PROGRAM 1.1—ASSURANCE AUDIT SERVICES
Table 1 provides a summary of the performance of Program 1.1 in 2010–11. The delivery of Assurance Audit Services is described in more detail in the following sections.
Table 1 Program 1.1: Performance against 2010–11 Portfolio Budget Statements deliverables and performance indicators
|Outcome 1: Assurance Audit Services
To provide assurance on the fair presentation of financial statements of Australian Government entities by providing independent audit opinions and related reports for the information of Parliament and the executive.
|Deliverables||2010–11 target||2010–11 result|
|Number of financial statement audit opinions to be issueda||250||260|
|Other regulatory assurance engagementsb||59||62|
|Number of financial statement related reports to be produced||2||2|
|Key performance indicators||2010–11 result|
|Audit opinions issued in respect of all Australian public sector entities|
|- upon receipt of signed entity financial statements|| 60% of audit opinions were issued on the same day the signed financial statements were received by the ANAO.
90% of audit opinions were issued within two days of the ANAO receiving the signed financial statements.
|- in accordance with ANAO auditing standards||The Quality Assurance Review Program did not identify any major systematic or repetitive deficiencies in application of the relevant auditing standards, but matters requiring attention were identified.|
|JCPAA and other committee satisfaction with the overall quality and usefulness of the interim and year-end financial statement audit reports||The JCPAA reported a high level of satisfaction with the overall quality, timeliness and coverage of ANAO products and services.|
|$40.060 million ($42.192 million in 2009–10).|
JCPAA = Joint Committee of Public Accounts and Audit
The ANAO’s audits of financial statements assist Australian Government entities to fulfil their annual accountability obligations under the Financial Management and Accountability Act 1997 (FMA Act), the Commonwealth Authorities and Companies Act 1997 (CAC Act) or the Corporations Act 2001.
Each year Australian Government entities must publish their financial statements, accompanied by an audit opinion pursuant to legislative requirements, in their annual reports. In accordance with the legislative requirements, the ANAO audits the financial statements and expresses an opinion on whether the statements:
- have been prepared in accordance with the Government’s reporting framework
- give a true and fair view (in accordance with Australian Accounting Standards) of the entity’s financial position, financial performance and cash flows.
The Auditor-General delegates responsibility for signing some financial statement audits to senior ANAO staff, in accordance with accountabilities under the annual work program.
In addition to the audit opinion on the financial statements, the ANAO provides each audited entity with a report on the findings of the financial statement audit and an assessment of the entity’s business or accounting processes, including the entity’s internal control relevant to the preparation of the financial statements. A report on the audit is also provided to the minister responsible for the entity.
Each year, the ANAO tables in Parliament two reports on its financial statement audit program:
- Audits of the Financial Statements of Australian Government Entities, tabled in December
- Interim Phase of the Audit of Financial Statements of Major General Government Sector Agencies, tabled in June.
Financial statement audit opinions
The audit opinion issued by the ANAO allows an Australian Government entity to fulfil its accountability obligations by stating whether the annual financial statements of the entity provide a true and fair view of the matters required to be disclosed under the financial reporting framework.
A risk-based methodology is used in conducting our financial statement audits. The methodology emphasises the need for a detailed understanding of the client’s organisation and associated business risks, and places great reliance on governance arrangements and business processes. Our audit methodology is supported by customised technology and comprehensive training programs.
Where an entity’s financial statements fairly represent its financial operations and position, the audit report is ‘unqualified’. The need to qualify an audit opinion can arise for a number of reasons, including material misstatement of the final balances, or where the Auditor-General is unable to obtain sufficient appropriate audit evidence to form an opinion on the entity’s financial statements. However, through a professional working relationship, we seek to support initiatives by the management of each entity to mitigate factors that may result in a qualified opinion.For the 2009–10 financial year, 260 audit opinions were issued, of which none were qualified.Figure 4 shows audit opinions from 2005–06 to 2009–10.
Figure 4 Comparison of audit opinions
Note: The ‘emphasis of matter’ references are provided in unqualified reports to draw the reader’s attention to matters disclosed in the financial statements that, in the auditor’s judgement, are of fundamental importance to the understanding of the financial statements.
Financial statement audit—2010
The report Audits of the Financial Statements of Australian Government Entities for the Period Ended 30 June 2010 was tabled in December 2010. This report summarised the final result of the audits of the 2009–10 financial statements of Australian Government entities, and the consolidated financial statements of the Australian Government. It also commented on key developments in the financial reporting and auditing framework that affect the Australian Government and its reporting entities, and provided information about audit findings and key governance and control activities, such as the certificate of compliance.
We plan our financial statement audits so that audit clearance and audit opinions are able to be issued in accordance with Australian Government timelines. In the 2009–10 year, the Department of Finance and Deregulation set the audit clearance deadline for material entities (which comprise 99 per cent of revenues, expenses, assets and liabilities of the Australian Government) as 16 August 2010. For non-material entities, the date was 31 August 2010.
Some 76 per cent of material entities and 57 per cent of non-material entities met their clearance deadlines. This was a small improvement from 2008–09, when 75 per cent of material entities and 54 per cent of non-material entities met the deadlines. Overall, a large majority of entities’ financial statements were completed within three months of the end of the financial year.
Summary of findings
The December 2010 report provided details of the number of unmodified audit opinions (clear opinions) issued. No audit reports for the 2009–10 year contained a qualification or an emphasis of matter (compared with one qualified report in 2008–09). Two audit reports for the 2009–10 year contained a reference to ‘other legal and regulatory requirements’ (compared with one in 2008–09). This is a good outcome and reflects the progressive improvements to financial reporting made by Australian Government entities.
The report also detailed the results of individual financial statement audits and any additional significant control issues identified by each audit. Continuing a trend evident over recent years, there was a reduction in both the number and the significance of issues arising from the final phase of the 2009–10 financial statement audits. New issues that were identified in the final audit phase were in respect of controls in entities’ IT environments, such as user access and data management controls; asset management processes, including accounting policy, accounting for the disposal of assets and calculations of asset impairment and write-downs; and business system processing controls, such as reconciliation controls. Our December 2010 report also mentioned that most entities had made good progress in addressing and resolving outstanding audit issues.
Certificates of compliance
Since the 2006–07 financial year, the chief executive of each FMA Act agency has been required to provide an annual certificate of compliance with the FMA Act. Directors of general government sector (GGS) CAC Act authorities and wholly owned companies are also required to provide a report on compliance with relevant aspects of CAC Act legislation.
The Department of Finance and Deregulation advised that agencies reported a total of 17,003 breaches in 2009–10. This represents an increase of 13.6 per cent compared with 2008–09, when 14,961 breaches were reported. The Department of Finance and Deregulation advised that the increase in noncompliance largely relates to the introduction of revised financial framework requirements, particularly relating to the revised Commonwealth Grant Guidelines that came into effect on 1 July 2009.
The ANAO’s performance audit report Management of the Certificate of Compliance Process in FMA Act Agencies was tabled on 20 April 2011. The audit focused on the effectiveness of annual certificate of compliance processes for FMA Act agencies by considering the Department of Finance and Deregulation’s administration of the certificate process at whole-of-government level; selected agencies’ annual certificate processes; and the design and impact of the certificate. Several independent or external members of FMA Act agency audit committees were surveyed and interviewed to obtain their views on the process.
The main area for improvement identified by the audit concerned the need for more targeted quality assurance activity by agencies in regard to compliance with the financial management framework. Quality assurance activities commonly involve risk-based reviews of some financial transactions, tests of key internal controls and review of business areas such as the central procurement unit. Well-targeted quality assurance activities to complement self-assessments could focus on higher risk, more significant or high-volume transactions in the agency’s context.
External members of audit committees, chief finance officers (CFOs) and the audited agencies have provided positive feedback on the impact of the certificate process. For example, 90 per cent of CFOs who responded to an ANAO survey agreed that the certificate process had helped to improve their agency’s compliance with the financial management framework; 80 per cent agreed that the certificate process had helped to improve agency staff’s understanding of financial management responsibilities; and 83 per cent agreed that the certificate process had helped to strengthen internal controls in their agency. At a whole-of-government level, as a result of issues identified through certificate reporting, the Department of Finance and Deregulation has revised some financial management framework requirements and improved guidance material, which has contributed to reductions in noncompliance. These findings illustrate that the certificate process has helped improve compliance with the financial management framework. In particular, the necessity for chief executives to be attentive to the range of requirements covered by the certificate has flowed through to heightened focus on these requirements by agency staff, and improvements in internal controls.
The Australian Government recently instigated a Commonwealth Financial Accountability Review (CFAR), which presents an opportunity to consider means to address systemic noncompliance issues identified in certificate reporting. The CFAR is designed to analyse the Commonwealth’s financial framework from first principles and includes a range of activities to improve the delivery of government services, policies and programs and upgrade the public management framework.
Interim financial statement audit—period ended 30 June 2011
The report Interim Phase of the Audit of Financial Statements of Major General Government Sector Agencies for the year ending 30 June 2011 was tabled in June 2011. This report presented the results of the interim phase of the 2010–11 financial statement audits of 27 agencies that represent some 95 per cent of total GGS revenues and expenses.
Our interim audits of agencies encompass a review of governance arrangements related to agencies’ financial reporting responsibilities, and an examination of relevant internal controls, including information technology system controls. An examination of such issues is designed to assess the reliance that can be placed on internal control to produce complete and accurate information for financial reporting purposes.
Our June 2011 report indicated that the results of the interim phase of our 2010–11 financial statement audits reflected a continuation of the reduction over recent years in the number of significant and moderate risk audit findings. (The ANAO rates its audit findings according to a scale that rates the business or financial management risk to the entity in terms of material misstatement of the financial statements or noncompliance with legislation.) This reflects the general stability and maturity of the control regimes in the majority of major GGS agencies and actions taken by those agencies to address prior-year audit findings.
The June 2011 report also mentioned that our audits continue to identify control weaknesses in a number of areas, such as the management of inventory and assets, including stocktakes; business systems; the management of user access to key financial systems; and business continuity management. Our report also commented that, generally, agencies were positive and timely in their response to ANAO audit findings.
Developments in the auditing profession
In October 2009, the Australian Auditing and Assurance Standards Board released a replacement set of standards for auditing financial statements for implementation for reporting periods beginning on or after 1 January 2010. The new standards are referred to in chapter 1 of the report Interim Phase of the Audit of Financial Statements of Major General Government Sector Agencies for the year ending 30 June 2011, tabled in June 2011. They include a quality standard for the audit firm, which took effect on 1 January 2010. The replacement standards represent a significant revision of the previous standards, resulting in clearer and more rigorous standards. The changes follow closely changes made to auditing standards made by the International Auditing and Assurance Standards Board.
With the assistance of a leading international auditing firm, the ANAO has revised its audit methodology to ensure compliance with the new standards. This work included the update of ANAO policies, manuals, testing procedures and audit templates. ANAO auditors’ reports on financial statements for 2010–11 will be issued in accordance with the new standards. During 2010–11 the ANAO continued to pursue improvements in the quality and efficiency of its audit methodology and practices. In particular, it commenced a Methodology Support Project to provide audit teams with greater consultative opportunities and to provide opportunities to discuss the efficiency and effectiveness of the audit plans with an independent team. Ten audits were selected for review in 2010–11. Further reviews are planned to be undertaken in 2011–12.
Section 14 of the Auditor-General Act 1997 requires the Auditor-General to include in the ANAO annual report details of the basis on which the Auditor-General determined the audit fees that applied during the financial year.
Commonwealth authorities and companies and their subsidiaries that are subject to the CAC Act are required to pay fees for the audit of their financial statements. FMA Act agencies are advised of the notional cost (fee) for the audit of their financial statements, and that amount is disclosed in their financial statements. Notional cost recovery means that the ANAO accounts for the costs of performing the service without actually billing the auditee. In relation to audits by arrangement, under section 20(2) of the Auditor-General Act an entity may request additional audit services that may provide for the payment of fees to the Auditor-General. Other than fees received for audits by arrangement, fees are received by the Auditor-General on behalf of the Commonwealth and not retained by the ANAO.
The fees are based on a scale determined by the Auditor-General under section 14 of the Auditor-General Act. In determining audit fees, the audit fees charged for financial statement audits are calculated on a cost-recovery basis using an accrual-based costing model to determine an hourly charge-out rate for each staff classification level. The costing model takes into account all relevant costs, including the attribution of overhead costs.
The following sections describe in more detail the ANAO’s performance in providing financial statement audit opinions for 2009–10. The main performance measures for financial statement audit reports are the number of opinions issued, timeliness, cost and quality.
The number of audit opinions issued depends on government and entity decisions on entity structures. We have issued opinions on all relevant entities. Figure 5 shows the number of audit opinions issued for the 2009–10 financial statement audit cycle, in comparison to previous periods.
Figure 5 Financial statement audit opinions issued
Issuing audit opinions as soon as possible after the financial statements are signed assists entities to meet their management and annual reporting commitments. For the 2009–10 audit cycle, we issued 90 per cent of opinions on the day the financial statements were signed or within two days of the signing, a slight improvement from 88 per cent for the previous audit cycle. Figure 6 shows the timeliness with which we have issued audit opinions over the past five years.
Figure 6 Timeliness of issuing audit opinions
Table 2 summarises the costs of conducting financial statement audits in the past two reporting periods.
Table 2 Costs of financial statement audit reports by reporting period, 2009–10 to 2010–11
|Direct labour hours||159,966||149,230|
|Resources (including overheads)||$39.73m||$37.68m|
During 2010–11, we conducted a program of quality assurance reviews of a selection of completed 2009–10 financial statement audits and other assurance reports, in line with our Quality Assurance Review Program. The program’s objective is to assess compliance with auditing standards and other legal and regulatory requirements, relevant professional requirements, and associated quality control policies and procedures. The program is managed by the Professional Services Branch under the authority of the Deputy Auditor-General.
The 2010–11 program, which reviewed 10 financial statement audits and two audits by arrangement, identified no major systematic or repetitive deficiencies. However, the reviews highlighted matters that required attention, including the level of documentation of work performed, particularly in relation to areas of judgement. The results of the reviews were reviewed by senior management and disseminated to all financial statement audit staff. The results were also taken into account in the development of the financial audit learning and development program and increased support for outposted staff.
In March 2011, an independent survey was conducted to gain feedback from entities on the conduct of the audit of their 2009–10 financial statements. The report on the survey presents the views of 147 agencies.
The survey results were positive overall and indicated high satisfaction with our performance in auditing the 2009–10 financial statements. In particular:
- 92 per cent of respondents (94 per cent in 2009–10) agree that ANAO staff have the necessary understanding and skills to carry out audit work
- 88 per cent of respondents (95 per cent in 2009–10) acknowledge the value added by ANAO products and services.
While the results declined marginally from the previous year, the movement is not statistically significant and the results demonstrate the professional approach taken to maintain a high level of client satisfaction. The relevant senior leadership team has considered the results of the survey and will use the information to better focus audit efforts and improve client services.
Other regulatory assurance engagements provide assurance to entities and other third parties on selected matters outside the scope of the annual financial statements audit.
Ministers or entities can ask the ANAO to review activities on a cost-recovery basis, and a number of entities, as part of their corporate governance arrangements, seek reviews or audits of their half-year financial statements. Services also included grant acquittal certificates, performance information verification and other special purpose engagements.
Table 3 summarises the costs of conducting other regulatory assurance engagements in the past two reporting periods.
Table 3 Costs of other regulatory assurance engagements by reporting period, 2009–10 to 2010–11
|Direct labour hours||13,261||12,371|
|Resources (including overheads)||$1.62m||$1.54m|