Agenda item

2019/20 Audit Plan and Audit Results Report

Update report by Ernst Young (enclosed).


The Associate Partner (Ernst & Young) noted that it was unusual to present both the Audit Plan and Audit Results report on the same agenda. Due to the unusual circumstances of the year caused by the Covid pandemic, this was the first opportunity for presentation of the Audit Plan.  The Audit Plan set out the Audit risks to be addressed, and were equally shown in the Audit Results report, and it was therefore agreed that the two reports be presented and discussed together.


There had been a number of constraints, with the Council’s budget being prepared by Council officers during lockdown, and the whole audit process had been undertaken remotely.  There had also been additional financial reporting requirements involving additional procedures, as a result of Covid-19, around property, plant and equipment valuations, pension valuations and the going-concern concept.  Auditors were working to a materiality level of £921,000 for the Council.      


The following Audit Risks were explained, and were set out in both the 2019/20 Audit Plan and the Audit Results Report:


·         Fraud risks- The risk could be that management could override controls and financially mis-report the position of the Council as at 31 March, and through the incorrect capitalisation of revenue expenditure.  Auditors had found no evidence of this, and this was a key assurance for the Committee to note.


·         Property, plant and equipment valuation– this would be a key risk in any normal audit year, but was heightened this year by the Covid pandemic, and the fact that the balance sheet date of 31 March 2020 was in the middle of the first lockdown period.  This was key for assets valued at fair value.  The Council had a relatively high level of investment property valued at fair value and the assets therefore had to be considered specifically, and the valuations tested upon which they were set within the financial statements.  Auditors were awaiting sample documentation to complete procedures in this area and would expect some additional disclosures to be made in the set of accounts as a result.


·         Pension liability on the balance sheet – There were two audit-related issues being focussed on: 1) National remedy to the McCloud issue (an employment equalisation of pay issue last year) – there had been a remedy in July this year, and this remedy had changed some of the assumptions built into the actuarial model behind the liability; 2) Value of investments assets in the Lincolnshire Pension Fund and how these were valued within the actuarial model – assurances had been received from the Pension Fund auditor, which showed that the fund was understated by £12million at 31 March.  SHDC’s share of this was only £330,000, but this would reduce the liability showing within the draft financial statements.   As a result of these two issues, officers had requested an updated actuarial valuation in order to assess the impact on the Council’s liability, and to reflect this appropriately in the revised accounts.  Ernst and Young were awaiting this updated report.


·         Non-domestic rate appeal provision – This was a key estimate, with key judgement and was complex in its nature. Fluctuations had been seen in past years, giving rise to audit risk however, the auditors had completed procedures and there were no issues highlighted.


·         Going concern – This was key for a number of reasons: 1) This was a new audit standard, driving auditors to pay more attention to this area; 2) Covid 19 and the impact it had on the Council’s finances. This was especially true as the going concern concept was for a period of 12 months from the date of approval of financial statements.  This covered 2 municipal years, the second of which, 2021/22 did not yet have a Local Government Settlement behind it and many Councils across the country were facing additional costs and loss of income as a result of the pandemic and were having to assess their reserve positions.  A going-concern assessment had been requested from managers – when received this would have to be reviewed, stress-tested, and consideration given to how this would affect the future liquidity and reserve position of the Council over the 12 month period.


Audit differences (Section 4 of the report) – To date, there were no adjusted numerical differences.  Only one un-adjusted error had been found, based on the audit sample extrapolation, which was for a total of only £158,000.  Although this technically breached the reporting threshold, it was not considered material in view of the £921,000 threshold, and there was therefore no need for adjustment in terms of materiality.


The report set out areas of work to be completed.  The amount of time available meant that Ernst Young would not achieve the publication date of 30 November 2020 for the Audit Report, but a notice could be published on the SHDC website adhering to requirements of Audit and Accounts Regulations.  The Associate Partner (Ernst and Young) and the Strategic Finance and Compliance Manager would agree on a date to close out procedures to issue an audit opinion as soon as possible.


The following issues were raised:


·         Members asked that their thanks be noted for the work officers at SHDC and Ernst Young had undertaken in bringing the audit to the point it was at currently.  


·         Within the Audit Plan, the auditors requested that the Governance and Audit Committee confirm its understanding of, and agreement to the materiality and reporting levels.  The Committee confirmed that this was the case.


·         The Audit Plan stated that the auditors met regularly with the Head of Internal Audit to review internal audit plans, and the results of their work – had this happened as planned or had the Covid pandemic made this difficult?

  • The Associate Partner (Ernst Young) confirmed that he and the Director of Audit met regularly, that he had an appreciation of the key messages coming out of Internal Audit’s work and how these issues impacted on Ernst Young’s responsibilities.


·         The Audit Plan stated how Ernst Young were working to support the Authority.  However, the audit was behind schedule, and although the Covid pandemic had clearly affected it this year, the audit had also been behind schedule last year.  How was the work progressing, and had there been any learning points taken on board?

  • The relationship between the auditors and the Authority was good, and some lessons had been learned from last year however, every audit provided its challenges and the Covid pandemic had clearly impacted on the current one.  Ernst Young could provide officers at SHDC with a more up-front list of requirements in order that they could prepare for them in advance.  Ongoing discussions and liaison had been good.  An audit for an authority of SHDC’s size required a significant amount of audit assurance to be gained and there was a small window in which this information could be gained, and the timeframe had therefore over-run.  However, the quality of the audit had to be the first consideration.


·         Could the auditor provide an estimate for sign off?

  • It was anticipated that, if information was presented in a timely manner, that any outstanding issues could be cleared before Christmas, with sign off after Christmas.


·         Within the Audit Plan, specialists used were listed – with regard to valuers for land and buildings, did auditors consider how long a valuer had been used, and whether they could remain objective if this had been for a long time?

  • Where there had been a very long tenure, this could sometimes be an issue however, this was not currently the position.  The main criteria that were looked at were qualifications and experience in the sector, and ability to do the job, rather than tenure.


·         The fee amount was high and had increased greatly.  Whilst there was some appreciation that there had been extra work due to the Covid pandemic, had the amount of fees been agreed, and was the amount for additional work in addition to the original quotation?

  • With regard to the main fee, in an ordinary year, public sector audit appointments set an audit fee for each body within its contract remit, which was the scale fee set out in the report.  The scale fee was unfortunately linked to risk and audit requirements dating back 10 years, and the auditor believed this to be outdated for the level of risk and complexity involved in undertaking an audit now.  The auditors believed that the revised figure was a fair fee to discharge their statutory and professional responsibility under international auditing standards.  Discussions had taken place with senior officers at SHDC, who provided their own views, and the information was now with PSAA, as regulator to determine what they believed was the correct fee.
  • With regard to additional Covid–related procedures, it was necessary to complete the audit in order to see what impact Covid had had on the audit – these fees would be over and above the original amount.
  • The Strategic Finance and Compliance Manager confirmed that officers from SHDC had met the auditors to consider the revised proposals.  No confirmation had yet been received of the final fee as this was currently being negotiated. Once the recommendations were received, a follow up meeting between SHDC and the auditors would take place, and this would be reported back to the Committee.


·         In view of the fact that the accounts had been late in the last year, and would be this year, how long was the contract, when would it be reviewed, and was the Council getting value for money, especially in view of the large increase in fees?

  • The auditors confirmed that last year was the first in a five year contract.
  • The Strategic Finance and Compliance Manager explained that this was a nationally procured contract and the Authority was confined to some extent by the national procurement guidelines.  SHDC were reviewing the fees.  There was a review of external audit fees being undertaken nationally by the Redmond Review and there could be some intervention by Government to this.  Officers would provide an update on the national process in due course.

·         Members responded that the Committee should monitor the contract with Ernst and Young and also stated that the Covid pandemic could not always be a reason for delay.


·         The Approval of Financial statements 2019/20 stated that supporting documents regarding sample testing were still outstanding – was there any further information regarding this?

  • Auditors responded that they had received the respective evidence in respect of General Fund properties but not the investment property element of the portfolio.
  • The Strategic Finance and Compliance Manager confirmed that these were internal records held by SHDC.  The fact that these were paper records held on site was making it more difficult to access, but this was currently being progressed.


·         Had the delay in the audit for SHDC been replicated with other authorities?  Had the Covid pandemic been a contributing factor in delays for all authorities and how did SHDC compare?

  • The auditors confirmed that they were not behind on their procedures, and that they had input the budgeted number of hours agreed.  Delays had been as a result of a delay in information requested by the auditor in order to undertake the audit, being provided by the Authority.  Equally, many Councils were struggling to provide sufficient information to allow auditors to publish within the timeframes.  Covid was having an impact and contributing to delays as remote working was making it difficult to obtain and send the information through.




That both the 2019/20 Audit Plan, and the Audit Results Report be noted.

Supporting documents: