards and Statements 3 - 20

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1 - The Auditor-General

Why is there an Auditor-General?

In New Zealand’s system of government, Parliament authorises all government spending and

is the source of the statutory powers that public entities have.

Public sector organisations are therefore accountable to Parliament for their use of the public

resources and powers that Parliament gives them. As part of this accountability, Parliament

seeks independent assurance from the Auditor-General that public sector organisations are

operating and accounting for their performance in the way Parliament intended.

The need for independent assurance also covers local government. Local authorities are

accountable to the public for how they use the resources they fund through rates and other

sources.

It is not the role of the Auditor-General to question the policies of the Government or local

authorities.

The role and independence of the Auditor-General

The Auditor-General’s role is to assist Parliament to scrutinise the effectiveness, efficiency,

and accountability of the public entities that are accountable to it.

To be effective and credible in this role, the Auditor-General must be independent of

executive government. To ensure independence:

- the Auditor-General is appointed by the Governor-General on the recommendation of

the House of Representatives;

- the Auditor-General reports directly to the House of Representatives (and has the

power to report to anyone else);

- the Auditor-General’s salary is payable under a permanent authority from Parliament

and does not require the approval of the Government; and

- the Auditor-General makes requests for funding directly to the House of

Representatives (rather than through the Executive), after which the House

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commends the sum required to the Governor-General for inclusion in an

Appropriation Bill. 1

The Auditor-General is the auditor of all public entities

Under the Public Audit Act 2001 (the Act), the Auditor-General is the auditor of all “public

entities” – which are defined as including the Crown, government departments, Crown entities

(such as the Civil Aviation Authority and the New Zealand Lotteries Commission), local

authorities, and statutory boards and other public bodies (such as the Queen Elizabeth the

Second National Trust).

The outcomes sought by the Auditor-General

In carrying out audit and assurance work, the Auditor-General seeks the following outcomes:

- that the audit and assurance work carried out on behalf of the Auditor-General

improves the performance of, and the public’s trust in, the public sector; and

- that the actions taken by public entities in response to the Auditor-General’s

recommendations for improvement enable an assessment to be made about the

effectiveness of the Auditor-General’s work.

What resources does the Auditor-General employ?

Parliament has made the Auditor-General the auditor of all the public entities identified by the

Act. But, clearly, the Auditor-General needs help to:

- plan, conduct, and report the results of about 4000 annual financial report audits

(including audits of about 3000 schools and other small entities); and

- carry out other auditing functions under the Act.

The Auditor-General employs staff and engages private sector accounting firms for these

purposes.

1 Section 26E, Public Finance Act 1989.

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The people who actually carry out audits on the Auditor-General’s behalf are appointed to do

so under the Act. These people are called “Appointed Auditors”.

The Auditor-General’s employees are organised into two business units supported by a

shared team of corporate services staff:

- The Office of the Auditor-General – which is responsible for planning the Auditor-

General’s work; setting auditing standards; allocating audits to Appointed Auditors;

overseeing auditors’ performance; carrying out performance audits, special studies,

and inquiries; and Parliamentary reporting and advice.

- Audit New Zealand – which is responsible for carrying out annual audits on the

Auditor-General’s behalf, and providing other auditing services to public entities.

The organisational arrangements of the Controller and Auditor-General are depicted in the

diagram below.

Office of the Auditor-General

Audit New Zealand Private sector accounting firms

Controller and Auditor-General

Corporate Services

Together, Audit New Zealand and private sector accounting firms are referred to as “Audit

Service Providers”.

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2 - Public sector auditing

Introduction

In seeking to achieve the outcomes on page 3 - 5, the Auditor-General carries out work that is

designed to give assurance that:

- public entities are fairly reflecting the results of their activities in their annual reports;

- public entities are carrying out their activities effectively and efficiently;

- public entities are complying with their statutory obligations;

- waste is not occurring, or is not likely to occur in the future, as a consequence of any

act or omission of a public entity;

- there is no indication of, or no appearance of, a lack of probity as a result of any act

or omission by a public entity or by one or more of its members, office holders, and

employees; and

- there is no indication of, or no appearance of, a lack of financial prudence as a result

of any act or omission by a public entity or by one or more of its members, office

holders, and employees.

The above matters are consistent with sections 15, 16, and 19 of the Public Audit Act 2001

(the Act). The “routine” audit processes that give effect to these matters are supplemented

by:

- other auditing services, which the Auditor-General may, with the agreement of a

public entity, perform for that entity any services of a kind that it is reasonable and

appropriate for an auditor to perform (under section 17 of the Act); and

- inquiries, which the Auditor-General may carry out into any matter concerning a

public entity’s use of its resources (under section 18 of the Act).

The appropriate identification, scoping, investigation, and reporting of audits (under sections

15, 16, and 19 of the Act), other auditing services (under section 17 of the Act), and inquiries

(under section 18 of the Act) is underpinned by the Auditor-General’s Auditing Standards and

is facilitated by various processes carried out within the Office of the Auditor-General and by

Audit Service Providers on behalf of the Auditor-General.

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The main types of public sector audit

The Act identifies two main types of audit:

- the financial report audit (sections 15 and 19); and

- the performance audit (section 16).

A financial report audit is an audit of the financial statements, accounts, and other information

(such as non-financial performance information) that a public entity is required to have

audited.

A performance audit is performed at the discretion of the Auditor-General. It can be performed

in respect of one or more public entities, and can examine matters of:

- effectiveness and efficiency;

- compliance with statutory obligations;

- waste;

- probity; and

- financial prudence.

For practical purposes, when we carry out an audit of a public entity’s financial statements,

and any other information (such as non-financial performance information) that is required to

be audited (the financial report audit), we also assess the entity’s compliance with statutory

obligations. In addition, we maintain an awareness of other performance audit matters. We

have termed the combination of the financial report audit, the assessment of the entity’s

compliance with statutory obligations, and maintaining an awareness of performance audit

matters as the “annual audit”.

An annual audit, therefore, aims to report whether a public entity’s financial statements, and

any other information that is required to be audited:

- complies with a recognised framework, usually Generally Accepted Accounting

Practice; and

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- fairly reflects the entity’s performance and position.

An annual audit also provides the means by which performance audit matters are identified.

The performance audit matters may be reported to other parties, or publicly, at the discretion

of the Auditor-General.

Some public entities are required to report on both financial and non-financial performance.

The combination of these two types of performance is necessary to convey a coherent and

consistent picture of the public entity’s overall performance.

Other types of public sector audit

From time to time, the Auditor-General may carry out other types of audit (through legislation

or at the Auditor-General’s discretion). An example of another type of public sector audit is the

audits of Long-Term Plans under the Local Government Act 2002.

Fundamental aspects of public sector audits

Key principles

We apply four key principles to our work selection and processes:

- independence;

- balance in selecting performance audits, inquiries, and other discretionary work;

- applying ethical and professional standards; and

- integrity of process.

Independence

Section 9 of the Act says that the Auditor-General – and, implicitly, all those who work for the

Auditor-General – must act independently in the performance of all the Auditor-General’s

functions, duties, and powers.

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Independence in this context includes the professional independence of an auditor, but also

means:

- being free from direction by the Government, any entities we audit, or Parliament;

- having our own powers of access to information; and

- being free to report on any matter that the Auditor-General considers it appropriate to

report on.

In recognition of the fundamental importance of independence, the Auditor-General has

developed an additional statement (over and above the independence requirements that

apply to all assurance practitioners who are required to apply the XRB professional, ethical,

auditing, and assurance standards) that regulates the independence of auditors who conduct

audits, inquiries, and other auditing services on the Auditor-General’s behalf.

Balance in selecting performance audits, inquiries, and other work

Our performance audits, inquiries and other work are funded mostly out of money

appropriated by Parliament.

Because we have limited resources, we try to keep a suitable balance between our planned

programme of work and our need to be responsive to demand for unplanned audits and

inquiries.

We follow a transparent process when selecting unplanned work. The steps in the process

include deciding whether:

- the subject matter2 falls within our mandate;

- the concerns about the matter are serious, reasonably recent, and have substance;

- no other appropriate avenue of investigation is available;

- there are procedures that we can perform to achieve a useful result;

- we have the resources and technical skills to carry out the work well; and

2 This may include matters of financial impropriety, problems with a public entity’s overall governance or

management, or other systemic or significant concerns that may be important for the public entity, the sector it operates in, or the general public.

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- the work can be fitted into our other priorities.

Applying ethical and professional standards

In all our work, we endeavour to:

- act with proper professional care, and comply with all relevant ethical and

professional standards; and

- comply with the performance measures relating to quality and timeliness that we

publish at the beginning of each financial year in our Annual Plan.3

Integrity of process

Integrity of process is an essential part of public sector auditing work. To achieve integrity of

process, we:

- ensure that all our findings, conclusions, and recommendations are based on

established and accurately understood facts, the relevant law, and applicable

standards;

- act openly and transparently – subject to the need to respect personal privacy and

observe any other obligations of confidentiality; and

- ensure procedural integrity by observing the principles of natural justice – including

giving anyone affected by our reports an opportunity to comment on a draft version.

Ensuring quality

We ensure the quality of annual audits by:

- choosing competent people to be Appointed Auditors (generally, directors of Audit

New Zealand or partners of private sector accounting firms);

- requiring the highest professional standards to be applied to audits; and

- applying an extensive quality control system, including:

3 This plan is prepared and presented to the House of Representatives as required by section 36 of the Public

Audit Act 2001.

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- requiring substantial and/or high risk audits to be subject to peer review by a

director or partner other than the Appointed Auditor;

- formally reviewing each Audit Service Provider’s system of quality control at

least once every three years; and

- formally reviewing each Appointed Auditor’s performance at least once every

three years.

For performance audits, inquiries, and other types of audit activity, we use quality control

procedures to ensure that standards have been complied with.

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3 - The Auditor-General’s Auditing Standards

Basis of the Standards

The Auditor-General’s Auditing Standards (the Standards) are based on the standards issued

by the External Reporting Board (the XRB) that apply to all assurance practitioners who carry

out statutory audits in New Zealand.4

The Standards are aligned, as illustrated in Appendix 1, to the:

- professional and ethical standards issued by the XRB; and

- auditing and assurance standards issued by the XRB.

Meeting public sector needs

However, the professional and ethical standards and the auditing and assurance standards

do not always take full account of the particular scope and nature of public sector audits (for

example, there is no standard on the audit of service performance reports). Therefore, we

create our own standards, which take two forms:

- Auditor-General’s Statements – that add to professional, ethical, auditing, and

assurance standards issued by the XRB on particular topics; and

- Auditor-General’s Standards – that specify standards to be observed on topics for

which there is no equivalent XRB standards.

We create the Standards in consultation with Appointed Auditors and, where appropriate,

other interested parties.

4 An outline of the scope of the annual audit is on page 3 - 8.

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How the Standards are applied

We use the Standards when carrying out all annual audits and work other than the annual

audit, under the Public Audit Act 2001 (the Act).

We require all staff and Appointed Auditors to comply with the relevant professional, ethical,

auditing, and assurance standards issued by the XRB, and our own statements and specific

standards – which collectively form the Standards. Appendix 2 shows the relationship

between the various standards and the provisions of the Act.

Appendix 3 also gives a list of the individual standards and statements that we have created –

all of which are available on our website www.oag.govt.nz.

The applicability of the Standards varies depending on the type of work being carried out, as

defined in the Act. The table in Appendix 2 shows how the Standards apply to each of the

Auditor-General’s four statutory functions as the auditor of all public entities.

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Appendix 1 - Professional and Ethical Standards of the XRB and the additional Auditor-General’s

Auditing Standards and Statements5

XRB Au1: Application of Auditing and Assurance Standards

Professional and Ethical Standards

PES 1 (Revised): Code of Ethics for Assurance PractitionersPES 3: Quality Control

Auditor‐General's statements

AG PES 1 (Revised): Code of Ethics for Assurance PractitionersAG PES 3: Quality Control

Auditor‐General's statements on ISAs (NZ) International Standards on Auditing (New Zealand) for annual audits

Auditor‐General's Standards for annual audits

AG‐1: Reporting to the OAGAG‐2: The Appropriation Audit and the Controller FunctionAG‐3: The Auditor's Approach to Effectiveness and Efficiency, Waste, Probity, and Financial PrudenceAG‐4: The Audit of Service Performance ReportsAG‐4 (Revised): The Audit of Service Performance Reports

ISA (NZ) International Standards on Auditing (New Zealand) (ISA (NZ))

RS‐1: Statement of Review Engagement Standards

Other Audit or Review Engagements

An engagement that is not an audit or a review of historical financial information that meets the definition of an

assurance engagement in ISAE (NZ) 3000

ISAEs (NZ) International Standards on Assurance Engagements (New Zealand)

SAEs Standards on Assurance Engagements

Auditor‐General's Standards for work other than the annual audit

AG‐5: Performance Audits, Other Auditing Services and Other Work carried out by or on behalf of the Auditor‐GeneralAG‐6: Inquiries carried out by or on behalf of the Auditor‐General

Other Assurance Engagements

An engagement that is not an audit or a review of historical financial information that does not meet the definition of an

assurance engagement in ISAE (NZ) 3000

Audits and Reviews of Historical Financial Information

AGS Audit Guidance Statements

5 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”. However, for the purposes of the Auditor-General’s auditing standards and

statements, all references to “historical financial information” should be read as the audit of “historical financial and historical non-financial information”.

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Appendix 2 - Relationship between the applicable XRB

standards, and the Auditor-General’s Auditing Standards and

Statements, and the provisions of the Public Audit Act 2001

Note: Y = The standard applies. N = The standard does not apply.

Applicable

XRB

standards6

Applicable

Auditor-

General’s

Statements or

Standards7

Name of Statement or

Standard

Financial report

audit

(sections 15

and 19 of the

Act)

Performance

audit

(section 16 of

the Act)

Other auditing

services

(section 17 of

the Act)

Inquiries by

the Auditor-

General

(section 18 of

the Act)

NZAuASB

Glossary of

Terms

(EG Au4)

AG Glossary of

Terms

Glossary of terms Y Y Y Y

PES 1

(Revised)8

AG PES 1

(Revised)

Code of Ethics for

Assurance Practitioners

Y Y Y Y

PES 39

AG PES 3 Quality control Y Y Y Y

- AG-5 Performance audits, other

auditing services, and

other work carried out by

or on behalf of the Auditor-

General

N Y Y N

- AG-6 Inquiries carried out by or

on behalf of the Auditor-

General

N N N Y

ISA (NZ) 200 AG ISA (NZ) 200 Overall objectives of the

independent auditor and

the conduct of an audit in

accordance with

International Standards on

Auditing (New Zealand)

Y N N N

ISA (NZ) 210 AG ISA (NZ) 210 The terms of audit

engagements

Y N N N

ISA (NZ) 220 - Quality control for an audit

of financial statements

Y N N N

ISA (NZ) 230 - Audit documentation Y N N N

ISA (NZ) 240 AG ISA (NZ) 240 The auditor’s Y N N N

6 The XRB standards can be accessed on www.xrb.govt.nz. 7 The Auditor-General’s auditing standards and statements can be access on www.oag.govt.nz. 8 It is expected all individuals carrying out audits on behalf of the Auditor-General will comply with PES 1

(Revised) . 9 The XRB standard, PES 3, applies to the management of accounting firms and to individual professional

assurance engagements carried out in New Zealand. It is expected that PES 3 will be complied with by individuals, and firms to which they belong, when carrying out audits and other work on behalf of the Auditor-General.

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Applicable

XRB

standards6

Applicable

Auditor-

General’s

Statements or

Standards7


Standard

Financial report

audit

(sections 15

and 19 of the

Act)

Performance

audit

(section 16 of

the Act)

Other auditing

services

(section 17 of

the Act)

Inquiries by

the Auditor-

General

(section 18 of

the Act)

responsibilities relating to

fraud in an annual audit

ISA (NZ) 250 AG ISA (NZ) 250 Consideration of laws and

regulations

Y N N N

ISA (NZ) 260 AG ISA (NZ) 260 Communication with those

charged with governance

Y N N N

ISA (NZ) 265 - Communicating

deficiencies in internal

control

Y N N N

ISA (NZ) 300 AG ISA (NZ) 300 Planning the annual audit Y N N N

ISA (NZ) 315 AG ISA (NZ) 315 Identifying and assessing

the risks of material

misstatement through

understanding the entity

and its environment

Y N N N

ISA (NZ) 320 AG ISA (NZ) 320 Materiality in planning and

performing an annual audit

Y N N N

ISA (NZ) 330 AG ISA (NZ) 330 The auditor’s responses to

assessed risks

Y N N N

ISA (NZ) 402 - Audit considerations

relating to an entity using a

service organisation

Y N N N

ISA (NZ) 450 AG ISA (NZ) 450 Evaluation of

misstatements identified

during the annual audit

Y N N N

ISA (NZ) 500 - Audit evidence Y N N N

ISA (NZ) 501 - Audit evidence - specific

considerations for selected

items

Y N N N

ISA (NZ) 505 - External confirmations Y N N N

ISA (NZ) 510 - Initial audit engagements -

opening balances

Y N N N

ISA (NZ) 520 - Analytical procedures Y N N N

ISA (NZ) 530 - Audit sampling Y N N N

ISA (NZ) 540 - Auditing accounting

estimates

Y N N N

ISA (NZ) 550 - Related parties Y N N N

ISA (NZ) 560 - Subsequent event Y N N N

ISA (NZ) 570 AG ISA (NZ) 570 Going concern Y N N N

ISA (NZ) 580 AG ISA (NZ) 580 Written representations Y N N N

ISA (NZ) 600 AG ISA (NZ) 600 Special considerations -

audits of group financial

and non-financial

Y N N N

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Applicable

XRB

standards6

Applicable

Auditor-

General’s

Statements or

Standards7


Standard

Financial report

audit

(sections 15

and 19 of the

Act)

Performance

audit

(section 16 of

the Act)

Other auditing

services

(section 17 of

the Act)

Inquiries by

the Auditor-

General

(section 18 of

the Act)

information (including the

work of component

auditors)

ISA (NZ) 610 - Using the work of internal

auditors

Y N N N

ISA (NZ) 620 - Using the work of an

expert

Y N N N

ISA (NZ) 700 AG ISA (NZ) 700 Forming an opinion and

reporting on financial and

non-financial information

Y N N N

ISA (NZ) 705 AG ISA (NZ) 705 Modifications to the opinion

in the independent

auditor’s report

Y N N N

ISA (NZ) 706 AG ISA (NZ) 706 Emphasis of matter and

other matter paragraphs in

the independent auditor’s

report

Y N N N

ISA (NZ) 710 - Comparative information Y N N N

ISA (NZ) 720 - The auditor's responsibility

in relation to other

information

Y N N N

ISA (NZ) 800 - Audits of financial

statements prepared in

accordance with special

purpose frameworks

Y N N N

ISA (NZ) 805 - Audits of single financial

statements and specific

elements, accounts or

items of a financial

statement

Y N N N

ISA (NZ) 810 AG ISA (NZ) 810 Engagements to report on

summary financial and


Y N N N

- AG-1 Reporting to the OAG Y N N N

- AG-2 The appropriation audit

and the controller function

Y N N N

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Applicable

XRB

standards5

Applicable

Auditor-

General’s

Statements or

Standards6


Standard

Financial report

audit

(sections 15

and 19 of the

Act)

Performance

audit

(section 16 of

the Act)

Other auditing

services

(section 17 of

the Act)

Inquiries by

the Auditor-

General

(section 18 of

the Act)

- AG-3 The auditor’s approach to

issues of effectiveness and

efficiency, waste and a

lack of probity or financial

prudence

Y N N N

- AG-4 The audit of service

performance reports10

Y N N N

- AG-4 (Revised) The audit of service

performance reports

Y N N N

10 AG-4 is being progressively phased out as AG-4 (revised) is applied to more sectors.

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Appendix 3 - The Auditor-General’s Auditing Standards and

Statements Note: The page numbers follow the numbering format used in the material provided to

Appointed Auditors.

Reference Title Page

Glossary of terms * ^ Glossary of terms 3 - 100

AG PES 1 * ^ Code of Ethics for Assurance Practitioners 3 - 200

AG PES 3 * ^ Quality control 3 - 400

AG-5 * Performance audits, other auditing services and other work

carried out by or on behalf of the Auditor-General

3 - 1000

AG-6 * Inquiries carried out by or on behalf of the Auditor-General 3 - 1100

AG ISA (NZ) 200 ^ Overall objectives of the independent auditor and the

conduct of an audit in accordance with International

Standards on Auditing (New Zealand)

3 - 2000

AG ISA (NZ) 210 ^ The terms of audit engagements 3 - 2100

AG ISA (NZ) 240 ^ The auditor’s responsibilities relating to fraud in an annual

audit

3 - 2400

AG ISA (NZ) 250 ^ Consideration of laws and regulations 3 - 2500

AG ISA (NZ) 260 ^ Communication with those charged with governance 3 - 2600

AG ISA (NZ) 300 ^ Planning the annual audit 3 - 2800

AG ISA (NZ) 315 ^ Identifying and assessing the risks of material misstatement

through understanding the entity and its environment

3 - 2900

AG ISA (NZ) 320 ^ Materiality in planning and performing an annual audit 3 - 3000

AG ISA (NZ) 330 ^ The auditor’s responses to assessed risks 3 - 3100

AG ISA (NZ) 450 ^ Evaluation of misstatements identified during the annual

audit

3 - 3300

AG ISA (NZ) 570 ^ Going concern 3 - 4300

AG ISA (NZ) 580 ^ Written representations 3 - 4400

AG ISA (NZ) 600 Special considerations – Audits of group financial and non-

financial information (including the work of component

auditors)

3 - 4500

AG ISA (NZ) 700 ^ Forming an opinion and reporting on financial and non-

financial information

3 - 4800

AG ISA (NZ) 705 ^ Modifications to the opinion in the independent auditor’s

report

3 - 4900

AG ISA (NZ) 706 ^ Emphasis of matter paragraphs and other matter

paragraphs in the independent auditor’s report

3 - 5000

AG ISA (NZ) 810 ^ Engagements to report on summary financial and non-

financial information

3 - 5400

AG-1 ^ Reporting to the OAG 3 - 8000

AG-2 ^ The appropriation audit and the controller function 3 - 8100

AG-3 ^ The auditor’s approach to issues of effectiveness and

efficiency, waste, and a lack of probity or financial prudence

3 - 8200

AG-4 ^ The audit of service performance reports 3 - 8250

AG-4 (revised) ^ The audit of service performance reports 3 - 8300

* The Auditor-General’s standard or statement applies to engagements other than the annual audit. ^ The Auditor-General’s standard or statement applies to the annual audit.

Glossary of terms

Issued 03/14 Office of the Auditor-General 3 - 100

THE AUDITOR-GENERAL’S

GLOSSARY OF TERMS

1. The full set of defined terms used in the Auditor-General’s Auditing Standards and

statements include:

(a) the Glossary of Terms1 issued by the New Zealand Auditing and Assurance

Standards Board (the NZAuASB glossary) of the External Reporting Board (the

XRB glossary). The NZAuASB glossary may include terms that have a specific

meaning within the New Zealand public sector even though that definition may

differ from the definition in the NZAuASB glossary. Where there is a conflict in the

definition of a term between the NZAuASB glossary and the definition of the term

in the New Zealand public sector, then the New Zealand public sector definition

shall prevail;

(b) this Glossary of Terms; and

(c) the terms defined in individual auditing standards and statements published by the

Auditor-General.

The following terms have the meanings given below:

Acceptable level means a level at which a reasonable and informed

third party, informed only by publicly available

information, would conclude that compliance with the

fundamental principles, specified in the External

Reporting Board’s Professional and Ethical standards,

is not compromised.

Act means the Public Audit Act 2001.

Annual audit means the audit of the financial and non-financial

information of public entities or the audit of the

financial and non-financial information of entities that

are not public entities (under section 19 of the Public

Audit Act 2001) in accordance with the Auditor-

General’s Auditing Standards.

Audit brief means the instructions and guidance published by the

Auditor-General, which Appointed Auditors are

1 EG Au4.

Glossary of terms


required to incorporate into their overall audit strategy

and audit plan when carrying out an annual audit on

behalf of the Auditor-General.

Appointed Auditor or AA means the person or persons carrying out the audit,

usually the person appointed by the Auditor-General

who has the responsibility to carry out the annual

audit and/or other members of the audit team. Where

applicable the Appointed Auditor is assisted by the

Audit Service Provider. Where an Auditor-General’s

Statement or Standard expressly intends that a

requirement be fulfilled by the Appointed Auditor

personally, the requirement will indicate that the

Appointed Auditor shall personally satisfy the

requirement.

Audit Service Provider or ASP means a structure that is aimed at cooperation and:

- that is clearly aimed at profit or cost sharing, or

- that shares any of the following: common

ownership, control or management; common

quality control policies and procedures;

common business strategy; the use of a

common brand-name; or a significant part of

professional resources.

Audit Service Provider or ASP refers to all partners,

and persons who have an employment contract or a

contract for services with the Audit Service Provider or

ASP.

Auditor-General means the Controller and Auditor-General, appointed

under Part 2 of the Public Audit Act 2001.

Auditor-General's Auditing

Standards

means the auditing standards published by the

Auditor-General under section 23 of the Public Audit

Act 2001.

Auditor-General's auditing

statements

means the auditing statements published by the

Auditor-General on particular topics, that provide

guidance specific to the public sector, which are

based on the equivalent:

- professional and ethical standards issued by

the External Reporting Board; or

Glossary of terms


- auditing and assurance standards issued by

the External Reporting Board.

Auditor-General's specific

auditing standards

means the auditing standards published by the

Auditor-General on topics for which there is no

equivalent professional and ethical standard or where

there is no equivalent auditing and assurance

standard. These standards cover aspects specific to

the public sector.

Deputy Auditor-General means the Deputy Controller and Auditor-General,

appointed under Part 2 of the Public Audit Act 2001.

Effectiveness means the extent to which objectives are achieved,

and relates to the actual effect of an activity against

the intended effect.

Efficiency means that minimum resources are used to achieve a

given quantity and quality of output, or a maximum

output is gained with a given quantity and quality of

resources and relates to resources being used to

produce outputs to achieve objectives.

External Reporting Board or

XRB2

means the statutory entity constituted under the

Financial Reporting Act 19933 to prepare and issue in

New Zealand:

- accounting standards;

- professional and ethical standards; and

- auditing and assurance standards.

Financial and non-financial

information

means the financial statements and, where relevant,

the service performance reports that public entities

prepare in keeping with legislative requirements and

generally accepted accounting practice.

Financial prudence

means not committing to a course of action that may

be beyond an entity’s means, that may reflect reckless

behaviour, or that may reflect an act or omission in

bad faith in disregard to the entity’s functions and will

be influenced by Parliament’s and the public’s

expectations. An act or omission would not be

2 The External Reporting Board uses the acronym XRB. 3 The Financial Reporting Act 2013, which will come into force on 1 April 2014, will repeal and completely replace the

Financial Reporting Act 1993.

Glossary of terms


considered to be financially imprudent, even where

the outcome for the public entity was adverse, if the

public entity had carried out enough and appropriate

research and analysis to support its decision to act or

not to act, and the event could not have been

reasonably foreseen.

Immediate reporting means those situations where an issue is of such

significance or risk that the Appointed Auditor shall

advise the OAG about it as soon as it comes to their

attention.

Independence means:

- independence of mind – the state of mind that

permits the expression of a conclusion without

being affected by influences that compromise

professional judgement. this allows an

individual to act with integrity, and exercise

objectivity and professional scepticism; and

- independence in appearance – the avoidance

of any facts and circumstances that might

cause a reasonable and informed third party,

informed only by publicly available information,

to conclude that a firm’s, or a member of the

audit or assurance team’s, integrity, objectivity

or professional scepticism has been

compromised.

Inquiry means an investigation, either on request or on the

Auditor-General's own initiative, into any matter

concerning a public entity's use of its resources which

is carried out in accordance with section 18 of the

Public Audit Act 2001.

Management letter means the written communication with management

or those charged with governance regarding the

significant findings from the annual audit.

Non-standard audit report means an audit report containing a modified opinion,

an emphasis of matter or an other matter paragraph.

Glossary of terms


Office of the Auditor-General or

OAG

means the Office of the Controller and Auditor-

General, and includes the Auditor-General, the

Deputy Auditor-General, and the staff employed by

the Auditor-General to plan and report on the results

of annual audits and to carry out other activities

specified in the Public Audit Act 2001.

Other auditing services means any services of a kind that it is reasonable and

appropriate for an auditor to perform, which are

carried out in accordance with section 17 of the Public

Audit Act 2001.

Performance audit means an audit of one or more public entities or parts

of those public entities which is carried out in

accordance with section 16 of the Public Audit Act

2001 and that is intended to examine:

- the extent to which a public entity is carrying

out its activities effectively and efficiently;

- a public entity's compliance with its statutory

obligations;

- any act or omission of a public entity, in order

to determine whether waste has resulted or

may have resulted or may result; and/or

- any act or omission showing or appearing to

show a lack of probity or financial prudence by

a public entity or one or more of its members,

office holders, and employees.

Probity

means Parliament’s and the public’s expectations of

an appropriate standard of behaviour.

Professional and ethical

standards

means the standards that set out the fundamental

principles and provides guidance on professional

conduct issued by the External Reporting Board that

apply to all assurance practitioners that carry out

assurance engagements in New Zealand.

Public entity means an entity (or a group of entities for financial

reporting purposes) that meets the criteria in section 5

of the Public Audit Act 2001 and requires the Auditor-

General to be the auditor.

Service performance report means the report intended to communicate primarily

Glossary of terms


non-financial information that records the performance

of an entity against specified measures and targets.

This information is usually shown in statements of

service performance (or equivalent reports), and is

compared with information contained in forecast non-

financial performance reports (such as Information

Supporting the Estimates of Appropriation, statements

of intent, statements of corporate intent, long-term

plans, and annual plans). Service performance is

concerned not only with how well services are

delivered (output delivery performance) but also with

how effective the services are at achieving the entity’s

objectives (achievement of impacts and outcomes).

Therefore, service performance reports need to

incorporate or provide some link to impact and

outcome information.

Statutory obligations

means requirements that Parliament has established

through legislation or regulation.

Waste

means spending or using public money or other public

resources in ways that are, or could be, wasteful.

AG PES 1 (Revised) Code of ethics for assurance practitioners


AG PES 1 (REVISED)

THE AUDITOR-GENERAL’S STATEMENT ON

PROFESSIONAL AND ETHICAL STANDARD 1 (REVISED)

CODE OF ETHICS FOR ASSURANCE PRACTITIONERS

Contents

Page

Scope of this Statement 3 - 202

Background 3 - 202

How to Use this Statement 3 - 203

Application 3 - 203

Definitions 3 - 203

Specific Requirements and Guidance 3 - 204

Professional competence and due care 3 - 204

Confidentiality 3 - 206

The independence of the Auditor-General – introductory comments 3 - 207

Overall requirements - independence 3 - 208

Definition of independence 3 - 208

Threats to independence and safeguards 3 - 210

System of quality control to ensure compliance with independence

requirements 3 - 211

Requirement to consult the OAG where there is uncertainty about an

independence matter 3 - 211

Where public entity management attempts to limit the scope of the

annual audit, performance audit, inquiry, and/or engagement 3 - 212

Carrying out other work engagements 3 - 212

Appendix 1 - Decision tree for entering into engagements with public entities (other

than the annual audit, performance audits and inquiries) 3 - 224

Appendix 2 - Guidelines on the application of the approach in PES 1 (Revised) to

public entities 3 - 225



Appendix 3 - Applicability of PES 1 (Revised) to annual audits and/or other work

carried out on behalf of the Auditor-General 3 - 243



Scope of this Statement

1. This Auditor-General’s Auditing Statement:

(a) establishes the Auditor-General’s requirements in relation to Professional and

Ethical Standard 1 (Revised): Code of Ethics for Assurance Practitioners

(PES 1 (Revised)); and

(b) provides additional guidance to reflect the public sector perspective.

Background

2. The Auditor-General has adopted aspects of PES 1 (Revised) and those aspects

shall be applied to all annual audits and/or other work carried out on behalf of the

Auditor-General.

3. The aspects of PES 1 (Revised) that do not apply to the Auditor-General are:

(a) Paragraphs 290.500 to 290.514 concerning reports that include a restriction

on use and distribution; and

(b) Section 291.

4. The following factors create the need to expand PES 1 (Revised) to specify additional

requirements and guidance for all annual audits and/or other work carried out on

behalf of the Auditor-General:

(a) the statutory independence of the Auditor-General;

(b) the wider public reporting role of the Auditor-General;

(c) the mandate of the Auditor-General, particularly as it relates to effectiveness

and efficiency, compliance with statutory obligations, waste, and a lack of

probity and/or financial prudence;

(d) the greater accountability responsibilities (when compared to entities in the

private sector) that arise because public entities:

(i) are ultimately accountable to the general public; and

(ii) in most instances are established for the purpose of delivering public

services; and

(e) the relationship between the Auditor-General, Audit Service Providers

(ASPs), and Appointed Auditors.

5. Compliance with PES 1 (Revised) is mandatory for all assurance providers. Of

particular relevance are the Fundamental Principles that express the basic tenets of

ethical and professional behaviour and conduct. The Fundamental Principles, which

assurance practitioners shall abide by at all times, are:



(a) Integrity;

(b) Objectivity;

(c) Professional Competence and Due Care;

(d) Confidentiality; and

(e) Professional Behaviour.

How to Use this Statement

6. This Statement is aligned directly to PES 1 (Revised). To establish the relationship

between PES 1 (Revised) and AG PES 1 (Revised), Appointed Auditors should refer

to the table in appendix 3. Appendix 3 sets out the paragraphs of PES 1 (Revised)

and specifies the Auditor-General’s additional requirements or interpretations.

Application

7. Compliance with this Statement, as well as with aspects of PES 1 (Revised), is

mandatory for the Auditor-General, the Deputy Auditor-General and their staff, and

Appointed Auditors and their staff when carrying out annual audits and/or other work

on behalf of the Auditor-General. The aspects of PES 1 (Revised) that do not apply to

the Auditor-General are:

(a) Paragraphs 290.500 to 290.514, concerning reports that include a restriction

on use and distribution; and

(b) Section 291.

8. The specific requirements, interpretations and guidance in this Statement should be

considered as additions to any professional standards that may be determined by any

professional body for which the Auditor-General, the Deputy Auditor-General and

their staff and all Appointed Auditors and their staff may be members.

9. This Statement applies from 1 April 2014.

Definitions

10. For the purpose of this Auditor-General’s auditing statement the defined terms have

the meanings attributed:

(a) in the Glossary of Terms issued by the New Zealand Auditing and Assurance

Standards Board (the NZAuASB glossary) of the External Reporting Board

(although where a term with a specific meaning in the New Zealand public

sector differs from the NZAuASB glossary, the New Zealand public sector

definition shall prevail);



(b) in the Definitions accompanying PES 1 (Revised);

(c) in the Auditor-General’s Glossary of Terms; and

(d) in the list below.

Other work means performance audits, inquiries, other auditing

services and other work1 that may be carried out by

staff of the Auditor-General or by an Audit Service

Provider on behalf of the Auditor-General.

Staff means, in addition to the definition of staff in the

NZAuASB glossary, any person who has an

employment contract or a contract for services with the

Auditor-General

Specific Requirements and Guidance

Professional competence and due care

Technical competence

11. Technical competence is one aspect of the Fundamental Principle of Professional

Competence and Due Care. The Auditor-General, the Deputy Auditor-General and

their staff, and Appointed Auditors and their staff shall demonstrate technical

competence that reflects their role when carrying out annual audits and/or other work

on behalf of the Auditor-General and be responsive to the public sector environment.

12. The factors described in paragraph 4 lead to the requirement for a specific set of

technical competencies that are required of the Auditor-General, the Deputy Auditor-

General and their staff, and Appointed Auditors and their staff. The specific technical

competencies are:

(a) a clear understanding of the statutory mandate and role of the Auditor-General;

(b) a clear understanding of the statutory obligations placed on public entities that

specify their purpose, the way in which they are to be managed, and their

accountability requirements;

(c) an understanding of general issues of management and governance in the

public sector that is sufficient to identify issues of effectiveness and efficiency,

waste, and a lack of probity and/or financial prudence when they are

encountered;

1 Other work is made up of assurance engagements (covered by paragraphs 53-60 in this statement) and

other engagements (covered by paragraphs 61-63 in this statement).



(d) a capacity to adapt audit planning to the risks that result from the differing nature

and purposes of public entities;

(e) such specialist skills as are required to form an opinion on service performance

reported by a public entity (where necessary), or the ability to identify whether

and which specialist skills are required; and

(f) the ability to report completely, but succinctly, on audit issues, audit results, and

the state of the public entity.

Behavioural competence

13. Behavioural competence is one aspect of the Fundamental Principle of Professional

Competence and Due Care . The behavioural competencies below flow from the

factors described in paragraph 4 that characterise the public sector audit

environment. They primarily relate to managing the Appointed Auditor’s relationships

with the Office of the Auditor-General (in particular with the Auditor-General) and with

the public entity.

14. Appointed Auditors shall:

(a) identify themselves with the Auditor-General, and the Auditor-General’s statutory

role and independence, in any communications with the public entity,

Parliament, or other key groups in the public sector; and

(b) understand the Auditor-General’s interest as the statutory auditor of all public

entities in being kept informed of matters of:

(i) effectiveness and efficiency;

(ii) non-compliance with statutory obligations;

(iii) waste;

(iv) a lack of probity;

(v) a lack of financial prudence; and

(vi) other sensitive matters or issues.

15. The Auditor-General, the Deputy Auditor-General and their staff, and Appointed

Auditors and their staff have wide powers under the Public Audit Act 2001 to request

information. These powers shall be exercised judiciously, especially in respect of

sensitive or confidential information.



Confidentiality

General requirements

16. All information obtained while carrying out annual audits and/or other work on behalf

of the Auditor-General is confidential and the property of the Auditor-General. No

such information shall be disclosed outside the provisions of these standards without

the written approval of the OAG.

17. The information contained in evidential working papers, associated files or

documents, and management reports is the property of the Auditor-General. The

Auditor-General, the Deputy Auditor-General and their staff, and Appointed Auditors

and their staff shall take all reasonable steps to ensure the security and protection of

this information from unauthorised release, damage, malicious tampering, or

alteration.

18. The Auditor-General, the Deputy Auditor-General and their staff, and Appointed

Auditors and their staff shall note that their activities in collecting personal information

about individuals, and the use of that information, are subject to the Privacy Act 1993.

Procedures for Appointed Auditors in relation to contact with the news media

19. Appointed Auditors may provide factual background or technical information to the

news media about annual audits and/or other work they are carrying out, or have

carried out, on the Auditor-General’s behalf. However, Appointed Auditors should not

otherwise speak on behalf of the Auditor-General to the news media, unless

specifically authorised to do so. In practice, Appointed Auditors should refer general

media queries to OAG media staff and tell the media staff when they have been in

contact with the news media as soon as it is practicable.

Procedures for Appointed Auditors in relation to public meetings

20. Appointed Auditors shall not address or otherwise report to public meetings on annual

audits and/or other work they are carrying out, or have, carried out on behalf of the

Auditor-General, except:

(a) with the direct authority of the OAG; or

(b) in the case of the auditors of entities with public annual general meetings,

such as local authorities and school boards of trustees, as specified by the

OAG.



21. It is recognised that an Appointed Auditor in attending a public meeting may be

requested to make comment. In this situation, even though the Chairperson may have

been made aware of the Appointed Auditor’s obligations to the Auditor-General, it

may be difficult for the Appointed Auditor not to respond. Accordingly, the Appointed

Auditor shall take the following measures:

(a) Before the meeting the Appointed Auditor:

(i) shall develop a list of questions that are likely to be asked, and

determine those that they can answer and those that should be

referred to management or those charged with governance;

(ii) may consult with the OAG; and

(iii) shall ensure that any questions that the Appointed Auditor is not in a

position to answer are referred to management or to those charged

with governance.

(b) During the meeting, if the Appointed Auditor cannot avoid answering a

question then they shall keep to the facts and professional opinions formed

during the annual audit.

Misuse of Information

22. The private use of information obtained during audits and/or other work carried out on

behalf of the Auditor-General is prohibited.

The independence of the Auditor-General – introductory comments

23. A cornerstone of the role of the Auditor-General is independence, which is essential

for any audit agency to function effectively. Any breach of PES 1 (Revised) or AG

PES 1 (Revised) which may compromise the actual or perceived independence of the

Auditor-General will be treated as a serious breach of the Auditor-General’s code of

conduct that applies to staff of the Auditor-General or, if applicable, the audit contract.

24. The independence of the Auditor-General is underpinned by a number of legislative

provisions:

(a) statutory appointment of the Auditor-General as an officer of Parliament,

which guarantees, in particular, independence from the executive and public

entities;

(b) the requirement in section 9 of the Public Audit Act 2001 for the Auditor-

General and the Deputy Auditor-General (and, by extension, staff of the

Auditor-General and ASPs) to act independently in the performance of the

Auditor-General’s functions, duties, and powers; and



(c) statutory freedom to report when, how and to whom the Auditor-General

thinks fit, which guarantees, in extreme conditions, freedom from any

interference in doing what is perceived by the Auditor-General to be their

duty.

25. As far as the independence of Appointed Auditors is concerned, the independence of

the Auditor-General is further protected by specific limitations placed on Appointed

Auditors and ASPs in this Statement to ensure that they meet the stricter

independence standards of the Auditor-General.

Overall requirements - independence

26. AG PES 1 (Revised) has been structured to provide further requirements and

guidance on how the conceptual framework, as outlined in PES-1 (Revised), should

be applied in the context of any work on behalf of the Auditor-General. The

requirements and guidance is provided in the following sections of AG PES 1

(Revised):

(a) threats to independence and safeguards;

(b) carrying out other work engagements; and

(c) reporting on engagements other than the annual audit.

27. Further guidance on the application of the conceptual framework to specific situations

involving public entities is provided in Appendices 1 and 2, as follows:

(a) Appendix 1 gives a decision tree summarising the factors that ASPs shall

consider in determining whether to carry out engagements (other than the

annual audit, performance audits and inquiries).

(b) Appendix 2 expands on how the guidance in PES 1 (Revised) is to be applied

to specific situations involving public entities. Appendix 2 also includes

examples of independence situations previously encountered by the OAG,

and how those situations were resolved.

Definition of independence

28. Under PES 1 (Revised), independence requires:

(a) Independence of mind – The state of mind that permits the expression of a

conclusion without being affected by influences that compromise professional

judgement, thereby allowing an individual to act with integrity and exercise

objectivity and professional scepticism.

(b) Independence in appearance – The avoidance of facts and circumstances

that are so significant that a reasonable and informed third party would be



likely to conclude, weighing all the specific facts and circumstances, that a

firm’s, or a member of the assurance team’s, integrity, objectivity, or

professional scepticism had been compromised.

29. This Statement requires the Auditor-General, the Deputy Auditor-General and their

staff and ASPs and their staff to apply a more stringent test than that set down in PES

1 (Revised) when assessing their independence. They shall assess whether there are

any facts and circumstances that might cause a reasonable third party, informed only

by publicly available information, to conclude that some aspect of independence has

been, or may be, compromised.

30. The Auditor-General, the Deputy Auditor-General and their staff, and ASPs and their

staff shall ensure that, for any work carried out on behalf of the Auditor-General, they

are both independent and are seen to be independent. The perception of

independence (independence in appearance) is a vital component of independence

that the Auditor-General, the Deputy Auditor-General and their staff, and ASPs and

their staff shall take into account when assessing their independence. Such an

assessment requires consideration of the “look” of a particular situation from the

perspective of a third party informed with publicly available information.

31. Further to the matters raised in paragraph 29 above, the Auditor-General is

concerned that the definition of independence in appearance in PES 1 (Revised) is

not appropriate to the public sector in two main respects (as detailed below). The

Auditor-General, the Deputy Auditor-General and their staff, and ASPs and their staff

are required to take account of these matters when assessing their independence in

appearance:

(a) The inclusion of the highly subjective term “so significant” does not establish

a sufficiently high or rigorous threshold to ensure that independence in

appearance is maintained. Those applying the “so significant” test are

required to discount all facts or circumstances unless they meet a level of

significance that exceeds “normal” significance. This interpretation can be

taken from the term “so significant”. The Auditor-General, the Deputy Auditor-

General and their staff, and ASPs and their staff are required to take account

of all facts and circumstances in assessing independence in appearance –

irrespective of whether the facts or circumstances meet the “so significant”

criterion.

(b) The definition of independence in appearance also requires that a reasonable

and informed third party “would be likely to conclude” that integrity, objectivity,

or professional scepticism has been compromised. The “would be likely to

conclude” test is a relatively low standard in that the facts and circumstances



must be persuasive before those applying the test would conclude that

independence in appearance had been impaired. The Auditor-General, the

Deputy Auditor-General and their staff, and ASPs and their staff are required

to take account of all facts and circumstances that might lead a reasonable

third party informed with publically available information to conclude a firm’s,

or a member of the assurance team’s, integrity, objectivity, or professional

scepticism had been compromised.

32. In making their assessment staff of the Auditor-General and ASPs are reminded of

the requirement in paragraphs 38 and 39 below to consult with the OAG when

uncertainty exists about an independence matter.

Threats to independence and safeguards

Application of the threats and safeguards approach to the Auditor-General

33. PES 1 (Revised) establishes the conceptual framework to independence. This

approach requires the auditor to identify, and maintain an ongoing awareness of,

existing and potential threats to independence. Where the threat is other than clearly

insignificant, the auditor shall apply safeguards to eliminate or reduce the threat to an

acceptable level. The conceptual framework to independence detailed in PES 1

(Revised) is applicable to the Auditor-General, subject to the reservations noted in

paragraphs 34 and 35 below.

34. The Auditor-General is the auditor of all public entities. Unlike auditors in the private

sector, the Auditor-General cannot refuse to accept or continue an annual audit to

eliminate threats to independence. This situation is recognised in PES 1 (Revised),

which states “This Code is not intended to detract from responsibilities which may be

imposed by law or regulation”.

35. In a conflict between PES 1 (Revised) and legislation relating to the statutory

appointment of the Auditor-General, the following steps shall be taken:

(a) The threat to independence will be disclosed to those responsible for

governance of the public entity and publicly disclosed in the auditor’s report.

(b) Safeguards will be introduced, which may include the selection of the ASP

and/or the Appointed Auditor, the terms and conditions of their appointment,

the assignment of audit staff, and other quality control processes to minimise

the threat to independence.



Application of the threats and safeguards approach to specific situations

36. Appendix 2 expands on how the guidance in PES 1 (Revised) shall be applied to specific

situations involving public entities. Appendix 2 also includes examples of independence

situations previously encountered by the OAG, and how those situations were resolved.

System of quality control to ensure compliance with independence

requirements

37. The OAG and ASPs shall establish policies and procedures designed to provide

reasonable assurance that the independence requirements of the Auditor-General

have been complied with. Typically, the system of quality control should include the

following aspects:

(a) All staff of the Auditor-General and the Deputy Auditor-General shall be made

aware of the Auditor-General’s policies and procedures on independence,

including the relevant aspects of this Statement.

(b) ASPs shall make Appointed Auditors and staff aware of the ASP’s policies and

procedures on independence, including the relevant aspects of this Statement;

(c) Written confirmation shall be obtained from all staff required to be independent

that they have complied with this Statement and any other policies and

procedures on independence. The written confirmation shall be obtained at least

annually.

(d) For each annual audit, performance audit, inquiry and/or engagement on behalf

of the Auditor-General, Appointed Auditors and staff, where applicable, shall

form and document a conclusion on compliance with the requirements of this

Statement and any other policies and procedures on independence;.

(e) ASPs and/or Appointed Auditors will immediately advise the Assistant Auditor-

General – Accounting and Auditing Policy at the OAG if there has been a

breach of the independence requirements of AG PES 1 (Revised), or if they

have reason to believe that a breach may arise in the future.

Requirement to consult the OAG where there is uncertainty about an

independence matter

38. Where staff of the Auditor-General or an ASP believe there is a possibility that an

existing or potential situation could result in a threat to independence that is other

than clearly insignificant, the fact shall be disclosed to the OAG. The OAG will provide

a ruling on how the threat to independence is to be resolved.



39. The nature of the public sector is such that a matter that would not normally threaten

independence in the private sector could result in an unacceptable threat to

independence in the public sector environment. Staff of the Auditor-General or ASPs

are therefore advised to consult with the OAG whenever there is any uncertainty

about whether a matter could result in a threat to independence.

Where public entity management attempts to limit the scope of the

annual audit, performance audit, inquiry, and/or engagement

40. Staff of the Auditor-General and Appointed Auditors shall ensure that the annual

audit, performance audit, inquiry, and/or engagement on behalf of the Auditor-

General are conducted free from intervention or influence by the public entity's

management. Attempts to restrict audit scope through:

(a) hindering access to personnel or information; or

(b) applying undue management influence over the nature, timing, extent, or cost

of professionally supportable and appropriate procedures;

shall be reported to the OAG and the appropriate level of management and/or those

charged with governance. If these restrictions are significant, a modification of the

audit opinion or other forms of public reporting may be considered.

Carrying out other work engagements

Over-riding principles governing other work engagements

41. The requirements and guidance given below on carrying out other work engagements

is based on the following general considerations:

(a) Public and Parliamentary perception of the Auditor-General's independence

is of paramount importance.

(b) There are statutory limitations to the Auditor-General's ability to carry out

non-audit-related work, but these limitations do not necessarily exist for some

of the Auditor-General's agents.

(c) The capacity of the Auditor-General to contribute to improvements in financial

management in the public sector may be enhanced by the application of the

additional skills that may be available to the Auditor-General's agents.

(d) Other work can help either add assurance about, or support improvements in,

financial management behaviour in the public sector.

42. The overriding principles set out below have been developed taking these sometimes

overlapping considerations into account. The Auditor-General believes that they

reflect the best balance between the effective and efficient delivery of annual audits,



performance audits and inquiries, and the sometimes competing interests of

Parliament and the public, and public entities.

43. Other work may be entered into with the public entity. However, each potential other

work engagement shall be evaluated to ensure that the Auditor-General, the Deputy

Auditor-General and their staff, and ASPs and their staff will not be:

(a) departing from the definition of independence in paragraphs 28 to 32 of this

Statement;

(b) departing from the conceptual framework and associated guidance set out in

PES 1 (Revised);

(c) involved in decision making that should be undertaken by management or the

owner of the public entity (a “self review” and/or “advocacy” threat to

independence);

(d) involved in both performing and auditing the same work (a “self-review” threat to

independence); or

(e) impairing the independence of either the ASP or the Auditor-General. For

example, a threat to the independence of the Auditor-General could arise where

carrying out an other work engagement for a public entity may conflict with the

Auditor-General’s wider responsibility to Parliament.

44. To protect these over-riding principles, the Auditor-General, the Deputy Auditor-

General and their staff, and Audit Service Providers and their staff shall comply with:

(a) PES 1 (Revised);

(b) AG PES 1 (Revised); and

(c) any specific directions from the OAG on independence matters.

Uncertainty whether other work is consistent with the definition of independence

and/or the over-riding principles

45. Where staff of the Auditor-General or an ASP believes that there is a possibility that

an other work engagement may be inconsistent with the definition of independence in

paragraphs 28 to 32 and/or the over-riding principles in paragraph 43, they shall

disclose the possibility to (and consult with) the OAG before commencing any other

work engagement.

46. Where staff of the Auditor-General or an ASP consults the OAG, the following

information shall be provided:

(a) the nature and scope of the proposed other work engagement;

(b) details of any fee arrangement (including the value of “free or preparatory”

services provided) for the other work engagement;



(c) the staff of the Auditor-General or ASP staff involved in the other work

engagement and their professional relationship to the Appointed Auditor;

(d) the anticipated timing of commencement and completion of the other work

engagement; and

(e) indications of the anticipated benefit and/or impact that the other work

engagement could have for the public entity.

Other work of possible media or political interest, or of a sensitive nature

47. Staff of the Auditor-General or ASPs shall consult the relevant OAG sector manager

before accepting any other work engagement or finalising any terms of reference for

any other work engagement where there is possible media or political interest in the

subject matter of the engagement, or where the matter is generally of a sensitive

nature or relates to another core interest of the Auditor-General (such as a matter of

compliance with statutory obligations, effectiveness and efficiency, waste, or a lack of

probity and/or financial prudence that affects the management or those charged with

governance). Consultation may include discussing whether:

(a) the engagement should be accepted in the first instance and, if so, the most

appropriate party to conduct the engagement;

(b) the terms of reference are complete and that all key matters or areas have

been included within the scope of the engagement; and/or

(c) the engagement letter (which specifies the terms of the engagement)

includes any unreasonable restrictions on distribution of the report arising

from the engagement.

48. It is important that, before accepting such an engagement, proper consideration is

given to any political risks, the wider interests of the Auditor-General, and any

implications for the wider public sector. This may include consideration of the

following matters:

(a) Has the entity been involved in any political or public controversy, or does it

operate in a politically sensitive environment?

(b) Are there other agencies or institutions already involved (for example, a

central agency, a select committee, a regulator)?

(c) Could the work have implications for other entities in the public sector (for

example, if a probity matter concerns a board member who is also a director

of other entities in the public sector)?

(d) Is the entity subject to organisational, legislative, or other change?

(e) Has the Auditor-General carried out any previous work in relation to this entity

(for example, an enquiry into probity issues), or on the subject matter of the

assignment (for example, a special study of consultation procedures)?



(f) Has any performance audit or special study been signalled by the Auditor-

General?

(g) How does the entity intend making use of any report arising from the

engagement?

(h) Is the report likely to be used in the context of any legal or other dispute the

entity has with other parties?

49. Where there is possible media or political interest in the subject matter of the

engagement, or the matter is generally of a sensitive nature, a copy of the draft report

shall be provided to the relevant OAG sector manager for clearance before it is sent

to the public entity. Once the final report is signed, a copy shall be sent to the OAG

within 24 hours.

50. An example of an engagement referred to the OAG under paragraph 47 above

related to a request from an entity wanting to conduct due diligence for the possible

purchase of assets from a public entity that was audited by an ASP on behalf of the

Auditor-General. What made this example unusual was that the request came from

an entity that was neither a public entity nor subject to audit by the ASP that had been

approached to do the work. The acceptance of this engagement by the ASP would

have impaired the independence of the ASP and the Auditor-General.

The Auditor-General has a statutory responsibility to act independently. It is therefore

essential that the Auditor-General remains totally independent – in both fact and

appearance. This responsibility extends not only to the owners of a particular public

entity subject to audit by the ASP but ultimately to the New Zealand public.

Acceptance of the due diligence engagement would have compromised the Auditor-

General’s independence because the ASP (and, by implication, the Auditor-General)

would have been perceived to have conflicting responsibilities – firstly, as the auditor

of the public entity, and secondly, as an advisor to a third party transacting with the

public entity. Such a conflict would have been damaging to the independence of the

ASP and the Auditor-General, and would have compromised the objectivity of the

Auditor-General had they been requested to investigate any issues surrounding the

transaction at a later date.

No safeguards applied by the ASP would have reduced the threat to independence to

an acceptable level, despite the fact that the due diligence engagement would have

been carried out by ASP staff who had no association with the annual audit. Such a

safeguard would not have been enough to overcome the perception that

independence had been impaired in this instance.



The appropriateness of the ASP accepting the due diligence engagement was

considered by reference to paragraphs 47 and 48 of AG PES 1 (Revised) – relating to

engagements of possible media or political interest or of a sensitive nature. Although

these requirements were primarily written for engagements with the entity for which

an annual audit appointment has been made, paragraphs 47 and 48 do not preclude

consideration of engagements with other entities that might adversely affect the

independence of the Auditor-General.

Requirements for staff of the Auditor-General or ASPs carrying out specific types of

other work engagements

51. For the purposes of this Statement, the range of possible other work engagements

that staff of the Auditor-General or an ASP may be requested to carry out are

categorised as follows:

(a) prohibited engagements (refer to paragraph 52);

(b) assurance engagements, divided between:

(i) reporting engagements to a third party that rely, in part or in total, on the

evidence gained from the conduct of the annual audit (refer to

paragraphs 53 to 59); and

(ii) other assurance engagements (refer to paragraph 60); and

(c) other engagements (refer to paragraphs 61 to 63).

Prohibited engagements

52. The following types of engagements are prohibited:

(a) Liquidations and receiverships: Carrying out liquidations and receiverships of

the public entity or its subsidiaries or other controlled entities.

(b) Assistance to management in provision of valuation services: Providing

valuation services to public entities that result in the product of the valuation

giving rise to asset or liability measurement in the Statement of Financial

Position. This prohibition does not extend to the giving of routine advice or

discussion, or work of a confirmatory nature, on the adequacy of provisions or

the valuation of assets or liabilities that are determined by the governing body of

the public entity. Further guidance is provided in paragraphs K1 and K2 of

Appendix 2.



(c) Participation in the annual audit of a public entity after having had recent service

with that public entity: The Auditor-General, the Deputy Auditor-General and

their staff, Appointed Auditors, and ASPs and their staff, cannot participate in

the annual audit of a public entity (or any other reporting engagement in

connection with a public entity) within two years of the cessation of that

individual’s previous service as an officer, director, or employee with that public

entity.

(d) Participation in the audit within two years of placement as a temporary

employee: Taking part in the annual audit, performance audit, inquiry, and/or

engagement carried out on behalf of the Auditor-General during a period of

temporary placement, or under contract as an employee in a public entity, or at

any time for two years after the placement has ceased.

(e) Roles that involve decision making that should be carried out by management or

the owner: Assuming a role that involves staff of the Auditor-General or an ASP

assuming responsibility (whether explicitly or implicitly) for decisions that are

properly the role of management.

(i) For example, no staff of the Auditor-General or ASP shall be a member

of the governing body or in any other way participate in the direction

and control of the public entity. Specifically, staff of the Auditor-General

or the ASP shall not take responsibility for the financial statements of

the public entity or accept a role of internal auditor. However, staff of the

Auditor-General or ASPs may provide accounting assistance and

support to an internal audit function in keeping with the specific

guidance in this Statement.

(ii) Another example is a request to staff of the Auditor-General or an ASP

to carry out an engagement by a public entity that requires the staff of

the Auditor-General or ASP to recommend a preferred option, and

where public entity management is reliant on the staff of the Auditor-

General or ASP expertise and specialist knowledge. This situation

effectively makes the staff of the Auditor-General or ASP a “de-facto”

decision maker, in that the staff of the Auditor-General or ASP is closely

associated with a decision that should be made by the management or

the owner of the public entity.

(iii) A further example is when a public entity asks the staff of the Auditor-

General or ASP to provide routine and ongoing advice on accounting

and financial management matters. Such advice might not threaten

independence if it is given in response to a specific matter at a point in

time. If, however, the advice is ongoing, public entity management will



rely on the advice – possibly to the extent that the staff of the Auditor-

General or ASP in effect assume a management role. The threat to

independence is heightened when public entity management has a

limited understanding of accounting and financial management matters.

(f) Taxation advice: Giving tax advice to the public entity or parties acting on their

behalf that:

(i) involves tax evasion or tax avoidance arrangements (determined

according to the policies of the Inland Revenue Department); or

(ii) is not in keeping with published Inland Revenue Department policy, or

has not been confirmed in writing by the Inland Revenue Department.

(g) Taxation services: Staff of the Auditor-General or ASPs cannot carry out

engagements involving the computation of income tax or other tax liabilities (or

assets) for the purposes of a public entity’s financial statements or its returns to

the Inland Revenue Department. Such engagements violate the over-riding

principles in paragraph 43, and a number of the prohibitions in paragraph 52

above, relating to:

(i) performing and auditing the same work;

(ii) being involved in decision making that should be carried out by

management or the owner of the public entity; and

(iii) assisting management in providing valuation services.

Further guidance is provided in paragraphs L1 to L10 of Appendix 2. Staff of the

Auditor-General or ASPs may provide taxation services of an assurance nature,

such as reviewing tax computations and returns before filing.

(h) Provision of information technology systems services to public entities: Staff

of the Auditor-General or ASPs cannot carry out engagements involving the

design and/or implementation of information technology systems used by

public entities. Further guidance is provided in paragraphs N1 to N3 of

Appendix 2.

(i) Provision of litigation support services to public entities: Staff of the Auditor-

General or ASPs cannot carry out engagements involving the provision of

litigation support services to public entities. Further guidance is provided in

paragraphs O1 to O3 of Appendix 2.

(j) Provision of legal services to public entities: Staff of the Auditor-General or

ASPs cannot carry out engagements involving the provision of legal services to

public entities.



(k) Fees and pricing: The setting of contingent or success fees in respect of any

service provided by staff of the Auditor-General or an ASP to a public entity is

not permitted.

Assurance engagements

53. For the purposes of this Statement, an “assurance engagement” is an engagement in

which a practitioner expresses a conclusion designed to enhance the degree of

confidence of the intended users about the outcome of the evaluation or

measurement of a subject matter against criteria. The fact that an engagement may

provide comfort to public entity management, contribute to audit assurance, or

provide a general feeling of confidence about a particular matter does not in itself

result in the engagement being classified as an “assurance engagement”. An

engagement shall satisfy the above criteria before it can be classified as an

“assurance engagement”.

54. Staff of the Auditor-General or ASPs shall obtain the approval of the OAG before

accepting a reporting engagement to a third party, unless otherwise provided in an

audit brief or other dispensation.

55. Subject to obtaining OAG approval, staff of the Auditor-General or ASPs may carry out

reporting engagements to third parties other than the annual audit, with no limit on

fees earned during the contract period.

56. Certain assurance engagements require the staff of the Auditor-General or ASP to

report to a third party and rely, in part or in total, on the evidence obtained from the

audit. Where approved by the OAG, these engagements shall be performed and

reported “on behalf of the Auditor-General”. This category of engagement includes:

(a) prospectus opinions;

(b) reports to trustees on an entity’s compliance with the terms of a trust deed;

(c) reports to the Commerce Commission relating to entities in “regulated

industries”; and

(d) audit opinions on “alternative” financial statements prepared by a public entity

(for example, Economic Value Added (EVA) financial statements).

57. To obtain approval, staff of the Auditor-General or ASPs shall provide the following

information to the Assistant Auditor-General – Accounting and Auditing Policy:

(a) full details of the nature of the engagement (supported by relevant documents

such as Trust Deeds, as appropriate); and



(b) the proposed wording of the report to the third party.

58. The decision of the OAG as to whether the engagement can be accepted will be

advised (promptly, in writing) to the staff of the Auditor-General or ASP, after careful

consideration of the documentation provided in accordance with paragraph 57.

59. Staff of the Auditor-General or ASPs shall consult the OAG if they are unsure whether

a particular reporting engagement to a third party is to be signed “on behalf of the

Auditor-General”.

60. Within the general rules of conduct stated above, staff of the Auditor-General or ASPs

may carry out other assurance engagements other than the annual audit, with no limit

on fees earned during the contract period.

Other engagements

61. Within the general rules of conduct stated above, staff of the Auditor-General or ASPs

may carry out other types of consulting or service engagement during the financial

year of the entity subject to annual audit, earning up to 100% of the audit fee set for

that financial year (the fee-cap).

62. Staff of the Auditor-General or ASPs sometimes enter into consulting or service

engagements with third parties where the subject matter of the engagement may, in

part or in total, relate to a public entity that the staff of the Auditor-General or ASP audit

on behalf of the Auditor-General. The fees corresponding to the portion of the

engagement that relate to the public entity shall be taken into account by the

Appointed Auditor in determining the total fees for fee-cap purposes. The OAG

reserves the right to determine if the fee-cap has been exceeded.

63. OAG approval to exceed the fee-cap will be granted only in certain limited

circumstances. In granting an exemption to exceed the fee-cap, the OAG will have

regard to the following factors:

(a) whether the total fees from other engagements over the contract period will be

less than the aggregate audit fee over the contract period;

(b) the amount by which the fee-cap will be exceeded in any one year;

(c) whether the timing of the other engagement around the public entity’s

balance date is the main cause of the fee-cap being exceeded – for example,

if a public entity with a 30 June balance date requested staff of the Auditor-

General or an ASP to start an other engagement in June (and this would

result in the fee-cap being exceeded for the year ended 30 June), this may

provide grounds for a fee-cap exemption being granted if starting the other



engagement in July (when the next year subject to the fee-cap began) would

cause the public entity significant inconvenience; and

(d) whether the other work is of such a nature that granting an exemption to the

fee-cap would enhance public sector accountability generally.

Requirements to issue engagement letters for all other work engagements

64. An engagement letter shall be issued in relation to each other work engagement.

There are separate requirements for formalising the terms of annual and performance

audits and inquiries. The engagement letter shall specify whether the engagement is

carried out on behalf of the Auditor-General.

65. Each engagement letter shall include wording that clearly communicates to

management and those charged with governance that:

(a) the results of the work will be made available to the OAG; and

(b) any matters identified will be brought to the attention of the Auditor-General,

who is free to report as they see fit.

66. There will often be important differences between the staff of the Auditor-General or

ASP's responsibilities for carrying out other engagements and the annual audit. The

staff of the Auditor-General or ASP shall ensure that management and those charged

with governance are aware of the different objectives and reporting requirements of

each engagement. The staff of the Auditor-General or ASP shall also be satisfied that

the Auditor-General's independence will not be threatened.

Figure 1

Category of engagement Nature of the engagement

letter

Nature of the report

Reporting engagement to a third

party where that engagement relies,

in part or in total, on evidence

gained from the conduct of the

annual audit (paragraphs 54 to 59).

The engagement letter is to state

that the engagement is to be

performed by the staff of the

Auditor-General or ASP “On behalf

of the Auditor-General”.

The report is to be signed by the

staff of the Auditor-General or ASP

“On behalf of the Auditor-General”.

Other assurance engagements

(paragraph 60) and other

engagements (paragraphs 61 to

63) where the engagement is

carried out by an ASP.

The engagement letter is to state

that the engagement is to be

performed in the name of the ASP.

The report is to be signed in the

name of the ASP.

67. With reference to the “assurance” and “other” category of engagement referred to in

paragraph 51, the guidelines in figure 1 are to apply – unless otherwise provided in an



audit brief or other dispensation – for the issue of the engagement letter and the

report arising from carrying out the engagement.

Reporting on engagements other than the annual audit

Requirements to report publicly on engagements other than the annual audit

68. There are two situations in which public disclosure about engagements other than the

annual audit may be required:

(a) where legislation or a financial reporting standard requires disclosure in the

financial statements of the fees paid for the annual audit and for other services;

and

(b) where ISA (NZ) 700: Forming an Opinion and Reporting on Financial

Statements requires disclosure of other services provided in the audit report.

69. Appointed Auditors may wish to distinguish between “assurance” and “other”

engagements in the audit report. For more detailed guidance on this disclosure,

Appointed Auditors should refer to AG ISA (NZ) 700.

Requirements to report to the OAG

All performance audits, inquiries and other work engagements (other than the annual audit)

70. For all performance audits, inquiries and other work engagements carried out by staff

of the Auditor-General or an ASP in addition to the annual audit, Appointed Auditors

shall advise the OAG in writing, as part of the “reporting on engagements other than the

annual audit” requirements in AG-1: Reporting to the OAG, details of all engagements

between the public entity and the ASP or staff.

71. For each engagement, Appointed Auditors shall send the following information to the

OAG as part of the requirement to “report on engagements other than the annual audit”:

(a) a copy of the report issued for the engagement;

(b) if applicable, a copy of the information on which the report has been issued;

(c) a description of the engagement;

(d) the name of the engagement partner or director;

(e) the actual fee for the engagement for the period covered by the annual audit;

(f) whether the report was signed on behalf of the Auditor-General; and

(g) whether the engagement was an assurance engagement (based on the

definition of an assurance engagement in paragraph 53).



72. Where the total fees for all engagements during the reporting period differ from those

disclosed in the financial statements, a reconciliation shall accompany the information

provided under paragraph 71 above to show the reason for the difference.

Engagements of possible media or political interest or of a sensitive nature

73. For engagements (referred to in paragraphs 47 to 50 above) where there is possible

media or political interest in the subject matter of the engagement, or the matter is

generally of a sensitive nature, a copy of the draft report shall be provided to the

relevant OAG sector manager for clearance before it is sent to the entity. A copy of

the final report shall be sent to the OAG within 24 hours of signing the report.



Appendix 1 - Decision tree for entering into engagements with public

entities (other than the annual audit, performance audits and inquiries)

N

N

N

N

NY

Y N

Perhaps

Perhaps Y

Perhaps Y

N

Perhaps Y

Perhaps Y

Perhaps Y

STARTIs the engagement prohibited having applied the principles and associated specific guidance in PES 1 (Revised)?

Would total fees from the entity cause undue economic dependence? (Para S1 - S9 in Appendix 2)

Would the engagement violate the overriding principles?(Para 43)

Is this type of engagement prohibited? (Para 52)

Is this an assurance engagement? (Para 53)

Would total annual fees from non-assurance engagements exceed 100% of the contracted audit fee? (Para 61 - 63)

Is the engagement the subject of possible media or political interest or of a sensitive nature? (Para 47 - 50)

Consult with the OAG, and the OAG will provide direction. DO NOT CARRY OUT THE

ENGAGEMENT

Document and carry out the engagement. (Para 64 - 67)

Report to the OAG (Para 71)



Appendix 2 - Guidelines on the application of the approach in PES 1

(Revised) to public entities

This appendix contains guidance covering the following topics:

A Financial interests

B Loans and guarantees

C Business relationships

D Family and personal relationships

E Employment with public entities

F Temporary staff assignments

G Recent service with a public entity

H Serving as an officer or member of the governing body of a public entity

I Long association of senior personnel involved in annual audits of public entities

J Preparing accounting records and financial and non-financial information

K Valuation services

L Provision of taxation advice and/or services to public entities

M Internal audit services

N IT systems services

O Litigation support services

P Legal services

Q Recruiting services

R Corporate finance services

S Fees

T Compensation and evaluation policies

U Gifts and hospitality

V Actual or threatened litigation

A Financial interests

A1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where an existing or potential financial interest may create a threat to

independence. Further guidance on financial interests in public entities is provided

below.

A2 For the purposes of these standards the definition of audit team (or its public sector

equivalent) is specified in the Glossary of Terms issued by the New Zealand Auditing

and Assurance Standards Board of the External Reporting Board.

A3 The Auditor-General and the Deputy Auditor-General may not have a financial

interest in any public entity.



Employees of the Auditor-General

A4 The following employees of the Auditor-General may not have a financial interest in

any public entity:

(a) members of the OAG Leadership team;

(b) members of the Audit NZ Leadership team:

(c) members of the OAG Accounting and Auditing Policy team;

(d) members of the OAG Legal team;

(e) Sector Managers in the OAG Local Government and Parliamentary teams;

and

(f) OAG and Audit NZ employees involved in the audit of the financial

statements of the government.

A5 Audit New Zealand directors and members of Audit New Zealand’s Professional

Practices Group may not have a financial interest in:

(a) any public entity audited by Audit New Zealand; or

(b) any public entities that are part of a public entity group where Audit New

Zealand audits a significant entity in the group.

A6 All other employees of the Auditor-General:

(a) may have a financial interest in a public entity;

(b) must disclose their interest as part of the employee independence system, so

that any independence threats can be managed; and

(c) must not work on any matter involving a public entity or group where they

have a financial interest.

ASPs (Other than Audit New Zealand) and the ASPs’ Appointed Auditors and

Audit Teams

A7 Where an ASP audits an entity on behalf of the Auditor-General, all engagement

partners of the ASP and members of the audit team may not have a financial interest

in that entity.

Immediate Family Members

A8 If an immediate family member (that is, a spouse (or equivalent) or dependent of an

individual referred to in paragraphs A3 to A7 above) has a financial interest in a public

entity then the financial interest must be disclosed, in accordance with the Auditor-



General’s, Audit New Zealand’s or other ASP’s independence policies and

procedures that are required by PES 3: Quality Control.

A9 Upon disclosure of a financial interest held by an immediate family member the threat

to independence must be managed by:

(a) disposing of the financial interest; or

(b) removing the individual referred to in paragraphs A3 to A7 from the audit

team, or from doing any other work involving the public entity in which the

immediate family member has a financial interest.

General Provisions

A10 If financial interests are acquired involuntarily (for example, in a share give-away by

an energy company):

(a) the financial interest shall be disclosed, in accordance with the Auditor-

General’s, Audit New Zealand’s, or other ASP’s independence policies and

procedures that are required by PES 3: Quality Control; and

(b) the threat to independence must be managed by:

(i) disposing of the financial interest at the earliest opportunity at which

there can be no suggestion of insider trading; or

(i) removing the individual referred to in paragraphs A3 to A7 from the

audit team, or from doing any other work involving the public entity in

which they have a financial interest.

A11 Paragraphs A3 to A10 do not apply to public securities, as defined in the Public

Finance Act 1989.

A12 Paragraphs A3 to A10 cease to apply when the Auditor-General is no longer the

auditor of an entity, and when all risks of insider trading have disappeared (for

example, following listing of shares on the Stock Exchange).

B Loans and guarantees

B1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where an existing or potential loan or guarantee may create a threat to

independence.



C Business relationships

C1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where a business relationship with a public entity may create a threat

to independence.

D Family and personal relationships

D1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where an existing or potential family or personal relationship may

create a threat to independence.

D2 In the public sector, it is important that the Auditor-General, the Deputy Auditor-

General and their staff, ASPs and their staff remain aware of the effect of existing or

potential political affiliations on audit independence. Such awareness should also

extend to comment on political issues made by staff of the Auditor-General or ASPs.

D3 Staff of the Auditor-General or ASPs shall not be, or seek to be, either an officer of, or

a candidate for, any political party seeking election to Parliament.

D4 Where staff of the Auditor-General or the ASP wish to seek election or accept an

appointment to any local authority, board, or other governing body that is audited by

staff of the Auditor-General or the ASP on behalf of the Auditor-General, they shall

consult with the OAG before seeking election or accepting an appointment. The OAG

reserves the right to revoke the audit appointment if it believes a potential conflict of

interest exists.

E Employment with public entities

E1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where previous staff of the Auditor-General or the ASP have been

employed by a public entity or a current member of the assurance team knows, or

has reason to believe, that they may join a public entity some time in the future.

Further guidance on how a situation involving employment, or potential employment,

with a public entity should be resolved is provided below.

E2 Staff of the Auditor-General or ASPs are employed by public entities on a regular

basis. In addition, arrangements are sometimes entered into to place staff (employed

by ASPs or the Auditor-General) with public entities to assist with their career

development. A significant threat to independence can arise if the person employed



by, or placed with, a public entity is in a position to exert direct and significant

influence over the subject matter of the audit.

E3 Paragraph 34 of AG PES 1 (Revised) notes that the Auditor-General is the auditor of

all public entities and cannot refuse to accept or continue an audit engagement to

eliminate threats to independence. Paragraph 35 of AG PES 1 (Revised) states that,

if there is a conflict between PES 1 (Revised) and legislation relating to the statutory

appointment of the Auditor-General, the Auditor-General will:

(a) introduce safeguards to reduce the threat to independence to the extent that

is reasonably possible in the circumstances; and

(b) disclose the threat to independence to those responsible for governance of

the public entity and publicly disclose the matter in the auditor’s report.

E4 Where a significant threat to independence arises in respect of a person employed

by, or placed with, a public entity, the Auditor-General will ensure the threat to

independence is reduced to the extent that is reasonably possible by considering one

or more of the following options:

(a) the selection of the ASP and/or the Appointed Auditor;

(b) the terms and conditions of their appointment;

(c) the assignment of audit staff; and

(d) additional quality control processes.

F Temporary staff assignments

F1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to temporary staff assignments to public entities.

F2 The Auditor-General will not permit staff of the Auditor-General or ASP to participate

in the audit of a public entity (or any other reporting engagement in connection with a

public entity) until a period of two years has elapsed from the time the employee’s

placement as a temporary member of staff with that public entity ceased.

G Recent service with a public entity

G1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where recent service with a public entity may create a threat to

independence.

G2 The Auditor-General will not permit staff of the Auditor-General or staff of an ASP to

participate in the audit of a public entity (or any other reporting engagement in



connection with a public entity) within two years of the cessation of the employee’s

previous service as an officer, director, or employee with that public entity.

H Serving as an officer or member of the governing body of a public

entity

H1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where staff of the Auditor-General or an ASP has served as an officer

or member of the governing body of a public entity.

H2 The Auditor-General will not permit staff of the Auditor-General or an ASP to assume a

role that involves decision making that should be carried out by management or the

owner, or alternatively assuming a role that involves staff of the Auditor-General or any

ASP accepting responsibility for decisions that are properly the role of management.

For example, no member of an ASP shall be a member of the governing body or in

any other way participate in the direction and control of the public entity. Specifically,

the ASP shall not take responsibility for the financial statements of the public entity or

accept a role of internal auditor. However, ASPs may provide accounting assistance

and support to an internal audit function in keeping with the specific guidance in this

Statement.

I Long association of senior personnel involved in annual audits

with public entities

I1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where there has been a long association of senior personnel (who may

be ASP staff or staff of the Auditor-General) with public entities. The Auditor-General

has specific requirements relating to rotation of key audit partners and members of

assurance teams who are involved in carrying out annual audits. The Auditor-

General’s specific requirements, which are detailed below, over-ride the more general

guidance in PES 1 (Revised).

I2 Application Date: The provisions within section I of this Statement apply with

immediate effect. The key audit partner provisions applied from 1 January 2014,

subject to the transitional provisions specified in PES 1 (Revised).

I3 To maintain individual audit staff objectivity, Appointed Auditors and senior personnel

involved in annual audits shall not (in audits of 150 budgeted hours or over) undertake

the same audit tasks for more than six consecutive years.



I4 In implementing the requirement of paragraph I3, the following principles and practices

apply:

(a) The individual who is appointed as the Appointed Auditor shall not carry out

the same audit for more than six consecutive years. Having completed six

consecutive years, a former Appointed Auditor will not become eligible to act

again in the capacity of Appointed Auditor, or in any other capacity in relation

to the audit (for example, as an engagement quality control reviewer /

director), until the expiry of two consecutive annual audits following the

conclusion of the previous audit appointment period. In addition, eligibility for

further appointment after that two-audit period will require that the former

Appointed Auditor does not carry out any professional and/or consulting

engagements with the public entity during this period.

(b) Other individuals associated with the audit (who are classified as a “key audit

partner”) shall not continue their association with the audit for more than six

consecutive years. After such time, the individual shall not be associated with

the engagement team or be a “key audit partner” for the entity for two years.

During that period, the individual shall not be involved with the entity in any

other professional capacity.

(c) Audit staff below Appointed Auditor level shall not continue their involvement

with the same audit for more than six consecutive years if they retain

substantially the same responsibility in relation to the conduct of the audit.

Audit staff below Appointed Auditor level may therefore be involved for more

than six consecutive years with a public entity provided their roles and

responsibilities have substantially changed as a result of legitimate career

development.

(d) The Appointed Auditor shall check annually that the staffing of annual audits

complies with the requirements of this Statement.

(e) Where the public entity is listed under the New Zealand Stock Exchange, the

rules on auditor rotation that apply to listed entities shall apply where they are

more restrictive than those that apply under AG PES 1 (Revised).

I5 The definition of “key audit partner”, the associated rotation requirements, and the

transitional provisions that apply to “key audit partners” are specified in PES 1

(Revised) issued by the External Reporting Board. Please note that the rotation

period for “key audit partners” under this Statement is six years, and not seven years

as permitted under PES 1 (Revised).

“Key audit partner” is defined in PES 1 (Revised) as the engagement partner, the

individual responsible for the engagement quality control review, and other audit



partners, if any, on the engagement team who make key decisions or judgements on

significant matters with respect to the audit of the financial statements on which the

firm will express an opinion. Depending upon the circumstances and the role of the

individuals on the audit, other audit partners may include, for example, audit partners

responsible for significant subsidiaries or divisions.

For the purposes of this Statement a “key audit partner” will be the engagement

partner or director (the Appointed Auditor), a second partner(s) or director(s), the

engagement quality control reviewer, and, possibly, other audit partners. Specialists

(such as tax or information systems specialists) and other technical experts are

generally not key audit partners.

I6 The OAG reserves the right to extend the rotation period in the interests of

maintaining audit quality.

J Preparing accounting records and financial and non-financial

information

J1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence in relation to the preparation of accounting records and financial

statements. The Auditor-General has specific requirements relating to the preparation

of accounting records and financial and non-financial information by staff of the

Auditor-General or ASPs. The Auditor-General’s specific requirements, which are

detailed below, over-ride the more general guidance in PES 1 (Revised).

Temporary accounting assistance and compilation engagements

J2 Staff of the Auditor-General or ASPs may provide temporary accounting assistance and

compile the financial and non-financial information subject to compliance with

paragraphs J3 to J5 below.

J3 When conducting temporary accounting assistance and compilation engagements, staff

of the Auditor-General or ASPs shall ensure that:

(a) the public entity accepts the responsibility for the financial and non-financial

information (including the accounting policies) as its own;

(b) the staff of the Auditor-General or ASP who carry out the temporary

accounting assistance and/or compilation engagement do not function as

employees or part of management in conducting the operations of the

organisation;



(c) the nature of the temporary accounting assistance and/or compilation

engagement is straightforward and does not require the staff of the Auditor-

General or ASP to exercise their professional judgement (an example would

be the preparation of cash-based financial statements for very small entities);

(d) processes and procedures are put in place to mitigate the risk of the staff of

the Auditor-General or ASP auditing their own work (for instance, their work is

reviewed by a more senior audit staff member); and

(e) the annual audit shall be carried out in keeping with the Auditor-General’s

auditing standards, which includes obtaining sufficient and appropriate audit

evidence to enable the Appointed Auditor to form an objective opinion on the

financial and non-financial information .

J4 Staff of the Auditor-General or ASPs may only provide temporary accounting assistance

or conduct compilation engagements for:

(a) small public entities whose size would tend to preclude the employment of

suitably qualified personnel; and

(b) larger public entities only in exceptional circumstances – for instance,

immediately after the unforeseen loss of key personnel.

J5 When carrying out these engagements, staff of the Auditor-General or ASPs shall not

encourage a situation where the public entity becomes reliant on the staff of the

Auditor-General or ASP for the provision of the service. Rather, the staff of the Auditor-

General or ASP shall foster a situation where the public entity becomes increasingly

self-reliant in recording accounting information and preparing its own financial and

non-financial information.

ASPs shall not provide payroll services

J6 Audit service providers shall not provide any payroll services to public entities.

K Valuation services

K1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence in relation to valuation services. The Auditor-General has specific

requirements relating to provision of valuation services by ASPs. The Auditor-



K2 Engagements involving assistance in providing valuation services to public entities

that result in the product of the valuation giving rise to asset or liability measurement



in the Statement of Financial Position are not permitted. This prohibition exists

irrespective of the materiality of the asset or liability to the financial and non-financial

information. This prohibition does not extend to the giving of routine advice or

discussion, or work of a confirmatory nature, on the adequacy of provisions or the

valuation of assets or liabilities that are determined by the governing body of the public

entity.

L Provision of taxation advice and/or services to public entities

L1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence in relation to the provision of taxation services to public entities. The

Auditor-General has specific requirements relating to provision of taxation services to

public entities by ASPs. The Auditor-General’s specific requirements, which are

detailed below, over-ride the more general guidance in PES 1 (Revised).

L2 Engagements that involve giving tax advice to the public entity or parties acting on

their behalf are prohibited if the advice:

(a) involves tax evasion or tax avoidance arrangements (determined according to

the policies of the Inland Revenue Department); or

(b) is not in keeping with published Inland Revenue Department policy, or has

not been confirmed in writing by the Inland Revenue Department.

L3 Staff of the Auditor-General or ASPs may provide taxation services of an assurance

nature, such as reviewing tax computations and returns before filing. Staff of the Auditor-

General or ASPs are, however, reminded of the prohibitions on staff of the Auditor-

General or ASPs:

(a) performing and auditing the same work;

(b) being involved in decision making that should be undertaken by management

or the owner of the public entity; and

(c) assisting management in providing valuation services. The prohibition exists

irrespective of whether the valuation is performed for tax purposes only, or if

the valuation will have an effect on the financial statements.

This means that staff of the Auditor-General or ASPs cannot carry out engagements

involving the computation of income tax or other tax liabilities (or assets) for the

purposes of the financial and non-financial information or returns to the Inland Revenue

Department.

L4 With reference to paragraph L3, where staff of the Auditor-General or ASPs are

requested to review a public entity’s tax computations or returns before filing, the staff of



the Auditor-General or ASP should assess whether the public entity has the in-house

capability to determine its tax position. If the public entity does not have the required

capability and has prepared “first draft” tax computations or returns for review that the

staff of the Auditor-General or ASP regard as unreliable, this would effectively mean the

staff of the Auditor-General or ASP are determining the public entity’s tax position, which

creates an unacceptable “self-review” threat to independence. The acceptance of such

engagements is therefore prohibited.

Assisting public entities to obtain binding and non-binding rulings

L5 Public entities may choose to obtain a degree of certainty about an aspect of their tax

affairs by seeking either a binding or non-binding ruling from the Inland Revenue

Department. In doing so, a public entity may request assistance from an ASP to

obtain a binding or non-binding ruling. Engagements of this nature do not satisfy the

criteria of an “assurance” engagement (refer to paragraph 53 of AG PES 1

(Revised)). Rather than providing assurance about a matter of accountability, these

engagements involve a process of assisting and advising a public entity to obtain a

degree of certainty about its tax affairs.

L6 Engagements to assist public entities obtain binding or non-binding rulings are

therefore subject to the fee-cap specified in paragraphs 61 to 63 of AG PES 1

(Revised). Such engagements are often open-ended in nature and can generate

significant fees to the ASP. This can result in fee-cap pressures. It is important

therefore that ASPs recognise the potential effect of these engagements on the fee-

cap, and that such engagements are only accepted when the ASP is confident the

fee-cap will not be exceeded.

Assisting public entities with tax investigations

L7 As a general rule, ASPs are prohibited from entering into engagements with public

entities to assist with the public entity’s interactions with the Inland Revenue

Department in the context of a tax investigation. Such engagements may result in an

“advocacy threat” to the ASP and the Auditor-General.

L8 An ASP should only accept an engagement to assist a public entity with a tax

investigation:

(a) when the public entity does not have its own resources to address the

demands of the tax investigation; and

(b) where it is impractical to use any firm other than the ASP because of the

ASP’s specialised understanding of the public entity’s taxation issues.



Such a situation might arise if the ASP was the public entity’s tax advisor before the

ASP was appointed to carry out the audit on behalf of the Auditor-General, and the

tax investigation is likely to focus on matters that were considered by the ASP when it

was the public entity’s tax advisor.

L9 If, during the course of a tax investigation, the ASP considers that they could assume

an advocacy role for the public entity on tax matters, they shall inform the OAG. Any

threats to independence will be assessed and an appropriate course of action agreed

to reduce the threats to independence to an acceptable level.

L10 Assistance with tax investigations are unlikely to satisfy the criteria of an “assurance”

engagement (refer to paragraph 53 of AG PES 1 (Revised)) and will therefore be subject

to the fee-cap specified in paragraphs 61 to 63 of AG PES 1 (Revised). Where the

circumstances, as outlined in paragraph L8, mean that it would be unreasonable for the

ASP not to assist the public entity with the tax investigation, and it is likely the fee-cap will

be exceeded as a result of accepting the engagement, the OAG will normally grant an

exemption to exceed the fee-cap.

M Internal audit services

M1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to the provision of internal audit services to public entities. The

Auditor-General has specific requirements relating to provision of internal audit

services to public entities by staff of the Auditor-General or ASPs. The Auditor-



M2 Staff of the Auditor-General or ASPs may provide support to a public entity’s internal

audit (or similar) function subject to compliance with paragraphs M3 to M6 below.

M3 Staff of the Auditor-General or ASPs may provide support to an internal audit function

only where the public entity has:

(a) designated a competent person(s) within senior management to be

responsible for the internal audit function;

(b) determined the scope, risk, and frequency of internal audit activities; and

(c) accepted responsibility to evaluate the adequacy of the internal audit

procedures performed and to respond to the findings and results.

M4 When providing assistance to an internal audit function, ASPs or staff are reminded that

they:



(a) may not perform management functions or make decisions properly made by

management;

(b) shall not act or appear to act in a capacity equivalent to that of an employee;

(c) shall make all the results of its work available to the OAG; and

(d) shall ensure that the public entity is aware that any matters identified will be

brought to the attention of the Auditor-General, who is free to report as they

see fit.

M5 The conditions set out in paragraphs M3 and M4 above shall be included in the

engagement letter required to be prepared in keeping with paragraphs 64 to 67.

M6 The provision of support to an internal audit function by staff of the Auditor-General or an

ASP, in keeping with paragraphs M1 to M5 above, is generally of a different nature to a

temporary staff assignment to a public entity. As a consequence, the restrictions in

paragraphs F1 and F2 would not normally apply.

N IT systems services

N1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to the provision of information technology systems services to

public entities. The Auditor-General’s specific requirements relating to provision of

information technology systems services to public entities by ASPs, and which over-

ride the more general guidance in PES 1 (Revised), are detailed below.

N2 Engagements by ASPs that involve the design and/or implementation of information

technology systems that have a direct or indirect link to the audit subject matter are

prohibited. The Auditor-General must be able to provide objective and impartial

advice to Parliament. If the Auditor-General’s agent has been involved in the design

and/or implementation of a public entity’s information technology systems, the ability

of the Auditor-General to comment objectively (or the perception around the ability to

comment objectively) will have been impaired.

N3 An example of a prohibited engagement relating to information technology systems

involved a request for an ASP to design and implement a “pricing” model for a public

entity. The “pricing” model was to be used as an input into the process by which the

public entity priced its products – taking into account the return required by its

shareholders. Although the link between the “pricing” model and the financial

statements was not strong, the ASP’s involvement in the engagement would have

created an unacceptable “self-interest” threat to independence because:



(a) the “pricing” model could provide circumstantial audit evidence to support the

public entity’s reported revenue, as disclosed in its financial statements; and

(b) the ASP’s involvement in the design and implementation of the “pricing”

model would prejudice the Auditor-General’s ability to “audit” the model at a

later date, if necessary.

O Litigation support services

O1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to provision of litigation support services to public entities. The

Auditor-General’s specific requirements relating to provision of litigation support

services to public entities by ASPs, and which over-ride the more general guidance in

PES 1 (Revised), are detailed below.

O2 Engagements by ASPs that involve the provision of litigation support services to

public entities are prohibited. Such engagements create an “advocacy” threat to

independence that could not be reduced to an acceptable level by the application of

any safeguards.

O3 The prohibition on ASPs entering into engagements that involve the provision of

litigation support services to public entities is reinforced by the possibility that the

litigation may involve a dispute between two public entities, both of which are subject

to audit by the Auditor-General. Other disputes may arise between a public entity and

its stakeholders – and the stakeholder group may be reliant on the expression of an

independent opinion by the Auditor-General. In these circumstances, it is essential

that the independence of the Auditor-General is maintained through the ASP not

accepting any engagements involving the provision of litigation support services.

P Legal services

P1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to provision of legal services to public entities. The Auditor-

General’s specific requirements relating to provision of legal services to public entities

by ASPs, and which over-ride the more general guidance in PES 1 (Revised), are

detailed below.

P2 Engagements by ASPs that involve the provision of legal services to public entities

are prohibited. Such engagements create “self-review” and “advocacy” threats to

independence that could not be reduced to an acceptable level by the application of

any safeguards.



Q Recruiting services

Q1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to the provision of recruiting services to public entities.

R Corporate finance services

R1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to provision of corporate finance services advice or assistance

to public entities. The Auditor-General’s specific requirements relating to provision of

corporate finance services advice or assistance to public entities by ASPs, and which

over-ride the more general guidance in PES 1 (Revised), are detailed below.

R2 Engagements by ASPs that involve the provision of corporate finance services advice

or assistance to public entities are prohibited when they extend into the areas of

strategic planning, investment options, or other engagements that may directly affect

the strategic direction of the public entity or its business units. Such engagements

create “self-review” threats to independence that could not be reduced to an

acceptable level by the application of any safeguards.

R3 An example of a prohibited engagement relating to corporate finance services advice

or assistance involved a request for an ASP to identify and approach potential

acquisition targets for a public entity. The ASP’s involvement in this engagement

would have created an unacceptable “self-review” threat to independence because:

(a) The engagement would have required the ASP to make a recommendation to

public entity management of a preferred option. Management, in seeking the

expertise of the ASP, would rely on the ASP’s advice. This situation

effectively makes the ASP a “de-facto” decision maker in that the ASP is

closely associated with a decision that should be undertaken by the

management or the owner of the public entity.

(b) The engagement would constrain the ability of the ASP and the Auditor-

General to objectively examine and report on the public entity’s investment or

expansion decisions or processes at a later date, if necessary.



S Fees

Fees – Relative Size

S1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to fees. The Auditor-General has specific requirements relating

to fees. The Auditor-General’s specific requirements, which are detailed below, over-

ride the more general guidance in PES 1 (Revised).

S2 For the purposes of paragraphs S3 to S9, ASP is defined exclusive of any larger

structure that is aimed at cooperation and:

- that is clearly aimed at profit or cost sharing; or

- that shares any of the following: common ownership, control or management;

common quality control policies and procedures; common business strategy;

the use of a common brand-name; or a significant part of professional

services.

The OAG reserves the right to rule on whether an association exists.

S3 ASPs shall ensure that independence is not put at risk by economic factors. ASPs

shall avoid undue economic dependence on the revenues derived from any one

public entity so that the public perception of the ASP’s objectivity is not likely to be in

jeopardy.

S4 ASPs shall consider and document the effect on independence when the total fees in

the financial reporting period paid by the public entity or group of connected public

entities exceed 15% of the gross fees of the practice or audit firm. The 15% fee limit

applies to the definition of ASP in S2.

S5 ASPs can demonstrate that undue economic dependence does not place

independence at risk by ensuring that the fees from one public entity or group of

public entities do not exceed an appropriate limit. In calculating the 15% limit, ASPs

shall take into account fees derived from both audit and other engagements provided

to the public entity or group of connected public entities during the financial reporting

period of the public entity. The denominator for the equation is to be gross fees of the

ASP for its most recent year-end.

S6 In circumstances where the remuneration of an ASP depends on the profits of any

one office within a firm, and that office regularly depends on one public entity or a

group of connected public entities for a significant proportion of its total fees, or where

one public entity may be significant to the position of an Appointed Auditor within an



ASP, freedom from undue economic influence shall be demonstrated by ensuring that

adequate quality control procedures are in place. This could include the involvement

of an engagement quality control review partner, or equivalent, from another office of

the firm or from another firm.

S7 Exceeding the 15% threshold does not in itself mean that independence has been

impaired because of undue economic dependence and that the provision of audit

and/or other engagements shall cease. It is a point at which ASPs are formally

required to consider the implications of deriving a significant proportion of their

revenues from one source on their ability to remain independent of the public entity.

S8 The ASP shall consider whether the fees derived from engagements other than the

annual audit might compromise independence through an actual or perceived undue

economic dependence on the receipt of those fees, regardless of the broad fee limit

set in paragraph S4.

S9 Fees obtained from other engagements suggest that a public entity may be able to

exert undue pressure on the ASP through the threat of their removal. Although the

earning of fees from such engagements does not necessarily impair the ASP's

independence, the ASP shall consider the effect on independence of the level of fees

derived.

Contingent fees

S10 The setting of contingent or success fees in respect of any service provided by staff of

the Auditor-General or an ASP to a public entity is not permitted. The setting of such

fees creates a “self-interest” threat to independence that could not be reduced to an

acceptable level by the application of any safeguards.

T Compensation and Evaluation Policies

T1 PES 1 (Revised) provides guidance where a member of the audit team is evaluated

on, or compensated for, selling non-assurance services to the entity subject to audit.

T2 No key audit partner or other member of the audit team shall be evaluated on, or

compensated for, selling non-assurance services to the entity subject to audit.



U Gifts and hospitality

U1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence relating to gifts and hospitality.

U2 No firm or individual shall accept gifts or hospitality, unless the value is trivial and

inconsequential.

V Actual or threatened litigation

V1 PES 1 (Revised) provides guidance on the application of the conceptual framework to

independence where there is actual or threatened litigation.

V2 When an Appointed Auditor or an ASP becomes aware of actual or threatened

litigation concerning an entity they audit on behalf of the Auditor-General, they shall

immediately advise the Assistant Auditor-General – Accounting and Auditing Policy at

the OAG.



Appendix 3 - Applicability of PES 1 (Revised) to annual audits and/or

other work carried out on behalf of the Auditor-General

Reference in PES 1 (Revised) Auditor-General’s Requirement or

Interpretation in AG PES 1 (Revised)

NEW ZEALAND PREFACE

Page 4 No additional requirement or interpretation.

NEW ZEALAND SCOPE AND APPLICATION

Paragraphs NZ1.1 to NZ1.4 No additional requirement or interpretation.

PART A: FUNDAMENTAL PRINCIPLES

SECTION 100 – Introduction and Fundamental Principles

Paragraph 100.1 No additional requirement or interpretation.

Paragraph 100.2 The Auditor-General applies a higher

standard in determining if the Fundamental

Principles have been compromised. This

standard, and the reasons behind it, are set

out in the Auditor-General’s position on

“independence in appearance”. The

underlying principle in establishing the

Auditor-General’s standard on “independence

in appearance” shall be applied in

determining if other Fundamental Principles

have been compromised. Refer to

paragraphs 28 to 32 of AG PES 1 (Revised).

Paragraphs 100.3 to 100.6 No additional requirement or interpretation.

Paragraph 100.7 In determining if the Fundamental Principles

have been compromised the higher standard

established by the Auditor-General shall be

applied. For the specific reference to AG PES

1 (Revised) refer to the comments relating to

paragraph 100.2 of PES 1 (Revised) above.


Paragraph 100.10 Where the Appointed Auditor, or their firm,

identifies a breach of an independence





provision of AG PES 1 (Revised) they shall

report the breach to the Assistant Auditor-

General – Accounting and Auditing Policy

immediately. Refer to paragraph 38 of AG

PES 1 (Revised).


SECTION 110 – Integrity


SECTION 120 – Objectivity

Paragraphs 120.1 to 120.2 The Auditor-General has higher audit

independence standards than the standards

set out in PES 1 (Revised). Refer to


SECTION 130 – Professional Competence and Due Care

Paragraphs 130.1 to 130.6 Appointed auditors are required to possess

additional technical and behavioural

competencies in carrying out annual audits

and/or other work on behalf of the Auditor-

General. Refer to paragraphs 11 to 15 of AG

PES 1 (Revised).

SECTION 140 – Confidentiality

Paragraphs 140.1 to 140.6 Clarification of the ownership of information

obtained in carrying out annual audits and/or

other work on behalf of the Auditor-General is

provided in paragraphs 16 and 18 of AG PES

1 (Revised).

In addition, specific requirements exist when

in contact with the news media, attending

public meetings, and in prohibiting the private

use of information. Refer to paragraphs 19 to

21 of AG PES 1 (Revised).

Paragraphs 140.7, NZ140.7.1 and 140.8 Section 30 of the Public Audit Act 2001





establishes the disclosure requirements for

the Auditor-General, and take precedence

over the requirements of paragraphs 140.7,

NZ140.7.1 and 140.8.

Paragraphs NZ140.9 and NZ140.10 Section 30 of the Public Audit Act 2001



over the requirements of paragraphs

NZ140.9 and NZ140.10.

In addition, the Auditor-General’s statements

AG ISA(NZ) 240: The Auditor-General’s

Statement on the Auditor’s Responsibilities

Relating to Fraud in an Annual Audit and AG

ISA(NZ) 250: The Auditor-General’s

Statement on Consideration of Laws and

Regulations establish requirements and

provide guidance on disclosures relating to

fraudulent or illegal activities.

SECTION 150 – Professional Behaviour


PART B: APPLICATION OF THE FUNDAMENTAL PRINCIPLES

SECTION 200 – Introduction



standard in determining if the fundamental

principles have been compromised. This







determining if other Fundamental Principles





have been compromised. Refer to



Paragraph 200.12 An important “firm-wide” safeguard in audits

carried out for the Auditor-General is to refer

any circumstances that either compromise, or

may compromise, compliance with

Fundamental Principles to the OAG.

Please note that the safeguard of “using

different partners and engagement teams

with separate reporting lines for the provision

of non-assurance services to an assurance

client” does not satisfy “independence in

appearance” and is not a satisfactory

safeguard. Refer to paragraphs 28 to 32 of

AG PES 1 (Revised).

Paragraph 200.13 An important engagement specific safeguard

in audits carried out for the Auditor-General is

to refer any circumstances that either

compromise, or may compromise,

compliance with Fundamental Principles to

the OAG.

Please note that the safeguard of “having an

assurance partner who was not involved with

the non-assurance service review the non-

assurance work performed or otherwise

advise as necessary” does not satisfy

“independence in appearance” and is not a

satisfactory safeguard. Refer to paragraphs

28 to 32 of AG PES 1 (Revised).

In addition, other examples of engagement-

specific safeguards are not considered to be





appropriate because the interests of the party

(to whom the matter is consulted with,

discussed with, or disclosed to) will often

differ from the public interest. The safeguards

referred to include:

- “Consulting an independent third party,

such as a committee of independent

directors, a professional or regulatory

body or another assurance

practitioner.”

- “Discussing ethical issues with those

charged with governance of the client.”

- “Disclosing to those charged with

governance of the client the nature of

the services and extent of fees

charged.”


SECTION 210 – Professional Appointment

Paragraphs 210.1 to 210.8 As a statutory auditor the Auditor-General

cannot decline an engagement or refuse to

continue an engagement. If circumstances

exist that would normally lead an assurance

practitioner to decline an engagement or

refuse to continue an engagement then the

appointed auditor shall advise the OAG of the

circumstances. Refer to paragraphs 11 to 12

of AG PES 3.

Paragraphs 210.9 to NZ210.14 Section 30 of the Public Audit Act 2001



over the requirements of paragraphs 210.9

and NZ140.10.

Although section 30 applies to information

obtained when carrying out annual audits





and/or other work on behalf of the Auditor-

General, the Auditor-General will normally

apply the section 30 criteria in determining

the appropriate disclosures to be made

where a change in the Auditor-General’s

appointment occurs. Such a change will arise

when an entity either becomes, or ceases

being, a “public entity”.

SECTION 220 – Conflicts of Interest



standard in assessing whether a conflict of

interest exists, or may arise in the future. This







determining if a conflict of interest exists, or

may arise in the future. Refer to paragraphs



Paragraph 220.9 If a conflict of interest is identified the

assurance practitioner shall advise the OAG.

The OAG, in conjunction with the appointed

auditor will determine any actions to be taken

to respond to the conflict of interest.

Paragraphs 220.10 to NZ220.14 No additional requirement or interpretation.

SECTION 240 – Fees and Other Types of Remuneration


Paragraphs 240.3 to 240.4 Contingent fee arrangements are not

permitted for non-assurance engagements

carried out by ASPs. Refer to paragraph S10





of Appendix 2 to AG PES 1 (Revised).

Paragraphs 240.8 to NZ240.9 No additional requirement or interpretation.

SECTION 250 – Marketing Assurance Services


SECTION 260 – Gifts and Hospitality


Paragraphs 260.2 and 260.3 No firm or individual subject to AG PES 1

(Revised) shall accept gifts or hospitality,

unless the value is trivial and

inconsequential. Refer to paragraph U1 and

U2 of Appendix 2 of AG PES 1 (Revised).

SECTION 270 – Custody of Client Assets


SECTION 280 – Objectivity


Paragraph 280.2 Some aspects of PES 1 (Revised) do not

apply to the Auditor-General because they do

not meet the minimum standards of

independence required for annual audits

and/or other work carried out on behalf of the

Auditor-General. The specific aspects of PES

1 (Revised) that do not apply to the Auditor-

General are:

- Paragraphs 290.500 to 290.514

concerning reports that include a

restriction on use and distribution; and

- Section 291.


Paragraph 280.4 Where an appointed auditor, or their firm,

identifies a threat to objectivity they shall

advise the OAG. Refer to paragraphs 38 and

39 of AG PES 1 (Revised).





SECTION 290 – Independence – Audit and Review Engagements

Structure of Section

Paragraph 290.1 Section 290 of PES 1 (Revised) sets out the

base of minimum standards for annual audits


Auditor-General. Section 291 of PES 1

(Revised) does not apply to the Auditor-

General.

Paragraph NZ290.1.1 No additional requirement or interpretation.

Paragraph 290.2 Paragraphs 290.500 to 290.514, concerning

reports that include a restriction on use and

distribution, do not apply to the Auditor-

General.


A Conceptual Framework Approach to Independence



standard in determining if independence has

been threatened. This standard, and the

reasons behind it, are set out in paragraphs



Networks and Network Firms

Paragraphs 290.13 to 290.24 The decision on whether a network, or a

network firm, threatens audit independence

will be made by the OAG, having taken

account of the guidance in paragraphs

290.13 to 290.24 of PES 1 (Revised). The

OAG decision will be based on the principles

and approach set out in paragraphs 28 to 32

of AG PES 1 (Revised).





Public Interest Entities


Related Entities


Those Charged with Governance

Paragraph 290.28 Regular communication on independence

matters with those charged with governance

of an entity is encouraged. However, the final

decision on independence matters rests with

the OAG and will be based on the principles

and approach set out in paragraphs 28 to 32


Documentation


Engagement Period


Paragraphs 290.31 to 290.32 The decision on whether an audit service

provider’s previous involvement with an entity

might threaten independence will be made by

the OAG, taking account of the guidance in

paragraphs 290.31 to 290.32 of PES 1

(Revised). The OAG decision will be based

on the principles and approach set out in


Mergers and Acquisitions

Paragraphs 290.33 to 290.38 The decision on whether a merger or

acquisition might threaten independence will

be made by the OAG, taking account of the

guidance in paragraphs 290.33 to 290.38 of

PES 1 (Revised). The OAG decision will be

based on the principles and approach set out

in paragraphs 28 to 32 of AG PES 1

(Revised).





Breach of a Provision of this Section

Paragraphs 290.39 to 290.49 Audit service providers and/or appointed

auditors shall advise the Assistant Auditor-

General – Accounting and Auditing Policy at

the OAG if there has been a breach of the

independence requirements of AG PES 1

(Revised), or if they have reason to believe

that a breach may arise in the future. Refer to

paragraph 38 of AG PES 1 (Revised).

The OAG will advise the action to be taken

having applied the principles and approach

set out in paragraphs 28 to 32 of AG PES 1

(Revised).

Application of the Conceptual Framework Approach to Independence

Paragraph 290.100 Paragraphs 290.102 to 290.231 of PES 1

(Revised) establish the base of specific

circumstances and relationships that create

or may create threats to independence.

However, in some instances the Auditor-

General has developed more stringent

requirements than those established in

paragraphs 290.102 to 290.231. The more

stringent requirements are specified in


Paragraph 290.101 For the purposes of informing the OAG all

interests should be regarded as material to

an individual.

Financial Interests

Paragraphs 290.102 to 290.117 These paragraphs are subject to the

requirements in paragraphs A1 to A12 of

Appendix 2 of AG PES 1 (Revised).

Loans and Guarantees






Business Relationships


Family and Personal Relationships


requirements in paragraphs D1 to D4 of


Employment with an Audit or Review Client


requirements in paragraphs E1 to E4 of


Temporary Staff Assignments

Paragraph 290.142 This paragraph is subject to the requirements

in paragraphs F1 to F2 of Appendix 2 of AG

PES 1 (Revised).

Recent Service with an Audit or Review Client


requirements in paragraphs G1 to G2 of


Serving as a Director or Officer of an Audit or Review Client


requirements in paragraphs H1 to H2 of


Long Association of Senior Personnel (Including Partner Rotation) with an Audit or

Review Client


requirements in paragraphs I1 to I6 of


Provision of Non-assurance Services to Audit or Review Clients


Paragraph 290.160 Audit service providers and/or appointed

auditors shall advise the OAG if the network





firm is contemplating providing assurance or

non-assurance services to an entity related to

a public entity where the appointed auditor is

carrying out an annual audit and/or other

work on behalf of the Auditor-General.

The OAG will make a decision based on the

principles and approach set out in



Management Responsibilities


Paragraph 290.164 Audit service providers shall not carry out

activities for a public entity, including

activities that are routine and administrative,

or involve matters that are insignificant.

Audit service providers and/or appointed

auditors may seek OAG approval to carry out

activities for a public entity. The OAG will

make a decision based on the principles and

approach set out in paragraphs 28 to 32 of

AG PES 1 (Revised).


Preparing Accounting Records and Financial Statements


requirements in paragraphs J1 to J6 of


For the avoidance of doubt audit service

providers shall not provide any payroll

services to public entities.

Valuation Services






requirements in paragraphs K1 to K2 of


Taxation Services


requirements in paragraphs L1 to L10 of


Internal Audit Services


requirements in paragraphs M1 to M6 of


IT Systems Services


requirements in paragraphs N1 to N3 of


Litigation Support Services


requirements in paragraphs O1 to O3 of


Legal Services


requirements in paragraphs P1 to P2 of


Recruiting Services


Corporate Finance Services


requirements in paragraphs R1 to R3 of


Fees

Fees – Relative Size






requirements in paragraphs S1 to S9 of


Fees - Overdue


Contingent Fees


requirement in paragraph S10 of Appendix 2


Compensation and Evaluation Policies


requirements in paragraphs of T1 and T2 of


Gifts and Hospitality


Actual and Threatened Litigation

Paragraph 290.231 These paragraphs are subject to the

requirement in paragraphs V1 and V2 of


Reports that Include a Restriction on Use and Distribution

Paragraphs 290.500 to 290.514 Paragraphs 290.500 to 290.514 do not apply

because they do not meet the minimum

standards of independence required for

annual audits and/or other work carried out

on behalf of the Auditor-General.

SECTION 291 – Independence – Other Assurance Engagements

Paragraphs 291.1 to 290.159 Paragraphs 291.1 to 290.159 of PES 1

(Revised) do not apply because they do not

meet the minimum standards of



Auditor-General.

Interpretation 2005-1 Interpretation 2005-1 accompanies





paragraphs 291.1 to 290.159 of PES 1

(Revised), and does not apply because it

does not meet the minimum standards of



Auditor-General.

DEFINITIONS

The Auditor-General’s Glossary of Terms

contains amended definitions for the terms

“Acceptable level” and “Independence”.

EFFECTIVE DATE

AG PES 1 (Revised) applies from 1 April

2014.

AG PES 3 Quality control


AG PES 3: AUDITOR-GENERAL’S STATEMENT ON

QUALITY CONTROL

Contents

Page

Introduction 3 - 401


Application 3 - 401

Background information 3 - 402

Objectives 3 - 402

Definitions 3 - 403

Requirements 3 - 403

Engagement acceptance and continuance procedures 3 - 403

Determining whether work other than the annual audit should

be carried out 3 - 403

Requirements for engagement quality control review for annual audits 3 - 404

Auditor-General’s engagement quality control review procedures 3 - 404

Requirements for quality control review for work other than the

annual audit 3 - 406

Application and Other Explanatory Material 3 - 406

Engagement acceptance and continuance procedures in relation

to annual audits 3 - 406



Introduction



(a) establishes the Auditor-General’s requirements in relation to PES 3: Quality

Control (PES 3) issued by the External Reporting Board, which applies to all

assurance providers; and


Application

2. Compliance with this Statement is mandatory for the “firm”. For the purposes of PES-

3 the “firm” is defined as:

“the combination of the statutory officer (where a statutory officer, such as the

Auditor-General appoints an employee, a Chartered Accountant, or other suitably

qualified person (appointed auditor) to perform audits or other assurance services on

that officer’s behalf) the appointed auditor, and, if applicable, the firm of which the

appointed auditor is a partner, member or employee.”

3. PES 3 was issued to establish:

(a) the system of quality control that is required to be applied by the “firm” (in

paragraphs 1 to 66 and A1 to A83 of PES 3 for assurance engagements); and

(b) quality control policies and procedures to be applied to specific engagements,

other than the annual audit, carried out on behalf of the Auditor-General (in

paragraphs 67 to 89 and A84 to A108).

4. This Statement applies to the work carried out by the Auditor-General or on behalf of

the Auditor-General with either:

(a) reporting periods for annual audits beginning on or after 1 July 2013 ,

although earlier application is encouraged; or

(b) in respect of all work, other than annual audits, beginning on or after 1 July

2013.

5. PES 3 and AG-PES 3 (which establish the overall framework for quality control) is

designed to apply to the system of quality control for all the work carried out on behalf




Background information

6. Producing work that meets appropriate standards of quality is fundamental to the

reputation and credibility of the Auditor-General, and ultimately to the Auditor-

General’s ability to fulfil the Auditor-General’s mandate. This Statement, in

conjunction with PES 3, assists the Auditor-General to establish and maintain an

appropriate system of quality control that covers all of the Auditor-General’s work.

7. Quality control procedures for annual audits are specified in ISA (NZ) 220: Quality

Control for an Audit of Financial Statements.

8. With reference to paragraph 1(a) of PES 3, in the public sector, “work generally

undertaken” refers to annual audits and/or other work that directly arises from being

the auditor, performance audits, other auditing services, and inquiries – in other

words, any work that is carried out on behalf of the Auditor-General.

Objectives

9. The objectives of the “firm” (“firm” is defined in paragraph 2 above) are to:

(a) establish and maintain a system of quality control to provide reasonable

assurance that:

(i) the firm and its personnel comply with the Auditor-General’s Auditing

Standards and applicable legal and regulatory requirements; and

(ii) reports issued by the Auditor-General, the Deputy Auditor-General

and their staff, and Appointed Auditors and their staff are appropriate

in the circumstances;

(b) implement quality control procedures at the engagement level for annual

audits in keeping with the requirements of ISA (NZ) 220: Quality Control for

an Audit of Financial Statements;1 and

(c) implement quality control procedures that are appropriate for all work carried

by or on behalf of the Auditor-General (other than the annual audit) in order to

provide reasonable assurance that:

(i) the work complies with the Auditor-General’s Auditing Standards and

applicable legal and regulatory requirements; and

(ii) any report issued is appropriate in the circumstances.

1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”.

However, for the purposes of the Auditor-General’s auditing standards and statements, all references to “historical financial information” should be read as the audit of “historical financial and non-financial information”.



Definitions







definition shall prevail); and

(b) in the Auditor-General’s Glossary of Terms.

Requirements

Engagement acceptance and continuance procedures

11. Appointed Auditors shall complete acceptance and continuance procedures before

planning the annual audit and/or other work carried out on behalf of the Auditor-

General, as required by PES 3.

12. Appointed Auditors shall contact the Assistant Auditor-General – Accounting and

Auditing Policy if:

(a) the acceptance and continuance procedures indicate that there are significant

risks in carrying out the annual audit and/or other work carried out on behalf

of the Auditor-General that ordinarily may have caused the annual audit

and/or other work to be declined; or

(b) the annual audit and/or other work may pose significant risks to the Auditor-

General; or

(c) if a public entity refuses to supply information, the matter shall be referred to

the OAG. The OAG will determine whether it is necessary to issue a formal

request to the public entity to produce the information. (Ref: Para. A1)

Determining whether work other than the annual audit should be carried out

13. The Auditor-General, the Deputy Auditor-General, their staff, and the Audit Service

Provider and their staff shall determine whether work carried out by or on behalf of

the Auditor-General, other than the annual audit, should be carried out, by having

regard to AG PES 1 (Revised): Code of ethics for assurance practitioners.



Requirements for engagement quality control review for annual audits

14. An engagement quality control review shall be carried out for:

(a) all annual audits over 750 budgeted hours;

(b) all annual audits of issuers;

(c) all Long-term Plan (LTP) audits where an engagement quality control review

was carried out on the annual audit;

(d) all other assurance engagements of issuers; and

(e) all high-risk annual audits less than 750 hours (refer to paragraph 15 below

for further guidance on assessing high-risk audits).

15. Subject to the provisions in paragraph 14 above, Appointed Auditors shall perform

their own risk assessments of all annual audits less than 750 hours to determine

whether the annual audit should be subject to engagement quality control review. The

risk assessments shall be performed annually. Examples of annual audits that would

normally meet the definition of “high risk” include:

(a) entities that are likely to be privatised, either wholly or in part;

(b) entities where there is significant media or political interest;

(c) entities that engage in large and complex financial transactions; and

(d) entities where there may be significant doubt about the validity of the going

concern assumption.

16. Where provision for an engagement quality control review is included in a proposal to

carry out an annual audit on behalf of the Auditor-General, and cited in the audit

engagement agreement, the terms of the audit engagement agreement take

precedence over the provisions in paragraphs 14 and 15 above, and the involvement

of an engagement quality control reviewer will continue to be required in those annual

audits.

17. Appointed Auditors shall apply the Auditor-General’s policies and procedures for

engagement quality control reviews for annual audits in paragraphs 18 to 24. The

Auditor-General’s policies and procedures take account of paragraphs 41 to 48 of

PES 3.

Auditor-General’s engagement quality control review procedures

18. The engagement quality control reviewer shall be an individual with sufficient

appropriate experience and authority to act as the Appointed Auditor on the audit for

which they are assigned as the engagement quality control reviewer.



19. In addition to meeting the Auditor-General’s independence standards required of

Appointed Auditors, the engagement quality control reviewer shall remain

operationally independent of both the engagement team carrying out the annual audit

and the public entity.

20. The Appointed Auditor shall keep the engagement quality control reviewer informed

of significant issues as they arise, but shall acknowledge the engagement quality

control reviewer’s operational independence by ensuring that they do not become

involved in the resolution of issues. Resolution of issues shall occur within the

engagement team or by using other resources within or available to the firm.

21. If, after they have been appointed, it emerges that the engagement quality control

reviewer may not be able to perform an objective engagement quality control review,

the Appointed Auditor shall find a suitable alternative. If a suitable alternative

engagement control reviewer cannot be found, the Appointed Auditor shall consult

the OAG.

22. The precise nature, timing, and extent of the engagement quality control review will

be left to the engagement quality control reviewer’s professional judgement.

However, as a minimum, the engagement quality control review shall include the

matters set out in paragraph 23 below. The engagement quality control review shall

be completed before the audit report is signed.

23. As part of performing the engagement quality control review, the engagement quality

control reviewer shall:

(a) obtain an understanding of the entity’s purpose, significant activities during the

current year, and significant financial and non-financial reporting issues and

risks;

(b) review the engagement team’s evaluation of the firm’s independence in relation

to the annual audit;

(c) evaluate the judgements made, in particular with respect to materiality and

significant risks;

(d) evaluate the adequacy of engagement planning;

(e) evaluate judgements made about:

(i) the materiality and disposition of corrected and uncorrected identified

misstatements; and

(ii) the severity and disposition of identified control deficiencies;

(f) determine whether appropriate consultations have taken place on difficult or

contentious matters;



(g) read other information in documents containing the material that is subject to

audit, and evaluate whether the Appointed Auditor has taken appropriate action

with respect to material inconsistencies with the material that is subject to audit

or material misstatements of fact of which the engagement quality control

reviewer is aware;

(h) review any document summarising the audit conclusions and confirm with the

Appointed Auditor that there are no significant unresolved matters;

(i) discuss any significant and unresolved matters with the Appointed Auditor and

ensure that the matters are appropriately resolved before the audit report is

signed;

(j) assess, based on professional judgement, whether the documentation selected

for review reflects the work performed in relation to the significant judgements

made by the Appointed Auditor and support the conclusions reached;

(k) determine whether appropriate matters have been communicated, or identified

for communication, to the entity and to other parties, such as the OAG; and

(l) read the material that is subject to audit and the auditor’s report that the

Appointed Auditor is proposing to issue and ensure that the audit opinion is

appropriate and that the auditor’s report is worded in keeping with the Auditor-

General’s Statement AG ISA (NZ) 700: Forming an opinion and reporting on

financial and non-financial information.

24. The engagement quality control reviewer shall maintain sufficient documentation to

demonstrate compliance with the requirements of this Statement.

Requirements for quality control review for work other than the annual audit

25. The Auditor-General, the Deputy Auditor-General, their staff, and Appointed Auditors

and their staff shall apply the quality control review procedures in PES 3 in relation to

work other than the annual audit.

***

Application and Other Explanatory Material

Engagement acceptance and continuance procedures in relation to annual audits (Ref:

Para. 12)

A1 It is important that the OAG is made aware of significant risks because the Auditor-

General cannot decline an annual audit, and it is often inappropriate to decline other

work because of public interest considerations. As a result, it would be necessary in



this situation for the OAG, in conjunction with the Appointed Auditor, to actively

manage the risks to the Auditor-General.

AG-5 Performance audits, other auditing services and other work


AUDITOR-GENERAL’S AUDITING STANDARD 5

PERFORMANCE AUDITS, OTHER AUDITING SERVICES

AND OTHER WORK CARRIED OUT BY OR ON BEHALF OF THE

AUDITOR-GENERAL

Contents

Page


Scope of this Standard 3 - 1002

Application 3 - 1002

Objectives 3 - 1003

Principles 3 - 1003

Definitions 3 - 1004


Applying the principles 3 - 1004

Determining whether the work should be carried out 3 - 1005

Determining whether the work should be carried out on behalf of the

Auditor-General 3 - 1005

Formulating the terms of the work and communicating this to relevant

parties 3 - 1005

Planning the work 3 - 1005

Obtaining and substantiating evidence 3 - 1006

Documentation 3 - 1006

Reporting 3 - 1007

Identification of additional matters for follow-up 3 - 1007

Communication of other matters arising during the work 3 - 1007


Applying the principles 3 - 1007

Determining whether the work should be carried out 3 - 1007

Determining whether the work should be carried out on behalf of the

Auditor-General 3 - 1009

Formulating the terms of the work and communicating this to relevant

parties 3 - 1010



Planning the work 3 - 1010

Obtaining and substantiating evidence 3 - 1011

Documentation 3 - 1012

Communication of other matters arising during the work 3 - 1013



Introduction

Scope of this Standard

1. This Auditor-General’s Auditing Standard establishes the principles to be followed,

establishes requirements and provides application guidance (where appropriate) for

auditors carrying out the following work on behalf of the Auditor-General:1

(a) Performance audits under section 16 of Public Audit Act 2001 (“the Act”);

(b) Other auditing services under section 17 of the Act; and/or

(c) Other work (other than the annual audit).2

Application

2. The Standards for annual audits are specified in the International Standards on

Auditing (New Zealand) and the accompanying Auditor-General’s Statements, and the

Auditor-General’s Specific Standards:

(a) AG-1: Reporting to the OAG;

(b) AG-2: The appropriation audit and the controller function;

(c) AG-3: The auditor’s approach to issues of effectiveness and efficiency, waste,

and a lack of probity or financial prudence; and, where applicable

(d) AG-4: The audit of service of performance reports or AG-4 (revised): The audit

of service of performance reports.

3. The Standards for inquiries carried out under section 18 of the Act are specified in the

Auditor-General’s Specific Standard AG-6: Inquiries carried out by or on behalf of the

Auditor-General.

4. Compliance with this Standard is mandatory for the Auditor-General, the Deputy

Auditor-General and their staff, and Audit Service Providers and their staff.

5. This Standard recognises that more specific standards may also apply to the work. It is

expected that the more specific standard should be applied to the work, together with

the general requirements of this Standard. If there are conflicting requirements

between this Standard and the more specific standard then the requirements of the

more specific standard shall generally apply.

6. In carrying out the work, the auditor shall note that the Act permits an examination of

effectiveness and efficiency as long as that examination takes into account any

applicable government or local authority policy.

1 Figure 1 depicts the two main categories of work carried out by or on behalf of the Auditor-General and the

Standards that apply to each category of work. 2 Refer to definition in paragraph 10.



Figure 1 – Application of the Auditor-General’s auditing standards

PES 1 (Revised): Code of Ethics for Assurance Practitioners and AG PES 1 (Revised)

PES 3: Quality Control and AG PES 3

Standards that apply to annual audits

Standards that apply to all work (other than annual audits)

ISA (NZ)s

AG ISA (NZ)s

AG Specific Standards 1 to 4

AG Specific Standards 5 and 6

7. This Standard applies to all performance audits, other auditing services and other work

commenced on or after the date of issue of this Standard.

Objectives

8. The objectives of the auditor are to:

(a) carry out a performance audit, other auditing services or other work as fully as

necessary to form conclusions in accordance with the terms of work;

(b) form conclusions based on the evidence; and

(c) clearly communicate any findings, conclusions or recommendations.

Principles

9. Auditors shall apply the following principles in the Auditor-General’s Statement on Code

of Ethics for Assurance Practitioners (AG PES 1 (Revised)) as well as the principles in

AG PES 3: Quality Control, when carrying out work on behalf of the Auditor-General:

(a) Integrity;

(b) Objectivity;

(c) Professional Competence and Due Care;

(d) Confidentiality; and

(e) Professional behaviour.



Definitions

10. For the purpose of this Auditor-General’s Auditing Standard the defined terms have the

meanings attributed:






(b) in the Auditor-General’s Glossary of Terms; and

(c) in the list below.

Auditor means the Auditor-General, the Deputy Auditor-

General and their staff and Audit Service Providers

and their staff.

Other work means all work carried out on behalf of the Auditor-

General other than annual audits (under sections 15

and 19 of the Act), performance audits (under section

16 of the Act), other auditing services (under section

17 of the Act) and inquiries (under section 18 of the

Act). Other work may include:

- work required by statute such as audits of Long-

Term Plans under the Local Government Act

2002; or

- work carried out at the discretion of the Auditor-

General.

Terms of the work means the documentation outlining the scope of the

performance audit, other auditing services or other

work to be carried out on behalf of the Auditor-

General.

Requirements

Applying the principles

11. Auditors shall apply the principles in paragraph 9 when carrying out their work. (Ref:

Para. A1)



Determining whether the work should be carried out

12. Decisions on which performance audits will be carried out shall be made through the

OAG processes for developing the Auditor-General’s work programme required under

the Public Audit Act 2001. For all other work, auditors shall determine whether the work

should be carried out, in accordance with any relevant OAG policies and/or guidelines.

13. Auditors shall consult the relevant OAG sector manager before accepting any other

work or finalising the terms of the work for any other work that is of possible media or

political interest, is generally of a sensitive nature, or relates to another core interest of

the Auditor-General (such as a matter of compliance with statutory obligations,

effectiveness and efficiency, waste, or a lack of probity and/or financial prudence). (Ref:

Para. A2 - A6)

14. Auditors shall implement quality control procedures for their work, in accordance with

Professional and Ethical Standard 3: Quality Control (PES 3) and, where applicable,

the accompanying Auditor-General’s statement (AG PES 3: Quality Control). (Ref:

Para. A7 - A9)

Determining whether the work should be carried out on behalf of the Auditor-General

15. Auditors, other than staff of the Auditor-General, shall consult the OAG to determine

whether the work should be carried out on behalf of the Auditor-General rather than in

the name of the Audit Service Provider. (Ref: Para. A10 - A15)

Formulating the terms of the work and communicating this to relevant parties

16. The terms of the work for performance audits shall be formulated by the OAG. Where

the performance audit is to be carried out (in part or in total) by an auditor external to

the OAG (an external auditor), the terms of the work shall be formulated by the OAG in

consultation with the external auditor. The terms of other auditing services or other

work shall be formulated in accordance with any delegations by the Auditor-General,

and AG PES 1 (Revised).

17. Once the terms of the work have been formulated in accordance with paragraph 16, the

terms shall, where appropriate, be made available to the relevant parties who may be

affected by the work. (Ref: Para. A16 - A19)

Planning the work

18. The auditor shall plan the work so that it will be performed effectively. (Ref: Para. A20 -

A22)



19. The auditor shall consider materiality and any significant risks when planning and

carrying out the work. (Ref: Para. A23 - A24)

Obtaining and substantiating evidence

20. The auditor shall obtain sufficient appropriate evidence on which to base the auditor’s

findings, recommendations, and, where appropriate, their conclusions.

21. The auditor shall evaluate the evidence obtained from the procedures performed as a

basis for clearly expressing the auditor’s findings, recommendations and, where

appropriate, their conclusions.

22. Where appropriate, and whenever the auditor is proposing to criticise a person or

organisation, the auditor shall provide relevant parties with sufficient information in

order to seek comments on:

(a) the factual accuracy of the auditor’s findings, recommendations and, where

appropriate, their conclusions;

(b) whether any facts material to the auditor’s findings, recommendations and,

where appropriate, their conclusions, have been omitted; and

(c) the balance and fairness of the auditor’s findings, recommendations and,

where appropriate, their conclusions.

23. The auditor shall consider any feedback received from relevant parties from whom

comments have been sought and, if necessary, make such changes to the auditor’s

findings, recommendations and, where appropriate, their conclusions that the auditor

considers necessary to achieve a report that is factually accurate and that is also

balanced and fair.

24. If relevant to the work, the auditor shall consider the effect of events occurring:

(a) between the period subject to the work (if the work relates to a specific period)

and the release of the auditor’s report of findings, recommendations and,

where appropriate, their conclusions; or

(b) between the completion of the formal evidence gathering procedures and the

release of the auditor’s findings, recommendations and, where appropriate,

their conclusions. (Ref: Para. A25 - A28)

Documentation

25. The auditor shall prepare for filing, documentation on a timely basis, that is sufficient

and appropriate to provide:



(a) a basis for the auditor’s findings, recommendations and, where appropriate,

their conclusions; and

(b) evidence that the work was carried out in accordance with this Standard and/or

other specific standards that are relevant to the work. (Ref: Para. A29 - A32)

Reporting

26. The final report shall contain a clear expression of the auditor’s findings,

recommendations and, where appropriate, their conclusions.

Identification of additional matters for follow-up

27. The auditor shall consider whether any matters that have come to their attention that

are of relevance to the Auditor-General (which are outside the terms of the work) and

should be referred elsewhere within the OAG for follow-up.

Communication of other matters arising during the work

28. The auditor shall consider any other reporting obligations to regulators and other

parties in relation to matters identified during the work. (Ref: Para. A33 - A34)

***


Applying the principles (Ref: Para. 11)

A1. Auditors may also need to comply with an ethical code (or equivalent) that applies to

them because they are members of a profession or occupational group other than the

New Zealand Institute of Chartered Accountants. Where a conflict arises, or may arise,

because of a conflict between the Auditor-General’s principles in paragraph 9 and any

other ethical code (or equivalent) that the auditor is required to comply with, then the

auditor should raise the actual or perceived conflict with the individual ultimately

responsible for the work with a view to resolving the conflict.

Determining whether the work should be carried out (Ref: Para. 13 - 14)

A2. Work is often discretionary (at the discretion of the Auditor-General, or at the discretion

of an employee of the Auditor-General under delegation). The exercise of the

discretionary powers is often guided by internal policies.



A3. Specifically, in determining whether to carry out work, the auditor should consider

whether:

- the work is within the Auditor-General’s statutory authority;

- there are no significant matters that indicate that the work should not be

accepted, notwithstanding that the engagement is within the Auditor-General’s

statutory authority; and

- the terms of the work are appropriate.

A4. Some work is not within the statutory authority of the Auditor-General. An example of

such work is a request to carry out work for a non public entity in respect of non public

entity resources. Also if the subject matter of the work concerns issues of policy then

this is beyond the Auditor-General’s statutory authority.

A5. Other work, although falling within the Auditor-General’s statutory authority, may not be

carried out (either on behalf of the Auditor-General or in the name of the Audit Service

Provider) because of the wider interests of the Auditor-General. Questions to consider

include:

- Has the entity been involved in any political or public controversy, or does it

operate in a politically sensitive environment?

- Are there other agencies or institutions already involved (such as a central

agency, a select committee, or a regulator)?

- Could the work have implications for other entities in the public sector (such as

if a probity matter concerns a board member who is also a director of other

entities in the public sector)?

- Is the entity subject to organisational, legislative, or other change?

- Has the Auditor-General carried out any previous work in relation to this entity

(for example, an enquiry into probity issues), or on the subject matter of the

work (for example, a report of consultation procedures)?

- Is any future performance audit or other work proposed by the Auditor-

General?

- How does the entity intend making use of any report arising from the work?

- Is the report likely to be used in the context of any legal or other dispute the

entity has with other parties?

A6. The Auditor-General’s statement on quality control (AG PES 3) requires consultation

with the Assistant Auditor-General – Accounting and Auditing Policy if:

- there are significant risks in carrying out the work that would ordinarily lead the

auditor to decline the work; or

- the work may pose significant risks to the Auditor-General.

A7. The reason for this consultative requirement is to appropriately consider any significant

risks to the Auditor-General arising from the work. A consequence of consultation may



be an amendment to the terms of the work and/or the introduction of additional quality

control procedures.

A8. The Auditor-General is sometimes requested to carry out work where the terms of the

work is prescribed by other parties. Such work should not be accepted where the terms

of the work have been scoped inappropriately and will possibly result in an incomplete

or distorted report. A suitable amendment to the terms of the work may enable the

Auditor-General to carry out the work.

A9. If there is any doubt as to whether an engagement should be accepted, the auditor

should consult with the OAG.

Determining whether the work should be carried out on behalf of the Auditor-General

(Ref: Para. 15)

A10. The guidance under this heading only applies to auditors, other than staff of the

Auditor-General. This is because all work performed by staff of the Auditor-General is

carried out on behalf of the Auditor-General.

A11. Auditors should seek the advice of the OAG, unless otherwise provided in an audit brief

or other dispensation, in determining whether the work should be carried out on behalf


A12. Auditors should consult the OAG if they are unsure whether work should be signed “On

behalf of the Auditor-General”.

A13. Auditors should first ensure that the work complies with AG PES 1 (Revised). Auditors

should consult with the OAG in respect of any work that may be of possible media or

political interest or of a sensitive nature. Examples of such work are set out in

paragraph A5 above.

A14. Certain work requires the auditor to report to a third party and relies, in part or in total, on

the evidence obtained from the annual audit. Where approved by the OAG, these

engagements should be carried out and reported “On behalf of the Auditor-General”. This

category of engagement may include reports issued on:

- a prospectus prepared by an entity;

- an entity’s compliance with the terms of a trust deed;

- an entity’s information provided to the Commerce Commission because they

operate in a “regulated industry”; or

- an entity’s “alternative” financial statements (such as Economic Value Added

(EVA) financial statements).



A15. Unless approval has already been provided by the OAG, auditors should seek approval

by providing the following information to the Assistant Auditor-General – Accounting

and Auditing Policy:

- full details of the nature of the engagement (supported by relevant documents

such as Trust Deeds, as appropriate); and

- the proposed wording of the report to the third party.

Formulating the terms of the work and communicating this to relevant parties (Ref: Para.

16 - 17)

A16. In formulating the terms of the work the OAG and/or the auditor should, where

appropriate, consult with relevant parties. Such consultation assists in achieving

balance and fairness in the terms of the work.

A17. On occasions it may be necessary to revise the terms of the work. Other than for minor

and inconsequential changes the same or a similar process should be followed as the

process used in determining the original terms of work.

A18. Where appropriate, the terms of the work should be communicated in writing to relevant

parties.

A19. Where appropriate, it is desirable that a formal acknowledgement of the terms of the

work is obtained from the party who is ultimately responsible for the matter that is the

subject of the work. The purpose of this process is to seek (as a minimum) the

acknowledgement, by the party who is being assessed or otherwise examined, of the

criteria that the auditor will be applying in making their assessment or examination.

Planning the work (Ref: Para. 18 - 19)

A20. The auditor should plan and carry out the work with professional scepticism,

recognising that circumstances may exist that cause the party who is ultimately

responsible for the matter to portray the matter in a favourable (or unfavourable) light.

A21. The auditor should obtain an understanding of the entity or activity, the subject matter

of the work (including any supporting policies, systems and processes), and other

relevant information. This understanding should be sufficient to identify and assess the

key risks surrounding the work, and sufficient to design and carry out evidence-

gathering procedures.

A22. The auditor should determine what information is needed to ensure a fair process is

followed when carrying out the work. For example, information would normally be

obtained from the parties directly affected by the work.



A23. A matter would be considered material if, in our judgement, are likely to influence users’

overall understanding of the auditor’s findings, recommendations and, where


A24. Considering materiality requires the auditor to understand and assess what factors are

likely to influence users’ understanding of the auditor’s findings, recommendations, and,

where appropriate, their conclusions. Auditors should use their judgement to assess

whether matters are material. A matter may be considered to be material if it:

- indicates a serious threat to, or lack of, financial viability of a public entity or an

activity;

- indicates that a public entity or an activity is not achieving, or is unlikely to

achieve, its objectives;

- undermines basic accountability arrangements of a public entity or an activity;

- is outside the capacity of, or undermines the purpose of, a public entity or an

activity;

- represents a significant abuse or misuse of powers conferred by Parliament;

- calls into question the probity of a major part or all of a public entity or activity;

- relates to an activity which could be of significant interest to the public;

- affects public health and safety;

- has disadvantaged the public (for example, through actual or opportunity cost to

the taxpayer or ratepayer); or

- indicates a significant departure from an industry or accepted standard or good

practice.

Obtaining and substantiating evidence (Ref: Para. 20 - 24)

A25. Where appropriate, the auditor should give all parties affected by the work the

opportunity to provide information relevant to the work. Providing this opportunity is

essential to ensuring a fair process is followed in obtaining evidence.

A26. When the work of experts is used, the auditor should:

- ensure that the expert is independent or, if independence in fact or in

appearance cannot be achieved, take measures to ensure the work of the

expert is objective and unbiased. For instance, the auditor may need to

engage their own expert to assess the work carried out by an expert employed

or engaged by an entity;

- specify, in writing, the following matters with the expert:

- the nature, scope, and objectives of that expert’s work;

- the respective roles of the auditor and that expert; and



- the nature, timing, and extent of communication between the auditor

and that expert, including the form of any report to be provided by that

expert;

- adopt appropriate quality control procedures covering the work of any experts

the auditor engages in the collection and evaluation of evidence; and

- be involved in and understand the work for which the expert is used, to an

extent sufficient to:

- obtain sufficient appropriate evidence that the expert’s work is

adequate for the purpose of the work; and

- be able to accept responsibility for the findings, recommendations,

and, where appropriate, the conclusions expressed in the expert’s

report.

A27. The auditor should not attempt to limit or reduce their findings by including reference in

those findings to their dependence on the work that may have been carried out by an

expert. This is because the auditor should have formed a view on the work of the expert

in accordance with paragraph A26.

A28. Where the work involves subject matter that can only be appropriately audited or

examined by an expert, the auditor may disclose details of the expert’s work, including

the name of the expert, in order to add credibility to the report. However, the auditor

should not refer to the expert in the auditor’s findings, recommendations, and, where


Documentation (Ref: Para. 25)

A29. The auditor should document discussions of significant matters, including when and

with whom the discussions took place.

A30. If the auditor has identified information that is inconsistent with the auditor’s final

conclusions regarding a significant matter, the auditor should document how the auditor

addressed the inconsistency in forming the auditor’s findings, recommendations, and,

where appropriate, their conclusions.

A31. After the documentation has been assembled for filing, the auditor should not delete or

discard documentation before the end of its retention period.

A32. If the auditor finds it necessary to modify documentation or add new documentation at a

later date, the auditor should, regardless of the nature of the modifications or additions,

document:

- when and by whom they were made, and (where applicable) reviewed; and

- the specific reasons for making them.



Communication of other matters arising during the work (Ref: Para. 28)

A33. Significant matters that come to the auditor’s attention as a result of their work should

be reported in writing, in a timely manner, to the party with primary responsibility for the

matters subject to the work, and/or to other relevant parties.

A34. Any reporting to regulators and/or other third parties should only be carried out

following consultation with the Assistant Auditor-General – Legal.

AG-6 Inquiries



INQUIRIES CARRIED OUT BY OR

ON BEHALF OF THE AUDITOR-GENERAL

Contents

Page




Objectives 3 - 1102



Administrative law principles 3 - 1103


Administrative law principles 3 - 1103

AG-6 Inquiries


Introduction


1. This Auditor-General’s Auditing Standard establishes the standards the Auditor-

General applies to the conduct of inquiries under section 18 of the Public Audit Act

2001.

Application

2. Compliance with this Standard is mandatory for the Auditor-General, the Deputy

Auditor-General and their staff, and, where applicable, individuals and/or entities that

are contracted to assist in the conduct of an inquiry.

3. Inquiries shall be carried out with regard to:

(a) The Auditor-General’s Statement on Professional and Ethical Standard 1

Revised: Code of Ethics for Assurance Practitioners (AG PES 1 (Revised));

and

(b) The Auditor-General’s Statement on Professional and Ethical Standard 3:

Quality Control (AG PES 3).

4. The specific requirements and guidance in this Statement should be considered as

additions to any professional standards that may be determined by any professional

body for which the Auditor-General, the Deputy Auditor-General and their staff, and,

where applicable, individuals and/or entities that are contracted to assist in the conduct

of an inquiry, may be members.

5. The Auditor-General, the Deputy Auditor-General and their staff, and, where applicable,

individuals and/or entities that are contracted to assist in the conduct of an inquiry, may

also need to comply with an ethical code (or equivalent) that applies to them because

they are members of a profession or occupational group other than the New Zealand

Institute of Chartered Accountants. Where a conflict arises, or may arise, because of a

conflict between the Auditor-General’s statements (in paragraph 3) and any other

ethical code (or equivalent) that is required to be complied with, then the actual or

perceived conflict should be raised with the individual ultimately responsible for the

inquiry with a view to resolving the conflict.

AG-6 Inquiries


The relationship between this Standard and the statements referred to above is

depicted as follows:

Application of the Auditor-General’s auditing standards

PES 1 (Revised): Code of Ethics for Assurance Practitioners and AG PES 1 (Revised)

PES 3: Quality Control and AG PES 3

Standards that apply to annual audits

Standards that apply to all work (other than annual audits)

ISA (NZ)s

AG ISA (NZ)s

AG Specific Standards 1 to 4

AG Specific Standards 5 and 6

6. This Standard applies to all inquiries commenced on or after the date of issue of this

Standard.

Objectives

7. The objectives of an inquiry are to:

(a) investigate a matter that is the subject of an inquiry as fully as necessary to

form conclusions on the matters raised or on appropriate next steps;

(b) form conclusions based on the evidence;

(c) ensure that the inquiry is carried out in accordance with administrative law

principles, and - in particular - that any person who may be adversely affected

by the inquiry’s conclusions is treated fairly; and

(d) where appropriate, clearly communicate any findings, conclusions, or

recommendations.

Definitions

8. For the purpose of this Auditor-General’s auditing standard the defined terms have the




AG-6 Inquiries






(c) in the following term.

Inquiry team means any staff of the Auditor-General assisting in the

conduct of an inquiry, and any individuals and/or

entities that are contracted to assist.

Requirements

Administrative law principles

9. Inquiries shall be carried out in accordance with the principles of administrative law,

including:

(a) Legality (Ref: Para A1 - A10);

(b) Fairness (Ref: Para A11 - A19); and

(c) Reasonableness (Ref: Para A20 - A21).

10. In order to meet the principles of administrative law, the inquiry team shall do what is

fair and reasonable in the particular circumstances to ensure that:

(a) the conclusions arising from inquiry work are well founded; and

(b) the rights of those criticised are properly protected.

***


Administrative law principles (Ref: Para. 9)

Legality

A1. The Auditor-General has several distinct obligations under the principle of legality to

ensure that:

- all inquiries are carried out within the Auditor-General’s authority;

- all reasonable steps are taken to ensure inquiry work is free of any legal or

factual errors;

- all reasonable steps are taken to ensure that all relevant and no irrelevant

matters are considered as part of the inquiry work; and

- all reasonable steps are taken to consider the individual facts covered by the

inquiry.

AG-6 Inquiries


A2. All work on inquiries should be carried out with the appropriate authority and should be

within the scope of the Auditor-General’s statutory functions. The inquiry must relate to

a public entity, and the issues should be within the terms of section 18 of the Public

Audit Act 2001.

A3. Section 18 of the Public Audit Act 2001 states:

“(1) The Auditor-General may inquire, either on request or on the Auditor-General’s

own initiative, into any matter concerning a public entity’s use of its resources.

(2) Subsection (1) does not apply to the Reserve Bank of New Zealand or any

registered bank (as defined in section 2(1) of the Reserve Bank of New

Zealand Act 1989).

(3) If subsection (1) applies and there is an applicable government or local

authority policy to which the public entity is required to adhere, the inquiry is to

be limited to the extent to which the public entity is using its resources in a

manner consistent with that policy.”

A4. If a person is taking formal responsibility for an inquiry, they should also have an

appropriate delegation from the Auditor-General.

A5. Any use of the coercive powers in the Public Audit Act 2001 (such as the power to

require information to be produced, or the power to take evidence) should be for a

proper purpose. The powers can only be exercised by a person with delegated

authority to do so, and are limited to gathering information that may be relevant to a

lawful inquiry.

A6. If the inquiry decisions are based on legal or factual errors, they may be found to be

unlawful because they involve an improper use of their powers. All those working on an

inquiry should therefore take all reasonable steps to ensure that their work is free of

any legal or factual errors.

A7. Depending on the nature of the issues and evidence in the particular inquiry,

appropriate steps that the inquiry team might take include:

- documenting and filing all evidence gathered, including full notes of all

interviews and discussions;

- setting out any conflicting evidence on matters of fact in the final report;

- checking that the final report accurately reflects the evidence;

- obtaining legal advice on any substantive legal issues, particularly if there is

any debate or conflict with or between parties on what the relevant law means;

and/or

- confirming the report’s factual accuracy by consulting those who are affected

by the report.

AG-6 Inquiries


A8. When forming judgements or making decisions, the inquiry team should be clear about

the considerations that are being taken into account. They should ensure that, so far as

possible within the scope of the inquiry, they have considered all relevant matters. This

means that when gathering evidence, they should cast their net wide. The inquiry team

should also look beyond the particular issues to ensure that they understand the

broader context and background to the issues. Taking a narrow view of any terms of

reference or the scope of the work can create risk. The inquiry team should periodically

give specific thought to whether there is anything else they could or should be thinking

about.

A9. Equally, the inquiry team should make sure that they are not being swayed by

considerations that are irrelevant. Risks here might include previous interactions with

the individuals or entities involved in other capacities, or the political context. If the

inquiry team is taking account of previous work in other contexts, they should be able to

explain why it is relevant and make explicit that it is a factor.

A10. When applying any expectations, policies, or standards to the matters being assessed,

the inquiry team should always consider the facts of the particular matter and whether it

is right to apply the policy to these circumstances. Rigid application of a pre-determined

policy can make a decision unlawful. The normal audit approach of establishing

benchmarks at the outset and applying them to the facts once they are gathered must

therefore be applied with caution. Similar caution is needed when applying precedents.

Although consistency is important, the inquiry team must always look for the right

answer on the particular facts.

Fairness

A11. The Auditor-General has several distinct obligations under the principle of fairness to

ensure that:

- due consideration is made to ensure inquiries are carried out without bias;

- proper procedures are carried out to ensure that any person or entity who may

be criticised is treated fairly in accordance with natural justice;

- there is clear communication about the processes that will be used to carry out

an inquiry; and

- adequate checks are made to ensure that the process or content of the inquiry

is substantively fair.

A12. The legal test for bias is whether a reasonable observer, aware of all the

circumstances, would think that the impartiality of the decision-maker might be affected.

This might arise because of financial interests in the issue or entity, or personal

connections with those involved.

AG-6 Inquiries


A13. The systems for managing independence across all of the Auditor-General’s work are

sufficient to manage this risk. When staff are being assigned to particular pieces of

inquiry work, the individual and their manager will consider whether there might be any

potential independence issue. Information recording any conflicts of interest and

mitigation actions (that is routinely recorded for every staff member) provides a starting

point, but specific consideration also needs to be given before the start of the inquiry as

to whether any other matters need to be considered.

A14. Pre-determination is the other aspect of bias that should be considered. All those

involved in an inquiry should be able to consider the issues with an open mind.

A15. Natural justice obligations apply whenever it is proposed by the inquiry team to include

a criticism in a final report, or where the inquiry team’s decision could in some other

way be regarded as having an adverse effect on someone. These are procedural

obligations to ensure that the person or entity who may be criticised is treated fairly.

The detail of what steps are required to achieve a fair process in each case will vary

depending on the nature of the issues, and the person’s interest in them. Strong

criticisms that will have a major effect will probably need to be accompanied by greater

procedural protections than lesser matters.

A16. The main elements for according natural justice to those affected are:

- letting those affected know that the inquiry may result in an adverse comment,

and showing them the comment, before the report is finalised;

- disclosing the basis for the proposed comment (usually this will be explained in

the draft report) and, if necessary, any material being relied upon to reach the

conclusions;

- giving a reasonable opportunity for the affected person to respond, including

sufficient time and information, and the ability to involve a legal representative;

and

- carefully considering the response with an open mind.

A17. These steps are built into the standard inquiry processes. However, in each case the

inquiry team should specifically consider whether fewer or more steps are required to

achieve a fair process. For example, the Public Audit Act 2001 gives the Auditor-

General the ability to meet the costs of legal representation for a person giving

evidence in appropriate cases.

A18. The inquiry team should be careful to ensure that they are clear to all those involved

about the process being followed in the particular case. If the process is unclear, there

is a risk that a person may have legitimate expectations about what will happen based

on past practice, general statements about the process, or some other comments that

AG-6 Inquiries


may have been made at an earlier time. If those expectations are legitimate ones, and

they are not met, then the inquiry process could be found to be unfair.

A19. In practice, the obligation to ensure substantive fairness effectively requires the inquiry

team to make an overall check, towards the end of their work, that there is nothing in

the process or content of their work that will result in an unfair outcome for someone. It

is an opportunity to pause, and consider whether there is anything else that the team

could or should be thinking about or doing - before reporting their findings and (where

appropriate) their recommendations and conclusions.

Reasonableness

A20. The essence of good decision-making, and this administrative law obligation, is to have

sound reasons for the decisions being made. Documenting and explaining the work

and conclusions help to demonstrate why the decisions are reasonable. The standard

consultation and internal peer review processes for inquiries are also useful procedural

steps for helping ensure that decisions are reasonable.

A21. The courts generally recognise that there may be a range of possible decisions that

would be reasonable. They will not use the “reasonableness” grounds of review to

substitute the court’s judgment for that of the decision-maker. For a decision to be

overturned as unreasonable usually requires quite strong facts, suggesting that the

decision is irrational or arbitrary.

AG ISA (NZ) 200 Overall objectives of the independent auditor


AG ISA (NZ) 200


OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE

CONDUCT OF AN AUDIT IN ACCORDANCE WITH INTERNATIONAL

STANDARDS ON AUDITING (NEW ZEALAND)

Contents

Page




Overall Objectives of the Appointed Auditor 3 - 2001



Overall objectives 3 - 2002

The Auditor-General’s auditing standards 3 - 2002

Appendix 1 - The Auditor-General’s Auditing Standards that apply to annual audits 3 - 2004



Introduction



(a) establishes the Auditor-General’s objectives and requirements in relation to ISA

(NZ) 200: Overall Objectives of the Independent Auditor and the Conduct of an

Audit in Accordance with International Standards on Auditing (New Zealand)1; and


Application

2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual

audits on behalf of the Auditor-General.

3. This Statement applies to all annual audits with reporting periods beginning on or after 1

July 2013, although earlier application is encouraged.

Overall Objectives of the Appointed Auditor

4. In conducting an annual audit on behalf of the Auditor-General, the overall objectives of the

Appointed Auditor are:

Forming an opinion, and reporting, on the financial and non-financial information

(a) to obtain reasonable assurance about whether the information that has been

audited as a whole is free from material misstatement, whether due to fraud or

error, enabling the Appointed Auditor to express an opinion on whether that

information:

(i) was prepared in accordance with generally accepted accounting practice;

and

(ii) fairly reflects (or gives a true and fair view of2) the performance and

position of the entity;

(b) in an audit report, report on the information that has been audited in paragraph

4(a) in accordance with the applicable standards;

(c) in a management letter, report on the information that has been audited in

paragraph 4(a), as well as the observations and significant matters arising from the


However, for the purposes of the Auditor-General’s auditing standards and statements, all references to “historical financial information” should be read as the audit of “historical financial and historical non-financial information”.

2 The use of “true and fair view” or “fairly reflects” is determined by the law or regulation governing the audit of financial statements, or by generally accepted practice.



audit - including suggested improvements to financial and other management

systems;

Identifying, and reporting to the OAG, any other issues of concern to the Auditor-General

(d) to identify any other issues of concern to the Auditor-General that may not have

been separately reported as part of the work carried out in paragraph 4(a); and

(e) to report on any other issues of concern to the Auditor-General, to the OAG, or to

other parties as directed by the OAG.

5. Collectively, Appointed Auditors and their staff are the “eyes and ears” of the Auditor-

General. It is expected that Appointed Auditors, in meeting the objectives in paragraph 4,

will do so with the aim of contributing towards the outcomes sought by the Auditor-General.

Definitions

6. For the purpose of this Auditor-General’s auditing statement the defined terms have the




(although where a term with a specific meaning in the New Zealand public sector

differs from the NZAuASB glossary, the New Zealand public sector definition shall

prevail); and


Requirements

Overall objectives

7. Appointed Auditors shall carry out the annual audit to achieve the overall objectives in

paragraph 4 above, with the intention of contributing towards meeting the outcome sought

by the Auditor-General.

8. Appointed Auditors shall comply with the Auditor-General’s statements and specific

standards listed in Appendix 1.

The Auditor-General’s auditing standards

9. The Auditor-General has prepared statements and specific standards, for the purpose of

reflecting the public sector perspective, in addition to the minimum standards that apply to

all assurance providers, which are issued by the External Reporting Board (the XRB).



10. Collectively, the standards issued by the XRB, together with the Auditor-General’s

statements and specific standards, are called the Auditor-General’s Auditing Standards.

11. The Auditor-General’s Auditing Standards apply, where relevant, to annual audits carried

out on behalf of the Auditor-General, and are intended to help achieve the outcomes

sought by the Auditor-General.

12. Appendix 1 outlines the Auditor-General’s statements that apply to annual audits and the

equivalent XRB standards. In addition, Appendix 1 also identifies the Auditor-General’s

specific standards that apply to annual audits.



Appendix 1 - The Auditor-General’s Auditing Standards that apply to annual

audits

The Auditor-General’s Statements that apply to annual audits

Applicable XRB standards Applicable Auditor-General’s

Statement

Name of Statement or Standard

NZAuASB Glossary of Terms

(EG Au4)

Glossary of Terms Glossary of terms

PES 1 (Revised) AG PES 1 (Revised) Code of Ethics for Assurance Practitioners

PES 3 AG PES 3 Quality control

ISA (NZ) 200 AG ISA (NZ) 200 Overall objectives of the independent auditor and the

conduct of an audit in accordance with International

Standards on Auditing (New Zealand)

ISA (NZ) 210 AG ISA (NZ) 210 The terms of audit engagements

ISA (NZ) 220 - Quality control for an audit of financial statements

ISA (NZ) 230 - Audit documentation

ISA (NZ) 240 AG ISA (NZ) 240 The auditor’s responsibilities relating to fraud in an

annual audit

ISA (NZ) 250 AG ISA (NZ) 250 Consideration of laws and regulations

ISA (NZ) 260 AG ISA (NZ) 260 Communication with those charged with governance

ISA (NZ) 265 - Communicating deficiencies in internal control

ISA (NZ) 300 AG ISA (NZ) 300 Planning the annual audit

ISA (NZ) 315 AG ISA (NZ) 315 Identifying and assessing the risks of material

misstatement through understanding the entity and its

environment

ISA (NZ) 320 AG ISA (NZ) 320 Materiality in planning and performing an annual audit

ISA (NZ) 330 AG ISA (NZ) 330 The auditor’s responses to assessed risks

ISA (NZ) 402 - Audit considerations relating to an entity using a

service organisation

ISA (NZ) 450 AG ISA (NZ) 450 Evaluation of misstatements identified during the

annual audit

ISA (NZ) 500 - Audit evidence

ISA (NZ) 501 - Audit evidence - specific considerations for selected

items

ISA (NZ) 505 - External confirmations

ISA (NZ) 510 - Initial audit engagements - opening balances

ISA (NZ) 520 - Analytical procedures

ISA (NZ) 530 - Audit sampling

ISA (NZ) 540 - Auditing accounting estimates

ISA (NZ) 550 - Related parties

ISA (NZ) 560 - Subsequent event

ISA (NZ) 570 AG ISA (NZ) 570 Going concern

ISA (NZ) 580 AG ISA (NZ) 580 Written representations

ISA (NZ) 600 AG ISA (NZ) 600 Special considerations - audits of group financial and

non-financial information (including the work of

component auditors)

ISA (NZ) 610 - Using the work of internal auditors

ISA (NZ) 620 - Using the work of an expert



The Auditor-General’s Statements that apply to annual audits

Applicable XRB standards Applicable Auditor-General’s

Statement

Name of Statement or Standard

ISA (NZ) 700 AG ISA (NZ) 700 Forming an opinion and reporting on financial and


ISA (NZ) 705 AG ISA (NZ) 705 Modifications to the opinion in the independent

auditor’s report

ISA (NZ) 706 AG ISA (NZ) 706 Emphasis of matter paragraphs and other matter

paragraphs in the independent auditor’s report

ISA (NZ) 710 - Comparative information

ISA (NZ) 720 - The auditor's responsibility in relation to other

information

ISA (NZ) 800 - Audits of financial statements prepared in accordance

with special purpose frameworks

ISA (NZ) 805 - Audits of single financial statements and specific

elements, accounts or items of a financial statement

ISA (NZ) 810 AG ISA (NZ) 810 Engagements to report on summary financial and


The Auditor-General’s Specific Standards that apply to annual audits

AG-1 Reporting to the OAG

AG-2 The appropriation audit and the controller function

AG-3 The auditor’s approach to issues of effectiveness and efficiency,

waste and a lack of probity or financial prudence

AG-4 The audit of service performance reports3

AG-4 (revised) The audit of service performance reports

3 AG-4 is being progressively phased out as AG-4 (revised) is applied to more sectors.

AG ISA (NZ) 210 The terms of audit engagements


AG ISA (NZ) 210


THE TERMS OF AUDIT ENGAGEMENTS

Contents

Page




Objective 3 - 2101



Audit Engagement Letters to be issued to all public entities or public

entity groups 3 - 2102

When to issue an Audit Engagement Letter 3 - 2103

Using standard Audit Engagement Letter templates 3 - 2103

Appointed Auditors shall not enter certain types of contracts with a

public entity 3 - 2103

Appointed Auditors shall not limit their liability to a public entity 3 - 2103

What to do if there are risks that may ordinarily lead to an audit

engagement being declined 3 - 2103


Audit Engagement Letters to be issued to all public entities or

public entity groups 3 - 2104

Appointed Auditors shall not enter certain types of contracts with a

public entity 3 - 2104

Appointed Auditors shall not limit their liability to a public entity 3 - 2105

Appendix 1 - Standard public entity Audit Engagement Letter 3 - 2106



Introduction



(a) establishes the Auditor-General’s requirements in relation to ISA (NZ) 210:

Agreeing the Terms of Audit Engagements1; and

(b) provides additional guidance to reflect the public sector’s perspective on

terms of audit engagements; and

(c) provides an Audit Engagement Letter template for Appointed Auditors to use

when communicating the terms of the audit engagement to public entities.

Application

2. Compliance with this Statement is mandatory for Appointed Auditors who carry out

annual audits on behalf of the Auditor-General.

3. This Statement applies to all annual audits where an Audit Engagement Letter is

issued for reporting periods beginning on or after 1 July 2013, although earlier

application is encouraged. Refer to paragraph 7 for further guidance on the public

entities for which an Audit Engagement Letter is required to be issued.

Objective

4. The objective of the Appointed Auditor is to confirm that there is a common

understanding of the terms of the audit engagement between the Appointed Auditor,

who is carrying out the annual audit on behalf of the Auditor-General, and those

charged with governance.

Definitions






1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”








Audit Engagement Agreement means the agreement between the Auditor-General,

the Appointed Auditor, and the Audit Service Provider

that records the appointment of the Appointed Auditor.

Audit Engagement Letter means the letter sent by the Appointed Auditor to the

public entity, on behalf of the Auditor-General, that

communicates the terms of the audit engagement. The

letter is not a contract nor is it an audit proposal, and a

public entity or the Appointed Auditor cannot negotiate

or vary the terms of the audit engagement.

Requirements

Audit Engagement Letters to be issued to all public entities or public entity groups

6. The Appointed Auditor shall personally sign and issue an Audit Engagement Letter to

the public entity.

7. The Appointed Auditor shall ensure that each public entity is covered by an applicable

Audit Engagement Letter. This may mean that an Audit Engagement Letter is issued

to each public entity or, if appropriate, to each public entity group they audit on behalf

of the Auditor-General. (Ref: Para. A1 - A2)

8. The Audit Engagement Letter shall be issued to the head of the public entity's

governing body, which for the purposes of this Statement includes management and

those charged with governance (for example the Chairperson, Mayor, or Chief

Executive of a government department) in keeping with the definition in paragraph 5

of ISA (NZ) 210.

9. The head of the public entity’s governing body is required to formally acknowledge the

terms of the audit engagement in writing. If the head of the public entity’s governing

body refuses to acknowledge the terms of the audit engagement, the Appointed

Auditor shall refer the matter to the OAG. In this situation the Auditor-General, or a

representative of the OAG, will discuss the terms of the engagement directly with the

public entity.



When to issue an Audit Engagement Letter

10. In addition to the requirements of paragraph 13 of ISA (NZ) 210 (which specifies the

circumstances when an Audit Engagement Letter should be issued for recurring

audits), the Appointed Auditor shall issue a new Audit Engagement Letter immediately

after a new audit engagement agreement has been entered into, or, when an existing

audit engagement agreement has been renegotiated (which is usually at least once

every three years for an audit contract).

Using standard Audit Engagement Letter templates

11. The Appointed Auditor shall use the standard Audit Engagement Letter template in

Appendix 1 unless directed otherwise by the OAG. The wording of any standard Audit

Engagement Letter template shall only be varied with the prior agreement of the

OAG. Additional text is to be included in each Audit Engagement Letter for those

annual audits that are carried out under section 19 of the Public Audit Act 2001 (the

Act). The additional text has been included as a footnote in the Audit Engagement

Letter template.

Appointed Auditors shall not enter certain types of contracts with a public entity

12. The Appointed Auditor or the Audit Service Provider shall not enter into a contract

with a public entity that limits:

(a) the scope of the annual audit;

(b) the duties of the Appointed Auditor or the Audit Service Provider under the

Audit Engagement Agreement; or

(c) the powers, duties, and functions of the Auditor-General under the Act, as

delegated to the Appointed Auditor. (Ref: Para. A3)

Appointed Auditors shall not limit their liability to a public entity

13. The Appointed Auditor or the Audit Service Provider shall not limit their liability to a

public entity, either by means of the Audit Engagement Letter or by a separate

contract. (Ref: Para. A4)

What to do if there are risks that may ordinarily lead to an audit engagement being

declined

14. Other than annual audits carried out under section 19 of the Act, the Auditor-General

cannot decline to carry out an annual audit, so the Appointed Auditor shall



immediately contact the OAG if there are indications of significant risks in carrying out an

annual audit that ordinarily may have led to that audit engagement being declined.

***


Audit Engagement Letters to be issued to all public entities or public entity groups

(Ref: Para. 7)

A1. Where a public entity controls one or more other public entities, and all public entities

in the “group” are under the common control of one governing body, it may be

appropriate to issue a single Audit Engagement Letter for the public entity “group”.

Alternatively, where a subsidiary public entity is under the immediate control of a

governing body that is different to the governing body of the parent public entity, it is

normal practice to issue an Audit Engagement Letter to the governing body of the

subsidiary public entity.

A2. Where a public entity is jointly controlled by two or more other public entities, but no

single public entity is able to exercise control in its own right, it may be appropriate to

issue an Audit Engagement Letter to the governing body of the jointly controlled

public entity.

Appointed Auditors shall not enter into certain types of contracts with a public entity

(Ref: Para. 12)

A3. The Audit Engagement Letter communicates the terms of the audit engagement, as

determined under statute, to a public entity. It is not a contract, and a public entity or

an Appointed Auditor cannot negotiate or vary the terms of the audit engagement.

The Appointed Auditor and/or the Audit Service Provider may enter separately into a

contract with a public entity for the purpose of enabling the Appointed Auditor or the

Audit Service Provider to effectively exercise their duties under the Audit Engagement

Agreement with the Auditor-General. Matters on which agreement with a public entity

may be desirable include the timing of the audit, billing arrangements, and so on.



Appointed Auditors shall not limit their liability to a public entity (Ref: Para 13)

A4. As the Auditor-General does not limit liability for annual audits, there is no basis for

an Appointed Auditor or Audit Service Provider (in their capacity as the Auditor-

General’s agent) to do so.



Appendix 1 - Standard public entity Audit Engagement Letter

[Firm’s letterhead] [Date] The Chairperson [Governing body] [Name of public entity] [Address] Dear [Chairperson] AUDIT ENGAGEMENT LETTER This audit engagement letter is sent to you on behalf of the Auditor-General, who is the auditor of all “public entities”, including [Name of public entity] under section 14 of the Public Audit Act 2001 (the Act).2 The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], under section 32 and 33 of the Act, to carry out the annual audits of the [Name of public entity]’s financial statements [and performance information]. We will be carrying out these annual audits on the Auditor-General’s behalf, for the years ending [DD MM 20X1 to DD MM 20X3]. This letter outlines: - the terms of the audit engagement and the nature, and limitations, of the annual audit; and - the respective responsibilities of the [Governing body] and me, as the Appointed Auditor, for the financial

statements [and performance information]. The objectives of the annual audit are: - to provide an independent opinion on the [Governing body]’s financial statements [and performance

information];3 and - to report on other matters relevant to the [Governing body]’s financial and other management systems that

come to our attention, need improvement or are significant (for example, non-compliance with statutory obligations or a lack of probity).

We will carry out the audit in accordance with the Auditing Standards issued by the Auditor-General, which incorporate the International Standards on Auditing (New Zealand) (the Auditing Standards). They require that we comply with ethical requirements, and plan and perform the audit to obtain reasonable assurance about whether the [Name of public entity]’s financial statements [and performance information] are free from material misstatements. Your responsibilities Our audit will be carried out on the basis that the [Governing body] acknowledges that it has responsibility for: - preparing the financial statements [and performance information] in accordance with legal requirements

and financial reporting standards; - having such internal control as you determine is necessary to enable you to prepare financial statements

[and performance information] that [is/are] free from material misstatement, whether due to fraud or error; and

- providing us with: - access to all information of which the [Name of public entity] is aware that is relevant to preparing

the financial statements [and performance information] such as records, documentation, and other matters;

- additional information that we may request from the [Name of public entity] for the purpose of the audit;

- unrestricted access to [Governing body] members and employees that we consider necessary; and

- written confirmation concerning representations made to us in connection with the audit.4

2 Replace the first sentence of the Audit Engagement Letter with the following sentence, only if the audit is

carried out under section 19 of the Public Audit Act 2001: “This audit engagement letter is sent to you on behalf of the Auditor-General. The Auditor-General has accepted the request of [Name of public entity] to be its auditor under section 19 of the Act.”

3 If the entity is a company or an issuer that is subject to the requirements of the Financial Reporting Act 1993 insert the following text as the second bullet point “to provide an independent opinion on whether the [Governing Body] kept proper accounting records in accordance with the Financial Reporting Act 1993.”

4 If an audit report is going to be issued on the public entity’s summary financial and non-financial information, the following text shall be included as a separate paragraph in accordance with the requirements of paragraph 6(b) in ISA (NZ) 810: In addition, the [Governing Body] is responsible: - for the preparation of the summary financial statements [and summary performance information]

in accordance with the applied criteria;



The [Governing body]’s responsibilities extend to all resources, activities, and entities under its control. We expect that the [Governing body] will ensure: - the resources, activities, and entities under its control have been operating effectively and efficiently; - it has complied with its statutory obligations including laws, regulations, and contractual requirements; - it has carried out its decisions and actions with due regard to minimising waste; - it has met Parliament's and the public's expectations of appropriate standards of behaviour in the public

sector in that it has carried out its decisions and actions with due regard to probity; and - its decisions and actions have been taken with due regard to financial prudence. We expect the [Governing body] and/or the individuals within the [Name of public entity] with delegated authority, to immediately inform us of any suspected fraud, where there is a reasonable basis that suspected fraud has occurred - regardless of the amount involved. Suspected fraud also includes instances of bribery and/or corruption. The [Governing body] should have documented policies and procedures to support its general responsibilities. It should also regularly monitor performance against its objectives. The [Governing body] has certain responsibilities relating to the preparation of the financial statements [and performance information] and in respect of financial management and accountability matters. These specific responsibilities are set out in Annex 1. We assume that members of the [Governing body] are familiar with those responsibilities and, where necessary, have obtained advice about them. Our responsibilities Carrying out the audit We are responsible for forming an independent opinion on whether the financial statements [and performance information] of [Name of public entity]: - comply with generally accepted accounting practice; and - [fairly reflect OR give a true and fair view of] its position and performance. An audit involves obtaining evidence about the amounts and disclosures in the financial statements [and performance information]. How we obtain this information depends on our judgement, including our assessment of the risks of material misstatement of the financial statements [and performance information], whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the financial statements [and performance information]. We do not examine every transaction, nor do we guarantee complete accuracy of the financial statements [and performance information]. Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with the Auditing Standards. During the audit, we consider internal control relevant to the [Governing body]’s preparation of the financial statements [and performance information], but not for the purpose of expressing an opinion on the effectiveness of the [Governing body]’s internal controls. Please note that the audit does not relieve the [Governing body] of its responsibilities. The Auditor-General expects members of the [Governing body] to be familiar with those responsibilities and, where necessary, to have obtained advice about them. However, we will communicate to you in writing about any significant deficiencies in internal control relevant to the audit of the financial statements [and performance information] that we have identified during the audit. During the audit, the audit team will be alert for issues of: - effectiveness and efficiency – in particular, how the [Governing body] and the [Entity type] have carried out

their activities; - non-compliance with laws, regulations, and contractual requirements; - waste – in particular, whether the [Governing body] obtained and applied the resources of the [Entity type]

in an economical manner, and whether any resources are being wasted; - a lack of probity – in particular, whether the [Governing body] and the [Entity type] have met Parliament's

and the public's expectations of appropriate standards of behaviour in the public sector; and - a lack of financial prudence. Our independence It is essential that the audit team and [Name of Auditing Firm] remain both economically and attitudinally independent of [Name of public entity] (the [Entity type]) (including management and the [Governing body]). This involves being,

- to make the audited financial statements [and summary performance information] available to the intended users of that information without undue difficulty; and

- to include our audit report on the summary financial statements [and summary performance information] in any document that contains that information and that indicates that we have reported on them.



and appearing to be, free of any interest that might be regarded, whatever its actual effect, as being incompatible with integrity, objectivity, and independence. To protect our independence, specific limitations are placed on us in accepting engagements with the [Governing body] other than the annual audit. We may accept certain types of other engagements, subject to the requirements of the Auditing Standards. Any such other engagements must be the subject of a separate written arrangement between the [Governing body] and myself or [Name of Auditing Firm]. Reporting We will issue an audit report that will be attached to the financial statements [and performance information]. This report contains an opinion that provides readers with reasonable assurance on whether the financial statements [and performance information] have been prepared in accordance with legal requirements, are free from material misstatements, and comply with financial reporting standards. It may also contain comment on matters such as compliance with statutory obligations, and other matters that we consider may be of interest to the readers of the audit report.5 We will also issue a management letter that will be sent to the [Governing body]. This letter communicates any matters that come to our attention during the audit that, in our opinion, are relevant to the [Governing body] (for example, internal control weaknesses, probity matters, or compliance with statutory obligations). [The management letter is the basis of a letter sent to the Minister and a briefing report sent to the select committee about the results of our audit.] [We may also provide other management letters to the [Name of public entity] from time to time. We will inform the [Governing body] of any other management letters we have issued.] Please note that the Auditor-General may refer to matters that are identified in the annual audit in a report to Parliament if it is in the public interest, in keeping with section 20 of the Public Audit Act 2001. Next steps Please acknowledge receipt of this letter and the terms of the audit engagement by signing the enclosed copy of the letter in the space provided and returning it to me. The terms will remain effective until a new Audit Engagement Letter is issued. Annex 2 contains some additional “other” responsibilities for the audit. If you have any questions about the audit generally, or have any concerns about the quality of the audit, you should contact me as soon as possible. If after contacting me you still have concerns, you should contact the Director of Auditor Appointments at the Office of the Auditor-General on (04) 917 1500. If you require any further information, or wish to discuss the terms of the audit engagement further before replying, please do not hesitate to contact me. Yours faithfully/sincerely [Signature of Appointed Auditor] ………………………………………………………..……… Date: …………………… [Name of Appointed Auditor] ……………………………………………………………….. [Title of Appointed Auditor]] On behalf of the Auditor-General I acknowledge the terms of this engagement and that I have the required authority on behalf of the [Governing body]. Signature: Name: ………………………………………………………. Title: ………………………………………………………... Date: …………………….

5 If an audit report is going to be issued on the public entity’s summary financial and non-financial information,

then the following text should be included at the end of this paragraph: In addition, we will issue an audit report that will be attached to the summary financial statements [and

summary performance information]. This audit report will contain an opinion that provides the same level of assurance as the audit report on the financial statements [and performance information].



Annex 1 – Respective specific responsibilities of the [Governing body] and the Appointed Auditor

Responsibilities for the financial statements [and performance information] Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor

You are required by legislation to prepare financial statements and, where appropriate, other accountability statements that comply with generally accepted accounting practice in New Zealand and that [fairly reflect or give a true and fair view] of the activities of the public entity. You must also ensure that any accompanying information in the annual report is consistent with that reported in the audited financial statements [and performance information]. You are required by legislation to prepare the financial statements [and performance information] and provide that information to us before the statutory reporting deadline. It is normal practice for you to set your own timetable to comply with statutory reporting deadlines.

We are responsible for carrying out an annual audit, on behalf of the Auditor-General, and to form an opinion on whether the public entity's financial statements [and performance information] have been prepared in accordance with legal requirements, comply with generally accepted accounting practice in New Zealand, and [fairly reflect or give a true and fair view of] the position and performance of the public entity. We will also read other accompanying information to the financial statements [and performance information] to identify whether there are material inconsistencies with the audited financial statements [and performance information]. Materiality is one of the main factors affecting our judgement on the areas to be tested and on the timing, nature, and extent of the tests and procedures performed during the audit. In planning and performing the annual audit, we aim to obtain reasonable assurance that the financial statements [and performance information] do not have material misstatements caused by either fraud or error. Material misstatements are differences or omissions of amounts and disclosures that, in our judgement, are likely to influence a reader’s overall understanding of the financial statements [and performance information]. If we find material misstatements that are not corrected, they will be referred to in the audit opinion. The Auditor-General's preference is for you to correct any material misstatements and avoid the need for them to be referred to in the audit opinion. An audit also involves evaluating: - the appropriateness of accounting policies used and

whether they have been consistently applied; - the reasonableness of the significant accounting

estimates and judgements made by those charged with governance;

[- the appropriateness of the content and measures in any non-financial accountability statements;]

- the adequacy of all disclosures in the financial statements [and performance information]; and

- the overall presentation of the financial statements [and performance information].

We will ask you for written confirmation of representations made about the financial statements [and performance information]. In particular, we will seek confirmation that: - the adoption of the going concern assumption is

appropriate; - all material transactions have been recorded and are

reflected in the financial statements [and performance information];

- all instances of non-compliance or suspected non-compliance with laws and regulations have been disclosed; and

- uncorrected misstatements noted during the audit are immaterial to the financial statements [and performance information].

Any representation made does not in any way reduce our responsibility to perform appropriate audit procedures and enquiries.

Responsibilities for the accounting records

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor You are responsible for maintaining accounting and other records that: - correctly record and explain the transactions of the

public entity; - enable you to monitor the resources, activities, and

entities under its control; - enable the public entity's financial position to be

determined with reasonable accuracy at any time;

We will perform sufficient tests to obtain reasonable assurance as to whether the underlying records are reliable and adequate as a basis for preparing the financial statements [and performance information]. If, in our opinion, the records are not reliable or accurate enough to enable the preparation of the financial statements [and performance information] and the necessary evidence cannot be



- enable you to prepare financial statements [and performance information] that comply with legislation (and that allow the financial statements [and performance information] to be readily and properly audited); and

- are in keeping with the requirements of the Commissioner of Inland Revenue.

obtained by other means, we will need to consider the effect on the audit opinion.

Responsibilities for accounting and internal control systems

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor You are responsible for establishing and maintaining accounting and internal control systems (appropriate to the size of the public entity), supported by written policies and procedures, designed to provide reasonable assurance as to the integrity and reliability of financial and - where applicable - non-financial reporting.

The annual audit is not designed to identify all significant weaknesses in your accounting and internal control systems. We will review the accounting and internal control systems only to the extent required to express an opinion on the financial statements [and performance information]. We will report to you separately, on any significant weaknesses in the accounting and internal control systems that come to our notice and that we consider may be relevant to you. Any such report will provide constructive recommendations to assist you to address those weaknesses.

Responsibilities for preventing and detecting fraud and error

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor The responsibility for the prevention and detection of fraud and error rests with you, through the implementation and continued operation of adequate internal control systems (appropriate to the size of the public entity) supported by written policies and procedures. We expect you to formally address the matter of fraud, and formulate an appropriate policy on how to minimise it and (if it occurs) how it will be dealt with. Fraud also includes bribery and corruption. We expect you to consider reporting all instances of actual, suspected, or alleged fraud to the appropriate law enforcement agency, which will decide whether proceedings for a criminal offence should be instituted. We expect you to immediately inform us of any suspected fraud where you, and/or any individuals within the [Name of public entity] with delegated authority have a reasonable basis that suspected fraud has occurred - regardless of the amount involved.

We design our audit to obtain reasonable, but not absolute, assurance of detecting fraud or error that would have a material effect on the financial statements [and performance information]. We will review the accounting and internal control systems only to the extent required for them to express an opinion on the financial statements [and performance information], but we will: - assess the effectiveness of internal control systems

and procedures for preventing and detecting fraud and error; and

- report to you the significant weaknesses in internal control systems and procedures for monitoring the prevention and detection of fraud and error that come to our notice and that we consider could be relevant to you.

We are required to immediately advise the Office of the Auditor-General of all instances of actual, suspected, or alleged fraud. As part of the audit, you will be asked for written confirmation that you have disclosed all known instances of actual, suspected, or alleged fraud to us. If we become aware of the possible existence of fraud, whether through applying audit procedures, advice from you, or management, or by any other means, we will communicate this to you with the expectation that you will consider whether it is appropriate to report the fraud to the appropriate law enforcement agency. In the event that you do not report the fraud to the appropriate law enforcement agency, the Auditor-General will consider doing so, if it is appropriate for the purposes of protecting the interests of the public.

Responsibilities for compliance with laws and regulations

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor You are responsible for ensuring that the public entity has systems, policies, and procedures (appropriate to the size of the public entity) to ensure that all applicable legislative, regulatory, and contractual requirements that apply to the activities and functions of the public entity are complied with. Such systems, policies, and procedures should be documented.

We will assess whether you have systems, policies, and procedures to ensure compliance with those legislative, regulatory, and contractual requirements that are relevant to the audit. We will either perform specific audit tests to assess whether you have complied with statutory requirements that are relevant to the audit, or will be alert for possible non-compliance that may be relevant to the audit. The way in which we will report instances of non-compliance that come to our attention will depend on considerations of materiality or significance. We will report to you and to the Auditor-General all material and significant instances of non-compliance. We will also report to you any significant weaknesses that we observe in internal control systems, policies, and procedures for monitoring compliance with laws, regulations, and contractual requirements that we consider may be relevant.



Responsibilities to establish and maintain appropriate standards of conduct and personal integrity

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor You should at all times take all practicable steps to ensure that your members and employees maintain high standards of conduct and personal integrity. You should document your expected standards of conduct and personal integrity in a "Code of Conduct" and, where applicable, support the “Code of Conduct” with policies and procedures. The expected standards of conduct and personal integrity should be determined by reference to accepted "Codes of Conduct" that apply to the public sector.

We will have regard to whether you maintain high standards of conduct and personal integrity. Specifically, we will be alert for significant instances where members and employees of the public entity may not have acted in accordance with the standards of conduct and personal integrity expected of them. The way in which we will report instances that come to our attention will depend on significance. We will report to you and to the Auditor-General all significant departures from expected standards of conduct and personal integrity. The Auditor-General, on receiving a report from us, may, at their discretion and with consideration of its significance, decide to conduct a performance audit of, or an inquiry into, the matters raised. The performance audit or inquiry will be subject to specific terms of reference, in consultation with you. Alternatively, the Auditor-General may decide to publicly report the matter without carrying out a performance audit or inquiry.

Responsibilities for conflicts of interest and related parties

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor You should have policies and procedures to ensure that your members and employees carry out their duties free from bias. You should maintain a full and complete record of related parties and their interests. It is your responsibility to record and disclose related-party transactions in the financial statements [and performance information] in accordance with generally accepted accounting practice.

To help determine whether your members and employees have carried out their duties free from bias, we will review information provided by you that identifies related parties, and will be alert for other material related-party transactions. We will check that you have complied with any statutory requirements for conflicts of interest and whether these transactions have been properly recorded and disclosed in the financial statements [and performance information].

Responsibilities for publishing the audited financial statements on a website

Responsibilities of the [Governing body] Responsibilities of the Appointed Auditor You are responsible for the electronic presentation of the financial statements [and performance information] on the public entity's website. This includes ensuring that there are enough security and controls over information on the website to maintain the integrity of the data presented. If you intend to publish or reproduce the financial statements [and performance information], together with the audit report, on a website, you must, before publication, provide us with a draft version of the documents to read. Also, you must obtain our approval to include the audit report with the information you intend publishing on the website. If the audit report is reproduced in any medium, you should present the complete financial statements, including notes, accounting policies, and any other accountability statements. If you intend to post any new material not previously read by us, you must advise us before posting the new material.

We will perform procedures to satisfy ourselves that the information you intend including on your website is consistent with the audited financial statements [and performance information], and that the audit report will not be inappropriately associated with any information that has not been audited. Examining the controls over the electronic presentation of audited financial statements [and performance information], and the associated audit report, on your website is beyond the scope of the annual audit. We will review the material on initial posting, and on notification from you that new material has been posted on the website. We do not carry out ongoing monitoring of the material on your website.



Annex 2 – Other responsibilities To meet the reporting deadlines, we are dependent on receiving the public entity's financial statements [and performance information] ready for audit and in enough time to enable the audit to be completed. "Ready for audit" means that the financial statements [and performance information] have been prepared in accordance with legal requirements, comply with generally accepted accounting practice and [fairly reflect or give a true and fair view of] the activities and position of the public entity, and are supported by proper accounting records and complete evidential documentation. We will ensure that the annual audit is completed by the reporting deadline or, if that is not practicable because of the non-receipt or condition of the financial statements [and performance information], or for some other reason beyond our control, as soon as possible after that. The work papers that we produce in carrying out the audit are the property of the Auditor-General. Workpapers are confidential to the Auditor-General and subject to the disclosure provisions in section 30 of the Public Audit Act 2001. The Auditor-General and Audit Service Providers take seriously their responsibility to provide a safe working environment for audit staff. You are, therefore, asked to clearly inform audit staff visiting your premises what you require of them to ensure health and safety requirements are satisfied, particularly emergency evacuation procedures and any requirement to wear safety equipment, and to report accidents and hazards.

AG ISA (NZ) 240 Fraud


AG ISA (NZ) 240


THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN

ANNUAL AUDIT

Contents

Page




Objectives 3 - 2402



Evaluation of fraud risk factors 3 - 2402

Reporting fraud to the OAG 3 - 2403

Reporting fraud in the audit report 3 - 2404

Reporting fraud to third parties 3 - 2405

Release of information 3 - 2405

Application and other explanatory material 3 - 2405

Background 3 - 2405

Reporting fraud to the OAG 3 - 2408

Reporting fraud in the audit report 3 - 2409

Reporting fraud to third parties 3 - 2409

Appendix 1 - Examples of fraud risk factors 3 - 2410



Introduction




The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial

Statements1; and


2. The Auditor-General’s requirements and application material in this Statement

specifically refer to fraud. For convenience, this Statement uses the term “fraud” as

an umbrella term for the range of possible offences involving dishonesty or deception.

For the avoidance of doubt “fraud” includes bribery or corruption. This Statement

adopts the definition of fraud set down in paragraph 11(a) of ISA (NZ) 240, which

states:

“Fraud is an intentional act by one or more individuals among management, those

charged with governance, employees, or third parties, involving the use of deception

to obtain an unjust or illegal advantage.”

3. The question of whether a criminal offence has been committed may only be finally

determined following a decision by a court of law. As a consequence, the Appointed

Auditor will normally be concerned with suspected, rather than proven, fraud.2

Application



5. This Statement applies to all annual audits with reporting periods beginning on or

after 1 July 2013, although earlier application is encouraged.

6. This Statement applies to all suspected or actual fraud that the Appointed Auditor

becomes aware of, regardless of materiality and irrespective of whether they involve

money or other property of the public entity (including intangible resources such as

information and intellectual property).



2 This Statement contains background information on the scope of this Statement in paragraph A1 to A13.



Objectives

7. The objectives of the Appointed Auditor are to:

(a) identify and assess the risks of material misstatement of the financial and

non-financial information due to fraud;

(b) obtain sufficient appropriate audit evidence about the assessed risks of

material misstatement due to fraud, through designing and implementing

appropriate responses; and

(c) respond appropriately to fraud or suspected fraud during the annual audit,

including:

(i) assessing the adequacy of policies and procedures put in place by

the public entity to prevent and detect fraud, and to report any

deficiencies to management and those charged with governance;

(ii) reporting suspected or actual fraud to the OAG; and

(iii) assessing whether the public entity has responded appropriately to

suspected or actual fraud in keeping with the expectations of this

Statement, and to report any deficiencies to management and those


Definitions









Requirements

Evaluation of fraud risk factors

9. The Appointed Auditor shall evaluate the public entity’s fraud risk factors. The

Appointed Auditor’s evaluation shall take account of the results of procedures carried

out in keeping with ISA (NZ) 240, together with a consideration of any fraud risk

factors identified by the OAG, including examples of fraud risk factors relating to the

public sector in Appendix 1.



10. The Appointed Auditor shall, as part of evaluating fraud risk factors, assess whether

the public entity has proper arrangements for the prevention and detection of fraud

and what the public entity would do if a suspected or actual fraud was discovered.

11. The Appointed Auditor shall report to management and those charged with

governance on areas where the prevention and detection of fraud could be improved.

Reporting fraud to the OAG

12. For all instances of suspected or actual fraud, the Appointed Auditor shall:

(a) inform the OAG immediately there is an indication that fraud may exist;

(b) report to the OAG the details of the suspected fraud or actual fraud so that

the OAG can identify any fraud risk factors; and

(c) provide other relevant information.

Immediately inform the OAG when there is an indication that fraud may exist

13. The Appointed Auditor shall immediately inform the OAG, through the fraud

notification return in the ASD Online, when they become aware of the possible

existence of fraud. The contact person in the OAG for all fraud questions is the

Assistant Auditor-General – Accounting and Auditing Policy. (Ref: Para. A14 - A15)

14. If, as a result of a misstatement resulting from suspected or actual fraud, the

Appointed Auditor encounters exceptional circumstances that bring into question the

Appointed Auditor’s ability to continue performing the annual audit, the Appointed

Auditor shall immediately advise the OAG.

15. Where a suspected or actual fraud is detected by the Appointed Auditor during the

annual audit, the Appointed Auditor shall not communicate the existence of that

suspected or actual fraud detected during the annual audit to the public entity without

first informing, and consulting, the OAG. (Ref: Para. A16)

16. Where the Appointed Auditor becomes aware of a suspected or actual fraud through

informants or a third party, the Appointed Auditor shall not communicate to the public

entity the existence of that suspected or actual fraud without first informing, and

consulting, the OAG. (Ref: Para. A17)

17. Where the Appointed Auditor is advised of a suspected or actual fraud by those

charged with governance and/or management of a public entity, the Appointed



Auditor shall carry out enquiries to ensure that the appropriate level of management

or, where appropriate, those charged with governance have been (or will be)

informed of the fraud.

18. Where the circumstances of the public entity make it impracticable for the Appointed

Auditor to immediately inform the OAG of each suspected or actual fraud, the

Appointed Auditor shall agree on alternative arrangements with the Assistant Auditor-

General – Accounting and Auditing Policy. (Ref: Para. A18)

The Protected Disclosures Act 2000

19. If an employee approaches the Appointed Auditor to disclose a fraud under the

Protected Disclosures Act 2000, the Appointed Auditor shall direct the employee to

follow the public entity’s internal procedure for protected disclosures, to the extent

that the Protected Disclosures Act 2000 requires. If the employee does not follow the

public entity’s internal procedure, the employee’s disclosure may not be protected

under the Protected Disclosures Act 2000. If the Appointed Auditor is uncertain about

whether the circumstances require the internal procedure to be followed, the

Appointed Auditor shall seek advice from the OAG (Assistant Auditor-General –

Legal). (Ref: Para. A19)

Reporting the details of fraud to the OAG

20. The Appointed Auditor shall keep the OAG informed of any significant developments

relating to a suspected or actual fraud following the immediate notification to the

OAG.

21. Once the details of suspected or actual fraud are known, the Appointed Auditor shall

update the fraud notification return in the ASD Online by outlining the matters relevant

to the particular circumstances of the suspected or actual fraud. The updated return

will be used by the OAG to identify any fraud risk factors.

Reporting fraud in the audit report

22. The Appointed Auditor shall obtain approval from the OAG before issuing an audit

report that contains a modification, an emphasis of matter paragraph, or an other

matter paragraph - as a consequence of a suspected or actual fraud. (Ref: Para. A20)



Reporting fraud to third parties

23. Reporting of any suspected or actual fraud (or any other matters surrounding a fraud)

to third parties shall be carried out by the OAG directly. (Ref: Para. A21 - A22)

Release of information

24. The Appointed Auditor shall not release information to third parties unless prior

written approval is obtained from the OAG. Any enquiries or requests for information

(including any audit-related correspondence, audit evidential working papers/files,

associated documentation, or management reports) from such agencies as the

Police, Serious Fraud Office, Inland Revenue Department, Privacy Commissioner, or

Ombudsmen are covered by OAG protocols. Any enquiries or requests for

information by these agencies shall be referred to the OAG, which will then advise on

the course of action to be taken.

***

Application and other explanatory material

Background

A1. This Statement recognises that:

- the primary responsibility for the prevention and detection of fraud rests with

both those charged with governance of the entity and management (outlined

in paragraph 4 of ISA (NZ) 240); and

- an Appointed Auditor carrying out an annual audit in keeping with the Auditor-

General’s Auditing Standards is responsible for obtaining reasonable

assurance that the financial and non-financial information taken as a whole is

free from material misstatement, whether caused by fraud or error. However,

owing to the inherent limitations of an audit, there is an unavoidable risk that

some material misstatements of the financial and non-financial information

may not be detected, even though the audit is properly planned and

performed in keeping with the Auditor-General’s Auditing Standards.

A2. Fraud, by its nature, always attracts a great deal of interest – irrespective of the scale

of the fraud. Invariably, questions are asked about how the fraud took place and

whether the controls designed to stop fraudulent activity were operating effectively. In

the public sector, the interest in fraud is heightened because public funds are



involved, and because those individuals entrusted with public funds are expected to

exhibit the highest standards of honesty and integrity.

A3. The Auditor-General plays an important role in ensuring the financial integrity of

public entity resources. This includes ensuring that public entity resources are not

exposed to an unacceptable risk of fraud and that, when a fraud does occur,

appropriate standards of accountability and disclosure are applied by those

responsible for public entity resources.

A4. The OAG needs to be kept informed of all frauds involving the resources of public

entities. There are a number of reasons for this, including:

- to ensure that, where appropriate, the proper regulatory or enforcement

authorities have been informed;

- to ensure that the effect of the fraud on the financial and non-financial

information is systematically assessed, and that there is appropriate reporting

and disclosure of the fraud in the financial and non-financial information and,

if necessary, the audit report;

- to ensure that management and those charged with governance have given

appropriate consideration to preventing further offending;

- the need to be alerted to any limitations or circumstances that occur which

could affect the Appointed Auditor’s professional indemnity insurance over

the period of the engagement, or circumstances that could lead to a potential

claim against the Appointed Auditor or the Auditor-General; and

- the general expectation that the OAG is informed of frauds committed in the

public sector, which can reflect on the reputation of the Auditor-General.

A5. The responsibility for the prevention and detection of fraud rests with public entity

management through the implementation and continued operation of adequate

internal control systems.

A6. The Auditor-General expects that every public entity should formally address the

matter of fraud, and formulate an appropriate policy on how to minimise it and (if it

occurs) how it will be dealt with.

A7. A fraud policy should include, as a minimum, these key elements:

- a system for undertaking regular reviews of transactions, activities, or

locations that may be susceptible to fraud;

- specifications for fully documenting what happened in a fraud and how it is to

be managed;



- the means for ensuring that every individual suspected of committing fraud

(whether they are an employee or someone external to the entity) is dealt

with consistently and fairly; and

- the principle that recovery of the lost money or other property will be pursued

wherever practicable and appropriate.

A8. Management of a public entity needs to be clear about its attitude towards fraud, and

make its employees (and those who transact with the entity) aware of that attitude

(including an awareness of the consequences of transgressing). The only satisfactory

way of communicating that attitude within the entity is by issuing a formal statement

of policies and procedures to everyone in the entity.

A9. Management and those charged with governance must also consider the public

sector context when deciding how to respond to a suspected fraud. The perception of

how fraud and other types of criminal or corrupt activity are dealt with in the public

sector is an important part of maintaining the public’s trust in the public sector.

A10. In any context, a range of factors have to be balanced when deciding whether to refer

suspected offending to law enforcement agencies. These may include the scale and

nature of the wrongdoing, the likelihood of conviction, the time and cost of

enforcement action relative to the wrongdoing, how long ago the events took place,

the attitude and situation of the alleged offender, and any reparation that has been

made.

A11. In the public sector, additional weight also needs to be given to:

- the need to maintain, and to be seen to maintain, the highest possible

standards of honesty and integrity;

- the fact that the public sector is entrusted with taxpayer and ratepayer funds;

- the importance of transparency and accountability for the use of public funds;

and

- the risk of a perception that matters are being “swept under the carpet”.

A12. In effect this means that the threshold for referring a matter to law enforcement

agencies is likely to be lower than it might be in other organisations. It may not be

sufficient for suspected fraud or other wrongdoing to be resolved through an

employment settlement. It can be important for an independent and transparent

decision to be made on whether prosecution is appropriate.

A13. The Auditor-General’s policy is that the management of public entities should

consider carefully whether to refer a suspected fraud to law enforcement agencies in



every case, taking into account their public sector context. If management or those

charged with governance do not consider reporting a suspected fraud, the Auditor-

General will consider doing so.

Reporting fraud to the OAG (Ref: Para. 13 - 18)

Immediately inform the OAG when there is an indication that fraud may exist

A14. When an Appointed Auditor becomes aware of a suspected or actual fraud involving

the resources of a public entity, it is imperative that the OAG be notified immediately

so that the OAG and the Appointed Auditor can agree on the course of action to be

followed to ensure that the matter is appropriately addressed.

A15. Once the OAG is informed of the possible existence of a fraud, the OAG and the

Appointed Auditor (through discussion and mutual agreement) will:

- consider the potential effect on the financial and non-financial information

and, if the fraud could have a material effect, plan any appropriate modified or

additional audit procedures;

- establish the means by which the fraud is to be communicated to the public

entity’s management (if they are unaware of the fraud) and, if necessary, to

any third parties (refer to paragraphs 40 to 42 of ISA (NZ) 240);

- establish the accounting and disclosure requirements for the financial and

non-financial information; and

- agree on any additional information that can not be included in the fraud

notification return, to be reported to the OAG.

A16. If those persons ultimately responsible for the overall direction of the public entity may

be implicated in the fraud, the OAG shall determine what reporting action will be

taken. If legal advice is required, this will be sought directly by the OAG. (refer to

paragraph A63 of ISA (NZ) 240)

A17. In some circumstances, the Appointed Auditor may have no alternative but to inform

the entity’s management of a fraud detected during the annual audit before informing

and consulting with the OAG. For example, this may be necessary if there is an

immediate need to protect accounting records and associated information.

A18. A few public entities experience a significant number of frauds of low monetary value.

For example, public entities responsible for the payment of benefits regularly

encounter situations where beneficiaries have deliberately misrepresented their

circumstances to claim benefits to which they are not entitled. In this situation, it may



be impracticable for the Appointed Auditor to inform the OAG each time they become

aware of a new fraud. As a result, the OAG and the Appointed Auditor will agree a

practical arrangement, so that they are kept informed of frauds, with the management

of the public entity. The arrangements will only be agreed on a case-by-case basis.

The Protected Disclosures Act 2000

A19. If the public entity does not have an internal procedure for protected disclosures, the

Appointed Auditor should advise the employee to make the disclosure to the head of

the public entity. If the employee believes that the head of the entity is involved in the

fraud, that disclosure of the fraud is urgent, or that other exceptional circumstances

exist, the Appointed Auditor should advise the employee to make the disclosure to

the OAG, the Police, or the Serious Fraud Office. The contact person in the OAG is

the Assistant Auditor-General – Legal.

Reporting fraud in the audit report (Ref: Para. 21)

A20. If the Appointed Auditor is unable to confirm or dispel a suspicion that a fraud has

occurred, the Appointed Auditor may need to seek legal advice before rendering any

opinion on the financial and non-financial information for annual audit. If legal advice

is required, this will be sought directly by the OAG.

Reporting fraud to third parties (Ref: Para. 22 - 23)

A21. The public entity should consider whether to report fraud to the appropriate law

enforcement agency, although this will not limit the Auditor-General also considering

whether to do so for the purpose of protecting the interests of the public.

A22. If a third party requests information on a fraud or a suspected fraud and it is

necessary to obtain a legal opinion on whether it is appropriate to release that

information, the OAG will obtain that legal opinion. (refer to paragraph 43 of ISA (NZ)

240)



Appendix 1 - Examples of fraud risk factors

The fraud risk factors identified in this appendix are examples of such factors that may be

faced by the Appointed Auditor in a broad range of situations. The examples below are in

addition to the equivalent appendix in ISA (NZ) 240 and take into account public sector

considerations.

It is possible that one or more fraud risk factors may be present in any particular public entity.

Further detail on sector-specific fraud risk factors may be summarised in applicable audit

briefs.

1 Fraud may arise where management or those charged with governance use their

position to obtain or procure a pecuniary benefit. Management or those charged with

governance may over-ride internal controls, particularly where there is little or no

segregation of duties or independent checks or authorisations and approvals of

transactions. In this situation, there may not be adequate oversight over decision-

making processes or full or adequate disclosure of related party transactions. A

common example of this is where an entity makes a significant procurement that may

involve contracting with related parties and where the related party relationship is

deliberately concealed.

2 Fraud may arise where there is a misuse of information. An example may be a public

sector employee who uses their knowledge of a benefits payments system to defeat

or suppress internal controls to facilitate payments of fraudulent benefits to

themselves or their family or friends.

3 Fraud may arise where an individual with authority to spend funds also establishes

the budget for the activity. This creates the opportunity to make provision for

“fraudulent payments” in the budget, and therefore enable fraudulent payments to be

made during the period of the budget without arousing suspicion by way of actual

expenditure exceeding the budget.

4 Fraud may arise where an individual with the authority to spend funds also has the

authority to code payments in the accounting system. This creates the opportunity to

allocate fraudulent payments to an under-utilised budgetary code and therefore

reduce the risk of detection.



5 Fraud may arise where an individual has the authority to commit the public entity to

discretionary expenditure, including travel, accommodation, or entertainment, and

that discretionary expenditure provides personal benefits to the individual.

AG ISA (NZ) 250 Consideration of laws and regulations


AG ISA (NZ) 250


CONSIDERATION OF LAWS AND REGULATIONS

Contents

Page




Objectives 3 - 2501



Determining those laws and regulations which, if breached, may

be material because the entity operates in the public sector 3 - 2503

Determining the audit approach to laws and regulations 3 - 2503

When non-compliance is identified 3 - 2504


Determining the audit approach to laws and regulations 3 - 2507

When non-compliance is identified 3 - 2508

Appendix 1 - Decision tree for determining the audit approach to laws and

regulations 3 - 2509

Appendix 2 - Decision tree for reporting non-compliance in the audit report 3 - 2510



Introduction




Consideration of Laws and Regulations in an Audit of Financial Statements1;

and

(b) establishes additional requirements and provides associated guidance to

reflect the public sector perspective.

2. This Statement and the equivalent auditing standard on which it is based reflect the

requirements for considering laws and regulations when carrying out an annual audit.

Application





5. There are specific issues of compliance with laws and regulations for the Appointed

Auditor to consider when auditing appropriations in government departments (including

planning, carrying out fieldwork, and reporting). For further guidance, the Appointed

Auditor is to refer to AG-2: The appropriation audit and the controller function and/or the

applicable audit brief.

Objectives


(a) obtain sufficient appropriate audit evidence on compliance with the provisions

of those laws and regulations generally recognised to have a direct effect on

the determination of material amounts and disclosures in the financial and

non-financial information;





(b) perform specified audit procedures to help identify instances of non-

compliance with those laws and regulations that, if they are not complied

with, do not have a direct effect on the determination of material amounts and

disclosures in the financial and non-financial information, but are material

because compliance may be fundamental to the operating aspects of the

entity;

(c) perform specified audit procedures to help identify instances of non-

compliance with those laws and regulations that do not have a direct effect on

the determination of material amounts and disclosures in the financial and

non-financial information and are not fundamental to the operating aspects of

the entity, but which may still be material because the entity operates in the

public sector;

(d) remain alert during the annual audit for any possible material non-compliance

with other laws or regulations, although they may not have been originally

identified as relevant during audit planning; and

(e) report appropriately on non-compliance with laws and regulations identified

during the audit.

Definitions










Non-compliance means acts of omission or commission by the entity,

either intentional or unintentional, that are contrary to

the prevailing laws or regulations. Such acts include

transactions entered into by, or in the name of, the

entity or, on its behalf, by those charged with

governance or management, or employees. Non-

compliance does not include personal misconduct

(unrelated to the business activities of the entity) by

those charged with governance or management, or

employees of the entity.



Requirements

Determining those laws and regulations which, if breached, may be material because

the entity operates in the public sector

8. The Appointed Auditor shall use their judgement when determining which laws and

regulations may give rise to material non-compliance, in keeping with the objective in

paragraph 6(c) of this Statement. As part of meeting the objective in paragraph 6(c), the

Appointed Auditor shall consider whether there is an instance or pattern of non-

compliance with laws and regulations, which may be considered material if it:

(a) undermines basic accountability arrangements (for example, non-compliance

with reporting obligations, or fundamental weaknesses in internal control, or

failure to keep proper accounting records);

(b) is outside the statutory powers of the public entity;

(c) represents a significant abuse or misuse of powers delegated by Parliament (for

example, payments to management or those charged with governance in

excess of authorities granted);

(d) calls into question the probity of a major part or all of the public entity;

(e) relates to an output or activity which could be of significant interest to the public;

or

(f) could be seen to disadvantage the public (for example, through actual or

opportunity cost to the taxpayer or ratepayer).

Determining the audit approach to laws and regulations

9. In the public sector the Appointed Auditor shall, as part of meeting the requirements

of paragraph 12 of ISA (NZ) 250:

(a) gain an understanding of any specific laws and regulations that apply to the

public entity;

(b) familiarise themselves with advice from the OAG, including the applicable audit

brief;

(c) maintain a general awareness of current events by monitoring:

(i) the results of any Parliamentary scrutiny of the public entity or the

sector in which it operates;

(ii) the outcome of any reviews by government agencies;

(iii) the outcome of any court proceedings; and

(iv) comments in the media; and

(d) monitor the development of any new legislative requirements that are likely to

affect the public entity.



10. The Appointed Auditor shall plan and perform audit procedures in keeping with

paragraphs 13 and 14 of ISA (NZ) 250 to obtain reasonable assurance that the entity

has complied with the categories of laws and regulations specified in paragraphs 6

(a), (b), and (c) of this Statement.2 (Ref: Para A1 - A2)

11. As part of obtaining an understanding of the legal and regulatory framework, in

keeping with paragraph 9 above and paragraph 12 in ISA (NZ) 250, the following

matters shall be documented in the audit working papers:

(a) a description of the legal and regulatory framework applicable to the entity and

the industry or sector in which it operates;

(b) a description of how the entity complies with that framework;

(c) the specific laws and regulations within each of the three categories of laws

and regulations as specified in paragraphs 6(a), (b), and (c) of this Statement;

and

(d) the audit procedures that the auditor plans to perform to assess compliance with

the specific laws and regulations within each of the three categories of laws and

regulations as specified in paragraphs 6(a), (b), and (c) of this Statement.

12. In meeting the requirements of paragraph 15 of ISA (NZ) 250, the Appointed Auditor

shall remain alert during the annual audit for any possible material non-compliance

with other laws or regulations, although they may not have been originally identified

as relevant during audit planning.

When non-compliance is identified

13. The Appointed Auditor shall not provide opinions (in a legal sense) on a public entity’s

compliance with laws and regulations. Nothing in the Auditor-General’s responsibility to

consider laws and regulations in the annual audit, including references to certain laws

and regulations disclosed in the audit report or the management letter, should be

misconstrued as the auditor providing a legal opinion on the entity's compliance with

relevant laws and regulations. (Ref: Para. A3)

14. The Appointed Auditor shall not report a public entity’s non-compliance with laws and

regulations to any responsible Minister or to Parliament. The OAG is responsible for

making these decisions and shall consider factors such as the frequency or pattern of

non-compliance, and the effects of non-compliance, when making its decision.

Communication with any Minister about instances of material non-compliance with

laws and regulations which arise during the year shall be done directly by the OAG, in

consultation with the Appointed Auditor.

2 Appendix 1 is a decision tree for determining the audit approach to laws and regulations.



15. If there is uncertainty about the nature of non-compliance with laws and regulations,

the Appointed Auditor shall request and obtain the public entity’s view, which may

include any legal advice it has obtained, before consulting the OAG.

Immediate reporting of certain non-compliance to the OAG

16. The Appointed Auditor shall immediately tell the OAG about any non-compliance with

laws and regulations that:

(a) is material, and for which the OAG has not provided guidance;

(b) calls into question the ethics or behaviour of management and/or those

charged with governance or where fraud is suspected; or

(c) where management and/or those charged with governance are suspected of

being involved in any deliberate non-compliance with a law or regulation.

(Ref: Para. A4 - A5)

Reporting instances of non-compliance

17. The Appointed Auditor shall report instances of material non-compliance with laws

and regulations which arise during the year to the appropriate level of management or

those charged with governance as soon as the non-compliance comes to the

Appointed Auditor’s attention.

18. The Appointed Auditor shall immediately inform the appropriate level of management

of any non-compliance that is of such a nature that it can be remedied or repaired

(For example, illegal investments). This provides management with the opportunity to

take prompt action to correct any non-compliance.

19. In addition to the reporting requirements of paragraph 22 of ISA (NZ) 250, the

Appointed Auditor shall report in the management letter (to the appropriate level of

management or those charged with governance) any concerns they have about the

integrity of internal control or other deficiencies that affect the ability of the public

entity to monitor its compliance with laws and regulations.

20. All instances of a public entity's non-compliance with laws and regulations identified

during the annual audit shall be reported to the OAG in the document summarising

the audit conclusions. (Ref: Para. A6)



Reporting non-compliance in the audit report3

21. The Appointed Auditor shall follow any directions issued by the OAG on reporting

non-compliance in the audit report.

22. Non-compliance that has a pervasive effect on the financial and non-financial

information4 shall be referred by the Appointed Auditor to the Auditor-General’s Opinions

Review Committee (the ORC) unless the OAG has issued directions covering how the

non-compliance shall be reported in the audit report.

23. The Appointed Auditor shall issue a qualified audit report when they identify non-

compliance that has a material effect on the financial and non-financial information5

unless the OAG has issued directions covering how the non-compliance shall be

reported in the audit report.

24. If the OAG has not issued any directions covering how the non-compliance shall be

reported in the audit report, the Appointed Auditor shall consult the OAG about the

appropriate audit report to issue when they identify non-compliance in keeping with

paragraph 6(c) of this Statement.

25. If the OAG has not issued any directions and the non-compliance is not material and has

been adequately disclosed by the entity in the financial and non-financial information, the

Appointed Auditor shall consider issuing an audit report that contains an emphasis of

matter paragraph, in keeping with the requirements in AG ISA (NZ) 706 and ISA (NZ)

706.

26. If the OAG has not issued any directions and the non-compliance is not material and has

not been adequately disclosed by the entity in the financial and non-financial information,

the Appointed Auditor shall consider issuing an audit report that contains an other matter

paragraph, in keeping with the requirements in AG ISA (NZ) 706 and ISA (NZ) 706.

27. The Appointed Auditor shall consult with the Assistant Auditor-General – Accounting

and Auditing Policy when there is doubt about whether an instance of non-compliance

should be included in the audit report.

***

3 Appendix 2 is a decision tree for reporting non-compliance in the audit report. 4 In keeping with the objectives in paragraphs 6(a) and (b) in this statement and the requirements in AG ISA (NZ)

700 and AG ISA (NZ) 705. 5 In keeping with the objectives in paragraphs 6(a) and (b) in this statement and the requirements in AG ISA (NZ)

700 and AG ISA (NZ) 705.




Determining the audit approach to laws and regulations (Ref: Para. 10 - 12)

A1. The nature and extent of audit procedures is to be determined by the Appointed Auditor,

after considering the likelihood and the effect of non-compliance. Types of audit

procedures that might be considered include:

- enquiring of management about any instances of non-compliance, or any new

or unusual activities/transactions (for example, new ventures, tax-based or

investment transactions) carried out during the year, and reviewing those

activities/transactions;

- reviewing minutes of management meetings or the public entity's internal

compliance reports, as applicable;

- reviewing systems and practices designed to monitor and report on compliance,

or with compliance requirements embedded in them, and the adequacy of the

public entity's policies and procedures governing compliance with relevant

statutory obligations;

- performing random or risk-based transaction tests that incorporate the element

of checking for compliance with laws and regulations; and

- performing substantive tests of particular laws and regulations (such as those

laws and regulations specifying the determination of material amounts and

disclosures in the financial and non-financial information).

A2. Audit procedures may focus primarily on results (that is, the search for instances of non-

compliance), or on placing reliance (where appropriate) on the systems and practices

designed to control and monitor compliance, or on both. If focusing on results, Appointed

Auditors should apply audit procedures that provide reasonable assurance of detecting

instances of non-compliance. However, the Appointed Auditor is not expected to review

every transaction of the public entity to be satisfied that compliance with laws and

regulations has occurred. If the focus is primarily on the systems and practices, audit

procedures should be designed to assess the internal control, including the internal

control environment, established by management to minimise the occurrence of non-

compliance.



When non-compliance is identified (Ref: Para. 13 - 26)

A3. The OAG, in consultation with the Appointed Auditor, may also write directly to the

Chief Executive or governing body in certain circumstances when non-compliance is

identified.

Immediate reporting of certain non-compliance to the OAG

A4. Assessment of non-compliance requires professional judgement and may need to be

based on legal advice. If there is uncertainty about the fact of non-compliance with laws

and regulations, the public entity should first be asked for its view, which may include

reviewing any legal advice the entity has obtained.6 The Appointed Auditor is to consider

that advice against any existing guidance provided by the OAG. If the OAG has not

provided any existing guidance, the Appointed Auditor should consult with the OAG.

The OAG will then provide the Appointed Auditor with the necessary direction and will

determine, as appropriate, the need to report the non-compliance to external parties.

A5. The Appointed Auditor is required to immediately advise the OAG when management

and/or those charged with governance are involved in non-compliance; this is so the

OAG can lead any response to the requirements contained in paragraphs 24 and 28 of

ISA (NZ) 250.

Reporting instances of non-compliance

A6. Formal reports made to management on compliance with laws and regulations may be

appended to the document summarising the audit conclusions. However, the essential

action is to give the OAG an account of all non-compliance with laws and regulations

identified at the same time that the audit report and the annual report are issued.

6 Note that the entity can not be compelled to give Appointed Auditors or the OAG its legal advice. However, if an

entity refuses to provide legal advice to the Appointed Auditor or to the OAG, this amounts to a limitation in scope and may result in a modification of the audit report.



Appendix 1 - Decision tree for determining the audit approach to laws

and regulations

N

N

N

N

Y

Y

Y

Y

STARTHas the OAG issued a specific policy or other guidance?

Would the laws and regulations be generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial and non-financial information? ( Para 6(a))

Remain alert for any possible non-compliance with the laws and regulations that may be material.

Perform audit procedures to help identify material instances of non-compliance.

END


Would the laws and regulations be material because compliance may be fundamental to the operating aspects of the entity? (Para 6(b))

Follow the specific policy or guidance.

Would the laws and regulations be material because the entity operates in the public sector? (Para 6(c))




Appendix 2 - Decision tree for reporting non-compliance in the audit

report

Y

N

Y

N

Y

N

Y

N

Y

N

N

Y

Y

N

Has the OAG provided direction on how the non-compliance is to be reported in the audit report?

START

END

Follow the OAG's direction. (Para 21)

Does the non-compliance have a direct effect on the determination of material amounts and disclosures in the financial and non-financial information?(Para 6(a))

Does the the non-compliance have a pervasive effect on the financial and non-financial information?

Refer to the ORC for a decision in accordance with the requirements in AG ISA (NZ) 700 and AG ISA (NZ) 705.(Para 22)

END

Issue a qualified opinion in accordance with the requirements in AG ISA (NZ) 705 and ISA (NZ) 705.(Para 23)

Is the non-compliance material because compliance may be fundamental to the operating aspects of the entity?(Para 6(b))

Has the entity disclosed the non-compliance in the financial and non-financial information?

Consult the OAG to establish whether to issue an audit report that contains an emphasis of matter paragraph in accordance with the requirements in AG ISA (NZ) 706 and ISA (NZ) 706.(Para 25 and 27)

END

Consult the OAG to establish whether to issue an audit report that contains an other matter paragraph in accordance with the requirements in AG ISA (NZ) 706 and ISA (NZ) 706.(Para 26 and 27)

END

ENDIs the non-compliance material because the entity operates in the public sector?(Para 6(c))

Consult the OAG to establish the appropriate audit report to be issued.(Para 24)

END

Is there any doubt about whether an instance of non-compliance should be included in the audit report?

Consult the OAG. (Para 27)

END

AG ISA (NZ) 260 Communication with those charged with governance


AG ISA (NZ) 260


COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

Contents

Page




Objectives 3 - 2601



Requirement to prepare a written management letter 3 - 2602

Requirement to inform those charged with governance of all

reports issued 3 - 2602

Precautions in respect of draft versions of the management letter 3 - 2602

Requests for access to versions of the management letter 3 - 2603


Requirement to prepare a written management letter 3 - 2603

Precautions in respect of draft versions of the management letter 3 - 2603



Introduction




Communication with Those Charged with Governance1; and


Application





Objectives


(a) communicate clearly with those charged with governance the responsibilities

of the Appointed Auditor in relation to the annual audit (including the aspects

of auditing public sector entities) and an overview of the planned scope and

timing of the annual audit;2

(b) obtain from those charged with governance information relevant to the annual

audit;3

(c) provide those charged with governance with timely observations arising from

the annual audit including areas for improving financial and other

management systems; and

(d) promote effective two-way communication between the Appointed Auditor

and those charged with governance.



2 This objective is consistent with the applicable objectives and requirements in AG ISA (NZ) 210: The Terms of Audit Engagements.

3 This objective is consistent with the applicable objectives and requirements in AG ISA (NZ) 580: Written Representations.



Definitions









Requirements

Requirement to prepare a written management letter

6. The Appointed Auditor shall personally communicate the significant matters arising

from the audit to those charged with governance or, where authorised by those

charged with governance, to the audit committee of the public entity in writing, in the

form of a management letter. Where there are no significant matters to raise, the

Appointed Auditor shall report that fact in writing to those charged with governance or

the audit committee. (Ref: Para. A1)

7. The Appointed Auditor shall ensure that the management letter includes the date of

issuance.

Requirement to inform those charged with governance of all reports issued

8. Reports to those charged with governance or the audit committee of the public entity

shall refer to the other reports issued by the Appointed Auditor to other persons or

bodies within the public entity and the nature of the matters included in those reports.

Precautions in respect of draft versions of the management letter

9. The Appointed Auditor shall mark as “DRAFT” each page of a draft version of the

audit management letter. (Ref: Para. A2)

10. The Appointed Auditor shall ensure management and those charged with governance

are aware of the importance of preserving the confidentiality of draft versions of the

management letter. (Ref: Para. A2 - A6)



Requests for access to versions of the management letter

11. The Appointed Auditor shall refer requests for any version of the management letter

from a third party to the Assistant Auditor-General - Legal at the OAG.

***


Requirement to prepare a written management letter (Ref: Para. 6)

A1. In many public entities, those charged with governance have a collective

responsibility for governance. Those charged with governance may assign some of

their responsibilities to an audit committee. In other public entities (such as

government departments), there is no governing body as such, but there are other

persons who fulfil the governance role (for example, the chief executive or a

committee of management).

Precautions in respect of draft versions of the management letter (Ref: Para. 9 - 10)

A2. Usually a draft management letter is issued when the Appointed Auditor considers it

is appropriate to obtain comments from management before release of the

management letter to those charged with governance. Draft versions of the

management letter are a critical part of the audit process. By their nature, they may

contain information which is factually inaccurate. It is therefore essential that each

page of a draft version of the audit management letter is marked with the word

“DRAFT”.

A3. Once a draft management letter has been issued to an entity it is “official information”

and may therefore be subject to a request for disclosure under the Official Information

Act 1982. It is for the entity that holds the information to determine whether it is

required to release it.

A4. The Official Information Act 1982 recognises that there may be a valid reason for

withholding information, for example, if withholding the information is necessary:

- to protect information which is subject to an obligation of confidence, where

making it available would be likely to damage the public interest; or

- to maintain the effective conduct of public affairs through the free and frank

expression of opinions by or between or to officers and employees of any

Department or organisation in the course of their duty.



A5. The Appointed Auditor should therefore ensure that management and those charged

with governance are aware that draft management letters are considered to be

confidential and that preserving their confidentiality is important in the interests of

ensuring open communication between the Appointed Auditor and management or

those charged with governance. The preservation of the confidentiality of draft

management letters enables appropriate changes to be made in keeping with the

principles of natural justice.

A6. The precautions about draft versions of the management letter apply to all

management letters issued to individuals in a public entity irrespective of whether the

individuals represent “management” or “those charged with governance”.

AG ISA (NZ) 300 Planning the annual audit


AG ISA (NZ) 300


PLANNING THE ANNUAL AUDIT

Contents

Page




Objectives 3 - 2801



Preliminary engagement activities 3 - 2802

Planning activities including the use of audit briefs 3 - 2802

Nature of the public entity’s objectives to be taken into account

in audit planning 3 - 2802


Planning activities including the use of audit briefs 3 - 2803

Nature of the public entity’s objectives to be taken into account

in audit planning 3 - 2804



Introduction




Planning an Audit of Financial Statements1; and


Application





Objectives


(a) plan the annual audit so that it will be performed in an effective and efficient

manner; and

(b) ensure that the audit plan takes account of the need for the public entity to:

(i) apply its resources effectively and efficiently;

(ii) comply with statutory obligations;

(iii) minimise waste;

(iv) conduct its business with due regard to probity; and

(v) act in a financially prudent manner.

Definitions













Requirements

Preliminary engagement activities

6. The Appointed Auditor shall take into account the acceptance and continuance

procedures outlined in AG-PS 1 when complying with the requirements in paragraph

6(a) of ISA (NZ) 300.

Planning activities including the use of audit briefs

7. The Appointed Auditor shall incorporate the requirements of the OAG, including

information and instructions contained in the applicable audit brief, into their overall

audit strategy and audit plan in meeting the requirement of paragraph 8 of ISA (NZ)

300. (Ref: Para. A1 - A5)

8. The Appointed Auditor shall consider the relevant public sector perspective when

developing their overall audit strategy and audit plan in accordance with the

requirements of paragraphs 8 and 9 in ISA (NZ) 300. Some of that perspective may

be included in the following standards and statements:

(a) AG-2: The appropriation audit and the controller function;

(b) AG-3: The auditor’s approach to issues of effectiveness and efficiency, waste

and a lack of probity or financial prudence;

(c) AG-4: The audit of service performance reports;

(d) AG-4 (revised): The audit of service performance reports;

(e) AG ISA (NZ) 250: Consideration of laws and regulations;

(f) AG ISA (NZ) 315: Identifying and assessing the risks of material

misstatement through understanding the entity and its environment; or

(g) AG ISA (NZ) 320: Materiality in planning and performing an annual audit.

9. The Appointed Auditor shall personally approve the overall audit strategy.

Nature of the public entity’s objectives to be taken into account in audit planning

10. Paragraphs 8 and 9 of ISA (NZ) 300 prescribes procedures to be performed in

establishing the overall audit strategy and audit plan. In identifying the characteristics

of the engagement that define its scope (as per paragraph 8(a) of ISA (NZ) 300), the



Appointed Auditor shall establish the purpose of the public entity, in particular whether

it primarily provides goods or services for community or social benefit or whether it

has commercial objectives as its primary purpose. (Ref: Para. A6 - A8)

***


Planning activities including the use of audit briefs (Ref: Para. 7)

A1. Although the Auditor-General is the auditor of every public entity under section 14(1)

of the Public Audit Act 2001 (the Act), the Auditor-General is personally unable to

plan every annual audit of every public entity. This is why the Auditor-General

appoints auditors to carry out those annual audits.

A2. The Auditor-General has approved the approach outlined in paragraph A3 to A5

below to ensure that the expectations in the Act are incorporated into all planning

activities carried out for every annual audit of every public entity. The approach is

intended to ensure that the requirements of paragraphs 6 to 11 of ISA (NZ) 300

appropriately reflect the public sector perspective.

A3. In the rare situation where the Auditor-General plans to sign the audit report, the

Auditor-General will meet all of the requirements of paragraph 6 to 11 of ISA (NZ)

300, including approving the overall audit strategy.

A4. In the most common situation, where an Appointed Auditor signs the audit report on

behalf of the Auditor-General, the Appointed Auditor will meet the requirements of

paragraphs 6 to 11 of ISA (NZ) 300 by incorporating the instructions of the OAG. The

instructions of the OAG are normally provided to the Appointed Auditor in the form of

an audit brief.

A5. Each audit brief will be based on audit planning that is carried out by the OAG. Each

audit brief may contain:

- those factors identified by the OAG that would be significant in directing the

audit team’s effort, including specific instructions; or

- those factors identified by the OAG that the Appointed Auditor should

consider as part of understanding the entity and its environment, in keeping

with the requirements of ISA (NZ) 315 and AG ISA (NZ) 315, including any

general or specific guidance on the nature and purpose of public entities,



and/or on any sensitivities or risks to be considered in designing the audit

approach.

Nature of the public entity’s objectives to be taken into account in audit planning (Ref:

Para. 10)

A6. As a general rule, the purpose of public entities will be set out in any enabling

legislation, or elaborated in other government, governing body, or internal policy

statements. These documents will set out the fundamental objectives of the public

entity, and also how it will be resourced to achieve these objectives.

A7. The primary purpose of most public entities is the provision of goods and services,

often called "public services". In these entities, the primary audit focus is on whether

the entity has in fact provided the goods and services in keeping with Parliament's

intentions. In this situation, the Appointed Auditor will need to consider targeting their

audit effort to the expenditure streams and any associated service performance

information of the public entity. Most of these types of public entities are primarily

funded by means of grants from taxpayers’ or ratepayers’ funds.

A8. For those public entities that are self-funding (to a significant extent or totally) through

trading activities, the audit focus may be more on the Statement of Financial Position,

with secondary consideration of revenue and expenditure streams. Examples of

these types of public entities are commonly referred to as the "commercial" sector,

including State-owned enterprises and council-controlled trading organisations.

AG ISA (NZ) 315 Understanding the entity and its environment


AG ISA (NZ) 315


IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL

MISSTATEMENT THROUGH UNDERSTANDING THE

ENTITY AND ITS ENVIRONMENT

Contents

Page




Objectives 3 - 2901



Understanding the entity’s internal control 3 - 2902

Appendix 1 - Examples of conditions and events that may indicate risks of material

misstatement in the financial and non-financial information 3 - 2904



Introduction




Identifying and Assessing the Risks of Material Misstatement through

Understanding the Entity and its Environment1; and


Application





Objectives


(a) identify and assess the risks of material misstatement whether due to fraud or

error, at the financial statement and assertion levels, through understanding

the entity and its environment including the entity’s internal control, thereby

providing a basis for designing and implementing responses to the assessed

risks of material misstatement;

(b) identify and assess the risks of material misstatement whether due to fraud or

error, at the service performance report and assertion levels, through

understanding the entity and its environment, including the entity’s internal

control, thereby providing a basis for designing and implementing responses

to the assessed risks of material misstatement;

(c) maintain alertness and awareness for, and if necessary assess, risks that the

public entity may not:

(i) apply its resources effectively and efficiently;

(ii) comply with its statutory obligations, in accordance with paragraph 6

of AG ISA (NZ) 250;

(iii) minimise waste;





(iv) conduct its business with due regard to probity; and

(v) act in a financially prudent manner.

(d) obtain, for public entities identified by the OAG, to the level necessary, an

understanding of internal control in a public entity which may be used by the

OAG to report matters to Parliament on the quality of the internal control in

public entities, at an individual, sectoral, or national level.

Definitions









Requirements

Understanding the entity’s internal control

6. As well as the requirements in paragraph 12 of ISA (NZ) 315, the Appointed Auditor

shall consider, where it is appropriate, whether:

(a) there is a long-term planning process that results in credible long-term

business and strategic plans;

(b) planning processes involve the specification of both financial and non-

financial performance information that is appropriate both for managing the

public entity and reporting externally;

(c) the public entity has appropriate risk management policies and procedures to

manage risks, including political issues, demographic trends, and natural

disasters;

(d) there is forecast financial and non-financial information that is consistent with

the public entity's business or strategic plans;

(e) the forecast financial and non-financial information has been compiled with

input from those charged with governance and appropriate levels of

management; and

(f) the forecast financial and non-financial information is detailed enough to

enable effective and frequent monitoring of actual performance against it.



7. Also, in addition to the requirements in paragraph 12 of ISA (NZ) 315, the Appointed

Auditor shall remain alert for and aware of risks that the public entity may not take

appropriate account of the public sector factors that are the focus of AG-3: The

auditor’s approach to issues of effectiveness and efficiency, waste and a lack of

probity or financial prudence and AG ISA (NZ) 250: Consideration of laws and

regulations. This may involve considering whether the entity’s internal control

provides assurance that the entity has:

(a) applied its resources effectively and efficiently;

(b) complied with its statutory obligations;

(c) minimised waste;

(d) conducted its business with due regard to probity; and

(e) acted in a financially prudent manner.

8. In keeping with paragraph 11(d) of ISA (NZ) 315, the Appointed Auditor shall take into

account the additional examples of conditions and events that may indicate risks of

material misstatement in Appendix 1.

9. The Appointed Auditor shall, if relevant to gaining an understanding of the public

entity, consider the findings from any other work of the OAG (such as performance

audits, inquiries, or audits of Long-Term Plans) or any external reviews. External

reviews may include:

(a) the involvement of external parties such as industry associations, Ministers,

and control agencies (such as the Treasury, State Services Commission) and

the extent to which this involvement affects internal control; or

(b) any other external influences that affect the Appointed Auditor’s

understanding of internal control, such as industry influences; and

(c) the findings of any external reviews conducted on the public entity that may

influence the Appointed Auditor’s understanding of any aspect of internal

control.

10. The Appointed Auditor shall immediately report the findings of any substantial or

significant external reviews of the activities of the public entity to the OAG.



Appendix 1 - Examples of conditions and events that may indicate risks

of material misstatement in the financial and non-financial information

The following are examples of conditions and events that may indicate risks of material

misstatement for public entities. The examples are additional to those in Appendix 2 of ISA

(NZ) 315.

Further examples of conditions and events that may indicate risks of material misstatement

include:

- major changes to existing programmes;

- new legislation and regulations or directives;

- new programmes, products or services;

- new performance measures;

- new systems for recording financial and non-financial information;

- political decisions such as relocation of operations;

- increased public expectations;

- high public interest, which may lead to expectations to meet output targets;

- changes in ownership arrangements;

- changes in political leadership;

- public private partnerships;

- outsourcing of government activities;

- higher than normal expectations to meet budget;

- budget overspending due to weak budgetary controls;

- programmes without sufficient allocated resources and funding;

- indications of non-compliance with statutory obligations;

- indications of a lack of effectiveness or efficiency, waste, a lack or probity or financial

prudence; and

- operations subject to special investigations.

AG ISA (NZ) 320 Materiality in planning and performing an annual audit


AG ISA (NZ) 320


MATERIALITY IN PLANNING AND PERFORMING AN ANNUAL AUDIT

Contents

Page




Objective 3 - 3001



Materiality to be applied to the annual audit of financial and

non-financial information 3 - 3002

Use of benchmarks in determining materiality for the financial and

non-financial information as a whole 3 - 3003


Materiality to be applied to the annual audit of financial and

non-financial information 3 - 3004



Introduction




Materiality in Planning and Performing an Audit1; and


Application





Objective

4. The objective of the Appointed Auditor is to apply the concept of materiality

appropriately, to reflect the public sector perspective, in planning and performing the

annual audit.

Definitions










Material means, for the purposes of forming an opinion on a

public entity’s financial and non-financial information, a





statement, omission, fact, or item of such a nature or

amount that its disclosure, or the method of treating it,

given full consideration of the circumstances applying

at the time the financial and non financial information is

completed, that could reasonably be expected to

influence readers’ overall understanding of the

financial statements and non-financial performance

information in making decisions or assessments about

the stewardship and allocation of resources, and the

performance of the public entity.

Requirements

Materiality to be applied to the annual audit of financial and non-financial information

6. The Appointed Auditor shall consider whether a statement, omission, fact, or item is

material when planning and performing the annual audit of the financial and non-

financial information prepared by an entity. The consideration of materiality by the

Appointed Auditor shall be taken from several perspectives – as follows:

(a) The Appointed Auditor shall apply the general definition of “material”, in

paragraph 5 of this statement, as the overall test of whether a statement,

omission, fact, or item is material when planning and performing the annual

audit of an entity’s financial and non-financial information;

(b) If an entity prepares service performance reports for audit, the Appointed

Auditor shall apply the materiality requirements of either AG-4: The audit of

service performance reports or AG-4 (revised): The audit of service

performance reports;

(c) In forming their opinion on an entity’s compliance with statutory obligations,

the Appointed Auditor shall apply the materiality requirements of ISA (NZ)

250: Consideration of Laws and Regulations and the accompanying Auditor-

General’s statement AG ISA (NZ) 250; and

(d) If a public entity receives a Parliamentary appropriation on behalf of a

Minister, the Appointed Auditor shall apply the materiality requirements of

AG-2: The appropriation audit and the controller function. (Ref: Para A1 – A3)

Additional requirement to consider issues of effectiveness and efficiency, waste and a

lack of probity or financial prudence

7. Regardless of the requirements in paragraph 6 of this Statement, the Appointed

Auditor shall maintain an alertness and awareness of issues of effectiveness and



efficiency, waste and a lack of probity or financial prudence when planning and

performing the annual audit. Such alertness and awareness shall be maintained for

the purpose of reporting such issues to the OAG.

8. The Appointed Auditor shall specifically maintain an alertness and awareness of such

issues and, should an issue come to their attention, form an initial view as to whether

to report the issue to the OAG. Issues that are clearly trivial or inconsequential are

not required to be reported to the OAG.

9. The Appointed Auditor shall refer to AG-3: The auditor’s approach to issues of

effectiveness and efficiency, waste and a lack of probity or financial prudence for

further requirements and guidance.

Appointed Auditors to comply with other OAG instructions on materiality

10. The Appointed Auditor shall, as a minimum, comply with any materiality

considerations specified in instructions by the OAG. Irrespective of any materiality

considerations specified by the OAG, the Appointed Auditor shall apply a lower

materiality limit if this is necessary to achieve the objective of this Statement.

Use of benchmarks in determining materiality for the financial and non-financial

information as a whole

11. The Appointed Auditor shall, when setting materiality for the financial and non-

financial information, take into account the activities of the public entity. For example:

(a) For public entities whose purpose is primarily to provide public benefits, the

focus is likely to be on the quality of its expenditure. In this instance, gross

expenditure might be an appropriate base for determining the level of

financial materiality.

(b) For public entities whose primary purpose is the pursuit of commercial

objectives, a financial materiality that is consistent with that entity’s

commercial objectives would be more appropriate.

***




Materiality to be applied to the annual audit of financial and non-financial information

(Ref: Para. 6)

Limitations in the definition of materiality in the New Zealand financial reporting

framework

A1. The financial reporting framework in New Zealand defines materiality. In New

Zealand, New Zealand International Accounting Standard 1 (NZ IAS 1) defines

materiality2 as:

“Omissions or misstatements of items are material if they could, individually or

collectively, influence the economic decisions that users make on the basis of the

financial statements. Materiality depends on the size and nature of the omission or

misstatement judged in the surrounding circumstances. The size or nature of the item,

or a combination of both, could be the determining factor.”

NZ IAS 1 includes the following additional guidance in respect of public benefit

entities:

“Material. In addition to the definition of “Material” given in paragraph 7, omissions or

misstatements of items are material if they could, individually or collectively, influence

the decisions or assessments of users made on the basis of the financial statements.

Public benefit entities are reporting entities whose primary objective is to provide

goods or services for community or social benefit and where any equity has been

provided with a view to supporting that primary objective rather than for a financial

return to equity holders.”

A2. For the purposes of annual audits, the materiality definition in NZ IAS 1 is too narrow

for the following reasons:

(a) Limiting the definition to "omissions or misstatements" effectively excludes

concerns identified by the auditor around financial management behaviour

that would not directly impact on the fair presentation (or truth and fairness) of

the financial and non-financial information. An example of financial

management behaviour that would be material to users but which would not

necessarily result in an omission or misstatement of the financial and non-

2 The Public Benefit Entities’ Framework, which was issued by the External Reporting Board in May 2013,

uses a consistent definition of materiality.



financial information would be when entity management had invested

unlawfully or without authority. In this instance the financial and non-financial

information may fairly reflect the investment – albeit that the investment is

unlawful or unauthorised.

(b) Limiting the definition to "economic decisions of users" also fails to recognise

that users may choose to make decisions other than economic decisions -

such as changing the governing body where they have the power to do so. In

the public sector many users do not have the power to make economic

decisions and must therefore resort to other action, such as voting for a

change in their elected representatives.

Auditing in the public sector places greater emphasis on the qualitative aspects (the

nature) of materiality

A3. Paragraph A2 of ISA (NZ) 320 describes matters to consider when determining

materiality levels in the public sector. When determining whether a particular class of

transactions, account balance, disclosure, or other assertion that is part of the

financial and non-financial information, is material by virtue of its nature, the

Appointed Auditor should take into account qualitative aspects such as:

(a) The context in which the matter appears, for example if the matter is also

subject to compliance with authorities, legislation or regulations, or if law or

regulation prohibits overspending of public funds, regardless of the amounts

involved;

(b) The needs of the various stakeholders and how they use the financial and

non-financial information;

(c) The nature of the transactions that are considered sensitive to users of the

financial and non-financial information;

(d) Public expectations and public interest, including emphasis placed on the

particular matter by Parliament or other elected representatives, including the

necessity of certain disclosures;

(e) The need for legislative oversight and regulation in a particular area; and

(f) The need for openness and transparency.

AG ISA (NZ) 330 The auditor’s responses to assessed risks


AG ISA (NZ) 330


THE AUDITOR’S RESPONSES TO ASSESSED RISKS

Contents

Page




Objectives 3 - 3101



Maintaining an awareness of public sector matters during the

annual audit 3 - 3102



Introduction




The Auditor’s Responses to Assessed Risks1; and


Application





Objectives


(a) obtain sufficient appropriate audit evidence about the assessed risks of

material misstatement in the financial and non-financial information, through

designing and implementing appropriate responses to those risks in keeping

with the requirements in ISA (NZ) 330;

(b) maintain an awareness of and report to the OAG any additional matters

identified during the audit that may be significant in the context of the public

sector; and

(c) respond to any specific directions, instructions, or requirements issued by the

OAG, which may be issued from time to time.

Definitions





(although where a term with a specific meaning in the New Zealand public 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”.







Requirements

Maintaining an awareness of public sector matters during the annual audit

6. In keeping with the objective in paragraphs 4(b) and (c) above, the Appointed Auditor

shall maintain an awareness of, and report to the OAG, any additional matters

identified during the annual audit that may be significant in the context of the public

sector. In particular, the Appointed Auditor shall:

(a) apply the requirements for annual audits that are outlined in:

(i) AG ISA (NZ) 250: Consideration of laws and regulations;

(ii) AG-3: The auditor’s approach to issues of effectiveness and

efficiency, waste and a lack of probity or financial prudence;

(iii) AG-4: The audit of service performance reports;2 and

(iv) AG-4 (revised): The audit of service performance reports;2

(b) apply the specific public sector factors where they are applicable to aspects

of the audit work to be carried out that are outlined in AG-2: The appropriation

audit and the controller function; and

(c) apply, where applicable, any requirements that may be specified in directives

from the OAG, such as audit briefs.

2 AG-4 and AG-4 (revised) only apply to annual audits where entities are required to have a service

performance report audited.

AG ISA (NZ) 450 Evaluation of misstatements


AG ISA (NZ) 450


EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE ANNUAL

AUDIT

Contents

Page




Objectives 3 - 3301



Evaluating the effect of uncorrected misstatements 3 - 3302

Evaluating issues of non-compliance with statutory obligations 3 - 3302

Evaluating issues of effectiveness and efficiency, waste, or a lack

of probity or financial prudence 3 - 3302



Introduction




Evaluation of Misstatements Identified During the Audit1; and


Application





Objectives


(a) evaluate the effect of identified misstatements on the annual audit in keeping

with the requirements of ISA (NZ) 450;

(b) evaluate the effect of uncorrected misstatements, if any, on the financial and

non-financial information; and

(c) evaluate any matters of effectiveness and efficiency, waste, or a lack of

probity or financial prudence identified during the audit.

Definitions








(b) in the Auditor-General’s Glossary of Terms. 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”.




Requirements

Evaluating the effect of uncorrected misstatements

6. In complying with paragraph 10 of ISA (NZ) 450, the Appointed Auditor shall, prior to

evaluating the effect of uncorrected misstatements confirm, when reassessing

materiality determined in keeping with AG ISA (NZ) 320, whether materiality remains

appropriate given the public entity’s actual results.

Evaluating issues of non-compliance with statutory obligations

7. The Appointed Auditor shall evaluate, in consultation with the OAG if necessary, any

issues of non-compliance with statutory obligations that were identified during the

annual audit. Such evaluation is primarily to determine whether further audit

procedures are necessary and/or how the additional matters identified during the

annual audit should be reported. For further guidance refer to AG ISA (NZ) 250:

Consideration of laws and regulations.

Evaluating issues of effectiveness and efficiency, waste, or a lack of probity or

financial prudence

8. The Appointed Auditor shall evaluate, in consultation with the OAG if necessary, any

issues of effectiveness and efficiency, waste, or a lack of probity or financial prudence

that were identified during the annual audit. Such evaluation is primarily to determine

whether further audit procedures are necessary and/or how the additional matters

identified during the annual audit should be reported.

AG ISA (NZ) 570 Going concern


AG ISA (NZ) 570


GOING CONCERN

Contents

Page




Objectives 3 - 4301



Going concern assessments 3 - 4302

Forming the audit opinion 3 - 4302

Making submissions to the Opinions Review Committee on going

concern issues 3 - 4303

Management reporting 3 - 4303


Going concern assessments 3 - 4304

Making submissions to the Opinions Review Committee on going

concern issues 3 - 4305

Appendix 1 - Going concern decision tree 3 - 4306



Introduction




Going Concern1; and


Application





Objectives


(a) obtain sufficient appropriate audit evidence about the appropriateness of the

use of the going concern assumption in the preparation and presentation of

the financial and non-financial information;

(b) conclude, based on the audit evidence obtained, whether a material

uncertainty exists related to events or conditions that may cast significant

doubt on the public entity’s ability to continue as a going concern; and

(c) determine the implications for the audit report.

Definitions







definition shall prevail); and 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”.





Requirements

Going concern assessments

6. In assessing the validity of the going concern assumption, the Appointed Auditor shall

consider whether the entity is operating within its means and whether or not it is likely

that it will be able to continue operating, without additional government support, for at

least one year (or for the foreseeable future) from the date of the approval of the

financial statements. (Ref: Para. A1 - A5)

Forming the audit opinion2

7. Where the financial statements have been prepared on a basis other than on a going

concern basis, the Appointed Auditor shall consider if the other basis is appropriate in

the specific circumstances, and if the financial statements contain the necessary

disclosures. In these circumstances the Appointed Auditor shall not issue a modified

opinion. However, the audit report shall include, when setting out the basis of the

opinion, an emphasis of matter paragraph that describes the other basis of

preparation and shall refer to the relevant disclosures in the financial statements.

Where there are material errors in application of the other basis, the Appointed

Auditor shall refer the recommended opinion to the OAG Accounting and Auditing

Policy Group for guidance. An example of such an error would be if the valuation of

assets and/or liabilities in financial statements prepared on a realisation basis were

materially misstated.

8. Where the Appointed Auditor disagrees with the use of the going concern

assumption, or inadequate disclosures have been made, an adverse opinion shall be

issued. In these circumstances, the audit report shall be referred to the Auditor-

General’s Opinions Review Committee (the ORC) in keeping with AG ISA (NZ) 700.

9. Where the Appointed Auditor identifies a limitation in scope over the use of the going

concern assumption, the Appointed Auditor shall consult with the OAG Accounting

and Auditing Policy Group before issuing the audit report.

10. Where the Appointed Auditor is able to obtain sufficient audit evidence to support the

use of the going concern assumption, but there is a matter outside the control of

2 Appendix 1 is a decision tree for forming the audit opinion.



management and those charged with governance that is adequately disclosed in the

financial statements, the audit report shall include an emphasis of matter paragraph

that describes the uncertainties and refers to the relevant disclosures in the financial

statements. In these circumstances, the audit report shall be referred to the ORC in

keeping with AG ISA (NZ) 700. In this situation, the Appointed Auditor shall ensure

that the written representation letter contains representations from those charged with

governance, outlining why they believe the use of the going concern assumption is

appropriate. An illustrative example of such representations is contained in Appendix

4 of AG ISA (NZ) 580: Written representations.

11. Where the Appointed Auditor is able to obtain sufficient audit evidence to support the

use of the going concern assumption, because the entity has obtained a letter of

support, the audit report shall be referred to the ORC, in keeping with AG ISA (NZ)

700, unless the OAG has issued other instructions. In this situation, the Appointed

Auditor shall ensure that the written representation letter contains representations

from those charged with governance, outlining why they believe the use of the going

concern assumption is appropriate. An illustrative example of such representations is

contained in Appendix 4 of AG ISA (NZ) 580: Written representations.

Making submissions to the Opinions Review Committee on going concern issues

12. The Appointed Auditor shall prepare a submission for the ORC, before signing the

audit report, in keeping with the requirements for ORC submissions that are outlined

in AG ISA (NZ) 700, if:

- they seriously consider the validity of the going concern assumption (Ref:

Para. A6);

- there are inadequate disclosures about going concern; or

- the circumstances outlined in paragraphs 10 and 11 above exist.

Management reporting

13. If the Appointed Auditor has seriously considered the validity of the going concern

assumption, the issue shall be addressed in the management letter to those charged

with governance.

***




Going concern assessments (Ref: Para. 6)

A1. The Auditor-General considers that the period of assessment should be a minimum of

one year from the date those charged with governance approve the financial and

non-financial information, as this is consistent with the objectives of the OAG to

provide as much assurance as possible on the financial and non-financial information.

The Appointed Auditor may need to request that those charged with governance

extend their period of assessment beyond one year from the approval date if there

are circumstances that could affect the validity of the going concern assumption.

A2. The Appointed Auditor should not assume that, because an entity is operating in the

public sector, the government will automatically support the entity should it run into

financial difficulties. When assessing the validity of the going concern assumption in

relation to a public entity, the Appointed Auditor needs to ask the question:

Without government or other external assistance over and above that provided to

fund normal operations (including the need to invoke statutory processes to amend

an entity’s ability to levy or rate), and without significant curtailment of activities, will

the entity be able to continue operating for at least one year (or for the foreseeable

future) from the date of the approval of the financial statements?

A3. From time to time public entities run into financial difficulties. Such difficulties usually

mean that, without government support over and above that provided for the delivery

of outputs, the entity would have to cease operating or significantly curtail its

operations.

A4. While it may be unlikely that the Government would allow a public entity to fail

financially, it is not the Appointed Auditor’s role to anticipate the Government’s

response to a public entity in financial trouble.

A5. It is not uncommon for a public entity to receive a letter of support that removes a

fundamental uncertainty over the use of the going concern assumption (for example,

a letter of support from Ministers to a District Health Board in financial difficulties). In

such circumstances it may be in the public interest for the audit report to draw

readers’ attention to the existence of the letter of support even though the use of the

going concern assumption is considered appropriate.



Making submissions to the Opinions Review Committee on going concern issues (Ref:

Para. 12)

A6. The submission to the ORC, with respect to going concern issues, should consider

the following (by reference to the latest information available):

- Financial statements: trends over time; whether the financial statements

adequately reflect all expenses and obligations of the entity.

- Public equity and working capital: adequacy and levels of equity and working

capital; reasons for current levels/trends; and existence of disturbing trends.

- Cash flows: ability of the entity to pay its debts as they fall due; and evidence

of out of the ordinary measures taken to manage cash or other liquid assets

to meet financial obligations.

- Commitments: existence of any capital expenditure or other financial

commitments; and the flexibility of these commitments.

- Budget: existence of a budget for the next 12 months and expected position

at the end of those 12 months; recognition of non cash-items in the budget

(for example, depreciation); and current and past performance against

budget.

- External funding: capacity of the entity to raise significant levels of external

funds and the reasonableness of the level of external funding as projected in

the budget.

- Those charged with governance: attitude of those charged with governance

with respect to the financial management of the entity (proactive versus

reactive); acknowledgement of the seriousness of the financial situation;

action taken to redress the situation; evidence that action is being taken; time

frame for rectification; and reaction to the Appointed Auditor’s decision to

refer the matter to the OAG.

- Non-financial performance information: where relevant to the going concern

issue.



Appendix 1 - Going concern decision tree

Y N

Y N

Y N

START

Have the financial statements been prepared using the going concern basis?

Is the other basis appropriate and do the financial statements include adequate disclosure?

END

UNMODIFIED OPINION WITH AN EMPHASIS OF MATTER PARAGRAPH

Example 706-02 in AG ISA (NZ) 706

This situation w ould arise where a decision has been made to disestablish the entity and accordingly the entity has prepared its f inancial statements on a basis other than the going concern basis and has included adequate disclosure that the entity is not a going concern. The emphasis of matter paragraph in the audit report w ill outline the decision to disestablish the entity and w ill refer to the disclosures in the f inancial statements. Where the Appointed Auditor identif ies material errors in the application of the other basis they should consult w ith the OAG Accounting and Auditing Policy Team.

The Appointed Auditor shall consult with the OAG Accounting and Auditing Policy Group on the appropriate audit report that should be issued in this situation.

Has sufficient and appropriate evidence been obtained which will provide reasonable assurance that the entity is a going concern?

ADVERSE OPINION


This situation w ould arise where a decision has been made to disestablish the entity but the f inancial statements have inappropriately been prepared on a going concern basis or that the disclosures in the f inancial statements are inadequate. The opinion paragraph w ill explain w hy there is a disagreement over the use of the going concern basis and/or the accompanying disclosures.

AUDIT REPORT TO BE APPROVED BY ORCCONTINUE AT A1



Y N

Y N

Y N

Y N

Has all evidence that supports the preparation of the financial statements on a going concern basis that is reasonably expected to be available, been obtained?


Are there inherent uncertainities over the appropriateness of the going concern assumption?

UNMODIFIED OPINION

This situation w ould arise where the Appointed Auditor is able to obtain suff icient evidence that the use of the going concern basis is appropriate.

END

Do the financial statements include adequate disclosure of the matters giving rise to the uncertainties?


UNMODIFIED OPINION WITH AN EMPHASIS OF MATTER PARAGRAPH


This situation w ould arise where the Appointed Auditor is able to obtain suff icient audit evidence to support the use of the going concern basis , although, there is a matter outside the control of management and those charged w ith governance, which is adequately disclosed in the f inancial statements. The emphasis of matter paragraph in the audit report w ould need to outline the reasons for the uncertainity and refer to the disclosures in the f inancial statements.

AUDIT REPORT TO BE APPROVED BY ORC

Has the public entity obtained a letter of support to confirm that the use of the going concern basis is appropriate?

AUDIT REPORT TO BE APPROVED BY ORC

CONTINUE FROM A1

AG ISA (NZ) 580 Written representations


AG ISA (NZ) 580


WRITTEN REPRESENTATIONS

Contents

Page




Objectives 3 - 4401



Content of representations 3 - 4402

Signatories of representations 3 - 4402

Doubt as to the reliability of written representations 3 - 4403

Requested written representations not provided 3 - 4403


Content of representations 3 - 4403

Signatories of representations 3 - 4404

Appendix 1 - Illustrative representation letter for a non-company 3 - 4405

Appendix 2 - Illustrative representation letter for a company and group 3 - 4408

Appendix 3 - Illustrative website publication representation 3 - 4411

Appendix 4 - Illustrative going concern representation where doubt exists

as to the use of the going concern assumption 3 - 4412



Introduction




Written Representations1;

(b) provides additional guidance to reflect the public sector perspective; and

(c) provides sample written representation templates for the Appointed Auditor to

use.

Application





Objectives


(a) obtain written representations from those charged with governance

confirming that they believe that they have fulfilled the fundamental

responsibilities that constitute the premise on which an audit is conducted;

(b) support other audit evidence relevant to the financial and non-financial

information or specific assertions in that information - by means of written

representations (if determined necessary by the auditor), or required by other

ISAs (NZ), or by the Auditor-General’s auditing standards and statements;

and

(c) respond appropriately to written representations provided by those charged

with governance, or if those charged with governance do not provide the

written representations requested by the Appointed Auditor.





Definitions

5. For the purpose of this Auditor-General’s Auditing Statement the defined terms have








Requirements

Content of representations

6. The written representation letter from a public entity shall, as a minimum:

(a) address all the issues included in the sample written representation letters,

except where they are not applicable in the circumstances; and

(b) be consistent with the intent and meaning of the representations requested in

the sample written representation letters.

Appendices 1 and 2 contain illustrative written representation letters. Additional

sample written representation letters, based on the requirements in this Statement

and on the requirements contained in ISA (NZ) 580, may be provided by the OAG.

7. The Appointed Auditor shall supplement the wording of the written representation

letter by requesting additional representations on material matters that are specific to

the public entity subject to audit (Ref: Para. A1). Some examples of additional

representations that may need to be requested include:

(a) a specific representation covering the publication of the audited financial and

non-financial information and the related audit report on a website (in

Appendix 3); and

(b) an illustrative example of a going concern representation where there is an

indication that the going concern assumption may be in doubt (in Appendix

4).

Signatories of representations

8. The Appointed Auditor shall request written representations from those charged with

governance with appropriate responsibilities for the financial and non-financial



information and knowledge of the matters concerned. There are two specific

exceptions to this requirement:

(a) public entities that are required by legislation to prepare a statement of

responsibility or a statement of compliance (Ref: Para. A2 – A3); and

(b) companies or issuers under the Financial Reporting Act 1993. (Ref: Para. A4)

The written representation letter may be countersigned by the Chief Executive Officer

and other relevant personnel, such as the Chief Financial Officer.

Doubt as to the reliability of written representations

9. If, in meeting the requirements of paragraphs 16 and 17 of ISA (NZ) 580, the

Appointed Auditor concludes that the written representations are not reliable, the

Appointed Auditor shall refer the matter to the OAG. The OAG, in consultation with

the Appointed Auditor, shall determine the effect on the audit report together with any

other reporting actions.

Requested written representations not provided

10. If, in meeting the requirements of paragraphs 19(a) and 19(b) of ISA (NZ) 580, the

Appointed Auditor is unable to obtain the requested written representations, the

Appointed Auditor shall refer the matter to the OAG. The OAG, in consultation with

the Appointed Auditor, shall determine the effect on the audit opinion together with

any other reporting actions.

***


Content of representations (Ref: Para. 6 - 7)

A1. Appointed Auditors may, in some situations, include in their representation letter the

misstatements that were corrected during the audit, or the number of versions of the

financial and non-financial information that were provided by management. Situations

where it may be appropriate to include such information in the representation letter

include, but are not limited to:

- where those charged with governance have requested such information; or

- where the Appointed Auditor wants to indicate to those charged with

governance the amount of audit work that was carried out to complete the



audit.

Signatories of representations (Ref: Para. 8)

A2. Some public entities are required by statute to prepare a statement of responsibility or

a statement of compliance to accompany the audited financial and non-financial

information.

A3. Those individuals who are required to sign the statement of responsibility (or

statement of compliance) will also be expected to sign the written representation

letter.

A4. Sections 10(1)(b) and 13(1)(b) of the Financial Reporting Act 1993 require the

financial statements of a company or an issuer (defined as a “reporting entity” in the

Financial Reporting Act 1993) to be dated and signed on behalf of the directors by

two directors of the entity or, if the entity has only one director, by that director. While

the Chairperson would normally sign the financial statements and, where applicable,

any performance information, this may not always be the case for a “reporting entity”.

In the situation where a director (or directors) other than the Chairperson signs the

financial statements and, where applicable, any performance information, it should be

expected that those individuals will also sign the written representation letter.



Appendix 1 - Illustrative representation letter for a non-company

The following illustrative letter, which is based on the requirements in AG ISA (NZ) 580 and

ISA (NZ) 580, is not to be considered as an all-inclusive list of issues to be addressed in the

written representation letter sought from those charged with governance. In all cases where

this illustrative representation letter is used, the contents of the letter should be reviewed for

their relevance and appropriateness, and additions or deletions made to it where considered

necessary.

It is assumed in this illustration that:

- the entity is not a company and is required to prepare financial statements and a

statement of service performance;2

- the entity is not an issuer, which means that it is not subject to the requirements of

the Financial Reporting Act 1993; and

- the applicable financial reporting framework is New Zealand Equivalents to

International Financial Reporting Standards.

[Public entity letterhead] [Date] [Appointed Auditor] [Audit Service Provider] [Address 1] [TOWN or CITY] REPRESENTATION LETTER FOR THE YEAR ENDED [DD MM 20XX] This representation letter is provided in connection with your audit, carried out on behalf of the Auditor-General, of the financial statements and statement of service performance of [Name of public entity] for the year ended [DD MM 20XX] for the purpose of expressing an independent opinion about whether: - the financial statements have been prepared in accordance with legal requirements, comply with generally

accepted accounting practice and fairly reflect the financial position of [Name of public entity] as at [DD MM 20XX] and of the results of its operations and its cash flows for the year ended on that date; and

- the statement of service performance has been prepared in accordance with legal requirements, complies with generally accepted accounting practice and fairly reflects the service performance for the year ended [DD MM 20XX].

We understand that your audit was carried out in accordance with the Auditing Standards issued by the Auditor-General, which incorporate the International Standards on Auditing (New Zealand). We also understand that your audit was (to the extent that you deemed appropriate) carried out with the objective of: - providing an independent opinion on the [Name of public entity]’s financial statements [and performance

information]; and - reporting on other matters relevant to the [Name of public entity]’s financial and other management systems

that come to your attention, need improvement or are significant (for example, non-compliance with statutory obligations or a lack of probity).

[We understand that because you will be issuing a non-standard audit report, the Auditor-General has the responsibility to refer to that audit report in a report to Parliament in accordance with section 20 of the Public Audit Act 2001.]3 General responsibilities

2 The Appointed Auditor should ensure that the references to the statements that have been audited in the

representation letter are consistent with the statements in the audit report where an opinion is provided. 3 This wording is optional and should only be included in the representation letter if the Appointed Auditor will

be issuing a non-standard audit report.



To the best of our knowledge and belief: - the resources, activities, [and entities] under our control have been operating effectively and efficiently; - we have complied with our statutory obligations including laws, regulations and contractual requirements; - we have carried out our decisions and actions with due regard to minimising waste; - we have met Parliament’s and the public’s expectations of appropriate standards of behaviour in the public

sector (that is, we have carried out our decisions and actions with due regard to probity); and - any decisions or actions have been taken with due regard to financial prudence. We also acknowledge that we have responsibility for designing, implementing, and maintaining internal control (to the extent that is reasonably practical given the size of [Name of public entity]) to prevent and detect fraud (a requirement of paragraph 39(a) in ISA (NZ) 240). Responsibilities for the financial statements and the statement of service performance We confirm that all transactions have been recorded in the accounting records and are reflected in the financial statements and statement of service performance, and that, to the best of our knowledge and belief, having made such enquiries as we considered necessary for the purpose of appropriately informing ourselves: - we have fulfilled our responsibilities for preparing and presenting the financial statements and the

statement of service performance as required by [specify the statutory or other requirements for the preparation of the financial statements and statement of service performance] and, in particular, that: - the financial statements comply with generally accepted accounting practice and fairly reflect the

financial position of [Name of public entity] as at [DD MM 20XX] and of the results of its operations and its cash flows for the year then ended; and

- the statement of service performance complies with generally accepted accounting practice and fairly reflects the service performance for the year ended [DD MM 20XX];

- we believe the significant assumptions used by us in making accounting estimates, including those measured at fair value, are reasonable (a requirement of paragraph 22 in ISA (NZ) 540);

- we have appropriately accounted for and disclosed the related party relationships and transactions in the financial statements (a requirement of paragraph 26(b) in ISA (NZ) 550);

- we have adjusted or disclosed all events subsequent to the date of the financial statements and the statement of service performance that require adjustment or disclosure (a requirement of paragraph 9 in ISA (NZ) 560); and

- we believe the effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements and statement of service performance as a whole. A list of the uncorrected misstatements is attached to this representation letter (a requirement of paragraph 14 in ISA (NZ) 450).

- [Any other matters that the Appointed Auditor may consider appropriate including references to written representations in paragraph 12 of ISA (NZ) 501 and paragraph 9 in ISA (NZ) 710 (paragraphs 8 and A10 in ISA (NZ) 580).]

Responsibilities to provide information We confirm that, to the best of our knowledge and belief, having made such enquiries as we considered necessary for the purpose of appropriately informing ourselves: - we have provided you with:

- all information, such as records and documentation, and other matters that are relevant to preparing and presenting the financial statements and the statement of service performance; and

- unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence;

- we have disclosed to you the results of our assessment of the risk that the financial statements and statement of service performance may be materially misstated as a result of fraud (a requirement of paragraph 39(b) in ISA (NZ) 240);

- we have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entity and involves: - management; - employees who have significant roles in internal control; or - others where the fraud could have a material effect on the financial statements (a requirement of

paragraph 39(c) in ISA (NZ) 240); - we have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affecting the

entity’s financial statements and statement of service performance communicated by employees, former employees, analysts, regulators, or others (a requirement of paragraph 39 (d) in ISA (NZ) 240);

- we have disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements and the statement of service performance (a requirement of paragraph 16 in ISA (NZ) 250); and

- we have disclosed the identity of the related parties, all of their relationships, and all of their transactions of which we are aware (a requirement of paragraph 26(a) in ISA (NZ) 550).


Going concern4

4 If there is any doubt about the validity of the going concern assumption, the going concern section in this

representation letter should be replaced with the going concern representation in Appendix 4.



We confirm that, to the best of our knowledge and belief, the [Name of public entity] has adequate resources to continue operations at its current level for the foreseeable future. For this reason, the [Governing body] continues to adopt the going concern assumption in preparing the financial statements and the statement of service performance for the year ended [DD MM 20XX]. We have reached this conclusion after making enquiries and having regard to circumstances that we consider likely to affect the [Name of public entity] during the period of one year from [date of signing the financial statements and the statement of service performance], and to circumstances that we know will occur after that date which could affect the validity of the going concern assumption. [Insert details of key considerations (for example, operating and cash flow forecasts, forecast borrowing requirements, commitments, and contingencies).] We consider that the financial statements and the statement of service performance adequately disclose the circumstances, and any uncertainties, surrounding the adoption of the going concern assumption by the [Name of public entity]. Throughout the year, the [Name of public entity] has conformed with the requirements of its banking arrangements, debenture trust deeds, or negative pledge agreements, including those relating to its net tangible assets ratios (a requirement of paragraph 16(e) in ISA (NZ) 570). The representations in this letter are made at your request, and to supplement information obtained by you from the records of the [Name of public entity] and to confirm information given to you orally. Yours faithfully

Chairperson Chief Executive



Appendix 2 - Illustrative representation letter for a company and group

The following illustrative letter, which is based on the requirements in AG ISA (NZ) 580 and

ISA (NZ) 580, is not to be considered as an all-inclusive list of issues to be addressed in the

written representation letter sought from those charged with governance. In all cases where

this illustrative representation letter is used, the contents of the letter should be reviewed for

their relevance and appropriateness, and additions or deletions made to it where considered

necessary.

The illustrative letter contains optional text that reflects that a Board of Directors is different

from the company. It is assumed in this illustrative letter that:

- the entity is a company and group and it is an issuer (in accordance with the

requirements of the Financial Reporting Act 1993) that only needs to prepare financial

statements; and

- the applicable financial reporting framework is New Zealand Equivalents to

International Financial Reporting Standards.

[Public entity letterhead] [Date] [Appointed Auditor] [Audit Service Provider] [Address 1] [TOWN or CITY] REPRESENTATION LETTER FOR THE YEAR ENDED [DD MM 20XX] This representation letter is provided in connection with your audit, carried out on behalf of the Auditor-General, of the financial statements for the year ended [DD MM 20XX] of: - [Name of parent entity] Limited (the company); and - the group, comprising the company and its subsidiaries.5 The purpose of the audit is to express an independent opinion about whether: - the company and group’s financial statements comply with generally accepted accounting practice; - the company and group’s financial statements give a true and fair view of the financial position of the

company and group as at [DD MM 20XX] and of the results of their operations and its cash flows for the year ended on that date; and

- the company and group has kept proper accounting records in accordance with the Financial Reporting Act 1993.

[The Board of Directors (the Board)/We] understand that your examination was conducted in accordance with the Auditing Standards issued by the Auditor-General, which incorporate the International Standards on Auditing (New Zealand). [The Board/We] also understand that your examination was (to the extent that you deemed appropriate) for the objectives of: - providing an independent opinion on the company and group’s financial statements; and

5 If the representation letter is intended by the auditor to provide representations on any separate financial

statements prepared by the subsidiary entities, in addition to the company and group financial statements, then the two bullet points need to be replace with: - [Name of parent entity] Limited (the company); - the group, comprising the company and its subsidiaries; and - each of the subsidiaries listed below:

- [Name of subsidiary 1]; - [Name of subsidiary 2]; and - [Name of subsidiary 3].



- reporting on other matters relevant to the company and group’s financial and other management systems that come to our attention and are material (for example, non-compliance with statutory obligations or a lack of probity).

[We understand that because you will be issuing a non-standard audit report, the Auditor-General has the responsibility to refer to that audit report in a report to Parliament in accordance with section 20 of the Public Audit Act 2001.]6 General responsibilities [The Board/We] acknowledge the following responsibilities, and to the best of [The Board’s/our] knowledge and belief: - the resources, activities, and entities under [the company’s/our] control have been operating effectively and

efficiently; - [the company and group has/we have] complied with our statutory obligations including laws, regulations

and contractual requirements; - [the company and group has/we have] carried out our decisions and actions with due regard to minimising

waste; - [the company and group has/we have] met Parliament’s and the public’s expectations of appropriate

standards of behaviour in the public sector (that is, [the Board and company personnel/we] have carried out our decisions and actions with due regard to probity); and

- any decisions or actions have been taken with due regard to financial prudence. [The Board/We] also acknowledge that we have responsibility for designing, implementing, and maintaining internal control (to the extent that is reasonably practical given the size of the company and group) to prevent and detect fraud (paragraph 39(a) in ISA (NZ) 240). Responsibilities for the financial statements [The Board confirms/We confirm] to the best of our knowledge and belief and having made such enquiries as is considered necessary, that: - all transactions have been recorded in the accounting records and are reflected in the financial statements; - we have fulfilled our responsibilities for preparing and presenting the financial statements as required by

[specify the statutory or other requirements for the preparation of the financial statements] and, in particular, that the financial statements: - comply with generally accepted accounting practice; and - give a true and fair view of the financial position of the company and group as at [DD MM 20XX]

and of the results of its operations and its cash flows for the year then ended; - the significant assumptions used by us in making accounting estimates, including those measured at fair

value, are reasonable (paragraph 22 in ISA (NZ) 540); - related party relationships and transactions have been appropriately accounted for and disclosed in the

financial statements (paragraph 26(b) in ISA (NZ) 550); - all events subsequent to the date of the financial statements that require adjustment or disclosure have

been adjusted or disclosed (paragraph 9 in ISA (NZ) 560); and - the effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the

financial statements as a whole. A list of the uncorrected misstatements is attached to this representation letter (paragraph 14 in ISA (NZ) 450).


Responsibilities to provide information [The Board confirms/We confirm] to the best of our knowledge and belief, having made such enquiries as is considered necessary: - you have been provided with:

- all information, such as records and documentation, and other matters that are relevant to preparing and presenting the financial statements; and

- unrestricted access to persons within the entity from whom you determined it necessary to obtain audit evidence;

- the results of [the company’s/our] assessment of the risk that the financial statements may be materially misstated as a result of fraud have been disclosed to you (paragraph 39(b) in ISA (NZ) 240);

- all information has been disclosed to you in relation to fraud or suspected fraud that [the Board is/we are] aware of and that affects the company and group and involves: - management; - employees who have significant roles in internal control; or - others where the fraud could have a material effect on the financial statements (paragraph 39(c)

in ISA (NZ) 240); - all information has been disclosed to you in relation to allegations of fraud, or suspected fraud, affecting the

company and group’s financial statements communicated by employees, former employees, analysts, regulators, or others (paragraph 39(d) in ISA (NZ) 240);

6 This wording is optional and should only be included in the representation letter if the Appointed Auditor will

be issuing a non-standard audit report.



- all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements has been disclosed to you (paragraph 16 in ISA (NZ) 250); and

- the identity of the related parties, all of their relationships, and all of their transactions of which [the Board is/we are] aware has been disclosed to you (paragraph 26(a) in ISA (NZ) 550).


Going concern7 [The Board confirms/We confirm] that, to the best of our knowledge and belief, the company and group has adequate resources to continue operations at their current level for the foreseeable future. For this reason, the Board continues to adopt the going concern assumption in preparing the financial statements for the year ended [DD MM 20XX]. [The Board has/We have] reached this conclusion after making enquiries and having regard to circumstances that we consider likely to affect the company and group during the period of one year from [date of signing the financial statements], and to circumstances that we know will occur after that date which could affect the validity of the going concern assumption. [Insert details of key considerations (for example, operating and cash flow forecasts, forecast borrowing requirements, commitments, and contingencies).] [The Board considers/We consider] that the financial statements adequately disclose the circumstances, and any uncertainties, surrounding the adoption of the going concern assumption by the company and group. Throughout the year, the company and group has conformed with the requirements of its banking arrangements, debenture trust deeds, or negative pledge agreements, including those relating to its net tangible assets ratios (paragraph 16(e) in ISA (NZ) 570). The representations in this letter are made at your request, and to supplement information obtained by you from the records of the company and group and to confirm information given to you orally. Yours faithfully

Director Director

7 If there is any doubt about the validity of the going concern assumption, the going concern section in this

representation letter should be replaced with the going concern representation in Appendix 4.



Appendix 3 - Illustrative website publication representation

The following is an illustration of an additional representation that can be included in the

representation letter when the entity intends publishing its audited financial statements and

statement of service performance and the related audit report on a website.

Publication of the financial statements [and statement of service performance] and related audit report on a website - The [Governing body] accepts that it is responsible for the electronic presentation of the audited financial

statements [and statement of service performance]. - The electronic version of the audited financial statements [and statement of service performance] and the

related audit report presented on the website are the same as the final signed version of the audited financial statements [and statement of service performance] and audit report.

- We have clearly differentiated between audited and unaudited information on the website and understand the risk of potential misrepresentation without appropriate controls.

- We have assessed the security controls over audited financial [and service performance] information and the related audit report, and are satisfied that procedures are adequate to ensure the integrity of the information provided.

- Where the audit report on the full financial statements [and statement of service performance] is provided on a website, the financial statements [and statement of service performance] are also provided in full.



Appendix 4 - Illustrative going concern representation where doubt exists as to the use of the going concern assumption

The following illustrative representation can be sought if there is an indication that the going

concern assumption is in doubt.

Going concern The considered view of the [Governing body] is that, after making enquiries, the [Governing body] has a reasonable expectation that the [Name of public entity] has adequate resources to continue operations for the foreseeable future. For this reason, the [Governing body] continues to adopt the going concern assumption in preparing the financial statements for the year ended [DD MM 20XX]. The [Governing body] has reached this conclusion having regard to circumstances that it considers likely to affect the [Name of public entity] during the period of one year from [date of signing the financial statements], and to circumstances that it knows will occur after that date which could affect the validity of the going concern assumption. The key considerations are set out below. Operating and cash flow forecasts The [Governing body] has considered forecast information relating to operational viability and cash flow requirements. The [Governing body] is satisfied that there will be enough cash flows generated from operating activities to meet the investing and financing cash flow requirements of the [Name of public entity]. Borrowing covenants and forecast borrowing requirements Throughout the year, the [Name of public entity] has conformed with the requirements of its banking arrangements, debenture trust deeds, or negative pledge agreements, including those relating to its net tangible assets ratios. The forecasts for the next […] months prepared by the [Governing body] show that the available borrowing facilities exceed the peak borrowing requirements by a margin of [$amount]. Furthermore, the forecast borrowing requirements can be met without breaching covenants or other borrowing restrictions. Commitments The [Name of public entity] has commitments that are analysed as follows:

$000

Relating to existing activities: Fixed assets – contracted xx Fixed assets – budgeted but not contracted xx xx Relating to expansion: Fixed assets – contracted xx Fixed assets – budgeted but not contracted xx xx Total xxx

The commitments for existing activities will be incurred in the next […] months and will be met out of established facilities. The commitments for future expansion will start to be incurred in […] months’ time and will be met partly out of existing facilities and partly out of new funds. [Note X] to the financial statements also shows lease commitments. These are to meet existing needs and will be met out of current funds. Contingencies [Note X] to the financial statements explains the [Name of public entity]’s contingencies. As stated, the [Governing body] does not consider that provision for these items is necessary and has not therefore arranged funding to meet the liability should the contingency be realised. The [Governing body] does not consider that the contingency affects the appropriateness of the going concern assumption in preparing the financial statements for the year ended [DD MM 20XX]. [or alternatively]



[Note X] to the financial statements states that the [Name of public entity] has no contingencies as at [date]. The [Governing body] is not aware of any undisclosed contingencies that would affect the appropriateness of the going concern assumption in preparing the financial statements for the year ended [date]. Disclosure We consider that the financial statements adequately disclose the circumstances, and any uncertainties, surrounding the adoption of the going concern assumption by the [Name of public entity].

AG ISA (NZ) 600 Audits of groups


AG ISA (NZ) 600


SPECIAL CONSIDERATIONS - AUDITS OF GROUP FINANCIAL AND

NON-FINANCIAL INFORMATION (INCLUDING THE WORK OF

COMPONENT AUDITORS)

Contents

Page




Objectives 3 - 4502



When components are public entities 3 - 4504

When components are not public entities 3 - 4505

When there are difficulties with the audit of a group 3 - 4506



Introduction


1. This Auditor-General’s Auditing Statement (Statement) applies to group audits where

the parent is a public entity in New Zealand, and:


Special Considerations – Audits of Group Financial Statements1; and


2. This Statement clarifies the extent to which the requirements in ISA (NZ) 600 apply to

the annual audits of public entity groups, which is illustrated in figure 1. Clarity is

needed because:

(a) ISA (NZ) 600 does not apply to the audits of public entity groups (where all

the entities in the group are public entities) because all public entities are

audited by one auditor, the Auditor-General; and

(b) ISA (NZ) 600 does apply to the audits of some public entity groups, where;

- a New Zealand domiciled component is not a public entity; and

- a public entity group includes a component domiciled in an overseas

jurisdiction (that may be controlled or not controlled).

3. A controlled entity domiciled in an overseas jurisdiction (subsequently referred as a

controlled overseas component) is not a public entity2. Nonetheless, those charged with

governance and the management of the parent public entity are expected to ensure

that a controlled overseas component operates with regard to the principles of probity

and financial prudence, operates effectively and efficiently, complies with statutory

obligations, and minimises waste. As a result, it is expected that the Group Appointed

Auditor will, as part of meeting the requirements contained in AG-3, request component

auditors to maintain the same level of awareness and alertness for issues or risks as

outlined in AG-3 The Auditor’s Approach to Issues of Effectiveness and Efficiency,

Waste, and a Lack of Probity or Financial Prudence.



2 This definition reflects the general principle of statutory interpretation that legislation does not have extraterritorial effect, unless the legislation expressly says that it does, or that extended application is necessary to achieve the purpose of the legislation. The Public Audit Act does not meet these criteria.



Application


annual audits of public entities within a group on behalf of the Auditor-General.

5. This Statement applies to all annual audits with reporting periods beginning 1 July

2014 or after, although earlier application is encouraged.

Objectives

The Group Appointed Auditor’s objective when a component is a public entity

6. The objective of the Group Appointed Auditor is to:

(a) work cooperatively with Component Appointed Auditors of all components

that are public entities, as if the Group and Component Appointed Auditors

are part of the same audit firm, rather than complying with all of the

requirements of ISA (NZ) 600; and

(b) obtain sufficient and appropriate audit evidence to form an opinion on the

group financial and non-financial information.

The Component Appointed Auditor’s objective when a component is a public

entity

7. The objective of the Component Appointed Auditor is to work cooperatively with

Group Appointed Auditor, as if the Group and Component Appointed Auditors are

part of the same audit firm to enable the Group Appointed Auditor to obtain sufficient

and appropriate audit evidence to form an opinion on the group financial and non-

financial information.

The Group Appointed Auditor’s objective when a component is not a public

entity

8. The objective of the Group Appointed Auditor is to work with the component auditors

of all non-public entity components in accordance with the requirements of ISA (NZ)

600, and the alternative requirements contained in this Statement, in order to obtain

sufficient and appropriate audit evidence to form an opinion on the group financial

and non-financial information.



The Group Appointed Auditor’s objective when a component is a controlled

overseas component

9. In addition to the objective in paragraph 8, the objective of the Group Appointed

Auditor is to ensure that AG-3 is appropriately applied to the audit of the Group,

including controlled overseas components.

Definitions










Component Appointed Auditor means the auditor appointed by the Auditor-General,

who carries out the annual audit of a subsidiary or

component which is a public entity, on behalf of the

Auditor-General.

Component auditor means, as defined in ISA (NZ) 600, an auditor who, at

the request of the group engagement team, performs

work on the financial and non-financial information

related to a component for the Group audit.

Component that is a public

entity

means a subsidiary or component of a public entity (or

entities) and is a public entity as defined in the Public

Audit Act 2001.

Component that is not a public

entity

means a subsidiary or component of a public entity (or

entities) and is not a public entity as defined in the

Public Audit Act 2001. This may include:

(c) a controlled overseas component; or

(d) a component that is not controlled by a public

entity (or entities) and is domiciled either in New

Zealand or an overseas jurisdiction.

Group Appointed Auditor means the auditor appointed by the Auditor-General



who carries out the annual audit of the public entity

group, on behalf of the Auditor-General.

Figure 1 – Scope and application of this Statement to each component within a public entity group

Requirements

When components are public entities

11. In developing the overall audit strategies and audit plans for the group in accordance

with the requirements in AG ISA (NZ) 3003, the Group Appointed Auditor shall work

with Component Appointed Auditors as if they are part of the same audit firm to

obtain sufficient and appropriate audit evidence in the most efficient way to be able to

form an opinion on the group financial and non-financial information. To do this, the

Group Appointed Auditor shall have regard to the requirements contained in ISA (NZ)

600, but take into account the Auditor-General’s processes and standards that apply

to the work of Component Appointed Auditors, including:

(a) taking account of the engagement acceptance and continuance requirements

in AG PES 3: Quality Control, instead of meeting the requirements of

paragraphs 12 to 13 of ISA (NZ) 600 on acceptance and continuance.

(b) taking account of the requirements in AG ISA (NZ) 210: The terms of the

audit engagement to confirm the terms of the audit engagement, instead of

3 Paragraph 8 in AG ISA (NZ) 300 requires all Appointed Auditors to consider the relevant public sector

perspective when developing their overall audit strategy and audit plan.

Y N

Y N

Y N

START

Is the Group Appointed Auditor auditing a public entity that controls a component that is based in New Zealand?

In this situation the component is a public entity, which means the Group Appointed Auditor shall comply with paragraphs 11 and 12 of this Statement.

Is the Group Appointed Auditor auditing a public entity that controls a component that is domiciled in an overseas jurisdiction?

In this situation the component is not a public entity, which means the Group Appointed Auditor shall comply withparagraphs 14, 15 and 16 of this Statement.

Is the Group Appointed Auditor auditing a public entity that has an interest in a component but does not control it (whether or not the uncontrolled component is domiciled in New Zealand or an overseas jurisdiction)?

In this situation the component is not a public entity, which means the Group Appointed Auditor shall comply with paragraph 13 of this Statement.

END



meeting the requirement of paragraph 14 of ISA (NZ) 600 on agreeing the

terms of audit engagement.

(c) taking account of the requirements in AG ISA (NZ) 300: Planning the Annual

Audit to incorporate the information and instructions contained in the

applicable audit brief in their overall audit strategy and audit plan, in addition

to the requirements of paragraphs 17 and 18 of ISA (NZ) 600. In meeting this

requirement the Group Appointed Auditor may need to understand the

information and instructions outlined in the applicable audit brief used by

Component Appointed Auditors and work with them in their audit planning

procedures.

(d) taking account of the fact that Component Appointed Auditors are required to

comply with the ethical and independence requirements in AG PES 1

(Revised): Code of Ethics for Assurance Practitioners, instead of meeting the

requirements of paragraphs 19(a), 40(b), and 41(a) of ISA (NZ) 600, on

obtaining confirmation, that Component Appointed Auditors will comply with

ethical and independence requirements.

(e) taking account of the fact that Component Appointed Auditors are required to

comply with the professional competence requirements in AG PES 3, instead

of meeting the requirement of 19(b) (also reflected in paragraph 4) of ISA

(NZ) 600, on obtaining confirmation that Component Appointed Auditors will

comply with professional competence requirements.

(f) taking account of the requirements in AG ISA (NZ) 320: Materiality in planning

and performing an annual audit, when meeting the requirements of

paragraphs 21, 22, and 23 of ISA (NZ) 600.

12. In meeting the requirements of paragraph 11 of this statement, the Group Appointed

Auditor may, in rare circumstances, need to review the audit files of a Component

Appointed Auditor. In this situation the Component Appointed Auditor shall provide

access to the Group Appointed Auditor.

When components are not public entities

The component is not a public entity

13. The Group Appointed Auditor shall carry out their audit in accordance with the

requirements of ISA (NZ) 600 but shall comply with the engagement acceptance and

continuance requirements in AG PES-3: Quality Control instead of meeting the



requirements of paragraphs 12 to 13 of ISA (NZ) 600 on acceptance and continuance

for group audits4.

The component is a controlled overseas component

14. In addition to the requirement in paragraph 13, the Group Appointed Auditor shall

request the component auditor to appropriately consider and report to the Group

Appointed Auditor on any issues or risks required to be identified under AG-3. This

will normally require the Group Appointed Auditor to add additional material to the

instructions sent to the component auditor to ensure they appropriately consider and

report any issue or risk required to be identified under AG-3.

15. Where this approach is not possible, the Group Appointed Auditor may need to

assess whether those charged with governance of the parent public entity actively

monitor compliance with AG-3 issues and risks within the controlled overseas

component, and determine if any additional auditing procedures and/or reporting is

necessary.

16. The Group Appointed Auditor shall report AG-3 issues and risks raised by the

component auditor, in keeping with the requirements contained in AG-3.

When there are difficulties with the audit of a group

17. Group or Component Appointed Auditors shall immediately contact the Assistant

Auditor-General – Accounting and Auditing Policy, if they:

(a) have any difficulties in applying this Statement;

(b) identify that the work of a Group Appointed Auditor, or Component Appointed

Auditor, or component auditor may be insufficient, in accordance with

paragraph 43 in ISA (NZ) 600; or

(c) are considering communicating with management or those charged with

governance, concerns about the quality of the component auditor’s work, in

accordance with paragraph 49(c) in ISA (NZ) 600.

4 AG-3 does not apply to uncontrolled components because these entities are not public entities as defined in

the Public Audit Act 2001.

AG ISA (NZ) 700 Forming and reporting an opinion


AG ISA (NZ) 700


FORMING AN OPINION AND REPORTING ON FINANCIAL AND NON-

FINANCIAL INFORMATION

Contents

Page




Audit reports issued on behalf of the Auditor-General 3 - 4801

Objectives 3 - 4802



Dating of audit reports 3 - 4803

Translation of audit reports 3 - 4804

Independence and the disclosure of relationships or interests in the

public entity in the Audit Report 3 - 4804

Audit reports to be referred to the OAG 3 - 4805

Reporting to the OAG 3 - 4805


Dating of audit reports 3 - 4806

Translation of audit reports 3 - 4806

Independence and the disclosure of relationships or interests in the

public entity in the Audit Report 3 - 4806


Appendix 1 - The Auditor-General’s Opinions Review Committee (ORC) 3 - 4809

Appendix 2 - Unmodified non-company model audit report 3 - 4814

Appendix 3 - Unmodified company group model audit report 3 - 4822



Introduction




Forming an Opinion and Reporting on Financial Statements1; and


Application





4. The Auditor-General will determine the standard format and wording for audit reports

on the financial and non-financial information prepared by public entities. In doing so,

the Auditor-General will be cognisant of the objectives and requirements of ISA (NZ)

700, 705, and 706 to ensure appropriate reporting for readers. The Auditor-General’s

example audit reports are provided in this statement, AG ISA (NZ) 705, AG ISA (NZ)

706, and in other directions issued by the OAG from time to time.

Audit reports issued on behalf of the Auditor-General

Format of audit reports

5. Audit reports issued on behalf of the Auditor-General identify the information subject

to audit and provides the auditor’s opinion on that information, and on any other

matters on which the auditor is required to form an opinion, at the beginning of the

audit report. In contrast, paragraph 39 of ISA (NZ) 700 requires any “Report on other

legal and regulatory requirements” to follow the “Report on the Financial Statements”.

The reason for the Auditor-General’s format is so that the reader gets the key

messages at the earliest possible opportunity, which enhances effective

communication. Some of the messages or conclusions may not relate directly to the





opinion on the financial and non-financial information but are, nonetheless, highly

relevant to the readers in a public sector context.

6. The Auditor-General considers that revising the format of the audit report is consistent

with the objectives of ISA (NZ) 700, 705, and 706. The Auditor-General’s audit report,

therefore, states that “we carried out our audit in accordance with the Auditor-

General’s auditing standards, which incorporate the International Standards on

Auditing (New Zealand)”.

Expression of two opinions

7. Legislation that applies to “reporting entities” (which has a specific meaning under the

Financial Reporting Act 1993) requires the auditor to express two separate opinions,

namely:

(a) whether, in the auditor’s opinion, the financial and non-financial information

complies with generally accepted accounting practice; and

(b) whether, in the auditor’s opinion, the financial and non-financial information

gives a true and fair view of the matters to which it relates.

8. Many public entities are not “reporting entities” and legislation does not specify the

form and content of the auditor’s opinion, which suggests that, under paragraph 35 of

ISA (NZ) 700, the Auditor-General should not express two opinions. Despite the

requirement in paragraph 35 of ISA (NZ) 700, it is the Auditor-General’s decision to

continue to express two opinions where it is appropriate to do so. The Auditor-

General considers that expressing two opinions is consistent with the objectives of

ISA (NZ) 700, 705, and 706. The Auditor-General’s audit report, therefore, states that

“we carried out our audit in accordance with the Auditor-General’s auditing standards

which incorporate the International Standards on Auditing (New Zealand)”.

Objectives


(a) form an opinion on the financial and non-financial information presented by

the entity that is required to be audited, based on an evaluation of the

conclusions drawn from the audit evidence obtained and:

(i) if it is necessary for the Appointed Auditor to express a modified

opinion, to do so in keeping with the requirements of AG ISA (NZ)

705 and ISA (NZ) 705; and

(ii) if it is necessary for the Appointed Auditor to draw readers’ attention

to an issue by including an emphasis of matter or an other matter



paragraph in the audit report, to do so in keeping with the

requirements of AG ISA (NZ) 706 and ISA (NZ) 706;

(b) express that opinion clearly through a written report that also describes the

basis of that opinion; and

(c) report any other material matters in the audit report.

Definitions









Requirements

Use of template audit reports issued by the OAG

11. The Appointed Auditor shall use audit report templates issued by the OAG as the

basis for all audit reports signed on behalf of the Auditor-General. The Appointed

Auditor shall consult with the OAG on any departures (other than those that are trivial

or inconsequential) from the format or style of any audit report template issued by the

OAG.

Signing of audit reports

12. All audit reports, except those audit reports where the Auditor-General directs

otherwise, shall be personally signed by the Appointed Auditor. However, the Auditor-

General reserves the right to sign any audit report after giving due notice to the

Appointed Auditor. (Ref: Para. A1)

Dating of audit reports

13. In addition to paragraph 41 of ISA (NZ) 700, the audit report shall not be dated before:

(a) the date on which the statement of responsibility or equivalent statement is

signed; or



(b) the date of the written representation, as required by AG ISA (NZ) 580 and

ISA (NZ) 580.

14. If the Appointed Auditor signs the audit report at a date later than the date the

governing body approves the financial and non-financial information, the Appointed

Auditor shall ensure procedures covering subsequent events cover the period up to

the date the audit report is signed. (Ref: Para. A2)

Translation of audit reports

Translation of audit reports into Māori

15. If the annual report is in Māori, it is desirable for the audit report to also be in Māori.

An audit report in Māori shall be provided by the Appointed Auditor if it is requested

by the entity’s management. (Ref: Para. A3 – A4)

16. If an Appointed Auditor issues an audit report in Māori, an audit report in English shall

also be provided.

Translation of audit reports into another language

17. If the Appointed Auditor is requested to provide an audit report in a language that is

not an official language of New Zealand (such as Niuean or Tokelaun), they shall

contact the OAG for a translated audit report if that is deemed necessary.

18. If an Appointed Auditor issues an audit report in a language, other than English, an

audit report in English shall also be provided.

Independence and the disclosure of relationships with or interests in the public entity

in the audit report

19. The Appointed Auditor shall outline in the Independence section of the audit report

any engagements they have, or their Audit Service Provider has, carried out other

than the annual audit, and whether they or their Audit Service Provider has any

relationship with or interests in the public entity. (Ref: Para. A5 - A9)



Issuing electronic audit reports

20. The Appointed Auditor shall include additional disclosures and information in the audit

report if it is to be published electronically. The additional disclosures and information

are included in the audit reports in Appendix 2 and 3.

Audit reports to be referred to the OAG

21. The Appointed Auditor shall obtain approval from the Auditor-General’s Opinions

Review Committee (the ORC) before issuing an audit report, if the Appointed Auditor

seriously considers issuing an audit report containing:

(a) an emphasis of matter or other matter paragraph in relation to an uncertainty

over the use of the going concern assumption;

(b) an emphasis of matter or other matter paragraph in relation to a matter of

efficiency and effectiveness, waste or a lack of probity or financial prudence;

(c) a disclaimer of opinion; or

(d) an adverse opinion. (Ref: Para. A10 - A11)

22. The Appointed Auditor shall consult the Accounting and Auditing Policy Group in the

OAG, before issuing an audit report, if the Appointed Auditor seriously considers

including an emphasis of matter or other matter paragraph in that audit report where the

OAG has not provided direction or guidance.

23. The Appointed Auditor shall consult the Accounting and Auditing Policy Group in the

OAG, before issuing an audit report if there is a technical matter related to that audit

report that they are unsure about. (Ref: Para A12)

Reporting to the OAG

24. The Appointed Auditor shall forward to the OAG a copy of all audit reports issued, in

keeping with the requirements set out in AG-1: Reporting to the OAG.

***


Signing of audit reports (Ref: Para. 12)

A1. The Auditor-General or designated representative may sign an audit report instead of

the Appointed Auditor where the Appointed Auditor is unwilling to sign the audit report



because they have been directed to use particular wording with which they disagree.

Such direction may arise as a result of the ORC process.

Dating of audit reports (Ref: Para. 13 - 14)

A2. The financial and non-financial information on which the Appointed Auditor has issued

the audit report may provide the basis for a subsequently published annual report. If

the annual report has been dated after the date of the audit report this does not

require the Appointed Auditor to change the date of the audit report.

Translation of audit reports (Ref: Para. 15 - 16)

Translation of audit reports into Māori

A3. The Māori Language Act 1987 established Māori as an official language of New

Zealand. Although the Māori Language Act 1987 enhances and promotes the use of

Māori, it does not require documents and reports to be written in Māori. However,

when auditing “Kaupapa Māori” entities, a Māori translation of the audit report can be

provided by the OAG on request. (Kaupapa Māori entities are entities that

substantially serve Māori interests, or where a significant proportion of the readers of

the annual report are Māori.)

A4. The Auditor-General provides practical support where an entity requires an audit

report in Māori. Māori translations of standard unqualified audit reports are included in

some sections of the Manual. Where a standard audit report in Māori is not provided

by the OAG, or the wording is “non-standard” (that is, it includes additional wording

such as an emphasis of matter paragraph or an other matter paragraph or is

modified), the Accounting and Auditing Policy Group will arrange for the Māori

translation to be completed and will meet the costs of the translation.

Independence and the disclosure of relationships with or interests in the public entity

in the audit report (Ref: Para. 19)

A5. The Appointed Auditor should refer to AG PES 1 (Revised): Code of Ethics for

Assurance Practitioners (AG PES 1 (Revised)) for the Auditor-General’s policy in

relation to carrying out engagements other than the annual audit. Where the

Appointed Auditor does not have a relationship with or interests in the entity (other

than as auditor) the audit report should outline in the Independence section that:

“When carrying out the audit, we followed the independence requirements of the

Auditor-General, which incorporate the independence requirements of the External



Reporting Board. Other than the audit, we have no relationship with, or interests in, the

entity [or any of its subsidiaries].”

A6. AG PES 1 (Revised) permits the Appointed Auditor to distinguish between assurance

engagements and other engagements when reporting any “other” work in the audit

report.

A7. Whether or not an Appointed Auditor makes a distinction between assurance work

and other work is at their discretion. If the Audit Service Provider has carried out

engagements for the entity in addition to the annual audit, and the Appointed Auditor

decides not to distinguish between assurance engagements and other engagements

in the audit report, the audit report may simply state:

“In addition to the audit, we have carried out assignments in the areas of [insert

description of assignments], which are compatible with those independence

requirements. Other than the audit and these assignments, we have no relationship with,

or interests in, the [entity type].”

A8. If the Appointed Auditor wishes to distinguish between assurance and other

engagements in the audit report, they should report this using the following reporting

format:

“In addition to the audit, we have carried out an assurance assignment in the area of

[insert description of assignment], which is compatible with those independence

requirements. Other than the audit and this assignment, we have no relationship with,

or interests in, the [entity type].”

A9. If the Appointed Auditor carried out another engagement other than an assurance

engagement, a brief description of the work carried out should be included in the audit

report. For example:

“In addition to the audit, we have provided temporary accounting assistance, which is

compatible with those independence requirements. Other than the audit and this

temporary accounting assistance, we have no relationship with, or interests in, the

[entity type].”

Audit reports to be referred to the OAG (Ref: Para. 21 - 23)

A10. The ORC is a technical group established with the purpose of deciding the wording of

non-standard audit reports in situations like those mentioned in paragraph 21 above.

Further information about the ORC is outlined in Appendix 1.

A11. All matters referred to the ORC should be:



- researched by the Appointed Auditor, including clearance through the

Appointed Auditor’s own internal procedures; and

- submitted to the OAG Accounting and Auditing Policy Group in a timely

manner.

A12. If an Appointed Auditor is uncertain as to whether or not a matter should be referred

to the ORC, the Appointed Auditor should approach the Accounting and Auditing

Policy Group for advice.



Appendix 1 - The Auditor-General’s Opinions Review Committee (ORC)

1.1 The objectives of the Auditor-General’s ORC are to:

- manage audit risk;

- provide assurance as to the consistency of non-standard audit reports; and

- ensure a consistent approach to major accounting and auditing policy issues.

Membership of the ORC

1.2 The ORC comprises the following members:

- the Assistant Auditor-General – Accounting and Auditing Policy as Chair;

- the Auditor-General;

- the relevant Sector Manager; and

- the Assistant Auditor-General – Legal.

1.3 A designated representative can be substituted for any of the above members.

1.4 The ORC will be convened as and when required by the Assistant Auditor-General –

Accounting and Auditing Policy. The Appointed Auditor may be asked to attend or be

available.

1.5 A quorum comprises the Assistant Auditor-General – Accounting and Auditing Policy

and one of the Auditor-General or relevant Sector Manager.

Appointed Auditor procedures

1.6 It is preferable that issues be referred to the ORC as early as possible. This may be

before the financial and non-financial information for annual audit is prepared – for

instance, an issue may become apparent at the planning stage.

1.7 If the Appointed Auditor is uncertain as to whether or not a matter should be referred

to the ORC, the Appointed Auditor should approach the Accounting and Auditing

Policy Group for advice.

1.8 The following information shall be submitted by the Appointed Auditor to the ORC at

least three working days before a decision is required:

- ORC checklist: Until all items required by the ORC are received by the

Accounting and Auditing Policy Group, the submission will not be considered.

- A copy of the financial and non-financial information for annual audit

that has been audited. If the financial and non-financial information for



annual audit is not available, the latest management accounts should be

provided to enable the issue to be considered in perspective.

- Outline of the issue(s) that may require a non-standard audit report. If

there is more than one issue, each issue should be addressed separately,

including the background, audit concerns, and the effect on the financial and

non-financial information.

- Technical support for the Appointed Auditor’s opinion. Technical support

includes financial reporting and auditing standards, other guidance issued by

relevant statutory and professional bodies, direction and advice from the

OAG, legislation, and any other relevant technical guidance as appropriate.

- The entity's view on the issue(s). The issue(s) and the potential effect on

the audit report shall be discussed, where appropriate, with the entity (at no

lower than chief executive level), and its position shall be clearly documented.

If the entity disagrees with the Appointed Auditor’s opinion, the rationale and

any technical support for the entity's view shall be provided. The onus is on

the entity to produce whatever technical support it believes is necessary to

justify its position. This support may range from seeking an opinion from its

own advisors to the Appointed Auditor simply recording (and considering the

reasonableness of) the entity's rationale. (The Auditor-General does not

require the entity to obtain and pay for technical advice to support its

position.)

- A copy of the recommended audit report.

1.9 If the Appointed Auditor has seriously considered the validity of the going concern

assumption, the following information (in addition to the information specified above)

shall be provided in the Appointed Auditor’s submission to the ORC:

- consideration of the requirements of AG ISA (NZ) 570;

- a budget for the next year;

- year-to-date financial and non-financial information;

- analysis of the entity’s working capital position and its ability to meet its

obligations as they fall due (this will normally include projected cash flow

information); and

- any other information relevant to the assessment of the going concern

assumption (for example, in the case of schools, historical and projected roll

information).



Procedures within the OAG

1.10 The ORC submission shall be referred to a member of the Accounting and Auditing

Policy Group, who will be responsible for checking for precedents, researching the

technical issues, and preparing a "technical report" for the ORC.

1.11 The ORC shall meet, discuss the submission and technical report, and reach and

minute a consensus of opinion. This will usually be done within three days of having

received the complete ORC submission. If a consensus is not reached, then the

Auditor-General shall decide.

1.12 The ORC may, in addition to determining the wording of the audit report, decide to

carry out any one or any combination of the following:

- request the Appointed Auditor to include a comment in the management

letter;

- raise the issue in a letter from the Sector Manager or Auditor-General to the

governing body;

- inform any Responsible Minister, Ministry, or department of the issue;

- inform any other body (for example, Companies Office, Local Authority, etc)

as appropriate; and

- report to Parliament.

The above list is not definitive. It indicates the types of action beyond the audit report that

the ORC may take in relation to audit findings. Other action shall only be taken after

consultation with the Appointed Auditor.

Notification of decisions to the Appointed Auditor

1.13 The Appointed Auditor will usually be advised in writing of the ORC's decision. If the

ORC’s decision differs from the Appointed Auditor’s recommendation, an explanation

and reasons will be given.

1.14 If an issue is of wider application, a general policy directive may be provided to the

Appointed Auditor and other parties.

1.15 Where the Appointed Auditor disagrees with the decision made by the ORC and is

unwilling to sign the audit report, the Appointed Auditor shall advise the Accounting

and Auditing Policy Group. The report shall then be signed by the Auditor-General or

a designated representative. This situation is highly unusual, and every effort will be



made to reconcile the positions of the Appointed Auditor and the ORC before such

action is taken.

1.16 The Auditor-General accepts full responsibility for any implications that may arise on

those matters reflected in audit reports signed by the Auditor-General (or a

designated representative) that depart from the audit report recommended by the

Appointed Auditor.



OAG ORC CHECKLIST

Public entity Name

Balance Date

Information included in submission to ORC Included

For all submissions to the ORC:

Copy of financial and non-financial information (including accounting policies

and notes).

Yes No

Outline of the issue(s). Yes No

Reference to technical support (i.e. the appropriate financial reporting and

auditing standards).

Yes No

View of the entity on the issue and the proposed audit report. Yes No

Copy of the recommended audit report. Yes No

For submissions with issues of going concern

A budget for the next year. Yes No

Year-to-date financial and non-financial information. Yes No

Analysis of working capital position and ability to meet obligations as they fall

due. (This should include projected cash flow information.)

Yes No

Any other relevant details (e.g., in the case of schools, historical and projected

roll information).

Yes No

Will an audit report be issued on summary financial and non-financial

information?

Yes No

Appointed Auditor

Date



Appendix 2 - Unmodified non-company model audit report

The following audit report is for an entity, which is not an issuer (in accordance with the requirements of the Financial Reporting Act 1993), that is required to

report non-financial information through a statement of service performance.

Appendix 2 - Unmodified non-company model audit report ISA (NZ) 700 requirements and corresponding OAG policies

[Firm’s letterhead]

INDEPENDENT AUDITOR’S REPORT

TO THE [READERS / JOINT VENTURERS / PARTNERS] OF

[NAME OF ENTITY]’S

FINANCIAL STATEMENTS AND STATEMENT OF SERVICE PERFORMANCE

FOR THE YEAR ENDED [DD MM 20XX]

The audit report shall be printed on the letterhead of the auditing firm.

Paragraph 21 of ISA (NZ) 700 requires that the auditor’s report shall have a title that clearly indicates

that it is the report of an independent auditor.

Paragraph 22 of ISA (NZ) 700 requires that the auditor’s report shall be addressed as required by the

circumstances of the engagement.

Apart from any individual exceptions, all audit reports issued by the Auditor-General shall be

addressed to the “readers” because public entities are accountable to a wide constituency and the

Auditor-General has broad responsibilities to report to this constituency. Individual exceptions may

include situations where there is a minority private sector interest in the entity. For example, where the

entity is a joint venture and one of the partners is from the private sector, then the audit report shall be

addressed to the “joint venturers”.

The terminology used to describe the accountability statements shall be the same as that used by the

public entity provided it appropriately describes the material that has been audited.




The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General

has appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of

Auditing Firm], to carry out the audit of the financial statements and statement of service

performance of the [entity type] on her behalf.

We have audited:

- the financial statements of the [entity type] on pages […] to […], that comprise2 the

[statement of financial position] as at [DD MM 20XX], the [statement of comprehensive

income, statement of changes in equity and statement of cash flows] for the year ended

on that date, and [the notes to the financial statements that include accounting policies

and other explanatory information]; and

- the statement of service performance2 of the [entity type] on pages […] to […].

The Public Audit Act 2001 (section 32) deals with the appointment of auditors. The Auditor-General

may from time to time appoint – in writing – a suitable person or body to act as an auditor on the

Auditor-General’s behalf.

Paragraph 23 of ISA (NZ) 700 requires that the introductory paragraph in the auditor’s report shall:

- identify the entity whose financial statements have been audited;

- state that the financial statements have been audited;

- identify the title of each statement that comprises the financial statements;

- refer to the summary of significant accounting policies and other explanatory information; and

- specify the date or period covered by each financial statement comprising the financial

statements.

The balance date is normally determined by legislation or by the governing body within the constraints

of any legislation.

2 Ensure that the names that are used in the financial statements are replicated in the audit report.




Opinion

In our opinion:

- the financial statements of the [entity type] on pages [...] to [...]:

- comply with generally accepted accounting practice in New Zealand; and

- fairly reflect the [entity type]’s:

- financial position as at [DD MM 20XX]; and

- financial performance and cash flows for the year ended on that date;

- the statement of service performance of the [entity type] on pages […] to […]:

- complies with generally accepted accounting practice in New Zealand; and

- fairly reflects the [entity type]’s service performance for the year ended [DD MM

20XX], including:

- its service performance compared with forecasts in the statement of forecast

service performance at the start of the financial year; and

- its actual revenue and output expenses compared with the forecasts in the

statement of forecast service performance at the start of the financial year.

Our audit was completed on [Date]. This is the date at which our opinion is expressed.

The basis of our opinion is explained below. In addition, we outline the responsibilities of the

[Governing body] and our responsibilities, and we explain our independence.

Paragraph 34 of ISA (NZ) 700 requires that the auditor’s report shall include a section with the

heading “Opinion”.

Audit reports issued on behalf of the Auditor-General provide readers with the key messages

arising from the audit at the beginning of the audit report. Further explanation for this approach is

outlined in paragraph 5.

It is the Auditor-General’s decision to express two opinions where it is appropriate to do so. Further

explanation for this approach is outlined in paragraphs 7 and 8.

Paragraph A28 of ISA (NZ) 700 outlines that the phrase used in any particular jurisdiction (e.g. “give a

true and fair view of” or “fairly reflects”) is determined by the law or regulation governing the audit of

financial statements in that jurisdiction, or by generally accepted practice in that jurisdiction.

Identification of audited information by page number will assist readers to identify the information to

which the audit report refers.

The audit opinion on a statement of service performance shall be expressed using the same terms

used to express the opinion on the financial statements.

Paragraph 41 of ISA (NZ) 700 requires that the auditor’s report shall be dated. Paragraph 13 of this

Statement outlines that the audit report shall not be dated before the date on which the statement of

responsibility or equivalent statement is signed nor shall the audit report be dated before the date of

the written representations.




Basis of opinion

We carried out our audit in accordance with the Auditor-General’s Auditing Standards, which

incorporate the International Standards on Auditing (New Zealand). Those standards require

that we comply with ethical requirements and plan and carry out our audit to obtain reasonable

assurance about whether the financial statements and statement of service performance are

free from material misstatement.

Material misstatements are differences or omissions of amounts and disclosures that, in our

judgement, are likely to influence readers’ overall understanding of the financial statements and

statement of service performance. If we had found material misstatements that were not

corrected, we would have referred to them in our opinion.

An audit involves carrying out procedures to obtain audit evidence about the amounts and

disclosures in the financial statements and statement of service performance. The procedures

selected depend on our judgement, including our assessment of risks of material misstatement

of the financial statements and statement of service performance, whether due to fraud or error.

In making those risk assessments we consider internal control relevant to the preparation of the

entity’s financial statements and statement of service performance that fairly reflect the matters

to which they relate. We consider internal control in order to design audit procedures that are

appropriate in the circumstances but not for the purpose of expressing an opinion on the

effectiveness of the entity’s internal control

An audit also involves evaluating:

- the appropriateness of accounting policies used and whether they have been consistently

applied;

- the reasonableness of the significant accounting estimates and judgements made by the

[Governing body];

The auditor’s report includes a separate section, appropriately headed, outlining the basis of the

auditor’s opinion, including where necessary the criteria used as the basis for the auditor’s opinion.

This assists readers’ understanding and is intended to provide greater transparency to help narrow

the expectations gap.

The ISA (NZ) 700 requirements have been amended to reflect the fact that audits of public entities in

New Zealand are conducted in accordance with the auditing standards published by the Auditor-

General, which incorporate the International Standards on Auditing (New Zealand). Further

explanation for this approach is outlined in paragraphs 5 to 8.

Paragraph 30 of ISA (NZ) 700 requires the auditor’s report to state that the audit was conducted in

accordance with International Standards on Auditing (New Zealand). The auditor’s report shall also

explain that those standards require that the auditor comply with the ethical requirements and that the

auditor plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free from misstatement.

To help narrow the expectations gap the basis of opinion section provides a brief summary of what

material misstatements are. This description is consistent with the requirements contained in ISA (NZ)

320 and AG ISA (NZ) 320: Materiality in planning and performing an annual audit.

Paragraph 31(a) of ISA (NZ) 700 requires that the auditor’s report shall describe an audit by stating an

audit involves procedures to obtain audit evidence about the amounts and disclosures in the financial

statements.

Paragraph 31(b) of ISA (NZ) 700 requires that the auditor’s report shall describe an audit by stating

the procedures selected depends on the auditor’s judgement, including the assessment of the risks of

material misstatement of the financial statements, whether due to fraud or error. In addition, the

auditor’s report is required to describe that the auditor considers internal control relevant to the

preparation of the financial statements but not for the purpose of expressing an opinion on the

effectiveness of the entity’s internal control.



- the appropriateness of the reported service performance information within the

framework for reporting performance;

- the adequacy of all disclosures in the financial statements and statement of service

performance; and

- the overall presentation of the financial statements and statement of service

performance.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial

statements and statement of service performance. [Also, we did not evaluate the security and

controls over the electronic publication of the financial statements and statement of service

performance 3.]

We have obtained all the information and explanations we have required and we believe we

have obtained sufficient and appropriate audit evidence to provide a basis for our audit opinion.

Paragraph 4(c) of ISA (NZ) 315 outlines that internal control is the process designed, implemented,

and maintained by those charged with governance, management, and other personnel to provide

reasonable assurance about the achievement of an entity’s objectives with regard to reliability of

financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws

and regulations. The term “controls” refers to any aspects of one or more of the components of

internal control.

Paragraph 31 (c) of ISA (NZ) 700 requires that the auditor’s report shall describe an audit by stating

an audit also includes evaluating the appropriateness of the accounting policies used and the

reasonableness of accounting estimates, as well as the overall presentation of the financial

statements.

If a public entity elects to publish audited information on its web site, the Appointed Auditor shall

include additional information in the basis of opinion section of the audit report that identifies that the

auditor is not responsible for evaluating the security and controls over the electronic publication of the

audited information.

Paragraph 11(a) of ISA (NZ) 700 requires the auditor to conclude on whether sufficient appropriate

audit evidence has been obtained in accordance with paragraph 27 in ISA (NZ) 330. This is also

consistent with the requirements of paragraph 33 of ISA (NZ) 700. While section 16(1)(d) of the

Financial Reporting Act 1993 requires the auditor’s report for “reporting entities” to state whether the

auditor has obtained all the information and explanations required, the Auditor-General also opines on

this matter for entities not subject to the Financial Reporting Act 1993.

3 This sentence should only be removed if there is no intention to publish the audit report on the public entity’s web site.




Responsibilities of the [Governing body]

The [Governing body] is responsible for preparing financial statements and a statement of

service performance that:

- comply with generally accepted accounting practice in New Zealand;

- fairly reflect the [entity type]’s financial position, financial performance and cash flows; and

- fairly reflect its service performance which includes the [entity type]’s achievements

compared to its forecasts.

The [Governing body] is also responsible for such internal control as it determines is necessary

to enable the preparation of financial statements and a statement of service performance that

are free from material misstatement, whether due to fraud or error. The [Governing body] is

also responsible for the publication of the financial statements and statement of service

performance, whether in printed or electronic form.

The [Governing body]’s responsibilities arise from the [Name of relevant Act(s)]

Paragraph 26 of ISA (NZ) 700 requires that the auditor’s report shall describe the responsibility of

those charged with governance for the preparation of the financial statements in the manner in which

that responsibility is described in the terms of the audit engagement. The description shall include an

explanation that those charged with governance are responsible for the preparation of the financial

statements in accordance with the applicable financial reporting framework; this responsibility includes

the design, implementation, and maintenance of internal control relevant to the preparation of

financial statements that are free from material misstatement, whether due to fraud or error.

If a public entity elects to publish audited information on its web site, the audit report shall include

additional information in the responsibilities section that identifies that the governing body is

responsible for the electronic publication of the audited information whether in printed or electronic

form.

The audit report shall refer to the relevant legislation requiring the governing body to prepare the

financial statements. It is not necessary to make reference to specific sections within the relevant

legislation.




Responsibilities of the Auditor

We are responsible for expressing an independent opinion on the financial statements and

statement of service performance and reporting that opinion to you based on our audit. Our

responsibility arises from section 15 of the Public Audit Act 2001 and the [Name of relevant

Act(s)].


heading “Auditor’s responsibility”.

For the annual audit of a public entity, reference should be made to section 15 of the Public Audit Act

2001 in every audit report. Where the Auditor-General is appointed auditor by another Act, reference

should be made to the other Act.

Paragraph 29 of ISA (NZ) 700 requires that the auditor’s report shall state that the responsibility of the

auditor is to express an opinion on the financial statements based on the audit.


Independence

When carrying out the audit, we followed the independence requirements of the Auditor-

General, which incorporate the independence requirements of the External Reporting Board.

[Other than the audit, we have no relationship with or interests in the [entity type].]

Or

[In addition to the audit, we have carried out assignments in the areas of [insert description of

assignments], which are compatible with those independence requirements. Other than the

audit and these assignments, we have no relationship with, or interests in, the [entity type].]

Paragraph 33.1 of ISA (NZ) 700 requires that the auditor’s report shall include a statement as to the

existence of any relationship with or interests in the entity subject to audit (other than that of auditor).




[Signature of Appointed Auditor]

[Name of Appointed Auditor]

[Name of Auditing Firm]

On behalf of the Auditor-General

[City], New Zealand

Paragraph 40 of ISA (NZ) 700 requires that the auditor’s report shall be signed.

The audit report will be signed in the name of the Appointed Auditor, followed by the name of the firm

of the Appointed Auditor. An alternative is to include the firm’s signature alongside the Appointed

Auditor’s, as follows:

_________________________ _________________________

[Signature of Appointed Auditor] [Signature of Auditing Firm]

Name of Appointed Auditor] [Name of Auditing Firm]


[City], New Zealand

Paragraph 42 of ISA (NZ) 700 requires that the auditor’s report shall name the location where the

auditor practises.



Appendix 3 - Unmodified company group model audit report

The following audit report is for a company and group, which is an issuer (in accordance with the requirements of the Financial Reporting Act 1993), that is

not required to report non-financial information.

Appendix 3 - Unmodified company group model audit report ISA (NZ) 700 requirements and corresponding OAG policies



TO THE [READERS/SHAREHOLDERS] OF

[NAME OF COMPANY] LIMITED AND GROUP’S

FINANCIAL STATEMENTS



Paragraph 21 of ISA (NZ) 700 requires that the auditor’s report shall have a title that clearly indicates

that it is the report of an independent auditor.

Paragraph 22 of ISA (NZ) 700 requires that the auditor’s report shall be addressed as required by the

circumstances of the engagement.

Apart from any individual exceptions all audit reports issued by the Auditor-General (including those to

companies) shall be addressed to the “readers” because public entities are accountable to a wide

constituency and the Auditor-General has broad responsibilities to report to this constituency.

Individual exceptions may include situations where there is a minority private sector shareholder when

the audit report shall be addressed to the “shareholders”.

In relation to companies, the term “readers” encompasses shareholders and is therefore consistent

with section 205 of the Companies Act 1993, which requires auditors to report to

shareholders/members.

In addition, the relationship between auditors and the shareholders of a public sector company can be

distinguished from the relationship between auditors and shareholders in a private sector company.

Shareholders of a public sector company (e.g. Responsible Ministers - SOEs, CEs; Councils - CCOs,

Ports, Airports) hold shares in a trustee-type relationship on behalf of the public, not as shareholders

in their own right.

The terminology used to describe the accountability statements shall be the same as that used by the




public entity provided it appropriately describes the material that has been audited.


The Auditor-General is the auditor of [Name of Company] Limited (the company) and group.

The Auditor-General has appointed me, [Name of Appointed Auditor], using the staff and

resources of [Name of Auditing Firm], to carry out the audit of the financial statements of the

company and group on her behalf.

We have audited the financial statements of the company and group on pages […] to […],

that comprise4 the [statement of financial position] as at [DD MM 20XX], the [statement of

comprehensive income, statement of changes in equity and statement of cash flows] for the

year ended on that date, and [the notes to the financial statements that include accounting

policies and other explanatory information].

The Public Audit Act 2001 (section 32) deals with the appointment of auditors. The Auditor-General

may from time to time appoint – in writing – a suitable person or body to act as an auditor on the

Auditor-General’s behalf.

Paragraph 23 of ISA (NZ) 700 requires that the introductory paragraph in the auditor’s report shall:

- identify the entity whose financial statements have been audited;

- state that the financial statements have been audited;

- identify the title of each statement that comprises the financial statements;

- refer to the summary of significant accounting policies and other explanatory information; and

- specify the date or period covered by each financial statement comprising the financial

statements.

Balance date is normally determined by legislation or by the governing body within the constraints of

any legislation.





Opinion

Financial statements

In our opinion, the financial statements of the company and group on pages [...] to [...]:


- [comply with International Financial Reporting Standards];5 and

- give a true and fair view of the company and group’s:


- financial performance and cash flows for the year ended on that date.


heading “Opinion”. Because the company opinion contains an opinion on the financial statements and

on other legal requirements the headings have been separated so that they are clear about what the

opinion relates to.

Audit reports issued on behalf of the Auditor-General provide readers with the key messages

arising from the audit at the beginning of the audit report. Further explanation for this approach is

outlined in paragraph 5.

It is the Auditor-General’s decision to express two opinions where it is appropriate to do so. Further

explanation for this approach is outlined in paragraphs 7 and 8.

Paragraph A28 of ISA (NZ) 700 outlines that the phrase used in any particular jurisdiction (e.g. “give a

true and fair view of” or “fairly reflects”) is determined by the law or regulation governing the audit of

financial statements in that jurisdiction, or by generally accepted practice in that jurisdiction.

Identification of audited information by page number will assist readers to identify the information to

which the audit report refers.

5 The additional opinion over the compliance with International Financial Reporting Standards should only be included in the audit report where the entity is a profit orientated entity and

management or those charged with governance specifically want the audit report to refer to International Financial Reporting Standards. In accordance with paragraph 37 in ISA (NZ) 700 if the financial reporting standards used were the New Zealand equivalents to International Financial Reporting Standards then reference needs to be made to the jurisdiction.




Other legal requirements

In accordance with the Financial Reporting Act 1993 we report that, in our opinion, proper

accounting records have been kept by the company and group as far as appears from an

examination of those records.

Paragraph 38 of ISA (NZ) 700 requires that, if the auditor addresses other reporting responsibilities in

the auditor’s report on the financial statements that are in addition to the auditor’s responsibility under

ISA (NZ) 700 to report on the financial statements, these other reporting responsibilities shall be

addressed in a separate section in the auditor’s report that shall be sub-titled “Report on other legal

and regulatory requirements”, or otherwise as appropriate to the content of the section.

Paragraph 39 of ISA (NZ) 700 requires that, if the audit report contains a separate section on other

reporting responsibilities, it shall follow all reporting responsibilities related to the audit of the historic

financial statements.

The Auditor-General has positioned the “Other reporting responsibilities” section under a separate

heading immediately following the “Opinion” heading because this approach maximises the

effectiveness of reporting in the audit report by bringing the conclusions of the audit immediately to

the attention of readers. Some of the conclusions may not relate directly to the opinion on the financial

statements but are, nonetheless, highly relevant to the readers.

The requirement to express an opinion on proper accounting records is only to be included for

reporting entities under the Financial Reporting Act 1993.



The basis of our opinion is explained below. In addition, we outline the responsibilities of the

Board of Directors and our responsibilities, and we explain our independence.

Paragraph 41 of ISA (NZ) 700 requires that the auditor’s report shall be dated. Paragraph 13 of this

Statement outlines that the audit report shall not be dated before the date on which the statement of

responsibility or equivalent statement is signed nor shall the audit report be dated before the date of

the written representations.




Basis of opinion

We carried out our audit in accordance with the Auditor-General’s Auditing Standards, which

incorporate the International Standards on Auditing (New Zealand). Those standards require

that we comply with ethical requirements and plan and carry out our audit to obtain

reasonable assurance about whether the financial statements are free from material

misstatement.

Material misstatements are differences or omissions of amounts and disclosures that, in our

judgement, are likely to influence readers’ overall understanding of the financial statements. If

we had found material misstatements that were not corrected, we would have referred to

them in our opinion.

An audit involves carrying out procedures to obtain audit evidence about the amounts and

disclosures in the financial statements. The procedures selected depend on our judgement,

including our assessment of risks of material misstatement of the financial statements,

whether due to fraud or error. In making those risk assessments we consider internal control

relevant to the preparation of the company and group’s financial statements that give a true

and fair view of the matters to which they relate. We consider internal control in order to

design audit procedures that are appropriate in the circumstances but not for the purpose of

expressing an opinion on the effectiveness of the company and group’s internal control.


- the appropriateness of accounting policies used and whether they have been consistently

applied;

- the reasonableness of the significant accounting estimates and judgements made by the

Board of Directors;

- the adequacy of all disclosures in the financial statements; and


auditor’s opinion, including where necessary the criteria used as the basis for the auditor’s opinion.

This assists readers’ understanding and is intended to provide greater transparency to help narrow


The ISA (NZ) 700 requirements have been amended to reflect the fact that audits of public entities in

New Zealand are conducted in accordance with the auditing standards published by the Auditor-

General, which incorporate the International Standards on Auditing (New Zealand). Further

explanation for this approach is outlined in paragraphs 5 to 8.

Paragraph 30 of ISA (NZ) 700 requires that the auditor’s report to state that the audit was conducted

in accordance with International Standards on Auditing (New Zealand). The auditor’s report shall also

explain that those standards require that the auditor comply with the ethical requirements and that the

auditor plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free from misstatement.

To help narrow the expectations gap the basis of opinion section provides a brief summary of what

material misstatements are. This description is consistent with the requirements contained in ISA (NZ)

320 and AG ISA (NZ) 320: Materiality in planning and performing an annual audit.

Paragraph 31(a) of ISA (NZ) 700 requires that the auditor’s report shall describe an audit by stating an

audit involves procedures to obtain audit evidence about the amounts and disclosures in the financial

statements.

Paragraph 31(b) of ISA (NZ) 700 requires that the auditor’s report shall describe an audit by stating

the procedures selected depends on the auditor’s judgement, including the assessment of the risks of

material misstatement of the financial statements, whether due to fraud or error. In addition, the

auditor’s report is required to describe that the auditor considers internal control relevant to the

preparation of the financial statements but not for the purpose of expressing an opinion on the




- the overall presentation of the financial statements.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial

statements. [Also, we did not evaluate the security and controls over the electronic

publication of the financial statements6.]

In accordance with the Financial Reporting Act 1993, we report that we have obtained all the

information and explanations we have required. We believe we have obtained sufficient and

appropriate audit evidence to provide a basis for our audit opinion.

Paragraph 4(c) of ISA (NZ) 315 outlines that internal control is the process designed, implemented,

and maintained by those charged with governance, management, and other personnel to provide

reasonable assurance about the achievement of an entity’s objectives with regard to reliability of

financial reporting, effectiveness and efficiency of operations, and compliance with applicable

laws and regulations. The term “controls” refers to any aspects of one or more of the components of

internal control.

Paragraph 31 (c) of ISA (NZ) 700 requires that the auditor’s report shall describe an audit by stating

an audit also includes evaluating the appropriateness of the accounting policies used and the

reasonableness of accounting estimates, as well as the overall presentation of the financial

statements.

If a public entity elects to publish audited information on its web site, the Appointed Auditor shall

include additional information in the basis of opinion section of the audit report that identifies that the

auditor is not responsible for evaluating the security and controls over the electronic publication of the

audited information.

Paragraph 11(a) of ISA (NZ) 700 requires the auditor to conclude on whether sufficient appropriate

audit evidence has been obtained in accordance with paragraph 27 in ISA (NZ) 330. This is also

consistent with the requirements of paragraph 33 of ISA (NZ) 700. Section 16(1)(d) of the Financial

Reporting Act 1993 requires the auditor’s report for “reporting entities” to state whether the auditor has

obtained all the information and explanations required. The Auditor-General also opines on this matter

for entities not subject to the Financial Reporting Act 1993.

6 This sentence should only be removed if there is no intention to publish the audit report on the public entity’s web site.




Responsibilities of the Board of Directors

The Board of Directors is responsible for preparing financial statements that:


- give a true and fair view of the company and group’s financial position, financial

performance, and cash flows.

The Board of Directors is also responsible for such internal control as it determines is

necessary to enable the preparation of financial statements that are free from material

misstatement, whether due to fraud or error. The [Governing body] is also responsible for the

publication of the financial statements, whether in printed or electronic form.

The Board of Directors’ responsibilities arise from the Financial Reporting Act 1993 [and name

of relevant Act(s)].

Paragraph 26 of ISA (NZ) 700 requires that the auditor’s report shall describe the responsibility of

those charged with governance for the preparation of the financial statements in the manner in which

that responsibility is described in the terms of the audit engagement. The description shall include an

explanation that those charged with governance are responsible for the preparation of the financial

statements in accordance with the applicable financial reporting framework; this responsibility includes

the design, implementation, and maintenance of internal control relevant to the preparation of

financial statements that are free from material misstatement, whether due to fraud or error.

If a public entity elects to publish audited information on its web site, the audit report shall include

additional information in the responsibilities section that identifies that the governing body is

responsible for the electronic publication of the audited information whether in printed or electronic

form.

The audit report shall refer to the relevant legislation requiring the governing body to prepare the

financial statements. It is not necessary to make reference to specific sections within the relevant

legislation.

For public sector companies governed by a sector Act, reference should also be made to the

Financial Reporting Act 1993.





We are responsible for expressing an independent opinion on the financial statements and

reporting that opinion to you based on our audit. Our responsibility arises from section 15 of the

Public Audit Act 2001 and the [Name of relevant Act(s)].


heading “Auditor’s responsibility.”

For the annual audit of a public entity, reference should be made to section 15 of the Public Audit Act

2001 in every audit report. Where the Auditor-General is appointed auditor by another Act, reference

should be made to the other Act.

Paragraph 29 of ISA (NZ) 700 requires that the auditor’s report shall state that the responsibility of the

auditor is to express an opinion on the financial statements based on the audit.


Independence

When carrying out the audit, we followed the independence requirements of the Auditor-

General, which incorporate the independence requirements of the External Reporting Board.

[Other than the audit, we have no relationship with or interests in the company or any of its

subsidiaries.]

Or

[In addition to the audit, we have carried out assignments in the areas of [insert description of

assignments], which are compatible with those independence requirements. Other than the

audit and these assignments, we have no relationship with, or interests in, the company or any

of its subsidiaries.]

Paragraph 33.1 of ISA (NZ) 700 requires that the auditor’s report shall include a statement as to the

existence of any relationship with or interests in the entity subject to audit (other than that of auditor).




[Signature of Appointed Auditor][Name of Appointed Auditor]



[City], New Zealand

Paragraph 40 of ISA (NZ) 700 requires that the auditor’s report shall be signed.

The audit report will be signed in the name of the Appointed Auditor, followed by the name of the firm

of the Appointed Auditor. An alternative is to include the firm’s signature alongside the Appointed

Auditor’s, as follows:

_________________________ _________________________




[City], New Zealand

Paragraph 42 of ISA (NZ) 700 requires that the auditor’s report shall name the location where the

auditor practises.

AG ISA (NZ) 705 Modifications to the opinion


AG ISA (NZ) 705


MODIFICATIONS TO THE OPINION IN THE


Contents

Page




Objective 3 - 4901



Matters to consider when preparing a modified audit report 3 - 4902



Appendix 1 - Examples of modified audit reports 3 - 4903



Introduction


1. This Auditor General’s Auditing Statement sets out the Auditor-General’s

requirements for issuing modified audit reports, and provides examples of modified

audit reports (in Appendix 1) that are based on the requirements of:

(a) AG ISA (NZ) 700: Forming an Opinion and Reporting on Financial and Non-

financial Information; and

(b) ISA (NZ) 705: Modifications to the Opinion in the Independent Auditor’s

Report1.

Application





Objective

4. The objective of the Appointed Auditor is to, when it is necessary, express clearly an

appropriately modified opinion on the financial and non-financial information, when:

(a) the Appointed Auditor concludes, based on the audit evidence obtained, that

the financial and non-financial information is materially misstated; or

(b) the Appointed Auditor is unable to obtain sufficient appropriate audit evidence

to conclude that the financial and non-financial information is free from

material misstatement.

Definitions





(although where a term with a specific meaning in the New Zealand public 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”.







Requirements

Matters to consider when preparing a modified audit report

6. When preparing a modified audit report, the Appointed Auditor shall ensure that they

apply any requirements:

(a) issued by the OAG in respect of particular audits or sectors;

(b) contained in AG ISA (NZ) 705 and ISA (NZ) 705; and

(c) contained in AG ISA (NZ) 700 and ISA (NZ) 700.

Audit reports to be referred to the OAG

7. The Appointed Auditor shall personally sign the audit report on the completion of the

annual audit, without reference to the OAG unless:

(a) the Auditor-General directs the audit report to be signed by another auditor,

including the Auditor-General;

(b) a matter arises as a result of the audit that is of such significance that referral

to the OAG is required;

(c) the Appointed Auditor is required to refer the audit report to the Auditor-

General’s Opinions Review Committee, in keeping with AG ISA (NZ) 700; or

(d) the OAG makes a specific direction that it will approve the wording of an audit

report.


8. The Appointed Auditor shall forward to the OAG a copy of all audit reports issued, in

keeping with the requirements set out in AG-1: Reporting to the OAG.



Appendix 1 – Examples of modified audit reports

Choosing the correct audit report template

1.1 There are four examples of modified audit reports in this appendix. The examples

refer to specific entities. The highlighted words or sentences can be replaced to suit

the audit report of the particular entity being audited. For a reporting entity, the audit

report must include the following terms to comply with the Financial Reporting Act

1993:

(a) “Give a true and fair view of”; and

(b) “Proper accounting records have been kept by the [entity] as far as appears

from an examination of those records”; and

(c) “All information and explanations required have been obtained”.

1.2 Please note that the requirement to express an opinion on proper accounting records

is only to be included for reporting entities. Normally, for a non-company entity, (a) is

replaced by “fairly reflect” and (b) is not used in the audit report.

1.3 Where a statement of service performance is audited, it should be correctly referred

to in the audit report. Positioning of the reference to the statement of service

performance depends on the legislation governing the reporting requirements of the

entity in question. In some instances, the statement of service performance is referred

to as performance information, because that is the term defined in the legislation that

sets the reporting requirements.

1.4 Where a “profit oriented” entity has adopted International Financial Reporting

Standards (IFRS) and management, and those changed with governance specifically

want the audit report to include a reference to IFRS, an additional opinion on whether

the financial statements comply with IFRS should be included in the audit report.



Example Audit Report 705-01 – Modified audit report for a company with an adverse

opinion for a disagreement over the use of the going concern assumption

1.5 Example Audit Report 705-01 is the audit report template for a company, which is an

issuer (in accordance with the requirements of the Financial Reporting Act 1993),

where the Appointed Auditor is issuing an adverse opinion because the use of the

going concern assumption is inappropriate. The Appointed Auditor has been able to

gain assurance that the cash flow statement is not materially misstated. In this

example, the company is not required to report non-financial information through a

statement of service performance.

Nature of the matter giving rise to the

modification

Auditor’s judgement about the pervasiveness of the effects or

possible effects on the financial information

Material but not pervasive Material and pervasive

The financial information is materially

misstated

Qualified opinion Adverse opinion

Inability to obtain enough appropriate

audit evidence

Qualified opinion Disclaimer of opinion

Example Audit Report 705-02 – Modified audit report for a non-company with a

disclaimer of opinion for a limitation of scope over loss of accounting records

1.6 Example Audit Report 705-02 is the audit report template for a non-company, which is

not an issuer (in accordance with the requirements of the Financial Reporting Act

1993), where the Appointed Auditor does not have sufficient appropriate audit

evidence. As a consequence, the Appointed Auditor has concluded that the lack of

evidence is sufficiently material and pervasive that they are unable to form an opinion

on the financial statements as a whole. In this example, the Appointed Auditor has

been unable to gain any assurance on the financial statements and the non-financial

information as a whole.


modification


possible effects on the financial and non-financial information


The financial and non-financial

information is materially misstated


Inability to obtain sufficient

appropriate audit evidence




Example Audit Report 705-03 – Modified audit report for a non-company and group

with a qualified opinion for a limitation on the auditor’s work on the control over

revenue

1.7 Example Audit Report 705-03 is the audit report template for a non-company and

group, which is not an issuer (in accordance with the requirements of the Financial

Reporting Act 1993), where the Appointed Auditor is not satisfied with the entity’s

controls over its revenue, and there are no adequate audit procedures to confirm

independently that the revenue is properly recorded. In this example, the Appointed

Auditor has been unable to gain assurance that revenue reported in the financial

statements is not materially misstated. In this example, the entity is not required to

report non-financial information through a statement of service performance.


modification


possible effects on the financial information


The financial information is materially

misstated





Example Audit Report 705-04 – Modified audit report for a company with a qualified

opinion for a disagreement over the departure from an applicable financial reporting

standard



where the Appointed Auditor has identified an uncorrected material error because the

company did not prepare the financial statements according to an applicable financial

reporting standard. In this example, the Appointed Auditor has been able to gain

assurance that the cash flow statement and the statement of service performance are

not materially misstated.


modification


possible effects on the financial and non-financial information


The financial and non-financial

information is materially misstated







Example Audit Report 705-01



TO THE READERS OF

[NAME OF COMPANY] LIMITED’S



The Auditor-General is the auditor of [Name of Company] Limited (the company). The Auditor-General has appointed

me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of

the financial statements of the company on her behalf.

We have audited the financial statements of the company on pages […] to […], that comprise2 the statement of

financial position as at [DD MM 20XX], the income statement, statement of changes in equity and statement of cash

flows for the year ended on that date, and the notes to the financial statements that include accounting policies and

other explanatory information.

Adverse opinion – The going concern basis on which the financial statements have been prepared is

inappropriate

Reason for our adverse opinion

The financial statements of the company have been prepared on a going concern basis, although a decision has been

made by the governing body of the company’s parent entity to disestablish the company. As a result, in our opinion, the

company cannot be considered a going concern and therefore the preparation of its financial statements on a going

concern basis is inappropriate. The financial statements should reflect adjustments to the net book value of assets,

reducing them to realisable amounts, together with additional provisions for other liabilities, such as redundancies, which

will arise from the company ceasing its activities. In addition, all assets and liabilities will need to be reclassified as

current assets and liabilities. We are unable to determine the nature and value of the required adjustments and

provisions.

Adverse opinion on the Statement of Financial Position and the Income Statement

In our opinion, because of the significance of the matter described in the “Reason for adverse opinion” paragraph above,

the financial statements of company on pages3 […] to […]:

- do not comply with generally accepted accounting practice in New Zealand;

- do not give a true and fair view of the company’s:


- financial performance for the year ended on that date.

Opinion on the Statement of Cash Flows

2 Ensure that the names that are used in the financial statements are replicated in the audit report. 3 Ensure that the page number range corresponds to the page number range outlined in the introduction

section.



In our opinion, the financial statements of the company on pages3 […] to […] give a true and fair view of the cash

flows for the year ended [DD MM 20XX].

Opinion on other legal requirements

In accordance with the Financial Reporting Act 1993 we report that, in our opinion, proper accounting records have

been kept by the company as far as appears from an examination of those records.


The basis of our opinion is explained below. In addition, we outline the responsibilities of the Board of Directors and

our responsibilities, and we explain our independence.

Basis of opinion

We carried out our audit in accordance with the Auditor-General’s Auditing Standards, which incorporate the

International Standards on Auditing (New Zealand). Those standards require that we comply with ethical

requirements and plan and carry out the audit to obtain reasonable assurance about whether the financial statements

are free from material misstatement.

Material misstatements are differences or omissions of amounts and disclosures that, in our judgement, are likely to

influence readers’ overall understanding of the financial statements. We found material misstatements that were not

corrected, as we referred to in our opinion.

An audit involves carrying out procedures to obtain audit evidence about the amounts and disclosures in the financial

statements. The procedures selected depend on our judgement, including our assessment of risks of material

misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we

consider internal control relevant to the preparation of the company’s financial statements that give a true and fair

view of the matters to which they relate. We consider internal control in order to design audit procedures that are

appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s

internal control.


- the appropriateness of accounting policies used and whether they have been consistently applied;

- the reasonableness of the significant accounting estimates and judgements made by the Board of

Directors;



We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements. [Also, we

did not evaluate the security and controls over the electronic publication of the financial statements4.]

4 This sentence should only be removed if there is no intention to publish the audit report on the public entity’s

web site.



In accordance with the Financial Reporting Act 1993, we report that we have obtained all the information and

explanations that we have required, to provide a basis for our unmodified opinion on the statement of cash flows and

our adverse opinion on the statement of financial position and the income statement. We believe we have obtained

sufficient and appropriate audit evidence to provide a basis for our audit opinion.




- give a true and fair view of the company’s financial position, financial performance, and cash flows.

The Board of Directors is also responsible for such internal control as it determines is necessary to enable the

preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board

of Directors is also responsible for the publication of the financial statements, whether in printed or electronic form.

The Board of Directors’ responsibilities arise from the Financial Reporting Act 1993 [and name of relevant Act(s)]


We are responsible for expressing an independent opinion on the financial statements and reporting that opinion to

you based on our audit. Our responsibility arises from section 15 of the Public Audit Act 2001 and the [Name of

relevant Act(s)].

Independence

When carrying out the audit, we followed the independence requirements of the Auditor-General, which incorporate

the independence requirements of the External Reporting Board.

Other than the audit, we have no relationship with, or interests in, the company.5





[City], New Zealand

5 If other relationships exist, this paragraph should be replaced with the following paragraph: “In addition to the

audit we have carried out assignments in the areas of [insert description of assignments], which are compatible with those independence requirements. Other than the audit and these assignments, we have no relationship with or interests in the company.” (Refer AG ISA (NZ) 700 for guidance).






TO THE READERS OF




The Auditor-General is the auditor of [Name of Entity] (the [entity type]). The Auditor-General has appointed me,

[Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the audit of the

financial statements and statement of service performance of the [entity type] on her behalf.

We have audited:

- the financial statements of the [entity type] on pages […] to […], that comprise6 the statement of financial

position as at [DD MM 20XX], the statement of comprehensive income, statement of changes in equity and

statement of cash flows for the year ended on that date and the notes to the financial statements that

include accounting policies and other explanatory information; and

- the statement of service performance of the [entity type] on pages […] to […].

Disclaimer of opinion – We were unable to form an opinion due to loss of accounting records

Reason for our disclaimer of opinion

As stated in note […] on page […], a fire at the [entity type]’s head office destroyed many of the accounting records that

form the basis for the preparation of the financial statements and the statement of service performance.

Disclaimer of opinion

Because of the significance of the matter described in the “Reason for our disclaimer of opinion” paragraph above, we

are unable to form an audit opinion. Accordingly we do not express an opinion on the [entity type]’s financial statements

and statement of service performance.


The basis of our opinion is explained below. In addition, we outline the responsibilities of the [Governing body] and


Basis of opinion




and statement of service performance are free from material misstatement.





influence readers’ overall understanding of the financial statements and statement of service performance. We are

unable to determine whether there are material misstatements because the scope of our work was limited, as we

referred to in our opinion.

An audit would ordinarily involve carrying out procedures to obtain audit evidence about the amounts and disclosures

in the financial statements and statement of service performance. The procedures selected would ordinarily depend

on our judgement, including our assessment of risks of material misstatement of the financial statements and

statement of service performance, whether due to fraud or error. In making those risk assessments, we would

ordinarily consider internal control relevant to the preparation of the entity’s financial statements and statement of

service performance that fairly reflect the matters to which they relate. This would be done in order to design audit

procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the


An audit would also, ordinarily, involve evaluating:



Directors;

- the appropriateness of the reported [service performance information] within the framework for reporting

performance;

- the adequacy of all disclosures in the financial statements and statement of service performance; and

- the overall presentation of the financial statements and statement of service performance.

We did not examine every transaction, nor do we guarantee complete accuracy of the financial statements and

statement of service performance. [Also, we did not evaluate the security and controls over the electronic publication

of the financial statements and statement of service performance 8.]

As noted above, we have not obtained all the information and explanations we have required with the consequence

being that we have issued a disclaimer of opinion.


The [Governing body] is responsible for preparing financial statements and a statement of service performance that:

- comply with generally accepted accounting practice in New Zealand.

- fairly reflect the [entity type]’s financial position, financial performance, and cash flows; and

- fairly reflect its service performance which includes the [entity type]’s achievements compared to its

forecasts.


web site.



The [Governing body] is responsible for such internal control as it determines is necessary to enable the preparation

of financial statements and a statement of service performance that are free from material misstatement, whether due

to fraud or error. The [Governing body] is also responsible for the publication of the financial statements and

statement of service performance, whether in printed or electronic form.

The [Governing body]’s responsibilities arise from the [Name of relevant Act(s)].


We are responsible for expressing an independent opinion on the financial statements and statement of service

performance and reporting that opinion to you based on our audit. Our responsibility arises from section 15 of the


Independence



Other than the audit, we have no relationship with, or interests in, the [entity type]9.





[City], New Zealand


audit we have carried out assignments in the areas of [insert description of assignments], which are compatible with those independence requirements. Other than the audit and these assignments, we have no relationship with or interests in the [entity type].” (Refer AG ISA (NZ) 700 for guidance).






TO THE READERS OF

[NAME OF ENTITY] AND GROUP’S



The Auditor-General is the auditor of [Name of Entity] (the [entity type]) and group. The Auditor-General has

appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the

audit of the financial statements of the [entity type] and group on her behalf.

We have audited the financial statements of the [entity type] and group on pages […] to […], that comprise10 the

statement of financial position as at [DD MM 20XX], the statement of comprehensive income, statement of changes

in equity and statement of cash flows for the year ended on that date, and the notes to the financial statements that

include accounting policies and other explanatory information.

Qualified opinion – Our work was limited because of limited control over revenues

Reason for our qualified opinion

As stated in note […] on page […], control over the revenues from door-to-door collections before being recorded is

limited, and there are no practical audit procedures to determine the effect of this limited control.

Qualified opinion

In our opinion, except for the possible effects of the matter described in the “Reason for our qualified opinion” paragraph

above, the financial statements of the [entity type] and group on pages11 [...] to [...]:


- fairly reflect the [entity type] and group’s:






Basis of opinion


section.








influence readers’ overall understanding of the financial statements. We are unable to determine whether there are

material misstatements because the scope of our work was limited, as we referred to in our opinion.




consider internal control relevant to the preparation of the entity and group’s financial statements that fairly reflect the

matters to which they relate. We consider internal control in order to design audit procedures that are appropriate in

the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity and group’s

internal control.



- the reasonableness of the significant accounting estimates and judgements made by the [Governing Body];





We did not receive all the information and explanations we required although believe that we have obtained sufficient

and appropriate audit evidence to provide a basis for our qualified opinion.


The [Governing body] is responsible for preparing the financial statements that:


- fairly reflect the [entity type] and group’s financial position, financial performance, and cash flows for the

year ended on that date.

The [Governing body] is also responsible for such internal control as it determines is necessary to enable the

preparation of financial statements that are free from material misstatement, whether due to fraud or error. The

[Governing body] is also responsible for the publication of the financial statements, whether in printed or electronic

form.

The [Governing body]’s responsibilities arise from the [Name of relevant Act(s)]


web site.






relevant Act(s)].

Independence



Other than the audit, we have no relationship with, or interests in, the [entity type] or any of its subsidiaries.13





[City], New Zealand


audit we have carried out assignments in the areas of [insert description of assignments], which are compatible with those independence requirements. Other than the audit and these assignments, we have no relationship with or interests in the [entity type] or any of its subsidiaries.” (Refer AG ISA (NZ) 700 for guidance).






TO THE READERS OF






the financial statements and statement of service performance of the company on her behalf.

We have audited:

- the financial statements of the company on pages […] to […], that comprise14 the statement of financial

position as at [DD MM 20XX], the income statement, statement of changes in equity and statement of cash

flows for the year ended on that date, and the notes to the financial statements that include accounting

policies and other explanatory information; and

- the statement of service performance of the company on pages […] to […].

Qualified opinion – Depreciation on buildings has not been recognised

Reason for our qualified opinion

As stated in note […] on page […], the company has not recognised depreciation on buildings. This is a departure from

applicable New Zealand Equivalent to International Accounting Standard 16: Property, Plant and Equipment (NZ IAS

16), which requires that depreciation be charged as an expense in the income statement - so as to allocate the carrying

value of the buildings over their useful lives. The company has not calculated the financial effect of this departure from

NZ IAS 16, but we estimate that, had the company adopted this policy, depreciation for the year ended [DD MM 20XX]

would have increased by approximately [amount]. Had the company correctly accounted for depreciation on its buildings,

the effect on the income statement would have been to decrease the surplus by [amount] and reduce the carrying value

of the buildings in the statement of financial position by [amount]. The departure has also had the effect of understating

output expenses incurred in the statement of service performance by approximately [amount].

Qualified opinion on the Statement of Financial Position, the Income Statement, and the Statement of Service

Performance

In our opinion, except for the effects of the matter outlined above:

- the financial statements of the company on pages15 […] to […]:


- give a true and fair view of the company’s:


section.




- financial performance for the year ended on that date.

In our opinion, except for the effects of the matter outlined above:

- the statement of service performance of the company on pages15 […] to […]:


- gives a true and fair view of the company’s service performance for the year ended [DD MM

20XX], including:

- its service performance compared with the forecasts in the statement of forecast


- its actual revenue and output expenses compared with the forecasts in the statement

of forecast service performance at the start of the financial year.

Opinion on the Statement of Cash Flows

In our opinion, the financial statements of the company on pages […] to […] give a true and fair view of the cash flows

for the year ended [DD MM 20XX].







Basis of opinion






influence readers’ overall understanding of the financial statements and statement of service performance. We found

material misstatements that were not corrected, as we referred to in our opinion.


statements and statement of service performance. The procedures selected depend on our judgement, including our

assessment of risks of material misstatement of the financial statements and statement of service performance,



whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the

preparation of the company’s financial statements and statement of service performance that give a true and fair view

of the matters to which they relate. We consider internal control in order to design audit procedures that are


internal control.




Directors;

- the appropriateness of the reported service performance information within the framework for reporting

performance;






In accordance with the Financial Reporting Act 1993 we report that we have obtained all the information and

explanations that we have required, to provide a basis for our unmodified opinion on the statement of cash flows and

our qualified opinion on the statement of financial position, the income statement and the statement of service

performance. We believe we have obtained sufficient and appropriate audit evidence to provide a basis for our audit

opinion.


The Board of Directors is responsible for preparing financial statements and a statement of service performance that:


- give a true and fair view of the company’s financial position, financial performance and cash flows for the

year ended on that date; and

- give a true and fair view of its service performance which includes the company’s achievements compared

to its forecasts.


preparation of financial statements and a statement of service performance that are free from material misstatement,

whether due to fraud or error. The [Governing body] is also responsible for the publication of the financial statements

and statement of service performance, whether in printed or electronic form.

The Board of Directors’ responsibilities arise from the Financial Reporting Act 1993 [and name of relevant Act(s)].


web site.






Public Audit Act 2001 and [Name of relevant Act(s)].

Independence

When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate







[City], New Zealand



AG ISA (NZ) 706 Emphasis of matter paragraphs and other matter paragraphs


AG ISA (NZ) 706


EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER

PARAGRAPHS IN THE INDEPENDENT AUDITOR’S REPORT

Contents

Page




Objective 3 - 5001



Matters to consider when preparing an audit report containing

an emphasis of matter or other matter paragraph 3 - 5002

Appendix 1 - Examples of emphasis of matter and other matter paragraphs 3 - 5003



Introduction


1. This Auditor-General’s Auditing Statement sets out the Auditor-General’s

requirements for issuing audit reports that contain emphasis of matter or other matter

paragraphs. Also, it provides examples (in Appendix 1) of emphasis of matter and

other matter paragraphs that are based on the requirements of:

(a) AG ISA (NZ) 700: Forming an Opinion and Reporting on Financial and Non-

financial Information; and

(b) ISA (NZ) 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs

in the Independent Auditor’s Report1.

Application





Objective

4. The objective of the Appointed Auditor, having formed an opinion on the financial and

non-financial information, is to draw readers’ attention, when in the Appointed

Auditor’s judgement it is necessary to do so, to:

(a) a matter that, although appropriately presented or disclosed in the financial

and non-financial information, is of such importance that it is fundamental to a

reader’s understanding of the financial and non-financial information; and/or

(b) as appropriate, any other matter that is relevant to a reader’s understanding

of the annual audit, the Appointed Auditor’s responsibilities, or the audit

report.

Definitions

5. For the purpose of this Auditor-General’s Auditing Statement the defined terms have

the meanings attributed: 1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information”.










Requirements

Matters to consider when preparing an audit report containing an emphasis of matter

or other matter paragraph

6. The Appointed Auditor shall personally sign the audit report at the completion of the

annual audit.

7. The Appointed Auditor shall not issue an audit report containing an emphasis of

matter or other matter paragraph without prior reference to the OAG, unless a specific

direction to do so has been provided (refer to AG ISA (NZ) 700 on audit reports to be

referred to the Auditor-General’s Opinions Review Committee - ORC). The Appointed

Auditor shall, in keeping with AG ISA (NZ) 700, obtain the approval of the ORC before

issuing an audit report if there is a technical matter related to that audit report that

they are unsure about.

8. When preparing an audit report containing an emphasis of matter or other matter

paragraph, the Appointed Auditor shall ensure that they apply any requirements:

(a) issued by the OAG in respect of particular audits or sectors;

(b) contained in AG ISA (NZ) 706 and ISA (NZ) 706; and

(c) contained in AG ISA (NZ) 700 and ISA (NZ) 700.

AG ISA (NZ) 706 Emphasis of matter and other matter paragraphs


Appendix 1 - Examples of emphasis of matter and other matter

paragraphs

Considerations to take into account in choosing the correct audit report template

1.1 There are six examples of emphasis of matter and other matter paragraphs in audit

reports in this appendix. The examples refer to specific entities. The examples can be

used interchangeably for a public sector company or non-company such as a trust.

The highlighted words or sentences that are found in the examples can be replaced to

suit the audit report of the particular entity being audited. The examples can also be

combined when the examples apply to the entity subject to audit and are relevant to

the entity’s audit report. In the case of a reporting entity, the audit opinion must

include the following terms to comply with the Financial Reporting Act 1993. Such

terms include:

(a) “Give a true and fair view of”; and

(b) “Proper accounting records have been kept by the [entity] as far as appears

from an examination of those records”; and

(c) “All information and explanations required have been obtained.”

1.2 Please note that the requirement to express an opinion on proper accounting records

is only to be included for reporting entities. Normally, in the case of a non-company

entity, (a) is replaced by “fairly reflect” and (b) is not used in the audit report.

1.3 Where a statement of service performance is audited, it should be referred to

correctly in the audit report. Positioning of the reference to the statement of service

performance depends on the legislation governing the reporting requirements of the

entity in question. In some instances, the statement of service performance is referred

to as performance information, because that is the term defined in the legislation that

sets the reporting requirements.

1.4 Where a “profit oriented” entity has adopted International Financial Reporting

Standards (IFRS) and management, and those changed with governance specifically

want the audit report to include a reference to IFRS, an additional opinion on whether

the financial statements comply with IFRS should be included in the audit report.



Example Audit Report 706-01 – Standard unmodified audit report for a company and

group with an emphasis of matter paragraph outlining uncertainties over the use of

the going concern assumption

1.5 Example Audit Report 706-01 is the audit report template for a company and group,

which is an issuer (in accordance with the requirements of the Financial Reporting Act

1993), where the Appointed Auditor is issuing an unmodified opinion with an

emphasis of matter paragraph outlining uncertainties about the company’s ability to

continue as a going concern. An emphasis of matter paragraph has been included in

the audit report because, in the auditor’s judgement, the matter disclosed is of such

importance that it is fundamental to a reader’s understanding of the financial

statements. In this example, the company and group are not required to report non-

financial information through a statement of service performance.

Example Audit Report 706-02 – Standard unmodified audit report for a non-company

with an emphasis of matter paragraph outlining that the financial statements have

been appropriately prepared on an alternative basis



1993), where the Appointed Auditor is issuing an unmodified opinion which includes

an emphasis of matter paragraph. The emphasis of matter paragraph draws attention

to the financial statements of the entity having been prepared on a non-going concern

basis, and that the Appointed Auditor concurs with this alternative basis of

preparation. An emphasis of matter paragraph has been included in the audit report

because, in the auditor’s judgement, the matter disclosed is of such importance that it

is fundamental to a readers’ understanding of the financial statements. In this

example, the entity is not required to report non-financial information through a

statement of service performance.


with an emphasis of matter paragraph outlining that the entity is experiencing

financial difficulties



1993), where the Appointed Auditor is issuing an unmodified opinion with an

emphasis of matter paragraph that outlines that the entity is experiencing financial

difficulties. An emphasis of matter paragraph has been included in the audit report

because, in the auditor’s judgement, the matter that has been disclosed is of such



importance that it is relevant to a reader’s understanding of the audit. In this example,

the entity is not required to report non-financial information through a statement of

service performance.

Example Audit Report 706-04 – Standard unmodified audit report for a company with

an emphasis of matter paragraph outlining that the financial statements, the

statement of service performance and the audit report were reissued



where the Appointed Auditor is issuing an unmodified opinion with an emphasis of

matter paragraph outlining that the financial statements, the statement of service

performance, and the audit report were reissued. An emphasis of matter paragraph

has been included in the audit report because, in the auditor’s judgement, the matter

disclosed is of such importance that it is fundamental to a reader’s understanding of

the financial and non-financial information.


with an other matter paragraph outlining a breach of law



1993), where the Appointed Auditor is issuing an unmodified opinion with an other

matter paragraph that outlines that the entity failed to comply with relevant legislation.

An other matter paragraph has been included in the audit report because, in the

auditor’s judgement, the matter is of such importance that it is relevant to a reader’s

understanding of the audit. In this example, the entity is required to report non-

financial information through a statement of service performance.


with an other matter paragraph outlining insufficient regard by the entity to waste,

probity, or financial prudence



1993), where the Appointed Auditor is issuing an unmodified opinion with an other

matter paragraph that outlines that the governing body incurred expenditure that is

considered to be wasteful and without enough regard to probity or financial prudence.

An other matter paragraph has been included in the audit report because, in the

auditor’s judgement, the matter that has not been disclosed is of such importance that



it is relevant to a reader’s understanding of the audit. In this example, the entity is not

required to report non-financial information through a statement of service

performance.






TO THE READERS OF




The Auditor-General is the auditor of [Name of Company] Limited (the company) and group. The Auditor-General has

appointed me, [Name of Appointed Auditor], using the staff and resources of [Name of Auditing Firm], to carry out the

audit of the financial statements of the company and group on her behalf.

We have audited the financial statements of the company and group on pages […] to […], that comprise2 the

[statement of financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes

in equity and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that

include accounting policies and other explanatory information].

Opinion on the Financial Statements

In our opinion, the financial statements of the company and group on pages3 [...] to [...]:


- give a true and fair view of the company and group’s:



Validity of the going concern basis on which the financial statements have been prepared4

Without modifying5 our opinion, we considered the adequacy of the disclosures made in note […] on page […] about

the Board of Directors’ negotiations for continued financial support from [Name of lender]. We consider the

disclosures to be adequate. The outcome of the negotiations is uncertain at this stage. The validity of the going

concern assumption on which the financial statements have been prepared depends on the successful conclusion of

the negotiations.



been kept by the company and group as far as appears from an examination of those records.

2 Ensure that the names that are used in the financial statements are replicated in the audit report. 3 Ensure that the page number range corresponds to the page numbers outlined in the introduction section. 4 Appointed Auditors shall use the heading “Emphasis of Matter - …”, or another appropriate heading such as

“Our comments on - …” in accordance with the requirements in paragraph 7(b) of ISA (NZ) 706. 5 Appointed Auditors should update this opinion reference so that it is consistent with the type of opinion that is

issued.






Basis of opinion






influence readers’ overall understanding of the financial statements. If we had found material misstatements that were

not corrected, we would have referred to them in our opinion.




consider internal control relevant to the preparation of the company and group’s financial statements that give a true

and fair view of the matters to which they relate. We consider internal control in order to design audit procedures that

are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the

company and group’s internal control.




Directors;






explanations we have required. We believe that we have obtained sufficient and appropriate audit evidence to provide a

basis for our audit opinion.




web site.




- give a true and fair view of the company and group’s financial position, financial performance, and cash

flows for the year ended on that date.


preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board

of Directors is also responsible for the publication of the financial statements, whether in printed or electronic form.

The Board of Directors’ responsibilities arise from the Financial Reporting Act 1993 [and name of relevant Act(s)]




relevant Act(s)].

Independence

When carrying out the audit we followed the independence requirements of the Auditor-General, which incorporate


Other than the audit, we have no relationship with, or interests in, the company and or any of its subsidiaries.7





[City], New Zealand


audit we have carried out assignments in the areas of [insert description of assignments], which are compatible with those independence requirements. Other than the audit and these assignments, we have no relationship with or interests in the company or any of its subsidiaries.” (Refer AG ISA (NZ) 700 for guidance).






TO THE READERS OF






financial statements of the [entity type] on her behalf.

We have audited the financial statements of the [entity type] on pages […] to […], that comprise8 the [statement of

financial position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity,

and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that include

accounting policies and other explanatory information].

Opinion

In our opinion, the financial statements of the [entity type] on pages9 [...] to [...], that are prepared on a

disestablishment basis:





The financial statements are appropriately prepared on a disestablishment basis10

Without modifying11 our opinion, we considered the accounting policy on page […], about the financial statements

being prepared on a disestablishment basis. We consider the disestablishment basis to be appropriate as the [entity

type] closed on [Date].






issued.



Basis of opinion










misstatement of the financial statements, whether due to fraud or error. In making those risk assessments we

consider internal control relevant to the preparation of the entity’s financial statements that fairly reflect the matters to

which they relate. We consider internal control in order to design audit procedures that are appropriate in the

circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.



- the reasonableness of the significant accounting estimates and judgements made by the [Governing Body];





We have obtained all the information and explanations we have required, and we believe that we have obtained

sufficient and appropriate audit evidence to provide a basis for our audit opinion.


The [Governing body] is responsible for preparing financial statements that:


- fairly reflect the [entity type]’s financial position, financial performance, and cash flows for the year ended

on that date.




form.


web site.







relevant Act(s)].

Independence



Other than the audit, we have no relationship with, or interests in, the [entity type].13





[City], New Zealand








TO THE READERS OF











Opinion

In our opinion, the financial statements of the [entity type] on pages15 [...] to [...]:





Financial difficulties16

Without modifying17 our opinion, we considered the adequacy of the disclosures made in note […] on page […] about

the financial difficulties being experienced by the [entity type]. The financial difficulties have arisen primarily because

[insert reason(s)]. The [entity type] is managing the situation by [explanation on what is being done to turnaround the

situation].






issued.



Basis of opinion









statements. The procedures selected depend on our judgement, including the assessment of risks of material







- the reasonableness of the significant accounting estimates and judgements made by the [Governing body];





We have obtained all the information and explanations we have required and we believe that we have obtained sufficient

and appropriate audit evidence to provide a basis for our audit opinion.




- fairly reflect the [entity type]’s financial position, financial performance, and cash flows.




form.


web site.







relevant Act(s)].

Independence








[City], New Zealand








TO THE READERS OF






the financial statements and statement of service performance of the company on her behalf.

We have audited:

- the financial statements of the company on pages […] to […], that comprise20 the [statement of financial

position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity,

and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that

include accounting policies and other explanatory information]; and

- the statement of service performance of the company on pages […] to […].

Opinion on the Financial Statements and Statement of Service Performance

In our opinion:

- the financial statements of the company on pages21 [...] to [...]:


- give a true and fair view of the company’s:



- the statement of service performance of the company on pages21 […] to […]:


- gives a true and fair view of the company’s service performance for the year ended [DD MM

20XX], including:

20 Ensure that the names that are used in the financial statements are replicated in the audit report. 21 Ensure that the page number range corresponds to the page numbers outlined in the introduction section.




service performance at the start of the year; and

- its actual revenue and output expenses compared with the forecasts in the statement of

forecast service performance at the start of the financial year.

Replacement financial statements, statement of service performance, and audit report22

Without modifying23 our opinion, we draw attention to the fact that the financial statements on pages […] to […] and

the statement of service performance on pages […] to […] replace the previously issued financial statements and

statement of service performance dated [Date]. The previous financial statements and statement of service

performance have been replaced because [explain reason]. Attention is drawn to note [...] on page […], which

outlines the circumstances in more detail. This audit report replaces the audit report issued on [Date].







Basis of opinion






influence readers’ overall understanding of the financial statements and statement of service performance. If we had

found material misstatements that were not corrected, we would have referred to them in our opinion.




whether due to fraud or error. In making those risk assessments we consider internal control relevant to the

preparation of the company’s financial statements and statement of service performance that give a true and fair view

of the matters to which they relate. We consider internal control in order to design audit procedures that are


internal control.


22 Appointed Auditors shall use the heading “Emphasis of Matter - …”, or another appropriate heading such as


issued.





Directors;


performance;







explanations we have required. We believe that we have obtained sufficient and appropriate audit evidence to provide a

basis for our audit opinion.


The Board of Directors is responsible for preparing financial statements and a statement of service performance that:


- give a true and fair view of the company’s financial position, financial performance and cash flows; and

- give a true and fair view of its service performance which includes the company’s achievements compared

to its forecasts.



whether due to fraud or error. The Board of Directors is also responsible for the publication of the financial statements


The Board of Directors’ responsibilities arise from the Financial Reporting Act 1993 [and name of relevant Act(s)].





Independence


web site.










[City], New Zealand








TO THE READERS OF






financial statements and statement of service performance of the [entity type] on her behalf.

We have audited:

- the financial statements of the [entity type] on pages […] to […], that comprise26 the [statement of financial

position] as at [DD MM 20XX], the [statement of comprehensive income, statement of changes in equity,

and statement of cash flows] for the year ended on that date, and [the notes to the financial statements that

include accounting policies and other explanatory information]; and

- the statement of service performance of the [entity type] on pages […] to […].

Opinion

In our opinion:

- the financial statements of the [entity type] on pages27 [...] to [...]:





- the statement of service performance of the [entity type] on pages27 […] to […]:


- fairly reflects the [entity type]’s service performance for the year ended [DD MM 20XX], including:



26 Ensure that the names that are used in the financial statements are replicated in the audit report. 27 Ensure that the page number range corresponds to the page numbers outlined in the introduction section.



- its actual revenue and output expenses compared with the forecasts in the statement of

forecast service performance at the start of the financial year.

Breach of law – [description of breach]28

Without modifying29 our opinion, we draw attention to the fact that the [Governing body] did not comply with [relevant

section(s) of relevant Act(s)] because the [Governing body] did not [outline the breach of law that occurred].




Basis of opinion






influence readers’ overall understanding of the financial statements and statement of service performance. If we had

found material misstatements that were not corrected, we would have referred to them in our opinion.




whether due to fraud or error. In making those risk assessments we consider internal control relevant to the

preparation of the entity’s financial statements and statement of service performance that fairly reflect the matters to







performance;



28 Appointed Auditors shall use the heading “Other Matter - …”, or another appropriate heading such as “Our

comments on - …” in accordance with the requirements in paragraph 8 of ISA (NZ) 706. 29 Appointed Auditors should update this opinion reference so that it is consistent with the type of opinion that is

issued.









The [Governing body] is responsible for preparing financial statements and a statement of service performance that:


- fairly reflect the [entity type]’s financial position, financial performance, and cash flows; and

- fairly reflect its service performance which includes the [entity type]’s achievements compared to its

forecasts.



whether due to fraud or error. The [Governing body] is also responsible for the publication of the financial statements







Independence









web site. 31 If other relationships exist, this paragraph should be replaced with the following paragraph: “In addition to the




[City], New Zealand






TO THE READERS OF











Opinion

In our opinion, the financial statements of the [entity type] on pages33 [...] to [...]:





Wasteful expenditure that is indicative of a lack of probity and financial prudence34

Without modifying35 our opinion, we draw attention to the fact that the [Governing body] incurred expenditure during

the year on [description of expenditure] of $[amount]. In our view, expenditure of this nature is wasteful and illustrates

a lack of probity and financial prudence on the part of the [Governing body].




32 Ensure that the names that are used in the financial statements are replicated in the audit report. 33 Ensure that the page number range corresponds to the page numbers outlined in the introduction section. 34 Appointed Auditors shall use the heading “Other Matter - …”, or another appropriate heading such as “Our

comments on - …” in accordance with the requirements in paragraph 8 of ISA (NZ) 706. 35 Appointed Auditors should update this opinion reference so that it is consistent with the type of opinion that is

issued.



Basis of opinion


























- fairly reflect the [entity type]’s financial position, financial performance, and cash flows.




form.



web site.






relevant Act(s)].

Independence








[City], New Zealand



AG ISA (NZ) 810 Summary financial and non-financial information


AG ISA (NZ) 810


ENGAGEMENTS TO REPORT ON SUMMARY FINANCIAL AND NON-

FINANCIAL INFORMATION

Contents

Page




Objectives 3 - 5401



Carrying out procedures on the summary financial and non-

financial information 3 - 5402

Use of template audit reports issued by the OAG 3 - 5402

Modifications to summary audit reports 3 - 5403

Summary audit report requirements 3 - 5403



Carrying out procedures on the summary financial and non-

financial information 3 - 5404

Signing of summary audit reports 3 - 5404

Modifications to summary audit reports 3 - 5404

Appendix 1 - Non-company model summary audit report 3 - 5405

Appendix 2 - Company and group model summary audit report 3 - 5409

Appendix 3 - Decision tree modifications to summary audit reports 3 - 5413



Introduction




Engagements to Report on Summary Financial Statements1; and

(b) provides additional requirements and guidance to reflect the public sector

perspective and covers all summaries of financial and non-financial information

that are audited on behalf of the Auditor-General.

Application



3. This Statement applies to all audits of summary financial and non-financial information

with reporting periods beginning on or after 1 July 2013, although earlier application is

encouraged.

4. The Auditor-General will determine the standard format and wording for public entity

audit reports issued on summary financial and non-financial information. In doing so,

the Auditor-General will be cognisant of the objectives and requirements of ISA (NZ)

810 to ensure appropriate reporting for readers. The Auditor-General’s example audit

reports are provided in this statement and may also be included in other directives

issued by the OAG from time to time.

Objectives


(a) form an opinion on summary financial and non-financial information based on

an evaluation of the conclusions drawn from the evidence obtained;

(b) advise, and where appropriate seek advice from, the OAG before issuing an

opinion to readers, where the Appointed Auditor does not consider that the

summary financial and non-financial information is a fair summary of the

audited full financial and non-financial information; and

1 The ISA (NZ) auditing standards are scoped so that they apply to audits of “historical financial information.




(c) clearly express that opinion through a written report that also describes the

basis for that opinion.

Definitions

6. For the purpose of this Auditor-General’s auditing statement the defined terms have the









Summary financial and


means the financial and non-financial information that

is derived from the full financial and non-financial

information contained in the annual report of a public

entity, but that contains less detail than the annual

report while still providing a structured representation

consistent with that provided in the annual report.

Requirements

Carrying out procedures on the summary financial and non-financial information

7. The Appointed Auditor shall carry out procedures on the summary financial and non-

financial information as part of the annual audit (Ref: Para. A1).

Use of template audit reports issued by the OAG

8. The Appointed Auditor shall use audit report templates issued by the OAG as the basis

for all audit reports issued on summary financial and non-financial information.

Templates are contained in Appendix 1 and 2 and may also be included in other

directions issued by the OAG from time to time. The Appointed Auditor shall consult

with the OAG on any significant departures from any audit report template issued by

the OAG.



Signing of summary audit reports

9. All summary audit reports, except those where the Auditor-General directs otherwise,

shall be personally signed by the Appointed Auditor. However, the Auditor-General

reserves the right to sign any summary audit report after giving due notice to the

Appointed Auditor. (Ref: Para. A2)

Modifications to summary audit reports2

The summary financial and non-financial information is not a fair summary

10. The Appointed Auditor shall obtain approval from the Auditor-General’s Opinions

Review Committee (the ORC) before issuing a summary audit report that states that

the summary is not consistent with, or is not a fair summary of, the full financial and

non-financial information. (Ref: Para. A3)

A non-standard audit report was issued on the full information

11. The Appointed Auditor shall ensure that the requirements of paragraphs 17 and 18 of

ISA (NZ) 810 are met when a non-standard audit report was issued on the full financial

and non-financial information.

Summary audit report requirements

12. The Appointed Auditor shall ensure that the audit report requirements contained in AG

ISA (NZ) 700 and ISA (NZ) 700 are complied with, including those relating to:

(a) dating of audit reports (because the date of its issuance is required to be included

in the summary audit report); and

(b) translation of audit reports.


13. The Appointed Auditor shall forward to the OAG a copy of all summary audit reports

issued, in keeping with the requirements set out in AG-1: Reporting to the OAG.

***

2 Appendix 3 is a decision tree for modifications to summary audit reports.




Carrying out procedures on the summary financial and non-financial information (Ref:

Para. 7)

A1. The Auditor-General is the auditor of all public entities and has a statutory obligation to

carry out, as part of the annual audit, the procedures on the summary financial and

non-financial information presented by each public entity. As a result, the procedures

on the summary financial and non-financial information that is prepared by public

entities shall be carried out on behalf of the Auditor-General.

Signing of summary audit reports (Ref: Para. 9)

A2. The Auditor-General or designated representative may sign a summary audit report

instead of the Appointed Auditor, if the Appointed Auditor is unwilling to sign the

summary audit report because they have been directed to use particular wording with

which they disagree. Such direction may arise as a result of the ORC process.

Modifications to summary audit reports (Ref: Para. 10)

A3. Although it is likely to be rare, the Auditor-General requires the ORC to approve all

modifications to summary audit reports when the summary financial and non-financial

information is not a fair summary of the full financial and non-financial information. This

requirement arises because of the unique issues that will need to be reflected in the

modification to that summary audit report.



Appendix 1 - Non-company model summary audit report

The following summary audit report is for an entity, which is not an issuer (in accordance with the requirements of the Financial Reporting Act 1993), that is

required to report summary financial statements and summary non-financial information through a summary of its statement of service performance.

Appendix 1 - Non-company model summary audit report ISA (NZ) 810 requirements and corresponding OAG policies



TO THE [READERS / JOINT VENTURERS / PARTNERS] OF


SUMMARY FINANCIAL STATEMENTS AND SUMMARY STATEMENT OF SERVICE

PERFORMANCE



Paragraph 14(a) of ISA (NZ) 810 outlines that the auditor’s report shall have a title that clearly

indicates that it is the report of an independent auditor.

Paragraph 14(b) of ISA (NZ) 810 outlines that the auditor’s report shall contain an addressee.

Apart from any individual exceptions all audit reports issued by the Auditor-General shall be

addressed to the “readers” because public entities are accountable to a wide constituency and

the Auditor-General has broad responsibilities to report to this constituency. Individual

exceptions may include situations where there is a minority private sector interest in the entity.

For example, where the entity is a joint venture and one of the partners is from the private

sector, then the audit report shall be addressed to the “joint venturers”.

The terminology used to describe the accountability statements shall be the same as that used

by the public entity, provided it appropriately describes the material that has been audited.


We have audited the summary financial statements and summary statement of service performance

as set out on pages […] to […], which were derived from the audited financial statements and

statement of service performance of the [entity type] for the year ended [DD MM 20XX] on which we

expressed an unmodified audit opinion in our report dated [Date].

The summary financial statements and summary statement of service performance comprise the

[summary statement of financial position] as at [DD MM 20XX], and summaries of the [statement of

Paragraph 14(c)(i) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include an introductory paragraph that identifies the title of each statement

included in the summary financial statements.

Paragraph 14(c)(ii) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include an introductory paragraph that identifies that the summary financial

statements were derived from the audited (full) financial statements.



comprehensive income, summary statement of changes in equity, and summary statement of cash

flows] for the year then ended, the related notes and the summary statement of service performance

of the [entity type] on pages […] to […].

Paragraph 14(c)(iii) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall refer to the opinion issued in the auditor’s report on the audited (full)



Opinion

In our opinion, the information reported in the summary financial statements and summary statement

of service performance complies with FRS-43 (PBE): Summary Financial Statements, and is

consistent in all material respects with the audited financial statements and statement of service

performance from which they have been derived.

A single audit opinion shall be issued, covering both financial and where appropriate non-

financial information.

The audit opinion shall be expressed in the form specified/implied by the legislation governing

the reporting requirements of the entity in question.

The audit opinion on a summary of the statement of service performance shall be expressed

using the same terms used to express the opinion on the summary of the financial statements.


Basis of opinion

The audit was conducted in accordance with the Auditor-General’s Auditing Standards, which

incorporate the International Standards on Auditing (New Zealand).

[The summary financial statements and summary statement of service performance, and the audited

financial statements and statement of service performance from which they were derived, do not

reflect the effects of events that occurred subsequent to our report dated [Date] on the audited

financial statements and statement of service performance.]3

The summary financial statements and summary statement of service performance do not contain all

the disclosures required for audited financial statements and statements of service performance


auditor’s opinion, including where necessary the criteria used as the basis for the auditor’s

opinion. This assists readers’ understanding and provides greater transparency to help narrow


Paragraph 14(c)(iv) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement indicating that the summary financial statements and the

audited (full) financial statements do not reflect the effects of events that occurred subsequent

to the date of the auditor’s report on the full financial statements.

Paragraph 14(c)(v) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement indicating that the summary financial statements do not

3 Appointed Auditors may remove this sentence from the summary audit report, if, and only if, the summary audit report will be signed on the same date as the full audit report (see paragraph

14(c)(iv) in ISA (NZ) 810).



under generally accepted accounting practice in New Zealand. Therefore, reading the summary

financial statements and summary statement of service performance is not a substitute for reading

the audited financial statements and statement of service performance of the [entity type].

contain all the disclosures required by the financial reporting framework applied in the

preparation of the audited (full) financial statements.


Responsibilities of the [Governing body] and the Auditor

The [Governing body] is responsible for preparing the summary financial statements and summary

statement of service performance in accordance with FRS-43 (PBE): Summary Financial

Statements. The [Governing body] is also responsible for the publication of the summary financial

statements and summary statement of service performance, whether in printed or electronic form.

We are responsible for expressing an opinion on those statements, based on the procedures

required by the Auditor-General’s Auditing Standards, including International Standard on Auditing

(New Zealand) 810: Engagements to Report on Summary Financial Statements.

Other than in our capacity as auditor, we have no relationship with, or interests in, [entity type]4.

Paragraph 14(d) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a description of the responsibilities of those charged with governance.

If a public entity elects to publish audited summary information on its web site, the summary

audit report shall include additional information in the responsibilities section that identifies that

the governing body is responsible for the electronic publication of the audited summary

information whether in printed or electronic form.

Paragraph 14(e) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement that the auditor is responsible for expressing an opinion on

the summary financial statements based on procedures required by ISA (NZ) 810.

Paragraph 14.1 of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement as to the existence of any relationship (other than that of

auditor) that the auditor has with, or any interests that the auditor has in, the entity. If other

relationships exist, this sentence should be amended to state the relationships (other than that

of auditor) with, or interests in, the entity (refer to AG ISA (NZ) 700 for guidance).



[Name of Appointed Auditor],

Paragraph 14(g) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include the auditor’s signature. The audit report will be signed in the name of

4 It may be necessary to include some disclosure in the summary audit report of other assignments carried out such as: “In addition to the audit, we have carried out assignments in the areas

of [insert description of assignments], which are compatible with those independence requirements. Other than these assignments, we have no relationship with, or interests in, the [entity type].”





[City], New Zealand

[Date]

the Appointed Auditor, followed by the name of the firm of the Appointed Auditor. An alternative

is to include the firm’s signature alongside the Appointed Auditor’s, as follows:

_________________________ _________________________




[City], New Zealand

[Date]

Paragraph 14 (i) of ISA (NZ) 810 requires that the auditor’s report shall include the auditor’s

address.

Paragraph 14(h) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include the date of the auditor’s report.



Appendix 2 - Company and group model summary audit report

The following summary audit report is for a company and group, which is an issuer (in accordance with the requirements of the Financial Reporting Act 1993),

that is not required to report summary non-financial information.

Appendix 2 - Company and group model summary audit report ISA (NZ) 810 requirements and corresponding OAG policies



TO THE [READERS/SHAREHOLDERS] OF


SUMMARY FINANCIAL STATEMENTS



Paragraph 14(a) of ISA (NZ) 810 outlines that the auditor’s report shall have a title that clearly

indicates that it is the report of an independent auditor.

Paragraph 14(b) of ISA (NZ) 810 outlines that the auditor’s report shall contain an addressee.

Apart from any individual exceptions all audit reports issued by the Auditor-General (including

those to companies) shall be addressed to the “readers” because public entities are

accountable to a wide constituency and the Auditor-General has broad responsibilities to report

to this constituency. Individual exceptions may include situations where there is a minority

private sector shareholder when the audit report shall be addressed to the “shareholders”.

In relation to companies, the term “readers” encompasses shareholders and is therefore

consistent with section 205 of the Companies Act 1993, which requires auditors to report to

shareholders/members.

In addition, the relationship between auditors and the shareholders of a public sector company

can be distinguished from the relationship between auditors and shareholders in a private

sector company. Shareholders of a public sector company (e.g., Responsible Ministers –

SOEs, CEs; Councils – CCOs, Ports, Airports) hold shares in a trustee-type relationship on

behalf of the public, not as shareholders in their own right.

The terminology used to describe the accountability statements shall be the same as that used

by the public entity, provided it appropriately describes the material that has been audited.




We have audited the summary financial statements as set out on pages […] to […], which were

derived from the audited financial statements of the company and group for the year ended [DD MM

20XX] on which we expressed an unmodified audit opinion in our report dated [Date].

The summary financial statements comprise the [summary statement of financial position] as at [DD

MM 20XX], and summaries of the [statement of comprehensive income, statement of changes in

equity, and statement of cash flows] for the year then ended and the related notes.

Paragraph 14(c)(i) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include an introductory paragraph that identifies the title of each statement

included in the summary financial statements.

Paragraph 14(c)(ii) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include an introductory paragraph that identifies that the summary financial

statements were derived from the audited (full) financial statements.

Paragraph 14(c)(iii) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall refer to the opinion issued in the auditor’s report on the audited (full)



Opinion

In our opinion, the information reported in the summary financial statements complies with FRS-43:

Summary Financial Statements, and is consistent in all material respects with the audited financial

statements from which they have been derived.

A single audit opinion shall be issued, covering the financial information.

The audit opinion shall be expressed in the form specified/implied by the legislation governing

the reporting requirements of the entity in question.




Basis of opinion

The audit was conducted in accordance with the Auditor-General’s Auditing Standards, which

incorporate the International Standards on Auditing (New Zealand).

[The summary financial statements, and the audited financial statements from which they were

derived, do not reflect the effects of events that occurred subsequent to our report dated [Date] on

the audited financial statements.]5

The summary financial statements do not contain all the disclosures required for audited financial

statements under generally accepted accounting practice in New Zealand. Therefore, reading the

summary financial statements is not a substitute for reading the audited financial statements of the

company and group.


auditor’s opinion, including where necessary the criteria used as the basis for the auditor’s

opinion. This assists readers’ understanding and provides greater transparency to help narrow


Paragraph 14(c)(iv) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement indicating that the summary financial statements and the

audited (full) financial statements do not reflect the effects of events that occurred subsequent

to the date of the auditor’s report on the full financial statements.

Paragraph 14(c)(v) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement indicating that the summary financial statements do not

contain all the disclosures required by the financial reporting framework applied in the

preparation of the audited (full) financial statements.


Responsibilities of the Board of Directors and the Auditor

The Board of Directors is responsible for preparing the summary financial statements in accordance

with FRS-43: Summary Financial Statements. The Board of Directors is also responsible for the

publication of the summary financial statements, whether in printed or electronic form. We are

responsible for expressing an opinion on those statements, based on the procedures required by the

Auditor-General’s Auditing Standards, including International Standard on Auditing (New Zealand)

810: Engagements to Report on Summary Financial Statements.

Other than in our capacity as auditor we have no relationship with, or interests in, the company or

Paragraph 14(d) of ISA (NZ) 810 outlines that the auditor’s report on summary financial

statements shall include a description of the responsibilities of those charged with governance.

If a public entity elects to publish audited summary information on its web site, the summary

audit report shall include additional information in the responsibilities section that identifies that

the governing body is responsible for the electronic publication of the audited summary

information whether in printed or electronic form.

Paragraph 14(e) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement that the auditor is responsible for expressing an opinion on

5 Appointed Auditors may remove this sentence from the summary audit report, if, and only if, the summary audit report will be signed on the same date as the full audit report (see paragraph

14(c)(iv) in ISA (NZ) 810).



any of its subsidiaries6.

the summary financial statements based on procedures required by ISA (NZ) 810.

Paragraph 14.1 of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include a statement as to the existence of any relationship (other than that of

auditor) that the auditor has with, or any interests that the auditor has in, the entity. If other

relationships exist, this sentence should be amended to state the relationships (other than that

of auditor) with, or interests in, the entity (refer to AG ISA (NZ) 700 for guidance).



[Name of Appointed Auditor],



[City], New Zealand

[Date]

Paragraph 14(g) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include the auditor’s signature. The audit report will be signed in the name of

the Appointed Auditor, followed by the name of the firm of the Appointed Auditor. An alternative

is to include the firm’s signature alongside the Appointed Auditor’s, as follows:

_________________________ _________________________




[City], New Zealand

[Date]

Paragraph 14 (i) of ISA (NZ) 810 requires that the auditor’s report shall include the auditor’s

address.

Paragraph 14(h) of ISA (NZ) 810 requires that the auditor’s report on summary financial

statements shall include the date of the auditor’s report.

6 It may be necessary to include some disclosure in the summary audit report of other assignments carried out such as: “In addition to the audit, we have carried out assignments in the areas

of [insert description of assignments], which are compatible with those independence requirements. Other than these assignments, we have no relationship with, or interests in, the [entity type].”



Appendix 3 - Decision tree modifications to summary audit reports

Y N

N Y

N Y

STARTDoes the summary financial and non-financial information fairly summarise the full financial and non-financial information?

Did the audit report on the full financial and non-financial information contain an adverse opinion, a disclaimer of opinion, a qualified opinion, an emphasis of matter paragraph or an other matter paragraph?

Does the disagreement that the summary financial and non-financial information does not fairly summarise the full financial and non-financial information result in material differences?

Issue an unmodified opinion Issue an audit report containing an adverse opinion, a disclaimer of opinion, a qualified opinion, an emphasis of matter paragraph or an other matter paragraph.

Refer the disagreement to the OAG

ENDEND




REPORTING TO THE OAG

Contents

Page




Background 3 - 8001

Objectives 3 - 8002



Appendix 1 - Immediate reporting 3 - 8003

Appendix 2 - Reporting the results of the annual audit 3 - 8008

Appendix 3 - Reporting on engagements other than the annual audit 3 - 8010

Appendix 4 - Reporting biannually on events or situations that could lead to a

potential claim 3 - 8012



Introduction


1. This Auditor-General’s Auditing Standard establishes the Auditor-General’s

requirements for reporting to the OAG.

Application

2. Compliance with this Standard is mandatory for Appointed Auditors who carry out


3. This Standard applies to all annual audits with reporting periods ending 30 June 2011

or after, although earlier application is encouraged.

4. Audit briefs, or any other direct correspondence to the Appointed Auditor, may require

specific information (either information required by or in addition to this Standard) to

be returned to the OAG on specified dates. This information shall be returned to the

OAG by the date specified in that audit brief or other direct correspondence.

Background

5. The effectiveness of the Auditor-General is largely dependent on the Appointed

Auditor keeping the OAG informed of significant issues affecting public entities in a

timely manner. The Appointed Auditor is the Auditor-General's "eyes and ears" on the

ground and is expected to freely communicate to the OAG any significant information

including that of a sensitive or confidential nature.

6. The reporting requirements outlined in this Standard are the minimum requirements,

and the Appointed Auditor should not feel constrained in communicating any issues

to the OAG as the minimum requirements are intended to ensure that the Auditor-

General is:

(a) adequately apprised, in a timely way, of significant matters related to the

annual audit in respect of the public entities;

(b) able to plan and ensure that the requisite audit activities are carried out

through the annual audit or engagements other than the annual audit, on a

timely basis; and

(c) able to monitor Appointed Auditor performance.



Objectives


(a) immediately report to the OAG the occurrence of any of the significant issues

identified in Appendix 1;

(b) formally report the results of annual audits to the OAG as outlined in Appendix

2;

(c) formally report the results of engagements other than the annual audit to the

OAG as outlined in Appendix 3; and

(d) provide certifications, where appropriate on behalf of their Audit Service

Provider (ASP), declaring the circumstances or occurrence of any events or

situations that could lead to a potential claim against the ASP or the Auditor-

General as outlined in Appendix 4.

Definitions

8. For the purpose of this Auditor-General’s auditing standard the defined terms have








Requirements

9. The OAG’s reporting requirements are classified into a number of different categories,

each with different reporting deadlines and information that shall be sent to the OAG.

The Appointed Auditor shall report to the OAG in keeping with the requirements

outlined in each of the following Appendices:

(a) Appendix 1: Immediate reporting;

(b) Appendix 2: Reporting the results of the annual audit;

(c) Appendix 3: Reporting on engagements other than the annual audit; and

(d) Appendix 4: Reporting biannually on events or situations that could lead to a

potential claim.

AG-1 Reporting to the OAG Appendix One


Appendix 1 - Immediate reporting

This appendix covers the following topics:

Introduction

Advising the OAG about public-entity-specific issues

Advising the OAG about professional indemnity insurance issues

Making submissions to the Auditor-General’s Opinions Review Committee

Notifying the OAG about significant changes to public entities

Introduction

A1.1 Immediate reporting covers those situations where an issue is of such significance or risk

that the Appointed Auditor shall advise the OAG about it as soon as it comes to their

attention. Examples of immediate reporting fall into five categories:

- where an Audit Service Provider (an ASP) or an Appointed Auditor has identified

a breach, or there is reason to believe that a breach may arise in the future, of

the independence requirements of AG PES 1 (Revised): Code of Ethics for

Assurance Practitioners;

- where any public-entity specific issues arise that are considered significant,

including certain non-compliance with laws and regulations, the existence of

fraud or suspected fraud and/or any issues surrounding effectiveness and

efficiency, waste, or a lack of probity or financial prudence;

- where any limitations or material circumstances occur which could affect the

ASP’s professional indemnity insurance over the period of the engagement, or

circumstances that could lead to a potential claim against the ASP or the

Auditor-General;

- where the Appointed Auditor makes a submission to the Auditor-General’s

ORC; and

- where the Appointed Auditor identifies any significant changes to a public entity

such as:

- an entity has been established that is a public entity;

- a public entity has been disestablished or ceased operating;

- an existing entity has become a public entity; or

- an existing entity has ceased being a public entity.

Advising the OAG about public-entity-specific issues

A1.2 The Appointed Auditor shall immediately inform the OAG about the following public-entity

specific issues:



- Where the Acceptance and Continuance procedures carried out by the

Appointed Auditor before planning the annual audit, as required by AG PES

3l, indicate the presence of circumstances and/or risks that would have

caused the engagement to be declined. The Appointed Auditor shall contact

the Assistant Auditor-General – Accounting and Auditing Policy.

- Details of all suspected or actual fraud. Guidance is provided in AG ISA (NZ)

240: The auditor’s responsibilities relating to fraud in an annual audit.

- Any information which is requested by a third party that was obtained

while carrying out work on behalf of the Auditor-General (guidance is provided

in AG PES 1 (Revised)). The Appointed Auditor shall contact the Assistant

Auditor-General – Legal.

- Details of any significant issues of effectiveness and efficiency, waste, or a

lack of probity or financial prudence. Guidance is provided in AG-3: The

auditor’s approach to issues of effectiveness and efficiency, waste, and lack

of probity or financial prudence. The Appointed Auditor shall contact either the

Assistant Auditor-General – Parliamentary Group or the Assistant Auditor-

General – Local Government.

- Details or information of any non-compliance with laws and regulations

that:

- is material, and for which the OAG has not provided guidance;

- calls into question the ethics or behaviour of management and/or

those charged with governance or where fraud is suspected; or

- where management and/or those charged with governance are

suspected of being involved in any deliberate non-compliance with a

law or regulation.

Guidance is provided in AG ISA (NZ) 250: Consideration of laws and

regulations. The Appointed Auditor shall contact either the Assistant Auditor-

General – Accounting and Auditing Policy or the Assistant Auditor-General –

Legal.

- Details of the findings of any substantial or significant external reviews

conducted over the activities of the public entity. The Appointed Auditor

shall contact either the Assistant Auditor-General – Parliamentary Group or the

Assistant Auditor-General – Local Government.

- For government departments, details of any actual or potential breach of an

appropriation, or expenditure incurred not for lawful purposes. Guidance

is provided in AG-2: The appropriation audit and the controller function. The

Appointed Auditor shall contact the Assistant Auditor-General – Parliamentary

Group.

- Details of any other issue that is likely to have national or parliamentary

implications, or has implications for the local community that are so



significant that it is likely to attract the attention of the media. Guidance is

provided in AG PES 1 (Revised). The Appointed Auditor shall contact either the

Assistant Auditor-General – Parliamentary Group or the Assistant Auditor-

General – Local Government.

- Details of any news media enquiries that the Appointed Auditor should

refer to the OAG. Guidance is provided in AG PES 1 (Revised). The

Appointed Auditor shall contact either the Assistant Auditor-General –

Parliamentary Group or the Assistant Auditor-General – Local Government.

- Any other matters specified in the other time-bound categories of

information that, because of their sensitivity, should be reported to the

OAG earlier. An example would be where the entity is exhibiting early warning

signs that if, individually or in combination, are left unchecked would be likely

to cause a failure in the entity’s ability to meet its objectives or functions. The

Appointed Auditor shall contact either the Assistant Auditor-General –

Parliamentary Group or the Assistant Auditor-General – Local Government.

- Details of any prior period error that is material. The Appointed Auditor shall

contact the Assistant Auditor-General – Accounting and Auditing Policy.

- When a Group or Component Appointed Auditor has difficulties applying the

requirements of AG ISA (NZ) 600. In this situation the Group or Component

Appointed Auditor shall contact the Assistant Auditor-General – Accounting

and Auditing Policy.

- When a Group or a Component Appointed Auditor identifies that the work of

a Group Appointed Auditor, a Component Appointed Auditor, or a

component auditor may be insufficient in accordance with paragraph 43

in ISA (NZ) 600. In this situation the Group or Component Appointed Auditor

shall contact the Assistant Auditor-General – Accounting and Auditing Policy.

- Where a Group Appointed Auditor is considering communicating with

management or those charged with governance, concerns about the

quality of a component auditor’s work, in accordance with paragraph 49(c) in

ISA (NZ) 600. In this situation the Group or Component Appointed Auditor shall

contact the Assistant Auditor-General – Accounting and Auditing Policy.

- Where the Appointed Auditor has concerns about the service performance

report of the public entity, including whether the Appointed Auditor is

concerned about the appropriateness of the content or the verification of the

content of the service performance report. Guidance is provided in AG-4

(Revised): The audit of service performance reports.



Advising the OAG about professional indemnity insurance issues

A1.3 The Appointed Auditor shall immediately inform the Assistant Auditor-General – Legal

about any limitations or material circumstances that occur which could affect the ASP’s

professional indemnity insurance over the period of the engagement, or circumstances

that could lead to a potential claim against the ASP or the Auditor-General. These could

include (but are not limited to):

- details of any limitations or circumstances that could reduce the level of cover;

- details of limitations or circumstances that could cause the insurance policy to

be defective or voidable by the insurers;

- details of limitations or circumstances that could cause the policy coverage to

be no longer effective during the period of the engagement with the Auditor-

General;

- details of circumstances that materially affect the insurance policy excess (or

any related self-insurance or personal coverage arrangements) that could

reduce or limit the effectiveness of cover;

- details of any claim made against the Auditor-General or ASP (when acting for

the Auditor-General) received by the ASP; or

- details, after becoming aware, of information or knowledge that could give rise

to a claim against the Auditor-General or ASP (as agent for the Auditor-

General), including:

- details of frauds or suspected frauds identified in the public entity;

- details of possible litigation arising out of any sale, takeover, or capital

restructuring of the public entity;

- details of failure of public entity investees or major debtors;

- details of receipt of notice from, or information as to any intention by,

another party to claim against the Auditor-General or the ASP (either

verbally or in writing); and

- details of the discovery of reasonable cause to suspect any dishonest

fraudulent or malicious act(s) or omission(s) of any past or present

ASP(s), Appointed Auditor, or staff employed by the ASP that have

been associated with the audit of the public entity.

Making submissions to the Auditor-General’s Opinions Review Committee

A1.4 The Appointed Auditor shall, in keeping with the requirements of AG ISA (NZ) 700,

obtain approval from the Auditor-General’s Opinions Review Committee (the ORC)

before issuing an audit report, if (regardless of the decision) the Appointed Auditor

seriously considered issuing an audit report containing:



- an emphasis of matter or other matter paragraph in relation to an uncertainty

over the use of the going concern assumption;

- a disclaimer of opinion; or

- an adverse opinion.

A1.5 The Appointed Auditor shall consult the OAG before issuing an audit report if (regardless

of the decision) the Appointed Auditor seriously considers including an emphasis of

matter or other matter paragraph in that audit report where the OAG has not provided

direction or guidance.

A1.6 The Appointed Auditor shall obtain the approval of the ORC before issuing an audit

report if there is a technical matter related to that audit report that they are unsure

about.

A1.7 The Appointed Auditor shall send their ORC submissions to the Assistant Auditor-

General – Accounting and Auditing Policy. The Appointed Auditor’s ORC submission

shall take into account any applicable guidance in:

- AG ISA (NZ) 250: Consideration of laws and regulations;

- AG ISA (NZ) 570: Going concern;

- AG-2: The appropriation audit and the controller function;

- AG-3: The auditor’s approach to issues of effectiveness and efficiency, waste,

and a lack of probity or financial prudence; or

- AG-4: The audit of service performance reports and AG-4 (Revised).

A1.8 AG ISA (NZ) 700 includes a checklist for the Appointed Auditor to use to ensure that

their submissions include all the appropriate information for the ORC to consider.

Notifying the OAG about significant changes to public entities

A1.9 The Appointed Auditor shall immediately notify the OAG about significant changes to a

public entity through the ASD Online (ASD Online is the external interface of the Audit

Status Database – ASD – see A2.2). These changes could include:

- details of an entity that has been established which is a public entity (using the

new entity button in the entity screen);

- details of a public entity that has or is ceasing operations or is being

disestablished (using the entity ceasing button in the entity screen);

- details of changes in management or those charged with governance (in the

officer details panel in the entity screen); or

- details of changes in public entity address details (in the contact details panel in

the entity screen).

AG-1 Reporting to the OAG Appendix Two


Appendix 2 - Reporting the results of the annual audit


Introduction

Reporting completed annual audits

Documents summarising the audit conclusions

Introduction

A2.1 This Appendix covers the formal reporting obligations of the Appointed Auditor to the

OAG immediately following the issue of the audit report(s) signed by the Appointed

Auditor on behalf of the Auditor-General. The formal reporting obligations apply where

the engagement(s) are being carried out in keeping with the requirements of the Audit

Engagement Agreement (otherwise known as the annual audit contract). The Audit

Engagement Agreement is contained in section 4 of the Manual for Audit Service

Providers.

Reporting completed annual audits

A2.2 The Auditor-General manages the audit completion returns of all public entities

through the Audit Status Database (the ASD). The ASD is an internal database with

an external interface that allows the Appointed Auditor and their delegates (for

example, audit managers and administration staff) to enter information relating to an

audit directly into ASD. The external interface is called the ASD Online.

A2.3 The Appointed Auditor shall use the ASD Online to report the results of all completed

annual audits. Annual audits that are due are listed in each Appointed Auditor’s

individual portfolio list.

A2.4 The Appointed Auditor shall use their email address and a password to access the

ASD Online. The Appointed Auditor can request a password through the ASD Online

log-in screen if they have forgotten their previous one. The Appointed Auditor may

change their password at any time.

A2.5 The Appointed Auditor shall input the date of the audit report in the ASD Online within 24

hours of issuing the audit report.

A2.6 The ASD Online updates the Appointed Auditor’s portfolio list when each audit

completion return is entered and also outlines the reporting requirements for each public

entity. The portfolio list will identify and list what information needs to be sent to the OAG

AG-1 Reporting to the OAG Appendix Two


and when. The information needs are usually driven off the sector requirements listed in

the applicable audit brief and is reflected in the ASD.

A2.7 The audit completion return shall be sent to the OAG within the timeframes listed in

paragraph A2.6. We recommend that the Appointed Auditor keep a copy of the audit

return on each individual audit file.

A2.8 Further guidance on using the ASD Online is contained in each applicable audit brief.

Documents summarising the audit conclusions

A2.9 The Appointed Auditor shall complete a document that summarises the audit

conclusions for each annual audit. Audit briefs detail when the use of an OAG

template is mandatory. In all other cases, its use is optional.

A2.10 The Appointed Auditor shall ensure that they use the correct template as provided by

the OAG, which meets the OAG’s specific reporting requirements.

A2.11 The Appointed Auditor shall not make the document that summarises the audit

conclusions available to the public entity for review or comment or clearance.1

A2.12 Appointed Auditors shall ensure that each document that summarises the audit

conclusions covers the misstatements, audit issues and areas of interest or risks

identified during the annual audit along with the audit response.

1 The document that summarises the audit conclusions is part of the audit file and covered by the disclosure

requirements of section 30 of the Public Audit Act 2001, which are outlined in more detail in AG-Code of ethics.

AG-1 Reporting to the OAG Appendix Three


Appendix 3 - Reporting on engagements other than the annual audit


Introduction

Accepting and reporting on engagements of possible media or political interest or of a sensitive nature

Reporting on performance audits, inquiries and other work (other than the annual audit)

Introduction

A3.1 For the purposes of reporting on engagements other than the annual audit, “other

work” engagements means all other work that has been carried out by staff of the

Auditor-General or by an Audit Service Provider in relation to a public entity (audited

by the Audit Service Provider). Other work excludes annual audits, performance

audits and inquiries.

A3.2 The Appointed Auditor shall ensure that they follow the requirements of AG PES 1

(Revised): Code of Ethics for Assurance Providers when carrying out engagements

other than the annual audit. AG PES 1 (Revised) includes a requirement to consult

with the OAG before accepting any engagement other than the annual audit where

uncertainty exists about an independence matter.

Accepting and reporting on engagements of possible media or political interest or of a

sensitive nature

A3.3 Acceptance of, and reporting on, engagements of possible media or political interest or

of a sensitive nature, requires careful consultation with the OAG. The requirements

covering this category of engagements are set out in AG PES 1 (Revised). These

requirements include:

- consulting with the OAG before accepting any engagement;

- sending a copy of the draft report to the relevant OAG sector manager for

clearance before the report is sent to the public entity; and

- sending a copy of the final report to the OAG Database Administrator within 24

hours of signing the report.

Reporting on performance audits, inquiries and other work (other than the annual

audit)

A3.4 The Appointed Auditor shall provide the following information through the ASD Online as

part of reporting completed annual audits:

- a copy of the report issued for the engagement;

AG-1 Reporting to the OAG Appendix Three


- if applicable, a copy of the information on which the report has been issued – for

example, if there is a report prepared by the entity on which the Audit Service

Provider has issued an opinion;

- a description of the engagement;

- the name of the engagement partner or director;

- the actual fee for the engagement for the period covered by the annual audit;

- a reconciliation of the fees paid to the auditor for engagements other than the

annual audit (as disclosed to the OAG in accordance with this standard) to the

fees paid to the auditor for engagements other than the annual audit (as

disclosed in the entity’s financial statements);

- whether the report was signed on behalf of the Auditor-General; and

- whether the engagement was an assurance engagement based on the OAG’s

definition of an assurance engagement in AG PES 1 (Revised).

AG-1 Reporting to the OAG Appendix Four


Appendix 4 - Reporting biannually on events or situations that could

lead to a potential claim

A4.1 Audit Service Providers shall send to the OAG, biannually in May and November each

year, a certification declaring the circumstances or occurrence of any events or situations

that could lead to a potential claim against the Audit Service Provider or the Auditor-

General.

A4.2 This certificate should confirm the advice previously supplied by the Audit Service

Provider to the OAG at the time the circumstances occurred.

A4.3 A copy of the certification is not included in this Standard because the OAG will send a

copy of the appropriate certification for each biannual period to each Appointed Auditor

before each due date. The reporting requirements and contact details for each

certification is outlined on the certification.




THE APPROPRIATION AUDIT AND THE CONTROLLER FUNCTION

Contents

Page




Objectives 3 - 8101



Planning 3 - 8104

Fieldwork 3 - 8108

Reporting 3 - 8110


Planning 3 - 8113

Fieldwork 3 - 8117

Reporting 3 - 8117

Appendix 1 - Background 3 - 8119

Appendix 2 - The appropriation process 3 - 8125

Appendix 3 - Key requirements of the Public Finance Act 1989 3 - 8128



Introduction



requirements in relation to the audit of appropriations made by Parliament and the

particular function of the Controller.

Application


annual audits of departments on behalf of the Auditor-General. It is to be applied with

regard to the requirements in AG ISA (NZ) 250: Consideration of Laws and

Regulations.

3. This Standard applies to all audits of appropriations with reporting periods ending 30

June 2011 or after.

Objectives


(a) plan the audit of each appropriation as required by section 15(2) of the Public

Audit Act 2001;

(b) audit each appropriation by:

(i) assessing whether the department has appropriate internal control to

enable effective monitoring of expenditure against appropriation or

other statutory authority, and to provide assurance that the Public

Finance Act 1989 and any other legislation relating to appropriations

have been complied with; and

(ii) obtaining reasonable assurance that expenses and capital

expenditure are incurred only as expressly authorised by an

appropriation or other statutory authority, and that public money is

spent only as expressly authorised by or under an Act; and

(c) report as required by this Standard.



Definitions


the meanings attributed in:








Appropriations means an authorisation by Parliament in an

Appropriation Act for the Crown, a department, or an

Office of Parliament to incur expenses or capital

expenditure up to a specified amount, and for a

specified scope and period.

Breach of appropriation means expenditure incurred without, or in excess of,

an appropriation that has been authorised by

Parliament in an Appropriation Act including any

breach of net assets.

Breach of net assets means that the departmental net assets exceed the

year end forecast (the limit), after allowing for any re-

measurements and increases under imprest supply.

Class of outputs means a group of (usually similar) outputs combined

for the purposes of appropriations.

Commitments means future obligations on contracts that have been

entered into at balance date.

Department means any department that is responsible for

administering a vote under the Public Finance Act

1989, and includes an Office of Parliament.

Estimates means a statement in any form (usually the Estimates

of Appropriations) that describes and supports the

appropriations being sought in the first Appropriation

Bill that relates to a financial year, and contains the

information referred to in section 14 of the Public

Finance Act 1989.



FSG means the annual financial statements of the

Government of New Zealand.

Imprest Supply Act means the basis that gives authority to the Crown to

spend public money and incur expenses and capital

expenditure for the day-to-day business of government

in advance of an appropriation.

Office of Parliament means the Parliamentary Commissioner for the

Environment (and that Commissioner’s office), the

Office of the Ombudsmen, but for the purposes of this

Standard, does not include the Office of the Controller

and Auditor-General.

Other authority or other

statutory authority

means a statutory authority, other than an

appropriation, to incur expenses or capital expenditure,

or to spend public money.

Outputs means the goods or services that are produced by the

public entity. The term refers only to the goods and

services produced for third parties; it excludes goods

and services consumed within the reporting entity

(such as services provided by legal, research, HR, and

IT functions to other functional areas within the same

entity, which are often referred to as “internal

outputs”).1

Public money means all money received by the Crown, including the

proceeds of all loans raised on behalf of the Crown

and any other money that the Minister of Finance or

the Secretary to the Treasury directs to be paid into a

Crown bank account or departmental bank account,

and any money held by an Office of Parliament. It does

not include money held in trust as trust money, or

money received and held by Crown entities.

Statements of appropriations means the information and disclosures a department is

required to provide in its annual report, as required by

section 45(B)(2) of the Public Finance Act 1989 and in

keeping with Treasury Instructions, that fairly reflect

1 The Local Government Act 2002 uses the term “activity” to refer to goods and services. The term “outputs” is

used in this Standard to refer to goods and services, and the term “activity” carries its common meaning.



each appropriation in relation to the activities of the

department and each appropriation it administers, and

the actual expenses and capital expenditure incurred

against each of those appropriations. The statement of

unappropriated expenditure and capital expenditure is

part of the statements of appropriations.

Supplementary estimates means a statement in any form that is presented to the

House of Representatives in support of an

Appropriation Bill other than the first relating to a

financial year, seeking additional appropriations.

Uncorrected misstatement means a deliberate or unintentional misstatement or

error, in the financial statements or statements of

appropriations, including the omission of an amount or

disclosure or a misclassification of an amount that has

not been corrected.

Unappropriated expenditure means the expenses or capital expenditure that are

incurred:

- without an appropriation;

- beyond the amount of an appropriation;

- for a purpose outside the scope of the

appropriation (subject to the rules relating to

transfers between appropriations); or

- after the appropriation has lapsed

and includes any breach of net asset limits.

Vote means an appropriation or grouping of appropriations

that is the responsibility of a designated Minister or

Ministers and administered by a department, or the

responsibility of the Speaker and administered by an

Office of Parliament, the Office of the Clerk of the

House, or the Parliamentary Service.

Requirements

Planning

6. The Appointed Auditor shall plan the appropriation audit in conjunction with the

annual audit to ensure the objectives of the appropriation audit are met. (Ref: Para.

A1)



Understanding the appropriation process

7. The Appointed Auditor shall obtain an understanding of the appropriation process and

the latest guidelines, and requirements relevant to carrying out the appropriation audit.

(Ref: Para A2)

Assessment of internal control

8. The Appointed Auditor shall obtain an understanding, and assess the adequacy, of the

internal control design and implementation by a department to enable effective

monitoring of expenditure against appropriation or other statutory authority. In performing

this assessment, the Appointed Auditor shall consider if there are adequate controls in

place to ensure that:

(a) expenses and capital expenditure incurred are for lawful purposes;

(b) expenses and capital expenditure incurred are within scope, amount, and period

of appropriation;

(c) expenses and capital expenditure incurred are in accordance with financial

delegations;

(d) the procedures for cost allocation to all appropriation types are reasonable; and

(e) net assets will not exceed the year-end forecast included in an Appropriation

Act. (Ref: Para. A3 - A4)

Scope considerations

9. The Appointed Auditor shall ensure that the audit approach to expenditure, with respect

to the consideration of scope, should be determined with reference to the internal control

the department has in place to ensure that all expenses and capital expenditure incurred

are within scope. Where possible, reliance should be placed on the internal control in

place for complying with laws and regulations under AG ISA (NZ) 250.

10. The Appointed Auditor’s consideration of the scope of expenditure shall include a review

of the adequacy of the scope descriptions of appropriations administered by the

department. (Ref: Para. A5 - A7)

Materiality

11. The Appointed Auditor shall establish a level of planning materiality for the appropriation

audit that will provide reasonable assurance that:

(a) statements of appropriations that report actual expenses or capital expenditure

incurred against each appropriation in relation to the activities of the department,



or relating to appropriations administered by the department, are not materially

misstated; and

(b) unappropriated expenses or capital expenditure, expenditure incurred without or

in excess of appropriation, or otherwise for unlawful purposes is identified and

properly disclosed.

12. As part of establishing a level of planning materiality, the Appointed Auditor shall plan

to perform adequate procedures in respect of every appropriation and other statutory

authority, irrespective of size, to obtain reasonable assurance that:

(a) the aggregate expenditure charged does not exceed the amount of the

appropriation or (if applicable) any other statutory authority;

(b) expenses or capital expenditure have not been incurred against the

appropriation or other statutory authority in respect of unplanned or

unnecessary items to maintain future baselines or to avoid reporting a

surplus;

(c) the expenditure charged against the appropriation is consistent with the

scope and within the period of the appropriation or other statutory authority;

(d) the expenditure charged against the appropriation or other statutory authority

is otherwise for lawful purposes; and

(e) all unappropriated expenditure is disclosed in the financial statements of each

department and the FSG in accordance with the reporting requirements of the

Public Finance Act 1989.

13. The application of materiality to the appropriation audit shall also take into account

the expectation of Parliament that appropriations and other statutory authorities,

irrespective of their amount, should not be exceeded – and, if they are, that full

disclosure should be made in the financial statements and the FSG. As some

appropriations or other statutory authorities can be very small in amount, they may be

overlooked if planning materiality is applied in a blanket fashion. Each appropriation

or other authority shall be audited, irrespective of the amount of the expenditure, to

assess whether expenses and capital expenditure have been incurred consistent with

the scope and period (and only up to the limit of the amount) authorised by

Parliament.

14. The Appointed Auditor shall document the rationale for setting the planning materiality

for the appropriation audit in the audit planning documents. (Ref: Para. A8 - A12)



Consideration of key legislative requirements and Treasury Instructions

15. The Appointed Auditor shall ensure that the audit approach includes audit procedures

that will provide reasonable assurance that key requirements of the Public Finance Act

1989, the Treasury Instructions and any applicable Cabinet Office circulars have been

complied with. The Appointed Auditor needs to remain alert throughout the appropriation

audit for any concerns in relation to unappropriated expenditure, including that arising

from the scope of appropriations and the designation of expenses as re-measurements.

(Ref: Para. A13)

16. The Appointed Auditor shall assess, in accordance with section 4(1) of the Public

Finance Act 1989, whether expenses and capital expenditure have not been incurred

except as expressly authorised by an appropriation.


Finance Act 1989, whether all expenditure treated as a re-measurement is classified

correctly and completely in accordance with the Public Finance Act 1989 and the

Treasury guidance. Incorrect classification of expenses as a re-measurement represents

a significant risk in the appropriation audit. Any issues of uncertainty should be referred

to the Assistant Auditor-General – Parliamentary Group.

18. The Appointed Auditor shall assess, in accordance with section 5 of the Public Finance

Act 1989, whether expenses or capital expenditure have been incurred not only in

keeping with an appropriation but also with the legal capacity and authority of the

department to engage in the activity concerned. (Ref: Para. A14 - A15)


Finance Act 1989, whether the departmental net assets do not exceed the year-end

forecast included in an Appropriation Act, after allowing for any re-measurements and

increases under imprest supply.

20. The Appointed Auditor shall verify, in accordance with section 26A of the Public Finance

Act 1989, a sample of approvals of transfers of resources between classes of outputs.

The size of the sample selected for testing should be determined based on the extent of

reliance that can be placed on the system of internal control that the department has in

place to ensure compliance with section 26A, and consideration of materiality. (Ref:

Para. A16)



21. The Appointed Auditor shall sight the approval by the Minister of Finance under section

26B of the Public Finance Act 19892 where an appropriation has been exceeded. (Ref:

Para. A17 - A19)

22. The Appointed Auditor shall assess, in accordance with section 26D and 45B(2)(d) of

the Public Finance Act 1989, whether expenditure incurred without, or in excess of, an

appropriation is correctly reported in the Statement of Unappropriated Expenditure and

Capital Expenditure. All such breaches of appropriation shall be reported regardless of

the amounts involved.

23. The Appointed Auditor shall assess, in accordance with section 45B(2)(c) of the Public

Finance Act 1989, whether a department has reported actual expenses or capital

expenditure against each appropriation it administers and each class of outputs included

in each output expense appropriation.

24. The Appointed Auditor shall verify, in accordance with the requirements in the Treasury

Instructions and any applicable Cabinet Office circular, a sample of approvals made by

Cabinet of alterations of resource allocations. The size of the sample selected for testing

should be determined based on the reliance that can be placed on the system of internal

control the department has in place to ensure compliance with the Treasury Instructions,

and consideration of materiality. (Ref: Para. A20)

Documentation – the overall audit strategy or audit plan

25. The overall audit strategy or audit plan for conducting the annual audit shall document

the requirements of the appropriation audit in terms of the planned nature, extent, and

timing of audit tests and procedures, as well as whether additional work is needed (over

and above that driven by the planning materiality level of the annual audit) to meet

the audit objectives of the appropriation audit.

Fieldwork

26. The Appointed Auditor shall carry out fieldwork to:

(a) assess whether the department has appropriate internal control to enable

effective monitoring of expenditure against appropriation or other statutory

authority, and to provide assurance that the Public Finance Act 1989 and any

other legislation relating to appropriations have been complied with; and

2 Section 26B of the Public Finance Act 1989 states that “the Minister may, in that financial year or not later

than 3 months after the end of that financial year, approve in respect of that appropriation up to the greater of: (a) an amount not exceeding $10,000; or (b) 2% of the total amount appropriated for that appropriation.”



(b) obtain reasonable assurance that expenses and capital expenditure are

incurred only as expressly authorised by an appropriation or other statutory

authority, and that public money is spent only as expressly authorised by or

under an Act.

27. During the appropriation audit, the Appointed Auditor shall be alert to the possibility

that appropriations or other statutory authorities are being managed to maintain future

baselines or to avoid reporting a surplus, or that an appropriation or other authority

has been breached or may be breached in the future. The Appointed Auditor shall

also consider whether a breach of an appropriation or other statutory authority may

be concealed. The following situations may indicate an actual or potential breach of

an appropriation or other statutory authority:

(a) poor budgetary systems and procedures;

(b) inadequate systems and procedures for monitoring performance against

appropriation (and lawfulness of purpose);

(c) a breakdown of systems and procedures for monitoring performance against

appropriations and other statutory authorities during the year;

(d) poorly developed cost allocation systems, or inadequate procedures for cost

allocations to each appropriation type;

(e) changes in the basis of cost allocation during, or at the end of, the year;

(f) miscoding of activities or large expenditure items between appropriations or

other statutory authorities;

(g) misclassification of operating expenses as capital expenditure, or vice versa;

(h) incorrectly assessing an expense to be a re-measurement or failing to treat it

as a re-measurement when it should be;

(i) unauthorised transfers between output expense appropriations;

(j) netting of expenses against revenue or vice versa;

(k) large or unusual balance date adjustments;

(l) allocating expenditure to the incorrect reporting period; and

(m) unusual payments or trends, higher than expected expense patterns, or

unusual or inconsistent expense recognition.

Evidential requirements

28. The Appointed Auditor shall ensure that sufficient appropriate audit evidence is obtained

through the performance of audit procedures to enable reasonable conclusions to be

drawn as to whether the Minister responsible for the department and the Chief Executive

have adhered to the requirements of appropriations and other statutory authorities. (Ref:

Para. A21)



Timing of audit work

29. The Appointed Auditor shall, on receipt of the monthly OAG Controller report, review

the report and follow up on any issues arising that relate to the departments they deal

with. The Central Controller Team may contact the Appointed Auditor during the

course of carrying out the monthly procedures to follow up any issues relating to

departments they audit. (Ref: Para. A22 - A23)

Errors

30. The Appointed Auditor shall assess all uncorrected misstatements noted during both the

annual audit and appropriation audit in terms of their effect on:

(a) each individual appropriation or other statutory authority; and

(b) the financial statements of the department.

31. Where errors are identified that lead to an appropriation being exceeded, the Appointed

Auditor shall ask that these errors are corrected and where the error results in a breach

of appropriation they shall ask that it is reported in the department's Statements of

Appropriations and Statement of Unappropriated Expenditure and Capital Expenditure

(in accordance with section 45B(2)(d) of the Public Finance Act 1989), irrespective of the

size of the breach. Where the Appointed Auditor has any concerns about the accuracy

or completeness of the department’s reporting of unappropriated expenditure, this shall

also be reported to the engagement director of the FSG.

Disclosure

32. The Appointed Auditor shall ensure that the financial statements of each department

fully disclose any unappropriated or unauthorised expenditure in keeping with the

statutory reporting requirements of the Public Finance Act 1989.

Reporting

33. The Appointed Auditor shall report any significant issues that arise from the

appropriation audit to both the department and the OAG. Where the Appointed Auditor

considers that a department has incurred unplanned or unnecessary expenditure for the

purposes of maintaining future baselines or avoiding reporting a surplus, they shall

discuss their concerns with the department. If the concerns remain, the Appointed

Auditor shall raise them with the OAG. Such matters shall be reported in the

management letter.



34. Communication with any Minister will be done directly by the OAG in consultation with

the Appointed Auditor. Reporting to Parliament will be done by the OAG. (Ref: Para. A24

- A25)

35. The Appointed Auditor shall report to the Auditor-General and to the engagement

director of the FSG in keeping with instructions specified in the government department’s

audit brief each year.

Reporting breaches of appropriation and unlawful actions during the year

36. The Appointed Auditor shall immediately advise the OAG where a breach of an

appropriation or other statutory authority is likely to occur, or has occurred, or where any

unlawful action has been identified (irrespective of whether the breach of appropriation

or unlawful action is “material” in terms of the financial statements). Where the

Appointed Auditor is uncertain as to whether a breach of appropriation has actually

occurred or is likely to occur, they shall clarify the situation with the department and, if

necessary, seek advice from the OAG. AG ISA (NZ) 250: Consideration of laws and

regulations also provides guidance on this. (Ref: Para. A26 - A32)

37. In addition to immediately advising the OAG, the Appointed Auditor shall also take the

following actions:

(a) immediately raise the matter with the Chief Executive of the department; and

(b) advise the department to:

(i) immediately inform its Minister in writing;

(ii) immediately contact its Treasury Vote Analyst; and

(iii) seek authority either from the Minister of Finance or from Cabinet to

incur expenses or capital expenditure from imprest supply and have

the amounts included in the next Appropriation Bill and (if

appropriate) the Supplementary Estimates.

38. If the Appointed Auditor becomes aware of expenses or capital expenditure that is

being applied for a purpose whose lawfulness is questionable, the Appointed Auditor

shall:

(a) ascertain the nature and extent of the possible breach, with the benefit of

legal advice from the OAG as necessary;

(b) ask the department to seek a legal opinion on the matter;

(c) ask the OAG to review the opinion (in the case of a dispute between the

department and the OAG, the OAG may seek its own external legal advice);

and



(d) inform the Chief Executive if external legal advice is being sought and invite

them to discuss the matter with the responsible Minister.

39. Where the department has not taken immediate action on a breach or likely breach of

appropriation or other statutory authority, the OAG will formally write to the Chief

Executive and the responsible Minister (in consultation with the Appointed Auditor).

Reporting on audit results

40. The Appointed Auditor shall issue an unmodified opinion if there is a breach of

appropriation that is properly disclosed in the financial statements (subject to there

being no other matters requiring a modification of the opinion). In certain

circumstances, it may be appropriate for the Appointed Auditor to consider including

an emphasis of matter or other matter paragraph in the audit report to draw readers’

attention to the disclosure of the unappropriated expenditure. OAG guidance should

be sought if such an action is contemplated.

41. The Appointed Auditor shall issue a modified opinion referring to the disagreement over

the disclosure of a breach of appropriation or other statutory authority where the

department has not properly disclosed the breach. If the Appointed Auditor seriously

considers issuing an adverse opinion on the financial statements or the Statements of

appropriations, they shall make a submission to the Opinions Review Committee (ORC)

of the OAG in keeping with AG ISA (NZ) 700.

42. Where the Appointed Auditor considers that there are material uncorrected

misstatements in the Statements of appropriations that do not, however, involve

breaches or potential breaches of an appropriation or other statutory authority, they shall

follow their normal procedures for considering whether to issue a modified opinion

referring to the disagreement over the disclosure of a material error where the

department has not properly corrected that error.

43. If the Appointed Auditor seriously considers issuing an adverse opinion or a disclaimer of

opinion on the financial statements or the Statements of appropriations, they shall make

a submission to the Opinions Review Committee of the OAG in keeping with AG ISA

(NZ) 700. Where the Appointed Auditor considers issuing a qualified opinion3 they shall,

before issuing that opinion, consult with the Accounting and Auditing Policy Group at the

OAG.

3 ISA (NZ) 705 uses the term “qualified” (as a type of modified opinion) in place of the term “except-for” which

was previously used in AG-702.



44. Any concerns that the Appointed Auditor has regarding manipulation of appropriations,

integrity of systems, or other deficiencies that may affect the ability of the department to

effectively monitor its performance against an appropriation or other statutory authority

shall be included in the management letter.

***


Planning (Ref: Para. 6 - 25)

A1. The appropriation audit should be planned and performed in conjunction with the

annual audit of the department. The Appointed Auditor should consider where

efficiencies can be obtained and which objectives of the appropriation audit can be

met concurrently with the performance of the annual audit.

Understanding the appropriation process

A2. As part of understanding the appropriation process, the Appointed Auditor may want

to consider the following documents:

- the Public Finance Act 1989;

- Treasury Instructions and Minister of Finance Instructions (issued under

sections 80 and 80A of the Public Finance Act 1989) that outline the

operational procedures to be followed so that the requirements of the Public

Finance Act 1989 are complied with;

- other legislation that affects the functions and powers of the department, and

that may also contain other statutory authorities;

- Treasury circulars and guidance;

- Cabinet Office circulars;

- information contained within this Standard – in particular, Appendices 1, 2,

and 3; and

- relevant sections of the audit brief for government departments.

Assessment of internal control systems and procedures

A3. Appropriations are made and reported against on an accrual basis. Furthermore, the

full cost of activities, including overhead costs, must be reported against the

appropriation or other authority to which the activity relates. Departments must have

appropriate control systems and procedures so that they can adequately monitor their



expenses and capital expenditure against an appropriation or other statutory

authority.

A4. The ability of a department to adequately monitor performance against an

appropriation or other statutory authority is largely dependent on the quality of its

accountability structures and processes. As a minimum, these structures and

processes should have the following attributes:

- a clear accountability framework established by the responsible Minister, and

achieved through the Minister's relationship with the Chief Executive

(normally formalised through an output agreement) and clear delegations

within the department for effective budgeting, monitoring, and reporting of

performance against appropriations and other statutory authorities;

- a budget for each appropriation or other statutory authority that has been

prepared on an appropriate and transparent basis; and

- processes that ensure that all incurred and committed expenditure is

identified and allocated to the correct appropriation or other statutory

authority – this includes the need for an effective accounting system that

records commitments as they arise, and the consistent application of

appropriately based cost allocation systems.

Scope considerations

A5. The Appointed Auditor should consider the scope of appropriations early and

throughout the audit work. One opportunity to consider scope is around the time of

the production of the Statement of Intent and the Estimates of Appropriations for the

following year. The scope description of appropriations should be sufficiently specific

so that the wording acts as an effective constraint against non-authorised activity

while not inappropriately constraining activity intended to be authorised.

A6. If the scope of an appropriation is unclear on its face, other sources of information –

for example, the more detailed descriptions of purpose contained in the commentary

in the Estimates, or information in Cabinet papers explaining the underlying policy –

can assist in understanding it (it maybe necessary to refer to Treasury guidance on

the scope of Appropriations as required). However, it is important to note that the

Estimates are not themselves part of the Appropriation Act – except to the extent that

the Act expressly incorporates them.

A7. Where concerns about the quality of the scope descriptions are noted, the Appointed

Auditor should discuss these concerns as early as possible with the department

involved. Where the department does not propose to make any changes, the



concerns should be discussed with the relevant OAG sector manager at the earliest

opportunity, and reported in the document summarising the audit conclusions and the

management letter.

Materiality

A8. The level of materiality for auditing a department's output expense and capital

expenditure appropriations must be established having regard to the risks identified

and the actual scale of the department's operations and asset base.

A9. The level of materiality for auditing other types of appropriations and other statutory

authorities administered by a department should be established having regard to the

risks identified, with the planning materiality established for the FSG auditors being

the absolute upper limit for the audit of those appropriations or other authorities.

A10. The risk evaluation process for the appropriation audit should consider:

- the assessment of internal control systems and procedures;

- the type of the appropriation;

- the nature of the appropriation and if any separate processing or information

systems are used in respect of that appropriation; and

- the preliminary assessment of risk based on the assessment of the

management control environment, previous audit history with the department

and contact with the entity during the year, and the potential risk factors.

A11. Accordingly, this Standard recognises the possibility that different levels of planning

materiality are possible for the annual audit and for the appropriation audit. On the

other hand, the same planning materiality may be determined to be appropriate for

both appropriation audit purposes and annual audit purposes.

A12. The Appointed Auditor should consider the use of efficient audit techniques, such as

analytical review procedures, to help obtain the overall assurance required for

appropriations and other statutory authorities that fall below planning materiality.

Where possible, reliance should be placed on the system of internal control in place

for complying with legislation.

Consideration of key legislative requirements and Treasury Instructions

A13. Where possible, reliance should be placed on key controls in the management control

environment and any separate processing or information systems used for monitoring

compliance with appropriations. The level of substantive tests to be performed should



depend on the assessment and result of testing of the key controls and the materiality

level. The substantive tests should be designed to ensure that residual audit risks are

adequately covered. A list of the key requirements of the Public Finance Act 1989 are

contained in Appendix 3.

A14. To be lawful, expenses or capital expenditure must be incurred not only in keeping with

an appropriation but also with the legal capacity and authority of the department to

engage in the activity concerned. Most activity by government departments relies on the

general legal capacity of the Crown at common law, and so there are few legal

constraints on the department’s capacity. However, some departments do still have

legislation that defines their functions and therefore constrains their general legal

capacity.

A15. AG ISA (NZ) 250: Consideration of laws and regulations provides further guidance on

the audit of laws and regulations affecting public entities. The Appointed Auditor should

also seek legal advice if necessary. The contact point at the OAG is the Assistant

Auditor-General – Legal.

A16. Section 26A of the Public Finance Act 1989 requires any transfer of resources

between classes of outputs to be approved by Order in Council.

A17. Section 26B of the Public Finance Act 1989 allows that the Minister of Finance may

approve expenses or capital expenditure to be incurred in excess of existing

appropriation (within limits). Note that section 26B is only operable during the last

three months of any financial year and the first three months of the following financial

year.

A18. The imprest supply and supplementary estimates processes are designed to allow

some flexibility for the Government and departments to alter resource allocations

while still maintaining prior parliamentary legislative approval and scrutiny.

A19. The processes are outlined in the Treasury Instructions as well as any applicable

Cabinet Office circular. The broad approach is that after the passing of the first

Appropriation Act for the financial year, the prior approval of Cabinet is required:

- for an appropriation of any expenditure of public money or incurring of

expenses or liabilities that are not in the main Estimates;

- to include these appropriations in the next Supplementary Estimates; and

- to meet such expenses or capital expenditure from imprest supply.



A20. Cabinet may approve delegations through Cabinet Office circulars to allow Ministers,

usually the Minister of Finance and the relevant Vote Minister (Joint Ministers), to

approve certain technical changes to appropriations.

Fieldwork (Ref: Para. 26 - 32)

Evidential requirements

A21. Where possible, reliance should be placed on key controls in the management control

environment and any separate processing or information system used for monitoring

compliance with appropriations. Where reliance is placed on key controls, the working

papers shall clearly document the assessment and testing of the key controls. The

level of substantive tests to be performed will depend on the assessment and result

of testing of the key controls, and should be designed to ensure that residual audit

risks are adequately covered.

Timing of audit work

A22. The Appointed Auditor should determine the precise timing of audit work needed to

fulfil the requirements of the appropriation audit, having regard to the following

factors:

- the risk that the amount of an appropriation or other statutory authority may

be exceeded, or that expenses or capital expenditure may be incurred, or

public money spent, on unplanned or unnecessary items to maintain future

baselines or to avoid reporting a surplus; and

- the reporting deadlines specified in the relevant audit brief.

A23. One of the requirements of the appropriation audit is that the OAG is to be notified

immediately when a breach of appropriation has occurred, or is likely to occur. Given

that expenditure is likely to be approaching the limit of appropriations towards the end

of the financial year, the Appointed Auditor's focus on appropriation in the last three

months of the financial year is crucial. However, a breach of appropriation (for

example, through a breach of scope) can occur at any time during the year.

Reporting (Ref: Para. 33 - 44)

A24. Any audit communication with Ministers will be done by the OAG. This also applies to

reports to the responsible Minister arising from the annual audit of a department.



A25. The Auditor-General may choose to report matters arising from the appropriation

audit and the Controller function to the House of Representatives under section 65Z.

Reporting breaches of appropriation and unlawful actions during the year

A26. It is imperative that the Appointed Auditor acts as soon as they become aware that a

particular appropriation or other statutory authority is likely to be breached (whether in

terms of amount, scope, or period).

A27. If the actions outlined in paragraphs 37(b) do not occur, the OAG (in consultation with

the Appointed Auditor) will write first to the Chief Executive and, once acknowledged,

to the responsible Minister. The letter to the Chief Executive will indicate that:

- once an appropriation or other statutory authority has been breached, no

further expenditure may be incurred under that appropriation or authority until

an approval has been obtained; and

- until an approval is obtained, there should be no funding of any further

disbursements from the Crown or departmental bank account in respect of

that appropriation or other statutory authority.

A28. This letter will be copied to the Treasury, and referred to the designated officer

responsible for the Controller function.

A29. If authority is not obtained at this stage, the Auditor-General may invoke the power to

direct the Minister, Treasury, or department to stop payments from the relevant bank

account, and/or (where a breach of appropriation or other authority has already

occurred) to direct the responsible Minister to report to the House.

A30. Once the necessary legal opinion has been received, and if it confirms the lack of

legal authority, the OAG will inform the Chief Executive of the need to remedy the

matter.

A31. The OAG will notify the Treasury of the question about the lawfulness of the activity,

and specify the proposed course of action.

A32. The Auditor-General may invoke the power to direct the Minister, Treasury, or the

department concerned to stop payments from the relevant bank account under

section 65ZA. The Auditor-General may also direct the Minister to report to the House

under section 65Z.



Appendix 1 - Background

1. The Public Finance Amendment Act 2004 amended section 15 of the Public Audit Act

2001 to ensure that the appropriation audit is an explicit statutory responsibility of the

Auditor-General, rather than an aspect of the annual audit of departments that the

Auditor-General, under the previous regime, chose to require through this auditing

standard. Section 15(2) of the Public Audit Act 2001 states:

In the case of an audit of a department (within the meaning of section 2(1) of the

Public Finance Act 1989) or an Office of Parliament, the Auditor-General must also

audit the appropriations administered by the department or Office.

2. The Auditor-General is required to provide independent assurance to Parliament that

expenses and capital expenditure of departments (including that net assets have

been retained within limits) have been incurred for purposes that are lawful and within

the scope, amount, and period of the appropriation or other authority, and that, where

this is not the case, the matter is appropriately dealt with.

3. The Auditor-General discharges this responsibility to Parliament through the conduct of

the appropriation audit and the Controller function.

4. The appropriation audit and the Controller function are closely inter-related. The

appropriation audit is an important and essential pre-requisite to the effective discharge

of the Controller responsibilities.

Public finance principles

5. Public expenditure is governed by two important principles, those of:

- appropriation; and

- lawfulness of purpose.

The principle of appropriation

6. The system of appropriations, as defined in the Public Finance Act 1989, is the primary

means by which Parliament authorises the Executive to use public resources. Under this

system, expenses and capital expenditure by departments and Offices of Parliament

should be incurred only in keeping with an appropriation or other statutory authority, and

net assets held by departments should not exceed the limits for which they have

authority from Parliament.



7. There are three elements to an appropriation. These are:

- the maximum amount of expenses or capital expenditure that can be

incurred;

- the scope (that is, what the amount can be used for); and

- the date on which the appropriation lapses (which is the end of the financial

year to which the Appropriation Act relates, unless a longer period not

exceeding five years is specified).

These elements and their legal consequences are set out in sections 8 to 10 of the Act.

8. Unappropriated expenditure occurs when expenses or capital expenditure are incurred:

- without an appropriation;

- beyond the amount of an appropriation;

- for a purpose outside the scope of the appropriation (subject to the rules

relating to transfers between appropriations); or

- after the appropriation has lapsed.

9. Parliament takes unappropriated expenditure very seriously. This is reflected in the

requirement in section 26D of the Act for departments or Offices of Parliament to report

unappropriated expenditure separately (irrespective of its dollar value) in their financial

statements, and for unappropriated expenditure to be reported in the Financial

Statements of the Government (FSG). In addition, the Minister of Finance shall present a

report to the House of Representatives setting out responsible Ministers’ explanations for

each instance of unappropriated expenditure.

Net assets holdings

10. The effective constraint on capital expenditure by departments is the total amount of its

net worth or assets. The projected level of net assets at the end of each year is included

in Appropriation Acts, and departments must not exceed this level unless the Minister of

Finance and Responsible Minister have agreed that a surplus can be retained, or it

arises as a result of a re-measurement.

Re-measurements

11. The Act makes provision for re-measurements.4 These are financial transactions that are

defined so as to be excluded from the meaning of expenses used in the Act, and

4 Re-measurements as defined in the Act:

(a) means revisions of prices or estimates that result from revised expectations of future economic benefits or obligations that change the carrying amount of assets or liabilities; but

(b) does not include: (i) revisions that result from transactions or events that give rise to the initial recognition of assets

or liabilities in the reporting period;



therefore, unlike other expenses, do not require an appropriation. The Act also provides

authority for the reported net asset holdings of a department to increase as a result of a

re-measurement of an asset or liability. Consequently, such an increase will not result in

a breach of an appropriation, even when the projected net asset limit is exceeded. An

example of a re-measurement is the revaluation of land and buildings.

Other statutory authority

12. Parliament may also authorise expenses or capital expenditure to be incurred by some

other form of statutory authority (described in this Standard as a “statutory authority” or

“other statutory authority”). One example is an Imprest Supply Act. Another is what is

known as Permanent Legislation Authority or “PLA”. A PLA typically authorises

resources to be committed by a particular entity, or for a particular activity, “without

further appropriation” or “without further authority”. The aim is often to insulate the

particular cost from immediate political control. A well-known example is the payment of

judicial salaries. Permanently authorising these payments provides additional protection

for the independence of the judiciary and the separation of powers (see section 9A of the

Judicature Act 1908).

13. Unlike appropriations, a PLA may be expressed in either accrual or cash terms. Those

expressed in cash terms typically authorise the spending of “public money” (that is,

money received by the Crown and money held by an Office of Parliament – see section

2 of the Public Finance Act 1989 for the full definition). Two other examples of PLAs are:

- section 6(c) of the Public Finance Act 1989, which provides for the repayment

of debt of the Crown or an Office of Parliament; and

- section 24 of the Crown Proceedings Act 1950, which provides for amounts

owing as a result of a Court judgment to be paid immediately.

14. Section 6 of the Public Finance Act 1989 contains an important other statutory authority,

which authorises a department or Office of Parliament to spend public money to meet

expenses or capital expenditure incurred in keeping with appropriations – that is, section

6 links the spending of public money to appropriations.

(ii) revisions that result from transactions or events directly attributable to actions or decisions taken by the Crown;

(iii) expenses that arise from the consumption of assets during the reporting period; or (iv) interest income or interest expense.



Types of appropriation

15. Section 7 of the Public Finance Act 1989 describes six categories of activity, expenses,

or expenditure for which a separate type of appropriation must be made. These

categories are known as appropriation “types”. They are:

- each category of output expenses;

- each category of benefits or other unrequited expenses;

- each category of borrowing expenses;

- each category of other expenses;

- each category of capital expenditure; and

- expenses and capital expenditure to be incurred by each intelligence and

security department.

16. All expenses or capital expenditure incurred in any financial year must be allocated to

one of those types of appropriation, within a Vote specified in an Appropriation Act.

17. The scope limitation on output expenses means that unused output expense

appropriations cannot be diverted for another purpose (except in certain limited

circumstances that are set out in section 26A of the Public Finance Act 1989). This is an

important and fundamental feature of the appropriation process, reflecting Parliament's

concern with the way that the Executive uses the authority it grants, as well as the

amount of the authority, its scope, and its period.

18. However, it is possible (under section 7(3) of the Public Finance Act 1989) for the

Minister of Finance to approve a single appropriation containing more than one output

class. A multi-class output expense appropriation, as it is known, enables expenses to

be transferred between the output classes concerned, without the need for separate

Parliamentary authority.

The principle of lawfulness of purpose

19. The principle of lawfulness of purpose encompasses, but is wider than, the principle of

appropriation. To be lawful, expenses or capital expenditure must be incurred not only in

keeping with an appropriation but also with the lawful authority or capacity to engage in

the activity concerned. An appropriation by itself is not lawful authority to engage in a

particular activity.

20. Subject to obtaining legal advice when necessary, it is a matter of professional

judgement whether a specific activity or transaction can be said to have been undertaken



with lawful authority. The judgement is primarily dependent upon the legal capacity of the

entity. Lawfulness of purpose may sometimes also be relevant, along with the way in

which an activity is carried out.

Imprest supply

21. Imprest supply is a statutory mechanism that allows Parliament to provide the

Government with the authority to incur expenses or capital expenditure in advance of

appropriation by way of an Appropriation Act.

22. Imprest supply is required because the first Appropriation Bill for the year is not normally

passed before the beginning of the financial year, and because the changing nature of

government activities and unexpected demands means it is impossible to adequately

foresee all future expenses and capital expenditure.

23. Cabinet must authorise every use of imprest supply by the Crown. Cabinet Committees

and Ministers do not have the authority to approve expenditure under imprest supply,

unless Cabinet specifically delegates the authority to them through a Cabinet Office

circular. For Offices of Parliament, approval of the proposed expenditure by the Officers

of Parliament Committee, along with a recommendation to include the changes in the

Supplementary Estimates, is enough. Parliamentary authority must subsequently be

sought through the Supplementary Estimates of Appropriation.

24. For a judicial comment on the breadth of an imprest authority, see the case of Archives

and Records Association v Blakeley [2000] 1 NZLR 607.

The Controller function

25. The Controller function is a key constitutional check. This function is exercised by the

Controller and Auditor-General under sections 65Y to 65ZA of the Public Finance Act

1989 and section 15(2) of the Public Audit Act. These sections are reproduced in

Appendix 3.

26. The main features of the Controller function are:

- Departments provide information to the Treasury about the expenses and

capital expenditure incurred against the authority available. The Treasury

collates and monitors this information throughout the year.



- The Treasury supplies monthly5 reports to the Controller, to enable the

Controller to examine whether expenses and capital expenditure have been

incurred in keeping with appropriation or other authority (section 65Y of the

Public Finance Act 1989).

- The Central Controller Team6 reviews the monthly monitoring reports from

the Treasury on a global year-to-date basis and operate the Controller

function using standard procedures.7

- The Controller can direct a Minister to report to the House in a case where the

Controller has reason to believe that any expenditure that has been incurred is

unlawful or not within the scope, amount, or period of any appropriation or other

authority (section 65Z of the Public Finance Act 1989).

- The Controller can stop payments from a Crown bank account or a

departmental bank account, to prevent money being paid out of the account that

may be applied for a purpose that is not lawful or not within the scope, amount,

or period of any appropriation or other statutory authority (section 65ZA of the

Public Finance Act 1989).

Monthly statements

27. The Treasury’s monthly reports under section 65Y of the Public Finance Act 1989 must

record:

- all actual expenses and capital expenditure incurred against an appropriation,

or other authority, by or under an Act; and

- all actual expenses and capital expenditure incurred in excess of, or without,

an appropriation, or other authority, by or under an Act.

28. Each report must also, in respect of each appropriation or other authority, set out the

balance between:

- the amount of expenses and capital expenditure authorised to be incurred;

and

- the amount that was actually incurred.

Note that the reference to authority includes a reference to an authority in advance of

an appropriation.

5 Monthly reporting is not required for July and August. 6 The Central Controller Team is a central team from the OAG and Audit New Zealand, assisted by Appointed

Auditors conducting appropriation audits of departments. 7 The joint understanding and expectations about the role and procedures associated with the Controller

function are set out in the Memorandum of Understanding between the Controller and Auditor-General and the Secretary to the Treasury.



Appendix 2 - The appropriation process

The appropriation process is an annual cycle of events based around the government’s financial year, which

runs from 1 July to 30 June.

Rules

The rules governing the process can be found in:

- the Public Finance Act 1989, which:

- stipulates the form and limits of appropriations and the key parts of the timetable; and

- requires the Crown to publish certain fiscal information at particular times;

- Treasury Instructions and Minister of Finance Instructions, issued under sections 80 and 80A of the

Public Finance Act 1989, which outline the operational procedures to be followed by departments

(including Offices of Parliament), and specify non-financial reporting standards, so that the

requirements of the Public Finance Act 1989 are complied with; and

- the Standing Orders of the House of Representatives, which supplement the statutory timetable

provisions and set the rules by which the House and its committees discharge their responsibilities

in the process.

- Cabinet rules.

Key stages

The key stages of the appropriation process are:

1. publication, by 31 March, of a Budget Policy Statement under the Public Finance Act 1989

containing (among other things) the Government’s broad strategic priorities for the forthcoming

Budget;

2. introduction and enactment, before 30 June, of the first Imprest Supply Bill to give the Government

supply from the expiry of the current year’s appropriations until the enactment of the first

Appropriation Act for the new financial year;

3. presentation of the Budget and the Estimates to the House, and introduction of the Appropriation

(Estimates) Bill, followed by select committee consideration (this must happen before 31 July, but

current practice is for the Budget and Estimates to be presented at the same time as the first

Imprest Supply Bill);

4. completion of the Estimates debate, followed by enactment of the Appropriation (Estimates) Act –

by which Parliament appropriates public money to the Crown. Each appropriation is administered by

a government department. A further Imprest Supply Act is passed at the same time;

5. a second Appropriation Bill, supported by Supplementary Estimates, is introduced in the second

half of the financial year. Its usual purposes are to allow the Government to commit more resources

than initially sought and to alter the uses to which existing appropriations can be put (this Bill is

sometimes updated by a Supplementary Order Paper just before the end of the financial year to

incorporate the Final Supplementary Estimates, ensuring that the Government does not commit



resources in excess of those statutorily allowed. This procedure has not, however, been required in

recent years);

6. the Supplementary Estimates are considered by the Finance and Expenditure Committee. After the

Committee has reported back to the House, there is a further debate following which the Bill is

enacted in the form of the Appropriation (Supplementary Estimates) Act. It is usually enacted at the

end of the financial year;

7. reporting by Chief Executives of their department's actual expenditure against each appropriation

for which they have been given responsibility by the responsible Minister – together with separate

reporting on any unappropriated expenditure;

8. scrutiny by the House and select committees by way of financial review; and

9. a final Appropriation Bill is introduced following the completion of financial reviews. This validates

the previous year's unappropriated expenditure, expenses, and liabilities. These amounts are

reported to Parliament in the FSG and in a report by the Minister of Finance accompanying the Bill,

which in due course is enacted as the Appropriation (Financial Review) Act.

Imprest Supply

With the enactment of an Appropriation Act, all previous Imprest Supply Acts are repealed and the

expenditure authority is included in the Appropriation Act. However, to introduce flexibility, another Imprest

Supply Act is passed giving the government authority to spend in advance of appropriations. The effect of

this procedure is that the government has imprest supply authority, up to the dollar limit stipulated in the

current Imprest Supply Act, at all times.



Summary of timetable

The timetable set out below illustrates the timing of the appropriation process as required by the Public Finance

Act 1989. It reflects the statutory position regarding Appropriation Bills and current practice regarding imprest

supply, and recognises that the Budget process precedes the introduction of Appropriation Bills by several

months.

TIMING OF THE APPROPRIATION PROCESS

(as required by the Public Finance Act 1989 and Standing Orders)

Period Event Supply

By 31 March

Budget Policy Statement

Before 1 July Introduction and passing of Imprest

Supply Act (No. 1)

Imprest

1 July Financial year starts

By 31 July Budget: Introduction of Appropriation

Estimates Bill

July/August/September Select Committee examination of the

Estimates must be completed by 30

September

October Parliamentary debate on the Budget

By 31 October Pass Appropriation Act (No. 1)

Pass Imprest Supply Act (No. 2)

Appropriation

Imprest

March

Pass Imprest Supply Act (No. 3)

Imprest

By 31 May Introduce Appropriation (Supplementary

Estimates) Bill

June If required, introduce and pass Final

Supplementary Estimates

Pass Appropriation (Final Supplementary

Estimates) Bill

Appropriation

By March Introduce and pass Appropriation

(Financial Review) Bill



Appendix 3 - Key requirements of the Public Finance Act 1989

Key requirements in relation to appropriations

4 Expenses or capital expenditure must not be incurred unless in accordance with appropriation

or statutory authority

(1) The Crown or an Office of Parliament must not incur expenses or capital expenditure, except as

expressly authorised by an appropriation, or other authority, by or under an Act.

(2) In this section, expense does not include an expense that results from –

(a) a re-measurement8 of an asset or a liability; or

(b) an operating loss incurred by –

(i) a Crown entity named or described in the Crown Entities Act 2004; or

(ii) an organisation named or described in Schedule 4; or

(iii) a State enterprise named in the First Schedule of the State-Owned Enterprises Act 1986; or

(iv) the Reserve Bank of New Zealand; or

(v) any other entity whose financial statements must be consolidated into the Financial

Statements of the Government to comply with generally accepted accounting practice.

5 Public money must not be spent unless in accordance with statutory authority

The Crown or an Office of Parliament must not spend public money, except as expressly authorised

by or under an Act (including this Act).

8 Re-measurements as defined in the Act:

(a) means revisions of prices or estimates that result from revised expectations of future economic benefits or obligations that change the carrying amount of assets or liabilities; but

(b) does not include: (i) revisions that result from transactions or events that give rise to the initial recognition of assets or liabilities in

the reporting period; (ii) revisions that result from transactions or events directly attributable to actions or decisions taken by the

Crown; (iii) expenses that arise from the consumption of assets during the reporting period; or (iv) interest income or interest expense.



6 Authority to spend public money

Public money may be spent, without further authority than this section, for the purpose of –

(a) meeting expenses or capital expenditure incurred in accordance with an appropriation or

other authority by or under an Act; and

(b) the payment of goods and services tax in relation to those expenses or capital expenditure;

and

(c) the repayment of debt of the Crown or an Office of Parliament; and

(d) the settlement of liabilities of the Crown or an Office of Parliament.

7 Separate appropriation required for types of expenses and capital expenditure

(1) A separate appropriation must be made for –

(a) each category of output expenses; and

(b) each category of benefits or other unrequited expenses; and

(c) each category of borrowing expenses; and

(d) each category of other expenses; and

(e) each category of capital expenditure; and

(f) expenses and capital expenditure to be incurred by each intelligence and security

department.

(2) All expenses or capital expenditure to be incurred in any financial year must be allocated to 1 of the

types of appropriation set out in subsection (1) within a Vote specified in an Appropriation Act.

(3) An output expense appropriation referred to in subsection (1)(a) must consist of –

(a) a class of outputs to be supplied –

(i) by a department; or

(ii) to or on behalf of the Crown (other than by a department); or

(b) if the Minister approves, more than 1 class of outputs (a multi-class output expense

appropriation) to be supplied –

(i) by a department; or

(ii) to or on behalf of the Crown (other than by a department).



(4) However, if subsection (3)(b) applies, the Estimates or other supporting information that must be

presented with the Appropriation Bill in which the multi-class output expense appropriation is sought

must, –

(a) to the extent required by section 14 or, as the case may be, section 15, relate to each class of

outputs in that appropriation; and

(b) explain why those classes of outputs have been grouped under that 1 appropriation.

8 Appropriation limited by amount

The authority to incur expenses or capital expenditure provided by an appropriation under an

Appropriation Act –

(a) is limited to the amount specified for the appropriation by or under that Act; and

(b) may not be exceeded (except as provided for in section 25 or section 26A or section 26B).

9 Appropriation limited by scope

(1) The authority to incur expenses or capital expenditure provided by an appropriation –

(a) is limited to the scope of the appropriation; and

(b) may not be used for any other purpose.

(2) For the purposes of subsection (1), –

(a) the scope of a multi-class output expense appropriation is the scope of each of the individual

classes of outputs included in that appropriation; and

(b) any variation made by the Minister of the terms and conditions of a capital injection to any

entity referred to in section 27(3)(a) to (f) does not change the scope or purpose of that capital

injection.

10 Appropriation limited by period

(1) The authority to incur expenses or capital expenditure provided by an appropriation under an

Appropriation Act lapses at the end of the financial year to which the Act relates.

(2) However, if an Appropriation Act provides that the authority to incur expenses or capital expenditure

applies for more than 1 financial year, that authority –

(a) lapses at the end of the period specified in the Act; and

(b) continues in force until the end of the period specified despite the repeal of the Act, unless the

authority is expressly varied, revoked, or replaced by an authority in another Appropriation

Act.



(3) Despite subsection (2), the authority to incur expenses or capital expenditure must not apply for more

than 5 financial years.

11 Expenses or payments authorised other than by Appropriation Act

(1) If an Act (other than an Appropriation Act) expressly provides for payments to be appropriated by or

under that Act, any expense or capital expenditure incurred that gives rise to the need for those

payments may be incurred without further appropriation than this section.

(2) Each expense or capital expenditure incurred in accordance with an appropriation by or under an Act

(other than an Appropriation Act) must be managed and accounted for in the same manner as

expenses or capital expenditure incurred in accordance with an Appropriation Act.

The Controller Function

65Y. Treasury must report on all expenses and capital expenditure incurred with or without

appropriation or other statutory authority—

(1) The Treasury must, within the time required under subsection (3), prepare and submit to the

Auditor-General a report that sets out—

(a) all actual expenses and capital expenditure incurred against an appropriation, or other

authority, by or under an Act; and

(b) all actual expenses and capital expenditure incurred in excess of, or without, an

appropriation, or other authority, by or under an Act.

(2) The report must also set out, for each appropriation, or other authority, by or under an Act, the

balance between—

(a) the amount of expenses and capital expenditure authorised to be incurred; and

(b) the amount that was actually incurred.

(3) The time required is 3 working days after the Treasury receives the information from departments

that is required for the preparation of the monthly Financial Statements of the Government reporting

entity under section 31A.

(4) To avoid doubt, this section does not limit the powers of the Auditor-General, under Part 4 of the

Public Audit Act 2001, to access information from a public entity or any person.

(5) In this section, a reference to authority includes a reference to an authority in advance of an

appropriation.

(6) In this section and sections 65Z and 65ZA, a reference to the Auditor-General is a reference to the

Auditor-General in his or her capacity as Controller and Auditor-General.



65Z. Auditor-General may direct Ministers to report to House of Representatives in cases involving

unlawful expenses, etc—

(1) The Auditor-General may direct a Minister to report to the House of Representatives if the Auditor-

General has reason to believe that expenses or capital expenditure for which that Minister is

responsible have been incurred for a purpose that—

(a) is not lawful; or

(b) is not within the scope, amount, or period of any appropriation, or other authority, by or

under an Act.

(2) The report must set out the following details:

(a) the nature and extent of any alleged breach of the appropriation or other authority that the

Auditor-General has reason to believe has occurred; and

(b) the events that gave rise to the alleged breach; and

(c) the remedial action taken or proposed to be taken to correct the breach and prevent its

recurrence.

(3) If the Minister is of the opinion that there has not been a breach, the report—

(a) must set out the details specified in subsection (2)(a) and (b); and

(b) must also state—

(i) that the Minister is of that opinion; and

(ii) the Minister's reasons for that opinion.

(4) The Minister responsible for the expenses or capital expenditure must—

(a) comply with the direction within 20 working days after receiving it; or

(b) if Parliament is not in session,—

(i) publish the information required by subsection (2) or, as the case may be,

subsection (3) in the Gazette within 20 working days after receiving the direction;

and

(ii) present the information to the House as soon as possible after the commencement

of the next session of Parliament; or

(c) if the direction is made after the end of the financial year,—

(i) comply with the direction by including the information required by subsection (2) or,

as the case may be, subsection (3) in the report under section 26C; or



(ii) comply with the direction within 20 working days after receiving it.

65ZA. Auditor-General may stop payments out of Bank Accounts—

(1) This section applies if the Auditor-General has reason to believe that any money to be paid out of a

Crown Bank Account or a Departmental Bank Account may be applied for a purpose that—

(a) is not lawful; or

(b) is not within the scope, amount, or period of any appropriation, or other authority, by or

under an Act.

(2) If this section applies, the Auditor-General may direct the Minister, the Treasury or, as the case may

be, the department concerned to stop payments out of that Crown Bank Account or Departmental

Bank Account.

AG-3 Effectiveness and efficiency, waste and a lack of probity or financial prudence



THE AUDITOR’S APPROACH TO ISSUES OF

EFFECTIVENESS AND EFFICIENCY, WASTE, AND A

LACK OF PROBITY OR FINANCIAL PRUDENCE

Contents

Page




Background 3 - 8201

Objectives 3 - 8201



Considerations to take into account when being alert and aware 3 - 8202

Maintaining alertness for and awareness of issues and risks 3 - 8202

Reporting instances of effectiveness and efficiency, waste, or a

lack of probity or financial prudence 3 - 8203

Auditing sensitive expenditure 3 - 8203

Reporting issues of sensitive expenditure 3 - 8204

Separate engagements on sensitive expenditure 3 - 8205


Maintaining alertness for and awareness of issues and risks 3 - 8205

Reporting instances of effectiveness and efficiency, waste, or

a lack of probity or financial prudence 3 - 8206

Auditing sensitive expenditure 3 - 8207

Reporting issues of sensitive expenditure 3 - 8207



Introduction



requirements on annual audits in relation to issues of effectiveness and efficiency,

waste, and a lack of probity or financial prudence.

Application



3. This Standard applies to all annual audits with reporting periods ending 30 June 2011

or after, although earlier application is encouraged.

Background

4. While carrying out the annual audit, the Appointed Auditor is expected to keep in mind

the overall role and concerns of the Auditor-General as specified in the Public Audit

Act 2001 (the Act), and also public and parliamentary expectations of the Auditor-

General as they emerge over time.

5. There is overlap between the content of this Standard and other Standards and

Statements. This overlap arises because this Standard requires the Appointed Auditor

to maintain alertness for and awareness of matters that may be of interest to the

Auditor-General, even though they may not affect the Appointed Auditor’s

responsibility to form an opinion on the financial and non-financial information.

Objectives

6. The objectives of the Appointed Auditor, in carrying out the annual audit are to:

(a) maintain alertness for and awareness of issues and risks related to the

Auditor-General’s concerns over effectiveness and efficiency, waste, and a

lack of probity or financial prudence;

(b) plan and audit areas of sensitive expenditure; and

(c) report in an appropriate manner on any matters identified in (a) and (b)

above.



Definitions










Sensitive expenditure means expenditure by a public entity that provides,

has the potential to provide, or has the perceived

potential to provide, a private benefit to an individual

staff member of a public entity that is additional to the

business benefit to the entity of the expenditure. It also

includes expenditure by a public entity that could be

considered unusual for the entity’s purpose and/or

functions.

Requirements

Considerations to take into account when being alert and aware

8. The Appointed Auditor shall, when carrying out the annual audit of the financial and

non-financial information of a public entity, take into account the need to maintain

alertness and awareness for any indication that:

(a) the public entity has not applied its resources effectively or efficiently;

(b) waste has occurred, either by the public entity itself or as a result of action or

inaction on the part of the public entity; or

(c) there has been an act or omission that shows or appears to show a lack of

probity or financial prudence on the part of the public entity or one or more of

its members, office holders, or employees.

Maintaining alertness for and awareness of issues and risks

9. As part of developing the overall audit strategy and audit plan, the Appointed Auditor

shall ensure that they maintain alertness and awareness for issues and risks related

to effectiveness and efficiency, waste, and a lack of probity or financial prudence.

(Ref: Para. A1 - A3)



10. The Appointed Auditor shall ensure that their overall audit strategy and audit plan

reflects any guidance on issues or risks identified by the OAG in the applicable audit

brief.

11. The Appointed Auditor shall document the processes used to ensure that they have

maintained alertness for and awareness of issues and risks of effectiveness and

efficiency, waste, and a lack of probity or financial prudence.

12. In carrying out the annual audit, the Appointed Auditor shall note that the Act permits

an examination of effectiveness and efficiency as long as that examination takes into

account any applicable government or local authority policy.

Reporting instances of effectiveness and efficiency, waste, or a lack of probity or

financial prudence

13. The Appointed Auditor shall immediately advise the OAG if they identify an instance

of effectiveness and efficiency, waste, or a lack of probity or financial prudence. The

Appointed Auditor in consultation with the OAG shall then decide what further steps

shall be taken, if any, to address the issue.

14. The Appointed Auditor shall formally report to the OAG on issues and risks related to

effectiveness and efficiency, waste, and a lack of probity or financial prudence

identified during the annual audit as part of reporting the results of the annual audit.

15. As part of advising the OAG in paragraph 13, the Appointed Auditor in consultation

with the OAG shall determine the appropriate external reporting action to be taken.

External reporting actions may include:

(a) reporting in the audit report;

(b) reporting to management or those charged with governance in the

management letter; and/or

(c) reporting to another party. (Ref: Para. A4 - A5)

Auditing sensitive expenditure

16. The Appointed Auditor shall follow any directions that are issued by the OAG to audit

specific areas or types of sensitive expenditure.

17. The Appointed Auditor shall audit sensitive expenditure irrespective of whether the

OAG issues any directions, although the Appointed Auditor shall apply their

judgement in determining what sensitive expenditure is to be examined. The



Appointed Auditor shall do this by having regard to the Auditor-General’s concerns

over effectiveness and efficiency, waste, and a lack of probity or financial prudence as

well as their understanding of the entity and its environment, including its internal

control.

18. The Appointed Auditor shall take into account the results of any external reviews or a

consideration of any risk factors that may have been identified by the OAG.

19. The Appointed Auditor shall ensure that their overall audit strategy and audit plan

clearly document the types of sensitive expenditure to be examined and the nature,

timing, and extent of the audit testing to be carried out. (Ref: Para. A6)

20. In meeting the requirements of paragraph 19, the Appointed Auditor shall audit areas

of sensitive expenditure by obtaining an understanding of the attitude of management

and those charged with governance towards sensitive expenditure, assessing the

public entity’s policies against current good practice, and performing tests on a

sample of expenditure to evaluate whether the public entity has complied with its

policies and that the expenditure:

(a) has a justifiable business purpose;

(b) preserves impartiality;

(c) has been made with integrity;

(d) is moderate and conservative, having regard to the circumstances;

(e) has been made transparently; and

(f) is appropriate in all respects. (Ref: Para. A7)

Reporting issues of sensitive expenditure

21. If the Appointed Auditor identifies an issue of sensitive expenditure in keeping with

paragraph 8, they shall immediately advise the OAG. As part of advising the OAG,

the Appointed Auditor shall specifically consider whether the sensitive expenditure

should be publicly reported in the audit report.

22. If the issue raises the potential that a fraud has been committed, the Appointed Auditor

shall follow the specific requirements and guidance in AG ISA (NZ) 240: The auditor’s

responsibilities relating to fraud in an annual audit.

23. The Appointed Auditor shall report separately on sensitive expenditure issues,

including any assessments made as to the appropriateness of the public entity’s

policies where deficiencies were noted in those policies that were identified during the

annual audit:

(a) to the OAG, normally as part of reporting the results of the annual audit; and



(b) to management or those charged with governance in the management letter.

Separate engagements on sensitive expenditure

24. A public entity, or another party, may request an Audit Service Provider (ASP) to carry

out a separate engagement on sensitive expenditure. Where there is possible media

or political interest in the engagement subject matter, or the matter is generally of a

sensitive nature, the ASP shall consult with the relevant OAG sector manager before

accepting the engagement or finalising the terms of reference. ASPs should refer to

AG PES 1 (Revised): Code of Ethics for Assurance Practitioners for further guidance

surrounding the acceptance and reporting of engagements of this nature. (Ref: Para.

A8)

***


Maintaining alertness for and awareness of issues and risks (Ref: Para. 9 - 12)

A1. It is not the role of the Auditor-General to set standards, or to make judgements in the

absence of generally accepted understanding of what is allowable practice or

behaviour. However, where the Auditor-General identifies an absence of standards

and a need for guidance as a result of issues that have arisen during audits of public

entities, the Auditor-General may issue a “good practice guide” that outlines the

principles applicable for appropriate practice or behaviour. The Appointed Auditor

should maintain alertness for and awareness of:

- any accepted standards promulgated by third parties; and

- any applicable “good practice guides” that may be issued by the Auditor-

General.

A2. Existing standards of conduct which have substantive authority in New Zealand for

various aspects of public entity behaviour include:

- the State Sector Act 1988, which, among other things, places a responsibility

on chief executives of public entities subject to the Act to operate "good

employer" principles and to ensure that all employees maintain proper

standards of integrity, conduct, and concern for the public interest;

- the Local Authorities (Members' Interests) Act 1968, which regulates the

behaviour of members of some public entities in relation to contracts in which

the members are “concerned and interested” and when voting on matters in

which they have a “pecuniary interest”;



- State Services Commission publications, including “codes of conduct” or

“Board appointment and induction guidelines”;

- the ethical standards and guidelines of professional bodies, as relevant;

- any government policy statements on behaviour, such as Cabinet Minutes or

Cabinet Office Circulars;

- financial reporting standards, which require the disclosure of related party

relationships, transactions, and balances;

- the Companies Act 1993, which requires directors’ interests to be disclosed in

an interests register that is available for inspection by shareholders; and

- the Local Government Act 2002, which requires the remuneration of chief

executives to be disclosed in the financial statements.

A3. The Appointed Auditor should, when maintaining alertness and awareness of the

standards expected of public entities, consider the following:

- whether the public entity has acquired resources in an economical manner,

with due regard to probity;

- whether the public entity has applied its resources in an effective and efficient

manner, and there is no evidence waste has occurred; and

- whether employees and members of the public entity have acted with proper

regard to probity and financial prudence.

Reporting instances of effectiveness and efficiency, waste, or a lack of probity or

financial prudence (Ref: Para. 13 - 15)

A4. One aspect of advising and/or consulting with the OAG will be about whether it is

appropriate to report the matter in the audit report and, if so, whether to include an

emphasis of matter or other matter paragraph in the audit report. Regard should be

given to the requirements of AG ISA (NZ) 706, which draw attention to matters or

disclosures relating to a lack of probity or financial prudence over expenditure

incurred by management or those charged with governance that would be important

to a reader’s understanding of the financial and non-financial information.

A5. If a significant issue is identified, the following steps should be taken:

- brief the Assistant Auditor-General – Parliamentary Group or the Assistant

Auditor-General – Local Government immediately on any significant issues of

effectiveness and efficiency, waste, and lack of probity or financial prudence;

and

- agree with the Assistant Auditor-General – Parliamentary Group or the

Assistant Auditor-General – Local Government the next steps (if any) to be

taken.



Auditing sensitive expenditure (Ref: Para. 19 - 20)

A6. As part of developing the audit strategy and audit plan, the Appointed Auditor needs

to understand the purpose of the public entity and the likely extent to which sensitive

expenditure may be incurred to achieve its purpose. Such an understanding will

assist the Appointed Auditor in determining the nature, timing, and extent of audit

procedures to be carried out. The Appointed Auditor should also consider the

appropriateness of the public entity’s sensitive expenditure policies as part of

sensitive expenditure testing.

A7. There are a number of areas of spending that are likely to generate significant

interest with stakeholders and other interested parties because of their sensitive

nature. The Appointed Auditor is expected to have a high level understanding of the

overall expenditure of each such area, and of the likelihood of impropriety. Sensitive

expenditure may include:

- board and senior management pay, travel, and expenses;

- management of large contracts;

- tendering processes used for large dollar value purchases;

- payments to or from related parties; and

- payments to or from other countries, particularly those with a history of

different ethical standards or where bribery is more prevalent.

Reporting issues of sensitive expenditure (Ref: Para. 24)

A8. If the sensitive expenditure issue reasonably falls within the scope of the annual audit,

further action might involve:

- pursuing the issue within the existing audit engagement agreement;

- obtaining agreement with the public entity for both the performance and

funding of a specific extension of the audit scope; or

- obtaining approval from the OAG for undertaking and funding the extension

of the audit scope.

AG-4 The audit of service performance reports



THE AUDIT OF SERVICE PERFORMANCE REPORTS

Contents

Page

1 Introduction 3 - 8251

Purpose of the Standard 3 - 8251

Background 3 - 8251


2 Application 3 - 8255

3 Carrying out the audit 3 - 8255

Planning 3 - 8256

Fieldwork 3 - 8262

Reporting 3 - 8271

Appendix 1 - Further development of non-financial performance reporting 3 - 8274

Appendix 2 - Decision tree for the audit of service performance reports 3 - 8277



1 Introduction

Purpose of the Standard

1.1 This Standard sets out the fundamental principles and requirements for the audit of

service performance reports. It also provides guidance to Appointed Auditors on the

criteria to be used to assess the desirable characteristics and appropriateness of

performance measures contained in such reports.

“Non-financial performance” refers to a broad range of performance aspects, including

inputs and capability; outcomes, impacts, and objectives; programmes and processes;

as well as outputs – the goods and services produced by the reporting entity. “Service

performance” refers only to the provision of outputs. This Standard concerns the audit of

service performance reports, taking into account the important context provided by the

other aspects of non-financial performance information provided in public entities’ non-

financial performance reports.

1.2 Appendix One provides supplementary guidance on opportunities for further

development in non-financial performance reporting. Appendix Two summarises the

key decisions to be considered by the Appointed Auditor, and their effect on reporting.

Background

1.3 The primary role of public entities is the provision of public services.

1.4 The provisions of the Public Finance Act 1989 focus the attention of departments and

Offices of Parliament on the achievement of this goal. The main emphasis of the Act

is on the identification of and accountability for goods and services provided (outputs)

rather than resources applied during the year (inputs). The outputs identified form a

key basis for appropriations, the entities' corporate plans and their annual budgets,

Chief Executives' performance agreements with Ministers, and the reporting of

achievements at the end of the year.

1.5 The emphasis on accountability for output performance is paralleled in the Crown

Entities Act 2004 and the Local Government Act 2002. Local Authorities are required

to prepare, and consult on, a long-term Council community plan (LTCCP) and an

annual plan detailing their intended policies and objectives, the nature and scope of

the activities to be undertaken, and the performance targets and other measures by

which their performance may be judged in relation to the objectives.



1.6 The performance of public entities is therefore reported in both financial and non-

financial terms in the financial statements.

1.7 A framework for financial reporting is set out in the New Zealand Institute of Chartered

Accountants of New Zealand (NZICA’s) New Zealand Equivalent to the IASB

Framework for the Preparation and Presentation of Financial Statements (NZ

Framework), and the form and content of these statements is included in NZ IAS 1:

Presentation of Financial Statements. The framework and standard provide guidance

to the preparers of financial statements, including service performance reports.

1.8 NZ IAS 1: Presentation of Financial Statements, paragraphs NZ 126.1 – 126.10

discuss the presentation of the statement of service performance. It requires the

description and disclosure of outputs and the disclosure of outcomes where practical

and appropriate.

1.9 Broadly, service performance reports should:

- generate the “right” questions; and

- generate informed debate;

concerning what the public entity has done/achieved over the period. The aim is

therefore to provide meaningful, succinct statements.

Definitions

The following terms are used in this Standard with these meanings:

Appropriateness

1.10 In relation to performance measures, “appropriateness” means that the measures are

relevant to the interests of stakeholders, reflect all significant aspects of a public

entity's performance, and are understandable.

Fundamentally misleading or senseless

1.11 In relation to performance measures, “fundamentally misleading or senseless” means

that (in the opinion of a reasonable lay person) the measures portray an extremely

inconsistent, inaccurate or irrelevant picture of the public entity, in that they fail badly

to reflect the purpose and nature of the outputs of the entity.



Management

1.12 Management is defined broadly as meaning the governing body, audit committee,

individual member of the governing body, officer(s) and/or other person(s) having

responsibility for planning and directing the activities of an entity.

Non-financial performance reports

Non-financial performance reports are reports to users that provide primarily non-

financial information that records the performance of a public entity against specified

objectives. They can encompass a comprehensive range of performance aspects (incl.

outcomes, outputs, inputs, and capability), and the information can be presented in

various statements (such as Estimates, Statements of Intent or Corporate Intent,

LTCCPs, annual plans, statements of service performance, and other statements within

annual reports).

Outcomes

1.13 Outcomes are impacts on, or consequences for, the community of the outputs or

activities of the public entity. The outcomes sought provide the rationale for the range

of outputs delivered by the entity.

Outputs

1.14 Outputs are goods or services that are produced by a Department, Crown entity,

Office of Parliament, Council, or other person or body.

(The Local Government Act 2002 uses the term, “activity” to refer to goods and

services. The term “outputs” is used in this Standard to refer to goods and services,

and the term “activity” carries its common meaning.),

Output Classes

1.15 Output Classes are a group of (usually similar) outputs combined for the purposes of

appropriations and performance reporting in Government departments and Offices of

Parliament.



Performance

1.16 Performance is a comprehensive concept and comprises outcomes, interactions with

the public (including outputs and processes), inputs, and capability.

Performance measures

1.17 Performance measures are the aspects of a particular output, output class, activity,

aspect of capability, or outcome used to measure achievement against targets or

objectives. These measures must report both the “target” and “actual” performance.

Service performance reports

1.18 Service performance reports are reports to users that provide primarily non-financial

information that records the output delivery performance of a public entity against

specified objectives. This information is generally shown in statements of service

performance (or equivalent reports) and is compared with information contained in

forecast non-financial performance reports (such as Estimates, Statements of Intent or

Corporate Intent, LTCCPs, and annual plans).

Significance

1.19 A statement, omission, fact or item is “significant” if it is of such a nature or amount (in

other than dollar terms) that its disclosure or non-disclosure, or the method of treating

it, given full consideration of the circumstances applying at the time, is likely to

influence users in making decisions or assessments. The concept of significance is

derived from the mandate of the legislative auditor. It is one aspect of materiality and

is separately defined to emphasise the importance of qualitative and non-financial

characteristics in public sector reporting.

Stakeholders

1.20 Stakeholders are the primary users of a public entity's financial statements.

Stakeholders are those to whom the entity is primarily accountable - for example,

Parliament or ratepayers.

Users

1.21 Users are as defined in section 2.3 of the Statement of Concepts for General Purpose

Financial Reporting:



- providers of resources to the reporting entity, for example, suppliers, lenders,

investors, tax payers, donors, or the controlling authority;

- representatives of groups such as voters or shareholders, whether the

representatives be elected or appointed;

- analysts and members of the media concerned with analysing and reporting the

performance of entities.

In relation to the public sector, specific users include ratepayers, interested members of

the public, recipients (or customers) of public services or goods, Ministers, select

committees, and central agencies such as the Treasury.

2 Application

2.1 Compliance with this Standard is mandatory for Appointed Auditors who carry

out annual audits on behalf of the Auditor-General.

2.2 This Standard applies to all annual audits with reporting periods ending 30

June 2011 or after, although earlier application is encouraged.

2.3 Although this Standard does not formally apply to the audit of forecast non-financial

performance reports, Appointed Auditors are encouraged to use relevant principles

and guidance in planning and carrying out the audit of these reports.

2.4 Also, although this Standard does not formally apply to the audit of statements of

resources Appointed Auditors are encouraged to use relevant principles and guidance

in planning and carrying out the audit of these statements.

2.5 Paragraphs in bold-type are intended to highlight key audit requirements and other

significant matters that warrant the attention of the Appointed Auditor.

3 Carrying out the audit

3.1 The Appointed Auditor must form an opinion, and report, on such service

performance reports as are required by legislation to be published and audited.

3.2 The Appointed Auditor must be conversant with the statute(s) governing the public

entity and, in particular, with the legislative requirements that specify the content and

audit of the financial statements (which may include service performance reports).



3.3 Where the audit of a public entity's service performance report is not required by

statute, and it is unaudited but included in the public entity's annual report, the

Appointed Auditor's responsibility for the service performance report is limited to

following the requirements of AS-518: Other Information in a Document Containing an

Audited Financial Report.

Planning

3.4 When auditing service performance reports, planning should be done in two stages:

- Initial planning - an initial stage, when the performance measures are being

formulated by the public entity; and

- The audit plan - a second stage, when the Appointed Auditor is preparing the

audit plan.

3.5 During both planning stages and the audit fieldwork, the Appointed Auditor will need

to assess the skills and competence of audit personnel to conduct the audit of the

service performance reports.

Initial planning

3.6 At an early stage, preferably when the performance measures are being drafted

and before public consultation and/or formal approval of the measures, the

Appointed Auditor must review the performance targets and measures, and the

process for establishing those measures, in consultation with management.

3.7 Performance targets and measures are established at the stage at which the public

entity draws up its forecast non-financial performance reports (e.g. the SOI, LTCCP,

Annual Plan or Estimates etc) most of which may take place up to six months before

the start of the reporting period to which they relate. The nature of targets and

measures chosen by a public entity may have significant implications for audit work.

For example, the appropriateness of measures chosen and the auditability of systems

used to record performance data are both of major concern to the Appointed Auditor.

As a consequence, the timing of the public entity's planning process has an impact on

the timing of audit work.

3.8 The involvement of the Appointed Auditor at this initial stage may also assist the

public entity to improve the quality of the forecast non-financial report and the

consultative process, and to identify and address appropriate risks.

3.9 The Appointed Auditor therefore must address the following matters:



- Consider whether the public entity is using the same performance information that

managers use to make decisions as the basis for its external service performance

reports.

- Consider the adequacy of processes being used to establish the measures - for

example, whether adequate consultation is being undertaken.

- Consider whether the public entity is complying with laws and regulations for

service performance reports (refer to paragraph 3.10 below for further discussion).

- Assess the “appropriateness” of the performance measures (refer to paragraph

3.11 below for further discussion).

- Consider whether there are any other issues in relation to the measures and

targets which may impact on the audit opinion - in particular, the auditability of the

measures.

Compliance with laws and regulations

3.10 The Appointed Auditor must be conversant with the laws and regulations for

approval, content, format, publication and circulation of plans and service

performance reports, and ensure that they have been met. These requirements

are contained in the Public Finance Act 1989, Crown Entities Act 2004, Local

Government Act 2002, and usually in the public entity's enabling Act.

Appropriateness

3.11 The Appointed Auditor must form a judgement about the appropriateness of the

performance measures.

3.12 It is the responsibility of the public entity to develop “appropriate” performance

measures. It is the Appointed Auditor's responsibility to consider whether these

measures, taken as a whole, will fairly reflect the performance of the public entity. If

they do not, the audit opinion and the management report may be affected.

3.13 In forming a view about the appropriateness of performance measures, the Appointed

Auditor must assess and discuss with the public entity whether those performance

measures are:

Relevant in that:

- they meet the information requirements of stakeholders; and

- they reflect objectives agreed between the public entity and stakeholders.

Any agreement between the public entity and stakeholders has a direct and enforceable

accountability, which is fundamental to the reporting of performance. Performance then



becomes an agreement between two parties as to what will be achieved during the

period, and appropriateness must be read in that light.

Complete in that:

- they cover all significant activities being undertaken by the public entity; and

- the important dimensions of those activities are portrayed.

Selective reporting or distorted presentation of performance measures will not portray a

complete picture of all significant activities.

Understandable in that:

- the presentation, content and format are clear; and

- targets and achievements are supported by recognised standards or are traceable

to agreements.

3.14 While the following procedures should not be regarded as complete, they provide the

Appointed Auditor with some guidance for assessing the appropriateness of

performance measures:

a. Ask users: As a minimum, at the commencement of the audit period, the

Appointed Auditor is to ask entity management whether they have identified

significant user groups; whether they have consulted with them; and what the

outcome of those consultations was.

The auditor may also consult directly with users of the financial statements to

assist in forming a view on the appropriateness of the reported performance

measures. In doing so, it may be necessary for the auditor to ask outcome-

oriented questions about the nature of the information provided to users to help

them understand the extent to which the public entity has achieved its goals.

Although this presumes a knowledgeable and informed set of users, the auditor

may be able to utilise a significant user group, such as select committees (central

government), as representatives of the wider user group.

b. Examine policy or outcome statements: By examining Policy or Outcome

Statements of the public entity, the Appointed Auditor may be able to gain

evidence to support the public entity's assertions that the performance measures

are appropriate.



The auditor could also consider any output or purchase agreements, or equivalent

contractual documents between the public entity and the controlling entity,

agency, individual, or Minister.

c. Assess process: If an appropriate process is in place, appropriate performance

measures should result. The Appointed Auditor could therefore make an

assessment of the appropriateness of the process used by the public entity to

develop and refine its significant reported performance measures.

3.15 Where the Appointed Auditor considers that the performance measures are

fundamentally misleading or senseless, and where those measures are

significant, the Appointed Auditor must discuss their concerns with

management at the earliest opportunity.

3.16 It should be stressed, however, that the Appointed Auditor's assessment of

appropriateness must particularly take into account the requirements of the

stakeholders. What appears technically inappropriate may, in fact, have sound

political or managerial justification.

Longer term orientation of service performance reports

3.17 The long-term goals and objectives of public entities are generally set out in their

strategic plans. There should be a link that shows how the annual goals contribute

towards the long-term goal. The overall logic for the existence of activities and outputs

should be clear and understandable.

3.18 Appointed Auditors should encourage public entities to:

- develop performance measures that are consistent over time;

- include long-term targets, where relevant; and

- reorient the focus of reporting by including information (both financial and non-

financial) that enables readers to track the entity’s progress in meeting both its

annual and long-term goals.

This will enable performance in the current reporting period to be assessed in the context

of the public entity’s longer-term objectives.

The audit plan

3.19 In preparing the plan for auditing the public entity's performance measures, the

Appointed Auditor must identify the public entity's significant outputs and




3.20 A performance measure is considered “significant” if it:

- could contain errors or omissions that individually or collectively have an effect on

the statement of service performance or financial statements being audited (that is

by altering the user's perception);

- relates to an output that could be of significant interest to the public, including the

media;

- could contain errors or omissions that could adversely affect the reputation of the

Auditor-General or the Appointed Auditor, or their relationships with the public

entity or Parliament, if they were to remain undetected (for example, relating to

illegal acts);

- relates to an output of significant risk to the public, such as those which impact on

public health and safety (for example, performance measures relating to purity of

water supply).

3.21 In determining which outputs and measures are significant, the Appointed Auditor

must have regard to the primary functions or purposes of the public entity (its "reason

for being") and also the guidance given in respect of materiality contained in NZ IAS-1

paragraphs 29-30 and the NZ Framework paragraph NZ 30.1:

“29. Each material class of similar items shall be presented separately in the financial

statements. Items of a dissimilar nature or function shall be presented separately

unless they are immaterial.

30. Financial statements result from processing large numbers of transactions or other

events that are aggregated into classes according to their nature or function. The

final stage in the process of aggregation and classification is the presentation of

condensed and classified data, which form line items on the face of the balance

sheet, income statement, statement of changes in equity and cash flow statement,

or in the notes. If a line item is not individually material, it is aggregated with other

line items either on the face of those statements or in the notes. An item that is not

sufficiently material to warrant separate presentation on the face of those

statements may nevertheless be sufficiently material for it to be presented

separately in the notes.”

“NZ 30.1 In addition to the guidance in paragraph 30 [of the NZ Framework],

information may be material if its non-disclosure could influence the decision-

making and evaluations of users about the allocation and stewardship of

resources, and the performance of the entity, made on the basis of the

financial statements.”



3.22 In relation to assessing the public entity's significant outputs and performance

measures, the Appointed Auditor must note the following points:

- Determination of significant outputs and measures should be made only after

discussions with public entity staff, the governing body and, where applicable,

Parliamentary select committees, politicians or councillors.

- Determination of significant outputs and measures should be consistent with the

auditor's knowledge of the political environment, and information gleaned from

sources such as minutes of meetings, media reports, and the like.

Materiality levels

3.23 The Appointed Auditor must establish a level of planning materiality for each

“significant” performance measure. The level determined is to reflect the level

of misstatement that would be accepted by the Appointed Auditor before they

consider that the user's judgement would be impaired. The level should be

expressed in terms of the appropriate unit of measurement, and be recorded in

the planning document.

3.24 The Appointed Auditor is not required to plan tests of “non-significant”

performance measures beyond reviewing them for reasonableness.

Skills and competence

3.25 Before undertaking the assignment, the Appointed Auditor must be satisfied

that the required skills and competence to audit service performance reports

are available and document this in the audit planning memorandum.

3.26 In auditing service performance information the Appointed Auditor is likely to be

required to exercise judgement and express an opinion on areas that involve

disciplines other than accounting. If neither the auditor nor a person in their

organisation has the professional competence, the Appointed Auditor must engage

the services of a qualified or professionally recognised specialist in the relevant field

(for example, valuers, engineers, actuaries or lawyers).

3.27 The specialist may be called upon to undertake the audit of particular areas of the

service performance information, or to offer the Appointed Auditor advice in relation to

certain parts of the audit process. For example, the specialist may be asked to:

- assist with the evaluation of the integrity of systems and controls that are of a

technical or specialist nature;



- advise on the type of audit testing the auditor should undertake; or

- advise on the relevant technical or quality standards for specific performance

measures.

3.28 The audit procedures to be applied when using the work of an expert are detailed in

ISA (NZ) 620: Using the Work of an Expert. In addition to these requirements, the

Appointed Auditor must ensure that the work of an expert is consistent with this

Standard and with the provisions of the Audit Engagement Agreement regarding the

use of external advisors.

Fieldwork

Sources of audit assurance

3.29 When auditing service performance reports, the Appointed Auditor must obtain

sufficient appropriate audit evidence through the application of adequate audit

procedures.

3.30 The non-financial aspects of a service performance report do not in themselves alter

the level of evidence required, nor necessarily call for new audit procedures to be

used. Rather, the mix of audit tests may vary compared with the mix used in regard to

the financial information.

3.31 Audit procedures that may be applied to gain the required level of assurance when

auditing service performance reports include:

- testing and evaluating the systems, processes and controls that capture, record,

analyse and monitor the information;

- performing analytical procedures on the information; and

- performing substantive or re-performance tests.

3.32 The Appointed Auditor must exercise judgement about the sufficiency of

appropriate audit evidence to enable reasonable conclusions to be drawn. This

does not mean that every aspect of non-financial information needs to be

audited.

3.33 The quality of the systems used to record and control results, and the nature and

quality of evidence available about the reported measures, may have an effect on the

mix of tests used. For instance, weak recording or control systems may force the

Appointed Auditor to use a substantive rather than a systems-based approach.



3.34 Sources of likely audit assurance may also vary according to the nature of the

measures reported, which may be:

- outcome measures, where impacts on communities are directly measured and

reported;

- output or output class measures, where the characteristics of goods and services

produced are measured and reported; and

- processes, input or ratio measures, where other factors or ratios are measured as

a preferable means of reporting performance.

Some public entities are beginning to consider reporting measures relating to capability,

or that reflect aspects of risk or strategy. Appendix One comments on the definition and

nature of these types of measures.

3.35 To be genuinely useful, specific performance measures should be (as far as is

possible, and among other things):

- consistent with the agreement between the public entity and the stakeholders, as

set out in the forecast non-financial performance report, and tailored to the needs

of users through a consultation process (such as the Annual Plan process), as

applicable;

- generally accepted as relevant and reliable – this can be within a profession or a

group of similar entities;

- comparable over time for the public entity, and with other public entities (note that

generally such comparisons form the starting point for further questions from

readers/users of the financial statements, rather than providing definitive

answers);

- sufficient, but not so detailed that the information swamps the ability of entity

management to absorb and act on them and the users to draw value from them;

- timely in relation to relevant decision making processes;

- economical to produce the information in relation to the benefits;

- linked to objectives, with sufficient cause-and-effect relationship; and

- controllable by the public entity to some degree.

Evidential issues

Outcomes

3.36 Where outcomes (that is, the impacts on, or consequences for, the community of

activities) are being measured, the Appointed Auditor is likely to be concerned

primarily with testing the systems used to measure them.



3.37 Government departments, local authorities, and Crown entities have some freedom to

choose the types of performance they measure, although they must measure

outcome achievement in addition to output performance. Since outcomes are the

impacts of entity activities on a community, they will usually be statements of specific

conditions, or behaviours in that community, and may be of a short, medium or long-

term nature.

3.38 Measures should:

- relate clearly to the area a public entity is seeking to influence;

- record multiple dimensions of performance;

- identify unintended costs or benefits (measurement of unintended consequences

is important information in assessing success in achieving the desired influence);

- reflect explicitly the trade-offs that have been considered in risk and strategy

assessment; and

- be set as appropriate for each entity or policy level.

In practice, measuring outcomes may mean measuring intermediate indicators towards

a long-term result for the community. Appendix One contains further discussion on

intermediate outcomes.

3.39 Where the Appointed Auditor is satisfied that the systems for measuring and reporting

the outcomes are reliable, they will usually test the systems as their primary means of

obtaining audit assurance. Existing audit standards and guidelines applying to

reliance on financial systems will be broadly applicable in most cases.

3.40 Where systems are not considered reliable, alternative substantive procedures will

usually be applied, including tests of detail. Sources of evidence could include

statistics gathered independently (for example, by the Department of Statistics).

3.41 The Appointed Auditor must be alert for the existence of secondary, and

possibly undesired, outcomes - which may be so significant as to require

reporting along with the primary outcomes. While there may be no specific

tests for secondary outcomes, the auditor should at least investigate whether

the entity is aware of the possibility of their occurrence.

3.42 The Appointed Auditor must consider the strength of the linkages between the

goods and services the entity provides and the outcomes reported. The longer

term or more high level the outcomes reported, the less likely it is that cause

and effect relationships can be easily established by the public entity. If the

public entity is reporting that it strongly influences or controls outcomes which,



to the auditor, are likely to have other strong influences on them, the auditor

will have to consider the impact on the audit report.

Linkage between outputs and outcomes

3.43 One of the fundamentals of public sector accountability is that the public have a right

to know what has been achieved when public funds have been spent. Since public

funds are often appropriated for the purposes of influencing (as opposed to

controlling) aspects of community life, it is important that the public entity using those

funds reports on the impact (influence) they have had on the area the public entity is

seeking to influence.

3.44 The public entity should be reporting, as a minimum, which outcomes its outputs

affect or are designed to contribute to. This should be reported at the start of each

period (in the forecast non-financial performance reports, such as Annual Plan, Long

Term Council Community Plan (LTCCP), Estimates or Statement of Corporate Intent)

so that stakeholders can see the linkages and participate in informed debate, and

again at the end of each period in the financial statements.

3.45 There is rarely a single cause-and-effect relationship between outputs and outcomes -

often, several outputs relate to one outcome and the reverse also occurs. These

multiple linkages may need to be set out, as far as can be done without sacrificing

clarity.

3.46 Outcomes are not completely under the control of the public entity. For instance,

where the outcomes being sought by a public entity revolve around complex social

questions (such as the crime rate) this outcome is normally a consequence of a wide

variety of factors, including the activities of all agencies responsible for:

- economic development and employment;

- provision of adequate and equitable social welfare and security;

- provision of education and training; and

- policing, prosecution, sentencing, imprisonment and rehabilitation.

3.47 The degree of control may be disclosed in the Annual Plan (or equivalent), and

reported on in the financial statements. The degree of control could, for example, be

described by the public entity as follows:

- control, where the public entity considers that its contribution to achieving the

outcome(s) is 50% or greater; or

- strongly influence, where the public entity considers that its contribution to

achieving the outcome(s) is between 20% and 50%; or



- influence, where the public entity considers its contribution to achieving the

outcome(s) is less than 20%.

3.48 In a similar manner, if the public entity allocates costs to outcomes the Appointed

Auditor will need to carefully consider the logic and validity of the allocations made.

Further guidance is given in paragraphs 3.51 to 3.53 below.

Outputs

3.49 Where outputs or output classes (that is, goods and services produced) are being

measured, the Appointed Auditor is likely to have a particular concern with the

dimensions being reported.

3.50 In Central Government, departments are required to measure and report on output

classes based on targets published in the Estimates each year. Local Government

and Crown entity reporting will also include some output measurement as required by

NZ IAS-1: Presentation of Financial Statements.

3.51 Generally, the following five dimensions are used in establishing measures for outputs

or output classes:

quality how well it is provided

quantity how much is provided

cost how much delivery costs

timeliness when it is provided

location where it is provided

Not all the five dimensions will be applicable for each output or output class measured -

for example, location is often not reported as it is self evident. The Appointed Auditor

must use their judgement in assessing which of the dimensions are applicable in each

case. Further commentary on auditing measures of quality and allocation of cost is

provided in paragraphs 3.59 to 3.66.

3.52 Where one or more of the dimensions are absent, the Appointed Auditor must assess

whether the reasons for the exclusion are justified. Where, in the auditor's opinion,

such an exclusion is not justified, they should seek further explanations from

management. If still not fully satisfied, they are to consider its effect on audit reporting.

3.53 In gaining assurance on outputs, the full range of normal audit procedures will usually

be available to the Appointed Auditor.



Processes, inputs, or ratios

3.54 Where the performance measures are of processes, inputs, or ratios between factors

(for example, efficiency measures), the more difficult issues for the Appointed Auditor

tend to be appropriateness, and whether the processes are operating effectively.

3.55 Public entities may measure and report on their outcomes and outputs indirectly,

through measurement of inputs and processes which should result in appropriate

outputs or outcomes.

Processes may include:

- interactions with the public;

- ways of conducting business internally; or

- recording systems.

Measuring aspects of these processes shows how well the entity is managing internal

and external delivery of its goods and services, such as:

- stakeholder satisfaction measures;

- employee compliance with desired management controls; or

- organisational culture or ethical standards.

A process measure may be significant as a proxy for an unobservable or hard-to-

measure performance element.

A typical example of this is reporting on quality assurance processes used - for example,

over the delivery of policy advice. While direct reporting is to be preferred, the public

entity may consider that indirect reporting of this nature offers greater cost-benefit.

3.56 Stakeholders may have specific rights, or expectations, that processes are to be

applied in a certain way. Particular aspects of public conduct that are important

include equal treatment in law and fair treatment in administration. Measures to

monitor these expectations might include the number and trend of instances where

processes fail to comply.

3.57 If process measures are reported, the Appointed Auditor must consider the

appropriateness of the measures used, in terms of paragraphs 3.11 to 3.16 of this

Standard. The applicable criteria for measurement of processes, which the auditor will

focus on, tend to be:

- completeness (was the process in use for the whole period?);

- quality (how good was the process?); and

- traceability (can the process be traced back to an agreed source or standard?).



The quality of recording systems may be judged by:

- past error rates;

- cross-checking data with other indicators; or

- benchmarking against other entities.

3.58 Public entities may also report performance through ratios, most often as measures of

efficiency/productivity (ratio of outputs to inputs). Examples are cost per unit of goods

or services produced. Again, the major evidential issue for the Appointed Auditor is

likely to be the appropriateness of the measure chosen.

Auditing measures of quality

3.59 This Standard covers only two issues relating to evidence in the audit of quality.

3.60 Quality has at least two possible meanings or dimensions – “stakeholder or customer

perception” and “technical quality”:

- Stakeholder or customer perception. These measures of quality reflect the “eye of

the customer” and indicate the extent to which a product or service meets or

exceeds stakeholder expectations. To establish customer perceptions of quality, a

public entity needs, at least, to consult stakeholders and ask what they value.

- Technical quality. These measures of quality reflect the “eye of the expert”. They

report on the degree of conformity to standards and specifications, or the

expectations about a product or service that an expert would hold. Technical

quality may apply technical standards, expert knowledge, or peer assessment.

3.61 To judge the standard of products or services, both categories of quality may use:

- acceptability of the product or service delivered;

- speed of response or turnaround time; or

- transaction accuracy.

3.62 Neither dimension is of itself "correct", and proper measurement of quality would

include both dimensions. Entities may choose to measure and report on either or

both. The Appointed Auditor should assess whether public entities have considered

both before choosing measures, and encourage the use of both.

3.63 The judgement involved in the audit of quality is such that the Appointed Auditor

should have appropriate knowledge and skills to undertake work in this area. It is

expected that the work will be performed by auditors at the senior level. If neither the

Appointed Auditor nor a person in their organisation has the professional

competence, the Appointed Auditor must engage the services of a qualified or



professionally recognised specialist in the relevant field. When engaging the services

of such a person the Appointed Auditor must follow the requirements specified in

paragraph 3.28.

Auditing allocation of costs

3.64 In auditing the allocation of costs much of the substantiation will be performed as part

of the audit of the financial systems and reports. The auditor must establish that costs

have been correctly allocated to each significant output or output class.

3.65 The full and fair allocation of costs to outputs is one of the cornerstones of an efficient

management control system. The information such systems generate should enable

stakeholders and executive management to make decisions concerning resource use,

budgetary implications, output pricing and the extent of cross-subsidisation.

Therefore, such systems can have a considerable effect on the disclosures in service

performance reports.

3.66 The audit focus should be on the underlying assumptions and the system. Therefore

the Appointed Auditor is likely to concentrate on:

- testing the reasonableness of the underlying assumptions;

- ensuring the method of allocation is reasonable and supportable (the allocation of

overheads should follow a cause and effect relationship. The factors which cause

the consumption of overheads are called "cost drivers". Although some proportion

of overhead will not be traceable to a particular output, the aim is to identify a

causal link wherever possible. Activity-based costing will be relevant for achieving

a more accurate costing of outputs in some cases.); and

- ensuring that there is consistency of treatment within the audit period (that is costs

are allocated on the same basis as funds are appropriated or budgeted), and

between audit periods where applicable.

Changes in significant performance measures

3.67 Where significant performance measures have been amended during the

reporting period, the Appointed Auditor must ensure that the changes have

been correctly authorised/approved, and that they improve the measurement of

achievement.

3.68 On receipt of the first draft of reported results, the Appointed Auditor must check

whether there have been any changes to significant performance measures during

the reporting period.



3.69 Performance measures for Government departments and Offices of Parliament are

published in the Annual Estimates. The Appointed Auditor must check that significant

performance measures agree to these published statements. Where changes are

noted, the auditor must ensure that the change has been approved by the Minister

and published in the Supplementary Estimates.

3.70 The performance targets and other measures for Local Authorities are included in the

Local Authority's LTCCP and Annual Plan. The Appointed Auditor must check that

significant performance targets and measures agree with the published LTCCP or

annual plan. Where changes are noted, the Appointed Auditor must ensure that there

was adequate public consultation before the change was made and sufficient public

notification of the change.

3.71 The requirements for Crown entities are specified in the Crown Entities Act 2004

sections 138 to 149 concerning the preparation and amendment of the Statement of

Intent.

3.72 Where applicable, the Appointed Auditor must check that, where performance

measures refer to standards outside the published measures (for example, those

relating to a standard agreed with the Minister), those external standards have also

not changed significantly during the period.

3.73 In addition to checking that the changes have been properly authorised, the

Appointed Auditor must be satisfied with the reasons for any change. The change

should improve the measurement of achievement. The auditor should be wary of

unnecessary and/or unsupportable changes that give the appearance of an improved

result, in a similar fashion to changes in accounting policies that are used to

manipulate financial results. Such changes are not acceptable.

3.74 Consistency of measures between periods is valuable and, in some cases, it is a

legislative requirement that the performance report includes comparative actual

information for the previous financial period. However, improvement in the quality of

significant performance measures is more important than inter-period consistency.

3.75 Where the Appointed Auditor considers that additional information about changes to

measures should be disclosed in order for the service performance report to be fairly

stated, they should request that the financial statements disclose (as a minimum) the

nature and reasons for the changes.



Management commentary

3.76 Where management commentary is included within service performance

reports, the Appointed Auditor must form an opinion on it.

3.77 Management commentary may be included in the service performance report to

assist readers' interpretation of achievements that are not otherwise evident from the

performance measures. Such management commentary forms part of the reported


3.78 The Appointed Auditor must assess such management commentary, to ensure that

the credibility of the audited financial and non-financial information is not undermined

by any inconsistencies arising from the commentary. Professional judgement is to be

exercised as to the level of assurance required, depending upon the comments made

in the management commentary.

3.79 Where the Appointed Auditor considers that the management commentary portrays

an impression inconsistent with, or unjustified by, information contained in the service

performance report or other parts of the financial statements, they must request

management to justify their commentary and reconcile the inconsistencies. Where

management is unable to satisfactorily justify the commentary or reconcile the

inconsistency, the Appointed Auditor must ask for the commentary to be amended or

removed.

3.80 Management commentary is not generally acceptable as a substitute for (or

alternative to) performance measures. Where the public entity seeks to use

management commentary as an alternative to performance measures, the Appointed

Auditor must consider qualifying the audit report.

3.81 Where commentary is attached to (but obviously not covered by) the audit opinion,

the Appointed Auditor's responsibility for such other information is limited to following

the guidance contained in AS-518: Other Information in a Document Containing an

Audited Financial Report.

Reporting

3.82 This section of the Standard deals with reporting as it relates to the audit report and

the report to entity management, and reporting to the OAG.



Circumstances that affect reporting

3.83 The specific circumstances that may influence the decision on whether to qualify the

audit report, and affect reporting to management or the OAG, include the following:

- where laws and regulations for approval, content, format, publication and

circulation of plans and service performance reports are not being followed,

including where targets and measures have not been legally and properly

approved (refer to paragraphs 3.6 to 3.18);

- where targets and measures have not been disclosed in the forecast non-financial

performance reports (e.g. LTCCP, Annual Plan, Estimates or Statements of

Intent) (refer to paragraphs 3.6 to 3.18);

- where the public entity's performance measures are inappropriate and the

Appointed Auditor considers that the measures are fundamentally misleading or

senseless (refer to paragraphs 3.6 to 3.18);

- where non-significant measures are not reasonable (refer to paragraph 3.24);

- where significant measures do not meet the requisite evidential criteria, and the

explanations given in the service performance report are insufficient (refer to

paragraphs 3.29 to 3.66);

- where the systems or processes for controlling and recording performance

information are deficient, or where significant measures cannot be substantiated

(refer to paragraphs 3.29 to 3.66);

- where changes made to significant measures during the reporting period have not

been legally or properly approved, or the changed measure is less appropriate,

and/or the change has not been adequately explained in the financial statements

(refer to paragraphs 3.67 to 3.75);

- where management commentary included in the performance report gives an

inconsistent or misleading view of the information contained in the service

performance report or any other parts of the financial statements (refer to

paragraphs 3.76 to 3.81); and

- where management commentary is used as a substitute for performance

measures (refer to paragraphs 3.76 to 3.81).

The above matters are also set out in Appendix Two: Decision tree for the audit of

service performance reports.

The audit report

3.84 The Appointed Auditor must consider qualifying the audit report if the errors or

specific circumstances identified, individually or collectively, are material

(giving due weight to the "significance" aspect of the error or circumstance).



3.85 The Appointed Auditor must consider the impact on the audit report of non-

compliance with laws and regulations by applying both this standard and AG-

208: Consideration of Laws and Regulations in an Audit (paragraphs 3.39 to

3.46).

3.86 The Appointed Auditor must not consider qualifying the audit report with

regard to the appropriateness of the performance measures unless those

measures are both significant and fundamentally misleading or senseless.

3.87 If the Appointed Auditor at any stage seriously considers qualification of the

service performance report for a fundamental reason which could result in an

adverse opinion or disclaimer, or where the performance measures are

fundamentally misleading or senseless, the Appointed Auditor must make a

submission to the OAG Opinions Review Committee in accordance with AG ISA

(NZ) 700.

3.88 The expression of the audit opinion (encompassing both the financial and service

performance reports) is to be included under one heading, "Unqualified Opinion" or

"Qualified Opinion" as appropriate.

Reporting to entity management

3.89 The Appointed Auditor must include in their management report(s) commentary

on qualifications made, and on any other matters that were substantive but did

not result in qualification.

3.90 Matters which might usually be commented on in a management report are outlined in

paragraph 3.83 above.


3.91 Special reporting requirements to the OAG may arise from matters outlined in

paragraphs 3.83 and 3.87.



Appendix 1 - Further development of non-financial performance

reporting

The Office of the Auditor-General has published a report, Reporting Public Sector

Performance (2002), which is available in hard copy (a short form report) or on our website,

www.oag.govt.nz (a long form report that includes case studies). We encourage Appointed

Auditors to make use of this report in auditing service performance reports, and also in liaising

with public entities over issues of development of performance measurement and reporting

generally.

Our report develops a comprehensive model of performance. This includes all elements of

performance -–the outcomes of activities; the entity processes and outputs that are delivered;

the inputs applied to tasks; and the capability to deliver services now and in the future.

Comprehensive external reporting of performance:

- considers all elements of a comprehensive model of performance;

- incorporates a time dimension;

- chooses useful reporting levels at which to report;

- selects relevant information from each element of the model to an appropriate extent;

and

- includes commentary on uncertainties and strategy.

Public entities are required by legislation and generally accepted accounting practice to report

on only certain of the above elements, and these are covered in the body of this Standard.

The additional commentary below, taken from our report, covers areas where some public

entities are beginning to develop aspects of measurement and reporting – namely, risk,

strategy, and capability.

Reporting in relation to uncertainties – risk and strategy

Aspects of risk assessment and strategy for an entity can be:

- measured directly;

- explained in the context of the entity’s activities; or

- a combination of both.

A useful definition of risk is “the chance of something happening that will have an impact upon

objectives.”1 In setting direction, assessments of risk need to be made that consider the

1 Joint Australian/New Zealand Standard (1999), Risk Management. Strathfield, NSW; Standards

Association of Australia. Paragraph 1.3.15.



uncertainties the entity faces, and form part of forecasting planned achievement. Measures

relevant to risk identification, assessment, and planned mitigation include:

- assessment of the likelihood of a particular risk;

- estimates of the potential impact, should that risk occur;

- choices made about mitigation measures; and

- the effects on related courses of action.

Identification of strategies also needs to be considered for measurement and reporting.

Strategies are broad ways to address risk. As such, they may lend themselves more to

discursive measures (narration and explanation) rather than quantitative measures.

An entity can report aspects of “measurement” of strategy, in both forecasts and reports. Key

ways in which the entity plans to deal with the risks identified, should they occur, can be

described in forecasts. In annual reports, an entity can report the choices actually made in

light of the risks that eventuated. Strategic “measures” can then be thought of, in hindsight, as

whether a good combination of choices was made, or particular intended outcomes achieved.

Public entity capability

A useful definition of organisational capability developed by the State Services Commission

is:

“Capability is having, or being able to access, the appropriate combination of resources,

systems and structures necessary to deliver the organisation’s outputs to customer-specified

levels of preference on an ongoing basis into the future.”2

Capability needs to be sustained to deliver services now and in the future. Measures of

capability may show:

- funding available;

- access to resources external to the entity;

- employees’ skills and knowledge;

- employee satisfaction and morale;

- technology and support systems;

- physical property;

- institutional knowledge, ability to innovate, and flexibility (sometimes the types of

measures listed above will provide data on such intangibles); and

- sustainability of entity capability (measures might range from employee training and

retention to working environment and building safety).

2 State Services Commission (1999), Occasional Paper No. 13, Measuring Human Resource Capability in

the Public Service. Wellington. Page 5.



In the public sector, capability is significant at both the entity level and in wider contexts –

such as the need to deliver services jointly. Capability measures at sector or cross-agency

levels can be more important than at entity level in demonstrating preparedness to deliver

against broader goals.

Performance elements need to be integrated and managed as a whole. Focusing on separate

elements at the expense of others gives an unbalanced view of performance. For example:

- too much concentration on outputs can result in ineffectiveness (achieve the wrong

things) or put capability at risk (achieve in the short term at the expense of the long

term);

- too much focus on capability and process can put achievement at risk; and

- statutory compliance requires reporting on an entity by entity basis.

The elements of a comprehensive model of performance are all relevant to any entity’s

performance. But they are not necessarily equally relevant to every entity. For an external

accountability report of performance, all elements need to be considered for reporting – but

they may be included to varying degrees in the report.

Intermediate outcomes

In paragraphs 3.37 and 3.38 we refer to the development of intermediate outcomes to take

account of long-term outcomes and to report annual performance to show that short-term

requirements have been delivered.

Intermediate outcomes are results, or indicators of results, that can:

- be measured over periods shorter than the number of years needed to achieve long-

term outcomes;

- show the extent of progress in the desired direction;

- indicate whether the desired long-term outcomes are likely to be achieved if activities

continue the trend of performance indicators over intermediate time periods shows

whether an entity is getting closer to, or further away from, a desired long-term

outcome; and

- be used to forecast desired results on an annual basis.



Appendix 2 - Decision tree for the audit of service performance reports

Note: References are to paragraphs in the Standard.

It is expected that Appointed Auditors will attempt to persuade the public entity to amend non-financial performance plans or reports in all cases before considering qualifying the audit report.

1. Have targets and measures been legally and properly approved? (3.6 to 3.18)

2. Have targets and measures been disclosed in the forecast non-financial performance reports? (3.6 to 3.18)

3. Are the measures appropriate for the entity? (3.11 to 3.16)

4. Determine the significant measures for each significant output / outcome. (3.19 to 3.22)

5. Determine materiality levels. (3.23 to 3.24)

Consider impact on reporting.


Are they fundamentally misleading or senseless?

Is there an explanation for any deficiencies in the service performance report?

Is the explanation sufficient?

Consider inclusion in management report.

Y

N Y

Y

N

N

N

Y

N

Y

Y

N

Make submission to ORC.



6. Do the significant performance measures meet evidential criteria? (3.29 to 3.66)

7. Have any of the significant performance measures changed during the period? (3.67 to 3.75)

8. Review the non-significant performance measures - are they reasonable? (3.24)

9. Is there inconsistent or misleading management commentary? (3.76 to 3.81)

10. Give an unqualified audit opinion on service performance report. (3.84 to 3.88)

Is there an explanation in the service performance report for deficiencies?

Is the explanation sufficient?

Is the approval process for the changed measure legal and proper?

Is the changed measure more appropriate?

Has the change been clearly explained in the financial statements?



Consider inclusion in management report.


N

N

Y

N

Y

N

Y

N

Y

Y

N

Y

Y Y

N

N

N

Y

AG-4 (Revised) The audit of service performance reports


AUDITOR-GENERAL’S AUDITING STANDARD 4 (REVISED)

THE AUDIT OF SERVICE PERFORMANCE REPORTS

Contents

Page




Objectives 3 - 8304


Requirements - Planning the Audit 3 - 8310

Requirements - Considering the forecast non-financial performance report 3 - 8311

Draft report - Fieldwork 3 - 8311

Draft report - Reporting 3 - 8312

Published report - Fieldwork 3 - 8313

Published report - Reporting 3 - 8313

Requirements - Auditing the service performance report 3 - 8314

Planning 3 - 8314

Fieldwork 3 - 8315

Reporting 3 - 8316


Planning the Audit 3 - 8319

Considering the forecast non-financial performance report 3 - 8319

Auditing the service performance report 3 - 8331

Appendix 1 - Criteria for the preparation of service performance reports 3 - 8338

Appendix 2 - Decision tree for considering the forecast non-financial performance

reports 3 - 8343

Appendix 3 - Decision tree for the audit of service performance reports 3 - 8344



Introduction


1. The Appointed Auditor is required to form an opinion, and report, on any service

performance report required by legislation to be prepared and audited.

2. This Standard deals with the Appointed Auditor’s responsibilities to audit service

performance reports including those audited under the Public Finance Act 1989, the

Crown Entities Act 2004, the Local Government Act 2002, and the Education Act

1989.

3. The Standard also addresses the Appointed Auditor’s responsibilities to undertake

work necessary to support the audit of service performance reports, including:

(a) understanding the entity’s environment, framework, and processes for

strategic and operational planning, managing, reporting, and evaluating to

determine whether the entity’s performance objectives and achievements are

adequately reflected in the service performance report; and

(b) evaluating the forecast non-financial performance report to determine

whether it provides an adequate framework for reporting service

performance.

4. The audit opinion on the service performance report is concerned with whether the

performance information complies with generally accepted accounting practice

(GAAP) and fairly reflects the entity’s service performance for the period. Among

other things, this requires the auditor to both:

(a) draw a conclusion on the appropriateness of the non-financial performance

reporting framework; and

(b) verify key aspects of the non-financial performance report, including outcome

and impact information.

5. The performance of public entities is reported in both financial and non-financial

terms in the annual report. “Non-financial performance” covers a wide range of

subject matter that comes within the definition of performance. In undertaking their

responsibilities under this Standard, Appointed Auditors will be chiefly concerned with

the non-financial performance report elements of outcomes, impacts, and outputs

(together with their associated performance measures and targets). “Service

performance” is a narrower concept than non-financial performance and refers only to

outputs.



6. This Standard requires Appointed Auditors to evaluate and conclude on several

aspects of the (more comprehensive) non-financial performance report. Although

their responsibility for issuing the audit opinion relates only to the service

performance report (as published within the entity’s annual report), the Appointed

Auditor will need to consider the higher level elements (for example, outcomes and

impacts) to determine whether there is enough context for the service performance

report and whether it is fairly presented. The context and framework within which the

service performance report is presented should, among other things, explain why the

services are being delivered (that is, the intended outcomes) and provide a basis for

assessing the efficiency and effectiveness of the service delivery.

7. The Appointed Auditor’s opinion on the service performance report is formed in the

context of the information provided in the non-financial performance report. Service

performance reporting is concerned not only with reporting how well services are

delivered (output delivery performance) but also with how effective the services are at

achieving the entity’s service objectives (achievement of impacts and outcomes).

Therefore, in performing the audit work necessary to form an audit opinion on the

service performance report, the Appointed Auditor will be required to assess how well

the service performance information is presented in the context of the information on

outcomes, impacts, and other organisational objectives presented in the non-financial

performance report. The non-financial performance report, together with other

information in the annual report, should provide the information necessary to enable

an informed assessment to be made of the entity’s performance during the financial

year.

8. Because the content of the service performance report is usually determined in

advance as part of the forecast non-financial report (for example, the statement of

intent, statement of forecast service performance, or long-term plan (LTP)), the

Appointed Auditor is also required to consider the appropriateness of the content of

the forecast non-financial performance report. The Appointed Auditor is required to

report these assessments to management and those charged with governance in a

timely manner to foster continued improvement.

9. The Appointed Auditor’s responsibility regarding performance information within the

annual report, but located outside the service performance report, is determined by

ISA (NZ) 720: The Auditor’s Responsibility in Relation to Other Information in

Documents Containing Audited Financial Statements. Where such information is

considered to be relevant to the statement of service performance it is to be audited

in accordance with this Standard rather than ISA (NZ) 720.



10. Where the audit of an entity’s service performance report is not required by statute,

and it is unaudited but included in the entity’s annual report, the Appointed Auditor’s

responsibility for the service performance report is limited to following the

requirements of ISA (NZ) 720: The Auditor’s Responsibility in Relation to Other

Information in Documents Containing Audited Financial Statements.

Criteria for the preparation and evaluation of service performance reports

11. Requirements for the preparation of service performance reports are specified in the

entity’s relevant legislation, and some guidance is provided by central agencies. In

addition, the main sources of GAAP relevant to service performance reports are:

(a) the New Zealand Equivalent to the IASB Framework for the Preparation and

Presentation of Financial statements (NZ Framework);

(b) NZ IAS-1: Presentation of Financial Statements; and

(c) TPA-9: Service Performance Reporting.

12. The NZ Framework provides the conceptual underpinning for service performance

reporting. NZ IAS-1 sets out the mandatory requirements for service performance

reporting; it requires the description and disclosure of outputs and the disclosure of

outcomes where practicable and appropriate. TPA-9 provides guidance on the

specification, measurement, and reporting of service performance.

13. GAAP states that non-financial performance reports should have the qualities of

relevance, reliability, understandability, and comparability. This Standard provides

guidance on the meaning of these qualities as they apply to non-financial

performance reports (see paragraphs A13 to A25). Important criteria for the

preparation of service performance reports are provided at Appendix 1.

14. In forming an opinion on the service performance report, the Appointed Auditor will

need to evaluate its appropriateness against the criteria outlined in legislation and

GAAP. To do so, the Appointed Auditor is required to consider the (forecast and

historical) non-financial performance reports as a whole, together with essential

contextual information (for example, legislative mandate; strategic and operational

objectives; as well as the reported outcome, impact, and output information).

Application





16. This Standard is effective for audits of service performance reports, unless

determined otherwise by the Auditor-General, of:

(a) local authorities - for periods beginning on or after 1 July 2009;1

(b) government departments - for periods beginning on either 1 July 2010, 1 July

2011, or 1 July 2012, in keeping with the Auditor-General’s programme for

the phased implementation;2

(c) Crown entities - for periods beginning on either 1 July 2010, 1 July 2011, or 1

July 2012, in keeping with the Auditor-General’s programme for the phased

implementation;3 and

(d) tertiary education institutions - for periods beginning on or after 1 January

2012;3 and

(e) other public entities that are required to, or elect to, present a statement of

service performance, for periods beginning on or after 1 July 2013 or as

otherwise advised by the OAG.

Objectives

17. The objectives of the Appointed Auditor are to plan an audit approach so as to be

able to form an opinion on the public entity’s service performance report by:

(a) considering, where relevant, the forecast non-financial performance report to

establish whether it will be able to provide an adequate framework for

reporting service performance; and

(b) auditing the performance information to confirm that it complies with GAAP

and fairly reflects the service performance of the public entity for the period.

Definitions








1 Excluding council controlled organisations. 2 This Standard will become effective for government departments and Crown entities according to the

category assigned by the Auditor-General for phasing in the Standard’s application. The standard will be applied to Category A entities for periods beginning 1 July 2010, Category B entities for periods beginning 1 July 2011, and Category C entities and District Health Boards for periods beginning 1 July 2012.

3 Only those Crown entities that are required to prepare a statement of intent and statement of service performance under sections 139 and 151 of the Crown Entities Act 2004. This excludes the audit of service performance reports for other Crown entities whose service performance reporting requirements are governed by other legislation (for example, Crown Research Institutes).





Appropriateness means the usefulness or suitability of various aspects

of the non-financial performance report; this term can

be used in relation to the:

- non-financial performance reporting framework;

- elements reported;

- performance measures; and

- targeted levels of performance or historical

results.

In assessing whether the service performance report is

appropriate, consideration is given to whether the

information is relevant to the interests of users, reliable

(that is, faithfully represented, supportable, neutral,

complete, and balanced), understandable, and

comparable. The subject matter should be sufficiently

appropriate to allow for an informed assessment of the

entity’s service performance.

Dimensions of performance means the aspects or properties of performance that

may be captured by a particular performance measure.

They include, but are not limited to, quantity, quality,

timeliness, location, and cost.

Elements of non-financial

performance reporting

means the inputs, outputs, impacts, and outcomes that

can be measured for the purpose of reporting and

assessing the entity’s performance.

Impacts means the contributions made to an outcome by a

specified set of outputs. Often referred to as

“intermediate outcomes”, they represent the relatively

immediate or direct effect on stakeholders of the

entity’s outputs.

Inputs means the resources used by the entity to produce its

outputs.

Non-financial performance

reporting framework

means the various components, statements, and

elements relating to entity performance; how the

performance information is structured; and how the

various parts are related to each other and to

organisational strategy and other objectives. A non-



financial performance reporting framework will typically

comprise the following components:

- a medium-term component that incorporates an

outcome-oriented statement of intended or

actual achievements, which should include

information on the entity’s outcomes, impacts,

and operating intentions, together with related

performance measures and targets and other

information required by legislation and GAAP;

and

- an annual component that incorporates a

service performance report (often referred to as

a “statement of service performance” or “SSP”)

– an output-oriented statement of forecast or

historical service (that is, output) delivery,

together with related performance measures and

targets and other information required by

legislation and GAAP.

To constitute a “framework”, these components need

to provide enough context and links (a) to strategic-

level information, and (b) within and between the

information in the two components to provide a

coherent structure for reporting. They need to clearly

demonstrate the rationale for, and the relationships

among, the contextual information, elements,

performance measures, and performance targets. The

framework, including the two components described

above, should be evident both in the forecast non-

financial performance report and in the historical (or

“actual”) non-financial performance report. The

historical non-financial performance report is typically

included in the annual report and should report

historical outcome and output performance against the

targets set in the forecast non-financial performance

report, together with related performance measures

and targets and other information required by

legislation and GAAP.

Non-financial performance means the reports to users that provide primarily non-



reports financial information that records the performance of

an entity against specified objectives. They can

encompass a comprehensive range of performance

elements (including outcomes, impacts, outputs, and

inputs), and the information can be presented in

various statements (for example, Information

Supporting the Estimates of Appropriation, Statements

of Intent, Statements of Corporate Intent, LTPs, annual

plans, statements of service performance, and other

statements within annual reports).

“Service performance reports” are non-financial reports

concerned primarily with the reporting of output

performance information.

Non-financial performance reports can be:

- forecast performance reports, which are before-

the-event or “ex ante” statements that express

intended, expected, or targeted performance for

the period; or

- historical performance reports, which are after-

the-event or “ex post” statements that report

results or achievements for the period, ideally

against the forecast levels of performance.

Outcomes means changes in the state, condition, effects on, or

consequences for the community, society, economy,

or environment resulting from the existence and

operations of the reporting entity. (The outcomes

sought provide the rationale for the range of outputs

delivered by the entity.)

Outputs means the goods or services that are produced by the

public entity. The term refers only to the goods and

services produced for third parties; it excludes goods

and services consumed within the reporting entity

(such as services provided by legal, research, HR, and

IT functions to other functional areas within the same

entity, which are often referred to as “internal



outputs”).4

Output classes means the groups of outputs of a similar nature. (They

are sometimes referred to as “groups of activities”.)

Performance means how well an entity performs against its

objectives. It is a comprehensive concept, as

performance can relate to a wide range of elements,

such as outcomes (including impacts or other

intermediate-level outcomes), outputs, inputs, and

capability. Performance may also be expressed in

relational terms, such as efficiency (that is, relationship

of inputs to outputs) or effectiveness (that is,

relationship of outputs to outcomes).

Performance information means the information included in non-financial

performance reports to convey an entity’s

performance. Such information includes outcomes,

impacts and outputs, together with their associated

performance measures and targets.

Performance measures means the specific criteria or means used to measure

performance (most commonly of output production and

achievement of impacts and outcomes). They may be

expressed as (but are not limited to) absolute

numbers, percentages, ratios, point estimates, or

ranges. They might also be qualitative in nature.

Examples of output performance measures might

include the following:

- the average waiting time for radiation treatment;

- the number of hectares of public reserve per

head of population;

- the percentage of investigations completed

within x months of receiving notification of an

event; and

- the percentage of decisions overturned on

appeal.

Performance targets means the specific levels of performance (usually

4 The Local Government Act 2002 uses the term “activity” to refer to goods and services. The term “outputs” is

used throughout this Standard to refer to goods and services in place of the term “activity” mainly because the term “outputs” is more commonly recognised.



relating to outputs produced and outcomes achieved)

that the entity aims to meet.

Various pronouncements and literature on

performance reporting often use the term “performance

standards” to refer to levels of planned performance.

This term carries the nuance of levels determined by

legislative or other mandatory requirements; by

contrast, the term “targets” is often reserved for levels

that are aspirational or otherwise discretionary. The

term “targets” is used as an over-arching concept to

describe performance levels and, therefore, the term

“performance targets” encompasses the notion of

“performance standards”.

Examples of output performance targets might include

the following:

- 90% of patients wait less than 10 weeks

between first assessment and treatment;

- at least 1.7 hectares of public reserve per 1000

people;

- 85% of investigations are completed within five

months of receiving notification of an event; and

- less than 5% of decisions are overturned on

appeal.

Service performance means how well the entity is delivering the services it

was established to deliver.

Stakeholders means the primary users of an entity’s financial and

non-financial performance reports and those to whom

the entity is primarily accountable (that is, Parliament,

taxpayers, and ratepayers).

Users means those persons who rely on published (that is,

external) general purpose reports as their major

source of financial and non-financial information about

the entity. For this purpose, users are assumed to

have a reasonable knowledge and willingness to study

the reported information with reasonable diligence.



In relation to the public sector, specific users of

published general purpose non-financial performance

reports may include customers (that is, the recipients

of public goods or services), funders and financial

supporters (including taxpayers and ratepayers),

elected or appointed representatives (for example,

members of Parliament and select committees), and

interested members of the public (for example, media

commentators, academics and other analysts, and

members of relevant professional or community

groups).

Although governors (for example, Ministers and local

authority councillors), central agencies, other

monitoring agencies, some grant providers, and

entities’ management or those charged with

governance are also users of published reports, they

have access to, or are able to request, additional

financial and non-financial performance information

(that is, special purpose reports) in carrying out their

governance, monitoring, or management

responsibilities.

Requirements - Planning the Audit

19. The Appointed Auditor shall be conversant with the statute(s) governing the entity – in

particular, with the laws and regulations that specify the form, content, preparation,

publication, and audit of the non-financial performance report, and assess whether

they have been met. 5 (Ref: Para. A1)

20. The Appointed Auditor shall gain an understanding of the nature and purpose of the

entity, in keeping with ISA (NZ) 315: Identifying and Assessing the Risks of Material

Misstatement Through Understanding the Entity and its Environment and AG ISA

(NZ) 315. This is necessary, among other things, to assist the Appointed Auditor to

assess the entity’s approach to performance management, provide a basis for

assessing the quality of its non-financial performance report, and plan the audit

approach. (Ref: Para. A2)

5 Appendices 2 and 3 contain a decision tree that summarises the requirements between paragraphs 19 and

62.



21. The Appointed Auditor shall assess internal control and obtain an understanding of

how the public entity’s performance information fits within it. This involves gaining an

appreciation of the policies, processes, systems, and structures employed by the

entity for planning, managing, reporting, and evaluating its overall performance. (Ref:

Para. A3)

22. When planning the audit of the service performance report, the Appointed Auditor

shall consider the current state of the entity and its environment. The Appointed

Auditor shall consider any changes affecting the entity’s internal control since their

most recent assessment and consider the implications of those changes for planning

the audit approach and the nature and extent of audit procedures.

23. Specifically, the Appointed Auditor shall consider:

(a) how the entity views the relationships between the various elements of

performance (that is, inputs, outputs, and outcomes, including impacts and

other intermediate outcomes); and

(b) the entity’s performance priorities.

The Appointed Auditor’s understanding of the way the entity manages and reports its

performance is essential for informing their views on the appropriateness of the non-

financial performance reporting framework.

24. The Appointed Auditor shall also consider the entity’s audit history, including recent

audit reports and reports to management or those charged with governance in

relation to matters affecting the entity’s non-financial performance report.

25. The Appointed Auditor shall consider and document the implications of the matters

referred to in paragraphs 19 to 24 above when planning the audit approach, setting

materiality, and determining the nature and extent of audit procedures to be carried

out.

Requirements - Considering the forecast non-financial performance

report

Draft report - Fieldwork

26. The Appointed Auditor shall seek to obtain a copy of the draft forecast non-financial

performance report before its approval.



27. If the draft report is obtained in enough time to enable the Appointed Auditor to

consider the report and the entity to respond to the Appointed Auditor’s comments,

then the Appointed Auditor shall form a preliminary view about:

(a) whether the draft forecast non-financial performance report provides an

adequate framework for reporting service performance; and

(b) whether the draft forecast service performance report complies with GAAP

and provides an adequate basis for fairly reflecting the service performance

of the entity. In doing so, the Appointed Auditor shall consider whether the

forecast output, outcome, and associated performance targets are

appropriate.

The Appointed Auditor’s views should be formed in the context of the matters referred

to in paragraphs 19 to 25 above.

Draft report - Reporting

28. If the Appointed Auditor considers that:

(a) the draft forecast non-financial performance report does not provide an

adequate framework for reporting service performance; or

(b) the draft forecast service performance report fails to comply with GAAP or

otherwise fails to provide an adequate basis for fairly reflecting the service

performance of the entity to the extent it is likely to affect the user’s ability to

make an informed assessment of entity performance;

then the Appointed Auditor shall notify the OAG and discuss their concerns with

management and those charged with governance at the earliest opportunity. This

may provide the entity with the opportunity to make improvements before the forecast

non-financial performance report is finalised.

29. If the Appointed Auditor has grounds for concern about the draft forecast non-financial

performance report but is in doubt as to the seriousness of those concerns, then the

Appointed Auditor shall confer with the OAG before discussing the concerns with

management or those charged with governance.


governance on any areas for improvement for the draft forecast non-financial

performance report.



Published report - Fieldwork

31. After the forecast non-financial performance report has been published or finalised,

the Appointed Auditor shall, if the forecast non-financial performance report was

considered in keeping with the requirements in paragraphs 27 to 30 above, confirm

whether it provides an adequate framework for reporting service performance in light

of the work carried out and the issues identified. If the forecast non-financial

performance report was not considered before it was finalised, the Appointed Auditor

shall determine whether it provides an adequate framework for reporting service

performance.

32. The Appointed Auditor shall determine whether the published or finalised forecast

service performance report complies with GAAP and provides an adequate basis for

fairly reflecting the service performance of the entity. In doing so, the Appointed

Auditor shall assess whether the forecast output, outcome and associated

performance targets are appropriate. (Ref: Para. A4 - A44)

33. The Appointed Auditor’s determination concerning the appropriateness of the non-

financial performance framework should be formed in the context of the matters

referred to in paragraphs 19 to 25 above.

Published report - Reporting

34. If the Appointed Auditor determines that:

(a) the forecast non-financial performance report does not provide an adequate

framework for reporting service performance; or

(b) the forecast service performance report fails to comply with GAAP or

otherwise fails to provide an adequate basis for fairly reflecting the service

performance of the entity to the extent it is likely to affect the user’s ability to

make an informed assessment of entity performance;

then the Appointed Auditor shall notify the OAG and report the matter to management

and those charged with governance in the management report. This may provide the

entity with the opportunity to make improvements to the service performance report

intended for inclusion in the annual report for that period or to the forecast non-

financial performance report for the following period.

35. If the Appointed Auditor has grounds for concern about the forecast non-financial

performance report but is in doubt as to the seriousness of those concerns, then the

Appointed Auditor shall confer with the OAG before reporting such matters to

management or those charged with governance.



36. The Appointed Auditor’s judgement on the appropriateness of the non-financial

performance reporting framework shall be taken into account when forming their audit

opinion on the (historical) service performance report at the conclusion of the audit.


governance on areas for improvement in the forecast non-financial performance

report. (Ref: Para. A4 - A44)

Requirements – Auditing the service performance report

Planning

38. The Appointed Auditor shall consider their conclusions on:

(a) the entity’s internal control and the way the entity manages and reports

performance;

(b) the adequacy of the forecast non-financial performance report; and

(c) the appropriateness of the non-financial performance framework,

when planning the audit of the service performance report.

Materiality

39. The Appointed Auditor shall determine and document the material performance

information for the purpose of audit testing. (Ref: Para. A16 and A45 - A46)

40. The Appointed Auditor shall establish a basis and level for determining planning

materiality that will be applied in the determination of those outcomes, impacts,

outputs and performance measures and targets that are of audit interest. The level

determined should be based on the Appointed Auditor’s judgement about the size of

misstatements that are likely to influence user’ overall understanding of the entity’s

performance. The materiality level for relevant performance measures and targets

should be expressed in terms of the appropriate unit of measurement and be

documented.



Fieldwork

Obtaining audit evidence

41. The Appointed Auditor shall obtain sufficient appropriate audit evidence in relation to

material performance information in keeping with ISA (NZ) 500: Audit Evidence. (Ref:

Para. A47 - A50)

Changes in material outcomes, impacts, outputs, performance measures, or targets

42. The Appointed Auditor shall check whether there have been any changes to material

outcomes, impacts, outputs, performance measures, or targets reported against

during the reporting period from those presented in the forecast service performance

report.

43. Where material outcomes, impacts, outputs, performance measures, or targets have

been amended during the reporting period, the Appointed Auditor shall ensure that

the changes have been approved and adequately explained within the non-financial

performance report. (Ref: Para. A51 - A56)

Management commentary

44. Where management commentary is included within the service performance report,

the Appointed Auditor shall evaluate such management commentary to determine the

relevance of the commentary to the audited service performance information and its

reliability.

45. Professional judgement is to be exercised as to the level of assurance required over

the management commentary.

46. Where there are material reported variances between forecast and historical service

performance, the Appointed Auditor shall consider the explanations given for those

variances and assess their reasonableness. If no explanation is given, then the

Appointed Auditor shall determine whether the absence of explanation is likely to

materially affect the users’ ability to make an informed assessment of entity

performance.

47. Where the Appointed Auditor considers that the management commentary is

misleading or inconsistent with information contained in the service performance

report or other parts of the annual report, they shall request management or those



charged with governance to justify their commentary or reconcile, remedy, or remove

the misleading or inconsistent statements, as appropriate. (Ref: Para. A57 - A61)

Allocation of costs

48. The Appointed Auditor shall obtain reasonable assurance that costs have been

appropriately allocated to each material output or output class. The cost allocation

method, and the application of that method, should result in the service performance

report presenting a fair reflection of the cost of each output or output class. (Ref:

Para. A62 - A63)

Reporting

Fieldwork conclusion

49. The Appointed Auditor shall consider the (forecast and historical) non-financial

performance reports as a whole, together with any other relevant performance

information, within the annual report, for the purpose of determining the

appropriateness of the service performance report. The Appointed Auditor’s

determination will be based on their conclusion about whether the service

performance report complies with GAAP and fairly reflects the entity’s service

performance for the year. Specific regard should be given to the appropriateness of

the outcomes, impacts and outputs selected by the entity for reporting, the

performance measures attached to those outcomes, impacts and outputs, the

performance targets set, and the historical results reported. (Ref: Para. A64 - A65)

50. The Appointed Auditor will have drawn conclusions on the appropriateness of the

non-financial performance reporting framework when evaluating the forecast non-

financial performance report. The Appointed Auditor shall therefore take into account

any significant differences between the forecast and historical non-financial

performance reports for the period.

51. The Appointed Auditor shall also consider any of the matters referred to in paragraphs

42 to 47 as well as any other matters arising during the course of the audit that may

affect their opinion on the appropriateness of the service performance report.

52. If the Appointed Auditor has serious concerns about the service performance report,

whether it is about the appropriateness of the content or the verification of that

content, then the Appointed Auditor shall notify the OAG at the earliest opportunity.



53. If the Appointed Auditor has grounds for concern about the service performance

report but is in doubt as to the seriousness of those concerns, then the Appointed

Auditor shall consult the OAG before forming their audit opinion or otherwise reporting

such matters to management or those charged with governance.

The audit report

54. The Appointed Auditor shall form an opinion on whether the service performance

report:

(a) complies with GAAP in New Zealand; and

(b) fairly reflects the entity’s service performance for the year, including:

(i) its performance achieved as compared with the forecasts in the

forecast non-financial performance report for the financial year; and

(ii) its actual revenue and output expenses as compared with the

forecasts in the forecast non-financial performance report for the

financial year. (Ref: Para. A66)

55. The Appointed Auditor’s opinion on whether the service performance report complies

with GAAP and fairly reflects the entity’s performance for the financial year shall be

dependent on:

(a) the content of the service performance report appropriately reflecting the

entity’s outputs, output delivery objectives, and results, which should be

reported within a context that makes evident the relevance of the outputs and

the performance measures to the impacts and outcomes sought; and

(b) the verification of that content, including those relating to impacts and

outcomes sought.

56. The Appointed Auditor shall consider modifying the audit report if the errors or specific

circumstances identified, individually or collectively, are material.

57. The Appointed Auditor shall consider the effect on the audit report of non-compliance

with laws and regulations by applying both this Standard and the Auditor-General’s

Statements.

58. The Appointed Auditor shall, in keeping with the requirements in AG ISA (NZ) 700,

obtain approval from the Auditor-General’s Opinions Review Committee (the ORC)

before issuing an audit report, if (regardless of the decision) the Appointed Auditor

seriously considered issuing an audit report containing:

(a) an adverse opinion due to a disagreement over the service performance

report which is considered to have a pervasive effect; or



(b) a disclaimer of opinion due to a limitation in scope over the service

performance report which is considered to have a pervasive effect.

59. The Appointed Auditor shall consult the OAG before issuing an audit report, if

(regardless of the decision) the Appointed Auditor seriously considers including an

emphasis of matter or other matter paragraph in that audit report where the OAG has not

provided direction or guidance.

60. The Appointed Auditor shall obtain the approval of the ORC before issuing an audit

report if there is a technical matter related to that audit report that they are unsure

about.


61. The Appointed Auditor shall outline issues or misstatements identified during the audit

of the service performance report in the document summarising the audit conclusions

which is prepared at the conclusion of the annual audit.

Communication with management and those charged with governance

62. The Appointed Auditor shall communicate to management and those charged with

governance:

(a) any uncorrected misstatements identified during the audit of the service

performance report in keeping with paragraph 12 of ISA (NZ) 450;

(b) any issues with internal control that affected, or may have affected, the

service performance report;

(c) any issues identified that may affect the appropriateness of the non-financial

performance reporting framework; and

(d) any other matters or issues that, in the Appointed Auditor’s professional

judgement, management and those charged with governance need to be

aware of.

***




Planning the Audit (Ref: Para 19 - 25)

A1. Statutes governing public entities’ non-financial performance reporting requirements

include the Public Finance Act 1989, Crown Entities Act 2004, Local Government Act

2002, Education Act 1989, and may also include the entity’s enabling Act.

A2. In gaining an understanding of the entity, the Appointed Auditor will also need to

consider the entity’s (external and internal) business environment, any changes in

that environment, and the possible implications for the audit.

A3. In assessing the internal control, the Appointed Auditor needs to understand:

- the entity’s approach to formulating strategy, its strategic planning processes,

and the links to operations, in terms of planning, management, and reporting

flows;

- its processes for:

- specifying outcomes and impacts, outputs, resources, and processes

for service delivery;

- setting organisational objectives and targets;

- establishing business plans and budgets; and

- measuring and reporting performance throughout the different levels

within (and outside) the entity;

- how the entity assesses its performance information needs for the purposes

of management decision-making and accountability; and

- how the entity designs, implements, and reviews the information systems that

support its information requirements.

This understanding is essential for determining whether the entity’s performance

objectives and achievements are adequately reflected in the (forecast and historical)

non-financial performance reports.

Considering the forecast non-financial performance report (Ref: Para 26 - 37)

A4. The draft forecast non-financial performance report should be requested at an early

enough stage to allow the auditor time to consider the report and provide comments

to the entity, and for the entity to take those comments into account when finalising

the report. Whether the Appointed Auditor is able to undertake this work will depend

on the entity making the draft report available within a reasonable time before the

report is formally approved. The extensiveness of the auditor’s examination of the

draft report will depend on the completeness of the draft report. Early consideration of



the draft report is primarily for the benefit of the entity, in that it provides the

opportunity for improvement before the report is finalised. The Appointed Auditor’s

work on the draft report should be taken into account when reviewing the final

forecast non-financial performance report. In undertaking this work on the draft or

final report, the Appointed Auditor should consider:

- how well the forecast non-financial performance report links to the entity’s

overall performance management and reporting arrangements;

- the process for establishing and selecting the reported elements (including

outcomes, impacts, outputs, and their associated performance measures and

targets); and

- the content of the report (for example, the outcomes, impacts, outputs

selected for reporting, and their associated performance measures and

targets) and how well they represent the entity’s strategic and operational

performance objectives.

A5. In general, the long-term goals and objectives of public entities are set out in their

legislation and strategic plans. The forecast non-financial performance report should

reflect the way the entity manages its performance, and it should show how the

annual performance contributes towards the long-term goals. The logic for the

existence of activities and outputs should be clear and understandable.

A6. The performance reports to be produced, and the specific elements to be reported

on, will differ among entities depending on their governing legislation. The Appointed

Auditor needs to be familiar with the specific reporting requirements relating to the

entity. For most entities reporting under the Public Finance Act, Crown Entities Act, or

Local Government Act, a non-financial performance reporting framework will include:

- a forecast performance report of intended outcomes or impacts:

- these reports are presented in Statements of Intent, LTPs, and like

documents;

- they are aimed at specifying what the entity hopes to achieve in

terms of its effect on third parties – that is, how it aims to influence or

contribute to changes in society (or a sector of society) as a result of

the services it delivers; and

- the reports usually cover the medium term;

- a forecast performance report of planned outputs:

- these reports are presented in Information Supporting the Estimates

of Appropriation, Statements of Intent, LTPs, and like documents;

- they are aimed at specifying the types and levels of service the entity

plans to deliver to third parties; and



- the reports are usually annual or cover the short term and are often

presented as a “statement of forecast service performance” or

“forecast SSP”;

- a historical performance report of actual outcomes or impacts achieved:

- these reports are presented in the entity’s annual report;

- they report outcomes or impacts achieved against the performance

intentions outlined in the medium-term, outcome-oriented part of the

forecast report;

- the annual report should disclose any other information necessary to

enable an informed assessment of the entity’s performance. (This

could include descriptions of identified effects of the entity’s

interventions, including unintended consequences.); and

- a historical service performance report of outputs delivered:

- these reports are presented in the entity’s annual reports;

- they report service performance delivered against the performance

targets outlined in the forecast SSP; and

- they relate to the financial year covered by the annual report.

A7. The forecast reports referred to in A6 above may be presented together as part of the

same report or presented in separate documents, depending on the entity’s reporting

requirements.

A8. In addition to the reports referred to in A6 being coherent within themselves, an

adequate non-financial performance reporting framework requires that they are

coherent in relation to each other. Each statement should demonstrate the links to the

other so that the user is able to ascertain which of the entity’s output classes

contribute to which of the outcomes. Such links are necessary for enabling users to

assess the effectiveness of the entity’s service delivery.

A9. The non-financial performance report should clearly and accurately describe, classify,

and group together the various elements of non-financial performance. For example,

the reporting of outcomes should be clearly distinct from the reporting of outputs

(although the two should be linked). A range of performance measures and targets

will be attached to the types of elements the entity is required by legislation to report

against (for example, outcomes, impacts, outputs, inputs, or other objectives if

expressly required).

A10. The non-financial performance report should include enough contextual information

(for example, on the entity’s statutory role and function, strategic goals, government

and Ministerial priorities, external and internal risks and responses, and other



information required by legislation or GAAP). It should also demonstrate logical links

between such contextual information and the main components of the forecast

performance reports (for example, reports on intended outcomes/impacts and reports

of planned outputs). This information provides a frame of reference for the entity to

demonstrate the appropriateness of its output reporting.

A11. The specific outcomes, output classes and outputs within each class, performance

measures, and targets selected for external reporting purposes are confirmed at the

stage at which the entity draws up its forecast non-financial performance report (for

example, the SOI, LTP, Annual Plan, or Estimates, etc), which may take place up to

six months before the start of the reporting period to which it relates. The choice of

outputs reported against, and the nature of measures and targets chosen by an

entity, may have significant implications for audit work. For example, the

appropriateness of measures chosen and the auditability of systems used to record

performance data are both of major concern to the Appointed Auditor. As a

consequence, the timing of the entity’s planning process has an effect on the timing

of audit work.

A12. The Appointed Auditor should address the following matters:

- Consider whether the entity is using performance information consistent with

that managers use to make decisions and monitor performance as the basis

for its external, published non-financial performance report. The Appointed

Auditor should therefore consider the entity’s environment (and any changes

in that environment) as well as its internal control, including the way it

manages its performance, and consider what they would expect to see in the

non-financial performance report. It is important for the Appointed Auditor to

consider what should be included in the report, rather than simply validating

the content that is included.

- Evaluate the adequacy of processes used to establish the selection of

elements and their respective performance measures and targets – for

example, whether adequate consultation (within or outside the entity) is being

undertaken.

- Determine whether the entity is complying with laws and regulations for non-

financial performance reports.

- Determine the “appropriateness” of the selected outcomes, outputs and

output classes, performance measures, and targets. The appropriateness of

performance targets will usually be determined by considering the process for

setting them.

- Consider whether there are any other issues in relation to the non-financial

performance report, selection of outputs, performance measures, and targets



that may affect the audit opinion – in particular, the auditability of the

measures.

Qualitative characteristics of non-financial performance reports

A13. Requirements are specified in the entity’s relevant legislation, and some guidance is

provided by central agencies and GAAP. GAAP states that non-financial performance

reports should have the qualities of relevance, reliability, understandability, and

comparability. Therefore, as part of forming an opinion on whether the service

performance report is fairly reflected, the Appointed Auditor will need to determine

whether the reported outcomes, outputs, performance measures, and targets/results

are appropriate (that is, relevant, reliable, understandable, and comparable).

Determining the extent to which the appropriateness of the output information is

demonstrated in the service performance report will involve analysing the various

components of the non-financial performance reporting framework, including relevant

contextual (for example, legislative, strategic, and outcomes) information, and

checking for credible links, internal logic, and consistency.

A14. The qualitative characteristics of relevance, reliability, understandability, and

comparability apply generally to all types of non-financial performance report. An

explanation of the qualitative characteristics is provided at paragraphs A15 to A25

below. The Appointed Auditor should also apply these characteristics when assessing

the appropriateness of:

- the impacts or outcomes sought;

- the reported outputs;

- the dimensions of performance to be measured and, therefore, the

performance measures selected;

- the levels of performance aspired to (that is, the performance targets); and

- the results achieved.

A15. To be relevant, the report (including the elements, performance measures, and

targets or results, as applicable) should:

- be presented within the context of the entity’s strategic objectives, past

performance, and current environment (including government themes, as

appropriate and other themes and considerations, such as sustainable

development);

- show clear and logical links between organisational objectives (and themes),

outcomes, impacts, outputs, and their associated performance measures and

targets (so that the rationale for the selection of elements, measures, and

targets is evident);



- meet the information requirements of users (including by reporting different

levels and layers of information) and be useful for decision making, as

appropriate; and

- be clearly linked to the financial information, including significant areas of

planned expenditure.

A16. The relevance of information is affected by its nature and materiality. Performance

information is considered “material” if, when reporting performance, it:

- relates to the primary functions or purposes of the entity (that is, its “reason

for being”);

- could be of significant national or community interest or interest to the public,

including the media;

- relates to a significant risk to the public (for example, the purity of water

supply) or that could have a negative effect on social, economic, or

environmental wellbeing;

- could contain errors or omissions that, individually or collectively, affect the

service performance report by altering the user’s perception in a way that is

likely to influence their assessment of entity performance or their decision-

making;

- relates to a function where there is a significant risk of performance failure by

the public entity;

- could contain errors or omissions that could adversely affect the reputation of

the entity or Parliament, if they were to remain undetected (for example,

relating to illegal acts);

- relates to an output that is financially significant; or

- relates to a performance target that may have a significant effect on

management performance rewards.

A17. To be reliable, the reports (including outcomes, impacts, outputs, and their associated

performance measures and targets, or results, as applicable) should be:

- faithfully represented and supportable, in that:

- they are measurable;

- they represent what they purport to, or are expected to, represent

(that is, they represent the substance of transactions and events);

- informed users would reach the same, or similar, conclusions on the

choice of elements and performance measures; and

- they are free from material error (that is, they are accurate or capable

of having their accuracy determined within an acceptable range of

precision or certainty – that is, free from errors of method and errors

of application);



- neutral (that is, free from bias in the selection, measurement, and disclosure

of the elements, performance measures, and performance targets); and

- complete and balanced, in that:

- they are comprehensive enough, aggregated where appropriate, and

reasonable (with the basis for aggregation clearly specified); and

- they cover the significant activities and all important aspects

(including identifying the important dimensions of performance), and

give them suitable emphasis, to fairly reflect their significance to the

entity’s performance.

A18. Biased reporting or distorted presentation of performance will not portray a complete

picture of all significant activities. On the other hand, giving equal weighting to

performance measures that vary greatly in their significance may also fail to portray a

sense of proportion representative of the entity’s activities. In this sense,

“completeness” relates more to the need for a rounded and proportionate view of

performance rather than to an overly comprehensive and voluminous set of

performance measures, which can swamp the user and detract from the usefulness

of the report.

A19. The use of external references and external assessment can enhance objectivity in

performance measurement. For example, measuring performance against external

benchmarks, standards, or predetermined criteria may provide more objectivity in the

choice of measure than measures derived internally (that is, within the entity). Also,

the use of external parties to measure and assess historical performance may

provide more objectivity than if performance were measured and assessed internally

(that is, by entity staff). However, although aspiring to high levels of objectivity is

desirable, it may not always be realistic or appropriate depending on the nature of the

output and the relevance of the measures sought.

A20. To be understandable, the reports (including the elements, performance measures,

and targets or results, as applicable) should:

- have a clear format and layout;

- be presented in a way that engages the user – for example, by creating visual

interest through the use of charts, tables, and symbols;

- classify reported items clearly and logically;

- be coherent, with easy-to-follow links between the different parts;

- be presented within the context of the entity’s strategic objectives, past

performance, and current environment (including government themes, as

appropriate, and other themes and considerations, such as sustainable

development);



- show clear, logical, and easy-to-follow links between organisational

objectives, outcomes, impacts, outputs, and their associated performance

measures and targets;

- be clear and concise in their content; and

- be easy to read, expressed in plain English, and use words and terms

suitable for users (with adequate explanations of acronyms, jargon, and

technical terms).

A21. The level of detail should be such that users can readily understand the key issues.

A22. To be comparable, the reports should be presented to allow users to identify

similarities and differences and to track progress:

- most importantly, of historical performance against forecast performance; and

- across different reporting periods and to identify trends.

This requires the reports to be consistent in their format, their layout, and in the way

information is classified, as well as in the selection, measurement, and disclosure of

elements and related information.

A23. It is also desirable that reports are presented to allow users to identify similarities and

differences among different entities, where appropriate and practicable.

A24. Appointed Auditors should encourage entities to:

- develop performance measures that are consistent over time;

- include long-term targets, where relevant; and

- reorient the focus of reporting by including information that enables users to

track the entity’s progress in meeting both its annual and long-term goals.

This will enable performance in the current reporting period to be assessed in the

context of the entity’s longer-term goals. Note that, generally, such comparisons form

the starting point for further questions from users of non-financial performance

reports, rather than providing definitive answers.

A25. The information in the reports should also be timely and economical. Therefore, the

Appointed Auditor should be mindful of the need for a balance between the cost and

benefits of producing the information as well as a balance among the qualitative

characteristics.

Outcomes and impacts

A26. There is rarely a single cause-and-effect relationship between outputs and outcomes.

Often, several outputs relate to one outcome, and the reverse may also be true. The



primary links may need to be set out in the non-financial performance report, as far as

is practicable without sacrificing clarity.

A27. Outcomes are usually not completely under the control of a single entity or totally

under the control of a group of entities. For instance, where the outcomes being

sought by an entity revolve around complex social questions, such as the crime rate,

each outcome would usually result from a variety of factors, including, for example,

the activities of all agencies responsible for:

- economic development and employment;

- provision of adequate and equitable social welfare and security;

- provision of education and training; and

- policing, prosecution, sentencing, imprisonment, and rehabilitation.

A28. Therefore, it is important that public entities recognise the importance of reporting

outcomes they expect to influence and contribute to by their output delivery, even

though they do not “control” the outcome. Entities can provide a rich set of

information by reporting outcome achievement at various levels (for example, high-

level societal outcomes, lower-level intermediate outcomes, and immediate

outcomes/impacts over which the entity has a stronger influence or closer control).

The relationship of the output performance of multiple agencies to the various levels

of outcome achievement can provide useful information for assessing public sector

performance and for future policy setting.

A29. If the reported outcomes and impacts do not meet the qualitative characteristics or do

not adequately link with other performance information in the service performance

report then the audit opinion and the management report may be affected.

Appropriateness of reported outputs, performance measures, and targets

A30. It is the responsibility of the entity to determine the reported outputs and output

classes and to develop “appropriate” performance measures and targets (although, in

some instances, significant performance benchmarks may be determined by

legislation or regulation – for example, statutory timeframes for approvals and the

more general reporting framework for tertiary education institutions prescribed by the

Tertiary Education Commission). It is the Appointed Auditor’s responsibility to

consider whether:

- the reported outputs, taken as a whole, fairly represent and reflect the

services provided by the entity; and

- the performance measures, taken as a whole, fairly reflect the performance of

the entity.



It should be stressed, however, that the Appointed Auditor’s assessment of

appropriateness should particularly take into account the requirements of users.

A31. If the reported outputs or performance measures and targets do not fairly reflect the

services provided by, or the performance of, the entity, then the audit opinion and the

management report may be affected.

A32. Although the following procedures should not be regarded as complete, they do

provide the Appointed Auditor with some guidance for assessing the appropriateness

of the performance measures and targets:

- Ascertain how users’ views have been taken into account: As a minimum, the

Appointed Auditor should assess whether management or those charged with

governance has identified significant user groups, whether they have

consulted with them, and what the result of those consultations was.

The Appointed Auditor needs to consider any views of users of the non-

financial performance report to assist in forming a view on the

appropriateness of the performance measures and targets. In doing so, it

may be necessary for the auditor to ask outcome-oriented questions about

the nature of the information provided to users to help them understand the

extent to which the entity has achieved its goals. Although this presumes a

knowledgeable and informed set of users, the auditor may wish to focus on a

significant user group, such as select committees (central government), as

representatives of the wider user group.

- Examine policy or outcome statements: By examining policy or outcome

statements of the entity, the Appointed Auditor may be able to gain evidence

to support the entity’s assertions that the reported outputs, performance

measures, and targets in the forecast service performance report are

appropriate.

The auditor should also consider any output or purchase agreements or

equivalent contractual documents between the entity and the controlling

entity, agency, individual, or Minister, as well as the outcome statements of

policy setting and funding agencies within the same sector.

- Assess process: If an appropriate process is in place, appropriate reporting of

outputs, performance measures, and targets should result. The Appointed

Auditor could therefore evaluate the appropriateness of the process used by



the entity to develop and refine its reported outputs and performance

measures.

Output dimensions

A33. The Appointed Auditor will have a particular concern with the dimensions of the

outputs being reported. Generally, the following five dimensions are used in

establishing performance measures for outputs or output classes:

- Quality – how well it is provided;

- Quantity – how much is provided;

- Cost – how much delivery costs;

- Timeliness – when it is provided; and

- Location – where it is provided.

Not all the five dimensions will be applicable for each output or output class

measured, for example, location is often not reported when it is self-evident.

However, there is a rebuttable presumption that quality will be a dimension that is

measured and reported. Appointed Auditors should use their judgement in assessing

which of the dimensions are applicable in each case.

A34. Where one or more of the dimensions are absent, the Appointed Auditor should

assess whether the reasons for the exclusion are justified. Where, in the auditor’s

opinion, such an exclusion is not justified, they should seek further explanations from

management or those charged with governance. If still not fully satisfied, they are to

consider its implications for the audit report or reporting to management and those


A35. Performance measures for all dimensions of performance should be robust. The

service performance reports should disclose enough information on what is being

measured and how it is being measured.

Measures of output quality

A36. Performance measures of output quality can be contrasted in various ways:

- direct versus indirect measures;

- quantitative versus judgemental (qualitative) criteria; and

- expert assessment versus a lay person’s assessment.

A37. Direct measures of output quality measure the properties or attributes inherent within

the service itself. They could be said to result from direct observation of the service

delivery or from data that record dimensions of the service delivered. Indirect



measures also aim to capture information about the properties or attributes of a

service but are derived by methods other than direct observation (for example, they

can be derived from the results of survey questionnaires about user perceptions or

experience of the quality of service received, which reflect the “eye of the customer”).

A38. Direct measures of output quality are likely to be more objective than, and are

therefore usually preferable to, indirect measures. Nevertheless, indirect measures

such as stakeholder or customer perceptions can provide relevant information when

the surveys are well designed and conducted and the results are interpreted with

enough caution. Direct measures of output quality should be used if possible, but they

can be usefully supplemented by indirect measures, such as customer perception of

the service. A public entity needs, at least, to consult stakeholders and ask what they

value (a) to inform the selection of direct measures of quality, and (b) to help

establish relevant questions for gauging stakeholder or customer perceptions of

output quality.

A39. Often output quality will be expressed in a range of explicit, easily quantifiable, and

objectively verifiable specifications or technical standards. For outputs for which

quality is not so easily quantifiable, a more judgemental (or qualitative) approach is

needed to assess the quality of the service. Quantitative measures that are readily

observable are likely to provide a more objective means of assessing performance

than qualitative measures based on individual judgement. However, measures that

are more easily quantifiable and measurable may not necessarily constitute the more

relevant measures of service quality. Therefore, entities need to consider which types

of measure would best capture the more relevant aspects of output quality.

A40. Many aspects of output quality are readily observable to the lay person (for example,

customer, service provider, or other stakeholder – the “eye of the customer”), while

other aspects require an expert assessment (the “eye of the expert”). These

perspectives apply to both quantitative and qualitative approaches to assessing

output quality. The lay person is often able to directly observe and interpret the

technical specifications of the output and so determine the level of quality achieved;

in other instances, the lay person may provide a more subjective judgement of output

quality based on their experience (for example, their opinion of how good the service

was). By contrast, some qualities expressed as quantifiable, technical specifications

may require expert reading, analysis, and interpretation. In other instances, an expert

may be required to provide a judgemental (or qualitative) assessment of service

quality. (One example is peer review, in which service quality is determined by an

expert, who observes the service delivery and applies their professional judgement to

assess the service, based on their expert knowledge and experience.)



A41. No particular combination of the above approaches to deriving measures or

assessing output quality is of itself “correct”. Entities may choose to measure and

report on the basis of several approaches; however, they should prefer objective

measures to subjective measures, subject to ensuring the more relevant properties of

the output are captured by the performance measures. A range of different

approaches to measuring output quality can be useful for providing confirmatory

evidence or simply providing a different perspective. The Appointed Auditor should

assess whether entities have considered a range of approaches to measuring quality

before selecting the measures.

A42. The judgement involved in the audit of quality is such that the Appointed Auditor

should have appropriate knowledge and skills to undertake work in this area.

Measures of inputs, processes, or a combination of elements

A43. As a general rule, entities should not report on inputs (other than the financial costs of

outputs) or processes within their service performance reports. However, in some

instances, entities may report input or process measures (or a combination of

elements, for example, ratio of outputs to inputs) as a proxy for unobservable or

difficult-to-measure outputs. Sometimes process measures can provide useful and

important information relating to output quality.

A44. Input or process measures should be reported as proxies for output measures in

service performance statements only when it is impracticable to measure the output.

Where entities provide input or process measures as a proxy for output measures in

the service performance report, the Appointed Auditor needs to consider:

- whether there is enough justification for not providing output measures; and

- whether the input or process measures are appropriate, considering their

relevance, reliability, understandability, and comparability.

Auditing the service performance report (Ref: Para 38 - 62)

Materiality (Ref: Para 39 - 40)

A45. Materiality, in the context of service performance reports, relates to both:

- the importance of the performance information to providing a relevant and

reliable representation of the entity’s performance (refer paragraph A16); and



- the level of misstatement of reported results that, based on the Appointed

Auditor’s judgement, are likely to influence users’ understanding of the

entity’s performance.

A46. In assessing the entity’s material performance information for the purpose of audit

testing, the Appointed Auditor should take into account their conclusions on the

forecast non-financial performance report (and the related guidance at paragraph

A16) and consider the following points:

- determination of material performance information should be made only after

discussions with the entity, management, and those charged with governance

(and, if necessary and appropriate, Parliamentary select committees,

politicians, or councillors).

- determination of material performance information should be consistent with

the auditor’s knowledge of the political environment and information gleaned

from sources such as minutes of meetings, media reports, and the like.

Obtaining audit evidence (Ref: Para 41)

A47. In gaining assurance on the material performance information, the full range of

normal audit procedures will usually be available to the Appointed Auditor. In doing so

the Appointed Auditor is not expected to verify performance information that is not

considered to be appropriate in assessing how well the entity is delivering the

services it was established to deliver.

A48. The mix of audit tests may vary compared with the mix used in regard to the financial

information, but the non-financial aspects of a service performance report do not in

themselves alter the level of evidence required.

A49. Audit procedures that may be applied to gain the required level of assurance when

auditing performance information include:

- testing and evaluating the systems, processes, and controls that capture,

record, analyse, and monitor the information;

- performing analytical procedures on the information; and

- performing other substantive or reperformance tests.

A50. The quality of the systems used to record and control results, and the nature and

quality of evidence available about the reported measures, may have an effect on the

mix of tests used. For instance, weak recording or information systems may force the

Appointed Auditor to use a substantive rather than a systems-based approach.



Changes in outcomes, impacts, material outputs, performance measures, or targets

(Ref: Para 42 - 43)

A51. Consistency of measures between periods is valuable and, in some cases, it is a

legislative requirement that the service performance report includes comparative data

for the previous financial period. However, improvement in the quality of performance

information is more important than inter-period consistency.

A52. Outputs and their performance measures and targets for government departments

and Offices of Parliament are published in the Annual Estimates. The Appointed

Auditor should check that material outputs, performance measures, and targets agree

to these published statements. Where changes are noted, the auditor should ensure

that the change has been approved and published in the Supplementary Estimates.

A53. The requirements for Crown entities are specified in the Crown Entities Act 2004, in

sections 138 to 149 concerning the preparation and amendment of the Statement of

Intent.

A54. Where applicable, the Appointed Auditor should check that, where outputs,

performance measures, or targets refer to standards outside the published measures

(for example, those relating to a standard agreed with the Minister), those external

standards have not changed significantly during the period.

A55. In addition to checking that the changes have been properly authorised, the

Appointed Auditor should be satisfied with the reasons for any change. Changes

relating solely to how performance is measured should improve the measurement of

performance. The Appointed Auditor should be wary of unnecessary or

unsupportable changes that give the appearance of an improved result, in a similar

fashion to changes in accounting policies that are used to manipulate financial

results. Such changes are not acceptable.

A56. Where the Appointed Auditor considers that additional information about changes to

reported outputs, output classes, performance measures, or targets should be

disclosed for the service performance report to be fairly stated, they should request

that the report disclose (as a minimum) the nature of, and reasons for, the changes.

Management commentary (Ref: Para 44 - 47)

A57. Management commentary generally features in annual reports in one of three forms:



- within the service performance report as a substitute for output reporting (this

is generally not acceptable, although it may be justified when new

performance measures or baselines are in the process of being established);

- within the service performance report as an aid to understanding the report

(this is to be encouraged); and

- outside the audited sections of the annual report.

A58. Management commentary may be used to inform or provide context for users of

intended improvements in reporting performance information. As such, the

commentary may provide useful information while the entity is consulting on, or

deriving, the new performance information or until such time as there are enough

data for reporting against new performance measures and targets.

A59. Where the entity seeks to use management commentary as an alternative to

performance information, the Appointed Auditor should consider modifying the audit

report.

A60. Management commentary should be included in, or along with, the service

performance report to assist users’ interpretation of achievements that are not

otherwise evident from the performance information. Such management commentary

forms part of the reported performance information.

A61. The Appointed Auditor’s responsibility for commentary included in the part of the

annual report not subject to audit is limited to following the requirements of ISA (NZ)

720: The Auditor’s Responsibility in Relation to Other Information in Documents

Containing Audited Financial Statements.

Allocation of costs (Ref: Para 48)

A62. The full and fair allocation of costs to outputs is one of the cornerstones of an efficient

management control system. The information such systems generate should enable

stakeholders, management, and those charged with governance to make decisions

concerning resource use, budgetary implications, output pricing, and the extent of

cross-subsidisation. Therefore, such systems can have a considerable effect on the

disclosures in service performance reports.

A63. The audit focus should be on the underlying assumptions and the system. Therefore,

the Appointed Auditor is likely to concentrate on:

- testing the reasonableness of the underlying assumptions;



- ensuring the method of allocation is reasonable and supportable. (The

allocation of overheads should follow a cause and effect relationship. The

factors that cause the consumption of overheads are called “cost drivers”.

Although some proportion of overhead will not be traceable to a particular

output, the aim is to identify a causal link wherever possible. Activity-based

costing will be relevant for achieving a more accurate costing of outputs in

some cases.); and

- ensuring that there is consistency of treatment within the audit period (that is,

costs are allocated on the same basis as funds are appropriated or

budgeted), and between audit periods where applicable.

Fieldwork conclusion (Ref: Para 49)

A64. With the benefit of having completed the fieldwork, the Appointed Auditor should

consider their earlier judgement about the adequacy of the non-financial performance

report and, in particular, the appropriateness of service performance report content.

To form an opinion on the fair presentation of the service performance report, the

auditor should consider the non-financial performance reports as a whole, including

the forecast non-financial performance report as well any other relevant performance

information included within the annual report.

A65. The Appointed Auditor needs to consider whether the service performance report is

presented within the context of the overall performance management framework. In

forming the audit opinion, the Appointed Auditor needs to determine whether the

service performance report complies with GAAP and fairly reflects the entity’s service

performance for the financial year. To do so, the Appointed Auditor should obtain an

overview of the non-financial performance reporting framework, giving particular

attention to the links (as relevant) between the following aspects:

- contextual information (including the entity’s role, purpose, function, and

strategic objectives);

- annual, medium-term, and longer-term information;

- the elements of the reports (including outcomes, impacts, outputs, and

inputs);

- performance measures, targets, and results (including consideration of the

effect of uncorrected errors of misstatement and omission);

- management commentary within and outside the audited statements; and

- the appropriateness of the service performance report content in light of the

information in the bullet points above.



The audit report (Ref: Para 54)

A66. The specific circumstances that may influence the decision on whether to modify the

audit report regarding performance information and therefore may affect reporting to

management, those charged with governance or the OAG, include the following:

- The reporting of performance information fails to comply with GAAP or

otherwise fails to fairly reflect the service performance of the entity to the

extent that, in the Appointed Auditor’s judgement, the reported performance

information are likely to influence users’ understanding of the entity’s

performance, for any of the following reasons:

- material performance information is omitted; and

- material performance information is inappropriate (for example, it

does not satisfy the qualities of relevance, reliability,

understandability, or comparability).

In such circumstances, the Appointed Auditor will need to consider whether to

issue a modified (adverse, disclaimer or qualified6) opinion.

- Material performance information is considered appropriate but is poorly

presented. In such circumstances, the Appointed Auditor should consider

whether to report the issue to management or those charged with

governance.

- Results reported for material performance measures do not meet the

requisite evidential criteria, the systems or processes for controlling and

recording performance information are deficient, or results reported for

material performance measures cannot be substantiated. In such

circumstances, the Appointed Auditor will need to consider whether to issue a

modified opinion.

- Laws and regulations for approval, format, publication, and circulation of

plans and service performance reports are not being followed – for example,

where performance measures or targets have not been legally and properly

approved. In such circumstances, the Appointed Auditor will need to consider

whether a legislative breach should be reported or whether to report the issue

to management or those charged with governance.

6 ISA (NZ) 705 uses the term “qualified” (as a type of modified opinion) in place of the term “except-for” which

was previously used in AG-702.



- Changes made to material performance measures during the reporting period

have not been legally or properly approved, or the changed measure is less

appropriate, or the change has not been adequately explained in the service

performance report. In such circumstances, the Appointed Auditor will need

to consider whether a legislative breach should be reported in a management

letter to the entity or whether to issue a modified opinion, as appropriate.

- Management commentary within the service performance report is used as a

substitute for output performance measures. In such circumstances, the

Appointed Auditor will need to consider whether to issue a modified opinion

or whether to report the issue to management or those charged with

governance.

- Management commentary within the service performance report is used as

an aid to understanding the report but the commentary or explanations given

are insufficient, inconsistent, or misleading. In such circumstances, the

Appointed Auditor will need to consider whether to issue a modified opinion

or whether to report the issue to management or those charged with

governance.



Appendix 1 - Criteria for the preparation of service performance reports

1.1 This Appendix outlines important criteria prescribed by legislation and generally

accepted accounting practice (GAAP) for the preparation of service performance

reports.

1.2 Auditors are required to evaluate the appropriateness of service performance reports

with regard to the recognition, measurement, and disclosure of output information.

The evaluation of appropriateness should be made against the criteria for the

preparation of service performance reports included in this Appendix.

Legislation

1.3 The legislative requirements for entities whose service performance reports are

audited in keeping with AG-4 (revised) include:

- the Public Finance Act 1989;

- the Crown Entities Act 2004;

- the Local Government Act 2002; or

- the Education Act 1989.

1.4 The annual report (which includes the service performance report) should enable

users to make an informed assessment of entity performance:

The annual report must provide the information that is necessary to enable an

informed assessment to be made of the [entity’s] performance during the financial

year (including an assessment against the intentions, measures, and standards set

out at the start of the financial year in the information on the [entity’s] future operating

intentions…) [Section 45(2) PFA. Consistent with s151(2) CEA]

1.5 The requirements for the content of the service performance report are as follows:

A[n entity’s] statement of service performance must –

(a) be prepared in accordance with generally accepted accounting practice; and

(b) describe each class of outputs supplied by the [entity] during the financial

year; and

(c) include, for each class of outputs, –

(i) the standards of delivery performance achieved by the [entity], as

compared with the forecast standards included in the [entity’s]

statement of forecast service performance at the start of the financial

year; and



(ii) the actual revenue earned and output expenses incurred, as

compared with the expected revenues and proposed output

expenses included in the [entity’s] statement of forecast service

performance at the start of the financial year.

[Section 45A PFA. Consistent with s153(1) CEA and s15 of Sched 10 Part 3 of the

LGA]

Treasury guidance on the legislation

1.6 Elements reported as outputs in the service performance report should meet the

statutory definition of outputs. However, links to impact and outcome information

should be provided so that service performance information is presented within the

wider context of what the service delivery is intended to achieve.

The statement of service performance should not report on internal departmental

activities or intermediate products consumed in-house.

The PFA requires departments to provide output performance information in their

statement of service performance. However, to provide context, departments are

encouraged to include impact, outcome and information on the achievement of

objectives in their statement of service performance.

[Preparing the Annual Report: Guidance and Requirements for Departments, July

2009, pp 15-16]

The CEA requires Crown entities to provide output performance information in their

statement of service performance. However, to provide a coherent account of

achievement, entities are encouraged to include information on their contribution to

achievement of impacts, outcomes and objectives in their statement of service

performance.

[Guidance and Requirements for Crown Entities: Preparing the Annual Report, 2008,

pp 15-16]

Generally Accepted Accounting Practice (GAAP)

1.7 The current7 main sources of GAAP relevant to service performance reports are:

- the New Zealand Equivalent to the IASB Framework for the Preparation and

Presentation of Financial Statements (NZ Framework);

- NZ IAS 1: Presentation of Financial statements; and

7 It is expected that changes to GAAP will be contained in a new Accounting Standards Framework which will

be established by the XRB in 2014.



- TPA-9: Service Performance Reporting.

1.8 The qualitative characteristics of non-financial performance reports are the same as

those applying to financial reports.

The quality of the information presented in the non-financial and supplementary

information should be considered with regard to the qualitative characteristics and

constraints on those qualitative characteristics discussed in paragraphs B24 to B45 of

this NZ Framework.

[Paragraph NZ B101.3, NZ Framework]

1.9 Paragraphs B24 to B45 of the NZ Framework refer to the following four qualitative

characteristics:

- understandability;

- relevance (including reference to materiality);

- reliability; and

- comparability.

1.10 Paragraphs B24 to B45 of the NZ Framework identify the following constraints on

relevant and reliable information:

- timeliness;

- balance between benefit and cost; and

- balance between qualitative characteristics.

1.11 The Auditor-General’s interpretation of, and guidance on, how these four qualitative

characteristics (and constraints) apply to the non-financial performance reports of

public entities is outlined in AG-4 (revised) paragraphs A13 to A25.

1.12 It is an expectation under GAAP that service performance reports will provide a true

and fair view, or fairly present, the entity’s service performance.

…the application of the principal qualitative characteristics … normally results in

financial statements that convey what is generally understood as a true and fair view

of, or as presenting fairly such information.

[Paragraph B46, NZ Framework]

1.13 The mandatory (standard) requirements for service performance reporting, as

required by NZ IAS 1, are as follows:



NZ 138.1 Where a statement of service performance is presented it shall

describe and disclose the outputs of an entity. Similar individual

outputs may be aggregated.

NZ 138.2 This Standard refers to the statement in paragraph NZ 138.1 as a

“statement of service performance”. The statement might, however,

be differently named in legislation. The aim of such statements, by

whatever name called, remains the providing of:

(a) narrative and statistics on the entity’s performance in

supplying goods and services; and

(b) information on the effects on the community of the entity’s

existence and operations.

NZ 138.4 The elements of service performance are inputs, outputs and

outcomes. Where relevant and appropriate for users of the entity’s

financial report, each output disclosed in the statement of service

performance is to be described in terms of the output’s:

(a) quantity;

(b) quality;

(c) time; and

(d) location.

The cost of each output is to be described and disclosed.

NZ 138.5 The information used to describe service performance is to be

selected so as to provide a complete description of delivery of each

output (or aggregation of outputs) reported, but without undue

emphasis on easily measured dimensions, and without resulting in an

overload of only partially relevant statistics.

NZ 138.6 For each output disclosed in a statement of service performance,

where practical and appropriate, the outcome(s) to which the output

is intended to contribute is to be disclosed.

NZ 138.7 The statement of service performance shall present both

projected service performance and actual service performance.

NZ 138.8 Projected service performance is described by presenting projected

outputs at the beginning of the period which an entity aimed to

produce by the end of the period. These projected outputs will often

be derived from the annual or corporate plan.



NZ 138.9 To report the degree of success in achieving objectives, it is

necessary to present both projected and actual results together with

full disclosures of any changes in objectives during the period.

NZ 138.10 Actual and projected service performance are to be reported

consistently with one another. The information is to be sufficiently

specific for performance to be assessed.

[NZ IAS 1: Presentation of Financial statements]

1.14 Service performance reports should focus on the reporting of outputs. Other elements

should not be reported in the service performance report as if they were outputs.

It is important to distinguish outputs from:

(a) Inputs;

(b) Outcomes;

(c) Management systems;

(d) Internal outputs; and

(e) Processes.

None of the above items are final goods or services and should not be regarded as

outputs. Except as contextual information, they should not be included in service

performance reporting or described as outputs …

None of the above items are outputs. They should therefore not be described as

outputs. This does not imply that measurement of the above items is unimportant for

internal management purposes, but rather that external users of service performance

information need information about results rather than efforts.

[TPA-9, paragraphs 4.6, 4.7, and 4.21]



Appendix 2 - Decision tree for considering the forecast non-financial performance reports

Y

Y Y

N N

Y N

N

The Appointed Auditor shall plan the audit of the service performance report in accordance with AG-4 (Revised), ISA (NZ) 315 and AG ISA (NZ) 315. (Para 19 - 25)

The Appointed Auditor shall consider the draft forecast non-financial performance report in order to develop a preliminary view about whether the draft will provide an adequate framework for reporting service performance. In addition, the Appointed Auditor shall develop a view about whether the draft complies with GAAP and provides an adequate basis for fairly reflecting the service performance of the entity. (Para 26 - 27)

The Appointed Auditor shall consider the published forecast non-financial performance report in order to develop a preliminary view about whether the report will provide an adequate framework for reporting service performance. In addition, the Appointed Auditor shall develop a view about whether the report complies with GAAP and provides an adequate basis for fairly reflecting the service performance of the entity. In doing so the Appointed Auditor shall assess whether the forecast outcomes, outputs, the performance measures, and the performance targets are appropriate. (Para 31 -33)

START

Has the Public Entity sought comments from the Appointed Auditor on the draft forecast non-financial performance report?

The Appointed Auditor shall report to management and those charged with governance on any areas for improvement for the draft forecast non-financial performance report. (Para 30)

Management and those charged with governance publish the forecast non-financial performance report.

The Appointed Auditor shall report to management and those charged with governance on areas for improvement for the published forecast non-financial performance report. (Para 37)

The Appointed Auditor shall determine whether the published forecast non-financial performance report will provide an adequate framework for reporting service performance. In addition the Appointed Auditor shall develop a view about whether the report complies with GAAP and provides an adequate basis for fairly reflecting the service performance of the entity. In doing so the Appointed Auditor shall assess whether the forecast outcomes, outputs, the performance measures, and the performance targets are appropriate. (Para 31 - 33)

Management and those charged with governance publish the forecast non-financial performance report.

Does the draft forecast non-financial report provide an adequate framework for reporting service performance, comply with GAAP or provide an adequate basis for fairly reflecting service performance?

Notify the OAG and discuss concerns with management and those charged with governance. (Para 28 - 29)

Notify the OAG and report concerns to management and those charged with governance. (Para 34 - 36)

Does the published forecast non-financial report provide an adequate framework for reporting service performance, comply with GAAP or provide an adequate basis for fairly reflecting service performance?

Does the published forecast non-financial report provide an adequate framework for reporting service performance, comply with GAAP or provide an adequate basis for fairly reflecting service performance?

Continue to Appendix 3



Appendix 3 - Decision tree for the audit of service performance reports

N

Y

The Appointed Auditor shall determine the material performance information for the purpose of testing. (Para 39 - 40)

The Appointed Auditor shall check whether there have been any changes to material outcomes, impacts, outputs, performance measures, or targets reported against during the reporting period from those presented in the published forecast service performance report. The Appointed Auditor shall ensure that changes have been approved and adequately explained within the service performance report. (Para 42 - 43)

The Appointed Auditor shall evaluate management commentary to determine the relevance of the commentary to the audited service performance information and its reliability. (Para 44 - 47)

The Appointed Auditor shall obtain sufficient, appropriate audit evidence in relation to all material performance information in accordance with ISA (NZ) 500: Audit Evidence. (Para 41)

The Appointed Auditor shall obtain reasonable assurance that costs have been appropriately allocated to each material output or output class. (Para 48)

The Appointed Auditor shall determine whether the service performance report complies with GAAP and fairly reflects the entity’s service performance for the year. (Para 49 - 51)

The Appointed Auditor shall issue an audit opinion on the service performance report.(Para 54 - 60)

END

Are there serious concerns about the appropriateness of the content or the verification of the content in the service performance report?

Notify the OAG. (Para 52 - 53)

The Appointed Auditor shall communicate to management and those charged with governance . (Para 62)

The Appointed Auditor shall outline issues or misstatements identified during the audit of the service performance report in the document summarising the audit conclusions. (Para 61)

Continue from Appendix 2The Appointed Auditor shall consider their conclusions on the entity's internal control, the adequacy of the forecast non-financial performance report, and the appropriateness of the non-financial performance framework when planning the audit of the service performance report. (Para 38)