Interim Opinion Report

							Interim Opinion
Report
Craven District Council
Audit 2008/09
Contents

Introduction                                                                               3

Identifying opinion audit risks                                                             4

Identification of specific risks                                                            5

Testing strategy                                                                           8

Key milestones and deadlines                                                               9

Audit fees                                                                                 10




Status of our reports
The Statement of Responsibilities of Auditors and Audited Bodies issued by the Audit
Commission explains the respective responsibilities of auditors and of the audited body.
Reports prepared by appointed auditors are addressed to non-executive
directors/members or officers. They are prepared for the sole use of the audited body.
Auditors accept no responsibility to:
•   any director/member or officer in their individual capacity; or
•   any third party.
Introduction




Introduction
1   We issued our initial audit plan for 2008/09 to the Council in April 2008, which set out
    the work that we proposed to undertake in order to satisfy our responsibilities under
    the Audit Commission’s Code of Audit Practice. We are required by professional
    auditing standards to specify the detailed risks that we need to consider as part of our
    opinion planning work. As the initial audit plan was produced at the start of the financial
    year for fee purposes, it was not possible to specify these risks. We are now in a
    position to do this as the opinion work is about to commence. We are required to:
    •     identify the risk of material misstatements in your accounts;
    •     plan audit procedures to address these risks; and
    •     ensure that the audit complies with all relevant auditing standards.
2   We have therefore set out below our approach to identifying opinion audit risks and
    have considered the additional risks that are appropriate to the current opinion audit.




3       Craven District Council
                                                               Identifying opinion audit risks




Identifying opinion audit risks
Organisation level risks
3   As part of our audit risk identification process we need to fully understand the audited
    body to identify any risk of material misstatement (whether due to fraud or error) in the
    financial statements. We do this by:
    •   establishing the nature of the Council's activities;
    •   identifying the business risks facing the Council, including assessing your own risk
        management arrangements;
    •   considering the financial performance of the Council; and
    •   assessing internal control - including reviewing the control environment, the IT
        control environment and internal audit.


Information system risks
4   To comply with ISA (UK&I) 315 we need to assess the risk of material misstatement
    arising from the activities and controls within the Council's information systems. To be
    able to assess these risks we need to identify and understand the material systems
    and document that understanding.
5   Material systems are those which produce material figures in the annual financial
    statements. We have identified that the Council has 10 material systems. For these
    systems we need to demonstrate our understanding by documenting the following:
    •   How transactions are initiated, recorded, processed and reported in the financial
        statements.
    •   The accounting records relevant to the transactions.
    •   How the Council identifies and captures events and conditions which are material
        to the financial statements eg depreciation.
    •   The financial reporting process used to prepare the financial statements.




                                                                   Craven District Council     4
Identification of specific risks




Identification of specific risks
6   We have considered the additional risks that are appropriate to the current opinion
    audit and have set these out below.

Table 1        Specific risks
Specific opinion risks identified

 Risk Area                                        Audit response
 Internal Control Weaknesses - The internal       We have carried out additional work to
 control weaknesses identified during our         consider the extent to which the issues
 2007/08 audit increases the risk that we will    affecting the Council may impact upon
 not be able to rely on the controls in           the operation of controls within the
 operation within individual material systems.    individual financial systems. Specific risks
                                                  identified through this review are detailed
                                                  below.
 Fraud & Corruption - The weaknesses in           We have tailored our work on the
 internal control identified during the course    financial systems to ensure that those
 of our 2007/08 audit, and additional issues      areas most prone to fraud, principally
 identified during our interim work, increase     Creditors, Cash Receipting, and Payroll,
 the risk that fraud has occurred.                are covered in our testing of key controls.
                                                  At this stage we have not identified any
                                                  evidence that fraud has occurred.
 Staffing issues have created problems for        We will carry out an initial review of the
 the past two opinion audits, resulting in poor   financial statements and supporting
 quality accounts and supporting working          working papers, and if we are not
 papers. The long-term solution to providing      satisfied that they meet the required
 an adequately resourced and skilled              standards, we will suspend the audit until
 Finance Department is still being discussed.     such time as they are put in order.


 Authorisation - The Finance Department           During our interim work we are checking
 was short staffed for significant periods of     that authorisation has been supported by
 time during 2008/09, during which time           evidence.
 there was increased pressure on existing
 staff, which could potentially result in
 authorisation of transactions being cursory,
 rather than providing real assurance.
 Segregation of Duties - During the period in     We will review the cash & bank
 which the Finance Department was short           reconciliations in detail, and will test a
 staffed with an increased risk that              sample of payments to new suppliers to
 segregation of duties was compromised.           ensure that they have been properly
 Currently we have identified two principal       authorised.
 areas where segregation of duties has not




5    Craven District Council
                                                             Identification of specific risks



Risk Area                                        Audit response
been in place:
   •   One member of staff has
       responsibility for creating new
       suppliers, and for putting invoices
       onto the creditors system.
   •   The systems administrator, who
       could create a payment to
       themselves, also undertakes the
       cash & bank reconciliation which
       would identify unusual transactions.


Financial Position - Recent financial            We will carry out detailed testing of
information indicates that the Council will be   capital expenditure to ensure that it is
using significant levels of revenue reserves     correctly classified, and will ensure that
in order to fund the revenue position. This      reserves have been used appropriately.
increases the risk of errors in using
reserves appropriately, and of revenue
expenditure being misclassified as capital
expenditure.
Cash & Bank Reconciliations - As at the          We will not commence our audit of the
date of this report, the Council is currently    financial statements until the
11 months behind with its Cash & Bank            reconciliations are up to date.
Reconciliations, the most recent complete        We will perform a detailed check on the
reconciliation being June 2008. During our       monthly cash & bank reconciliations to
interim audit work we identified errors in       ensure that they have been satisfactorily
cash receipting in April 2009, where cash        completed.
has been paid into another organisation's
bank account, which would have been
identified by regular bank reconciliations.
Our walkthrough of the Housing Benefits
system also indicates that the payment of
Housing Benefits has not always been
posted to the ledger in a timely fashion, and
may still be outstanding, due to lack of
completion of the cash & bank
reconciliation.
Payroll - Our work on the payroll system         We will need to agree an approach with
indicates that controls during the year have     the ADoCS as to how the council will
not been adequate, including a lack of           demonstrate that the financial statements
establishment checks, pre-adjustment             are materially correct in respect of payroll
reports are being input to the ledger            expenditure.
requiring additional work to agree payment
runs to the ledger, and there are no checks
to confirm that adjustments have been



                                                                 Craven District Council        6
Identification of specific risks



 Risk Area                                        Audit response
 correctly made. There are currently no
 Payroll procedure notes in place, and
 NYCC do not have an authorised signatory
 list to confirm that any changes they are
 informed of have been appropriately
 authorised.
 Income Collection - Garage rents have not        This will not have a material effect on the
 been consistently invoiced during the final      financial statements, and so does not
 quarter of 2008/09 and first quarter of          require further work from ourselves, but
 2009/10. With the Council in the financial       the council needs to address this issue to
 position it currently finds itself, all income   ensure all income is collected.
 should be invoiced and responsibility for this
 should be clearly allocated.
 The audit of the 2007/08 financial               Additional audit procedures will need to
 statements revealed a lack of knowledge          be conducted during the audit of the
 and understanding of the financial and           financial statements to ensure that the
 regulatory framework within which the            problems encountered during 2007/08
 accounts are prepared, and a lack of             have not been repeated, and that this
 knowledge of the organisation itself. Whilst     year's statements are consistent with
 steps have been taken to address the risks       underlying information.
 arising from this, there remains a risk that
 the accounts will not be prepared on a
 satisfactory basis.


7   We are still in the process of completing our interim systems work, and additional
    issues may arise that we will need to take into account. We will bring any relevant
    issues to your attention at the Audit & Governance Committee on 30 June 2009.




7    Craven District Council
                                                                           Testing strategy




Testing strategy
8   On the basis of risks identified above we have produced a testing strategy which will
    consist of testing key controls and/or substantive tests of transaction streams and
    material account balances at year end.
9   Our testing is carried out both before and after the draft financial statements have been
    produced (pre- and post-statement testing).
10 Wherever possible, we complete some substantive testing earlier in the year before
   the financial statements are available for audit. This year we have not been able to do
   substantive testing early due to the late completion of the 2007/08 financial
   statements, and the volume of work required by Finance staff in order to produce the
   2008/09 financial statements.
11 For future years, we have identified the following areas where substantive testing could
   be carried out early:
    •   Review of accounting policies;
    •   Bank reconciliation;
    •   Fixed Assets – confirmation of ownership and existence;
    •   Year end feeder system reconciliations;
    •   Contingent liabilities; and
    •   Review of Impairments.
12 Where other early testing is identified as being possible this will be discussed with
   officers.




                                                                Craven District Council      8
Key milestones and deadlines




Key milestones and deadlines
13 The Council is required to prepare the financial statements by 30 June 2009. We are
   required to complete our audit and issue our opinion by 30 September 2009. The key
   stages in the process of producing and auditing the financial statements are shown in
   Table 2
14 The opinion for 2007/08 was not issued until April 2009. We would advise you now that
   the audit will not be prolonged this year. If the audit is unable to be completed by 31
   October 2009, we would expect to issue a qualified opinion.
15 A schedule of required working papers has been provided to officers.

Table 2        Proposed timetable


 Task                                                      Deadline
 Control testing                                           May/June 2009
 Receipt of accounts                                       30 June 2009
 Confirmation that working papers are complete and         30 June 2009
 reviewed
 Start of detailed testing                                 3 August 2009
 Progress meetings                                         [At least] Weekly
 Present report to those charged with governance at the    30 September 2009
 Audit committee
 Issue of opinion                                          30 September 2009




9    Craven District Council
                                                                                Audit fees




Audit fees
16 In my original audit plan, the estimated fee for the opinion audit was based on my best
   estimate at the time and agreed at £48,745 as part of a total audit fee of £78,675. This
   was 8% below the Audit Commission's mid-point fee for an audit of this size, and was
   based on the assumption that the problems encountered during 2006/07 would not be
   repeated.
17 The issues that arose during the course of the 2007/08 audit demonstrated that the
   problems encountered during 2006/07 were not only repeated, but were exacerbated.
   As a result, I have concluded that a supplementary audit fee will be required in
   2008/09 in order to ensure that the correct audit opinion is given. Based on the
   additional work that has had to be carried out, and that estimated to be required to
   audit the financial statements, the supplementary fee at this stage is £12,996 bringing
   the total 2008/09 opinion audit fee to £61,741.
18 Should this need to be amended further, we will discuss and agree this with the Acting
   Director of Corporate Services.
19 As discussed at the Audit Committee in December, the additional fee in relation to the
   Use of Resources assessment in 2008 is reflected in the 2008/09 fee. The additional
   fee in respect of this work is £3,244.
20 The total audit fee for 2008/09 has now been revised to £64,985 which is 11% above
   the mid-point on the fee scale.




                                                               Craven District Council 10