Financial Audit Policy Manual...Berrigan Shire Council 2013-14 Audit Strategy 3 1 Purpose of this...

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Berrigan Shire Council

Audit Strategy

Financial year ending 30 June 2014

Appendix "L"

Berrigan Shire Council 2013-14 Audit Strategy

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Contents

1 Purpose of this strategy .............................................................................................................................. 3

2 Independence ............................................................................................................................................... 3

3 Scope of the audit ........................................................................................................................................ 3

4 Key financial report audit risks .................................................................................................................. 4

4.1 Audit risks relating to the financial report ............................................................................................................... 4

5 Other areas of audit focus .......................................................................................................................... 7

5.1 Qualitative aspects of accounting practices ........................................................................................................... 7

Accounting policies ..................................................................................................................................... 7

Management judgements and estimates .................................................................................................... 7

5.2 Fraud, irregularities or regulatory non-compliance ................................................................................................ 8

6 Internal controls ........................................................................................................................................... 9

6.1 Internal controls that mitigate risks of material misstatement ................................................................................ 9

7 Planned audit approach ............................................................................................................................ 10

7.1 Planned audit approach to material components ................................................................................................ 10

7.2 Management representations .............................................................................................................................. 12

7.3 Materiality, audit adjustments and unadjusted differences .................................................................................. 12

8 Audit administration .................................................................................................................................. 13

8.1 Engagement team and how to contact us............................................................................................................ 13

8.2 Key milestones..................................................................................................................................................... 13

Appendix "L"


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1 Purpose of this strategy This strategy sets out our approach to the audit of the financial report of Berrigan Shire Council for the year ending 30 June

2014. This document is a key tool for discharging our responsibilities in relation to communicating with those charged with the

governance of Berrigan Shire Council.

2 Independence Richmond Sinnott & Delahunty are independent of Berrigan Shire Council.

3 Scope of the audit We have been contracted to perform a statutory audit on Berrigan Shire Council’s full set of general purpose and special purpose

financial statements. The audit will be completed in accordance with Australian auditing standards, Australian Accounting

Standards and the Local Government Act 1993, Chapter 13, Part 3, Division 2.

As part of our engagement contract with Council, we also will perform the following:

Audit of permissible income return;

Audit of pensioner rebate subsidy;

Audit of Workers Compensation Insurance Declaration;

Audit of expenditure of Government Grants requiring a separate audit report; and

Any other financial returns as required by the Office of Local Government.

Appendix "L"


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4 Key financial report audit risks

4.1 Audit risks relating to the financial report Our overall financial audit approach focuses our attention on areas where there is a risk of material misstatement of the financial

report. We identify these areas through discussions with management, our understanding of your entity, its environment, its

internal control framework and the events, transactions and processes that occurred throughout the year that may significantly

impact the financial report.

Based on these procedures we have identified a number of key financial report risks. The following table summarises the key

financial report risks and our planned audit procedures relating to each.

Table: Audit risks relating to the financial report

Risk condition Audit Area & Consequence Audit response

Information technology and data integrity

The entity is dependent on a number of IT systems and processes for preparing the financial statements. Such dependence creates risks for:

data integrity and infrastructure security

complexity of and dependency on IT infrastructure

business continuity and disaster recovery.

Data for preparing the financial statements may be inaccurate and incomplete as a result of failure of controls over IT systems.

The ability to prepare financial accurate and timely financial reports may be affected in the event of systems breakdown.

Our team will review and assess the effectiveness of general IT controls operating at your entity, including controls over security, change management, business continuity and disaster recovery.

Risk of fraud through management override of controls

Entities are subjected to the risk of fraud due to management override of controls.

Assertions, account balances and operating results may be materially misstated.

We will assess the processes in place to prevent fraud.

ASA 240 imposes specific audit procedures, including:

Testing the appropriateness of journal entries and other adjustments made in preparing the financial report

Reviewing accounting estimates for biases, and

Reviewing significant unusual transactions

Fair value assessment and revaluation of non-current physical assets

Non-current physical assets represent a material component of the total assets of the entity.

Accounting standards require these assets be carried at fair value. Such measurements often involve complex assessments and significant judgement and estimation by experts.

The value of land and buildings may be materially misstated.

The accuracy of the asset revaluation surplus and/or impairment expense may be materially misstated.

We will:

test the effectiveness of key controls and place reliance on them (if appropriate)

consider reports of expert valuers including the assumptions used and the processes for consulting with the entity

in the case of management valuations, review the reasonableness of assumptions

substantiate the processed adjustments.

Appendix "L"


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Revenue recognition

Accounting Standards for Revenue and contributions recognition may prevent not-for-profit entities from recording unexpended Grants as a liability – Income Received in Advance.

Failure to correctly recognise and measure revenue in accordance with applicable accounting standards may result in a material misstatement of revenue.

We will:

substantiate verification of cut-off procedures; and

Assess whether revenue is in accordance with AASB 118 Revenue and AASB 1004 Contributions.

Form and content of financial report

The financial reporting requirements of the Australian accounting standards and Local Government Act 1993 are extensive and complex.

Accounting treatments or financial reporting disclosures may be incorrect or insufficient.

We will review the draft financial report against best practice financial reporting standards and the requirements of the Australian accounting standards.

Creditor cut-offs

It is important to identify and bring to account at June 30 the cost of all services and goods received to that date, irrespective of whether the Council has been invoiced yet.

Expenses incurred to 30 June are not recognised as liabilities.

We will examine the processes the Council applies to satisfy itself that all delivered goods and services are identified, and the unpaid invoices taken up, or an accrual made.

New and revised Australian Accounting Standards

AASB 13 Fair Value Measurement and the revised AASB 119 Employee Benefits have become applicable for financial years commencing 1 July 2013.

AASB 13 provides a single principled based framework for how to measure the fair value of relevant assets and liabilities recognised in the financial statements as well as significantly increasing the associated reporting disclosure requirements.

The revised AASB 119 clarifies the timing classification of short term employee benefits and may result in annual leave being reclassification from short term to long term.

Financial reporting and valuation of assets may be inaccurate due to the complexities associated with applying the new standards.

We will:

Encourage and review early drafts of the new note disclosures against the requirements of AASB 13.

Review assumptions used to classify annual leave between current and non-current.

Indexation freeze on FAG

The Financial Assistance Grant (FAG) is an ongoing funding source received from the Federal Government and is provided to all Councils across Australia. Councils have no control over the amount they receive from the FAG, with a complex formula used to distribute the state wide amount allocated to NSW by the Federal Government.

In the recently released Federal Budget papers, it was announced the indexation on the FAG would be frozen for the next three years, seriously affecting the revenue levels of Councils nationally.

The FAG accounts for approximately 23% of all Council revenue, or just over $4 million. This is a significant source of income for Council and ongoing support from the Federal Government is crucial to ensure Council continues to service the needs of the community.

Council’s future budget strategies will need to be amended to ensure ongoing financial viability.

We will review the financial viability of Council through review of historical financial information as well as forward projections.

Appendix "L"


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Revitalising Local Government review paper

In October 2013, an independent review into NSW Local Government, titled ‘Revitalising Local Government’ was released. The review was commissioned by the Department of Local Government to indicate improvements to combat major areas of concerns in relation to poor governance and the increasing number of Council with distressed financial situations.

Berrigan Shire Council has been flagged for amalgamation in the report. The idea behind the proposed amalgamations included grouping a poor performing Council with one that had a more stable financial situation. The suggested merger involves Berrigan Shire merging with Jerilderie Shire Council. In this case, Berrigan is considered the stable organisation as Jerilderie Shire is facing a much more distressed situation.

Council’s ability to report as a going concern may be affected future budget strategies will need to be amended to ensure ongoing financial viability

Review the going concern of Council and assess the reasonableness of disclosures to be included in the financial report.

Appendix "L"


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5 Other areas of audit focus In addition to the responses to specific financial report risks outlined in Section 4, we include the following areas of focus in all

our financial statement audits.

5.1 Qualitative aspects of accounting practices We review the reasonableness of the underlying assumptions used by management in relation to accounting policies, accounting

estimates and financial report disclosures.

Accounting policies It is important that those charged with governance understand the accounting policies adopted by management in the

preparation of the financial report. As indicated in section 4, a small number of new or revised Australian Accounting Standards

and Financial Reporting Directions are expected to impact the accounting policies used in the preparation of the 2013-14

financial report.

At this time, we are not aware of any other accounting policy changes or any policies which we would consider inappropriate for

the circumstances of the entity.

Management judgements and estimates It is important that those charged with governance understand the significant areas in the financial report that are subject to

judgement and assumptions.

The following items are subject to material accounting estimates. We will review the underlying assumptions by management for

reasonableness.

Table: Balances subjected to estimates and judgement

Component / Balance Basis of estimate and underlying assumption

Audit response

Valuation of land and buildings Fair value based on market value for land and either market value or depreciated replacement cost for buildings. The valuation requires judgement on the current condition of the assets.

Review carrying values of land and buildings at year end for any potential material adjustments.

Fair value assessment of non-current physical assets

The new AASB 13 Fair Value standard requires fair value assessments that may involve both complex and significant judgement and estimation by management and experts. The value of land and buildings may be materially misstated and potential classification and disclosure risks may occur.

We will test the effectiveness of key controls, consider reports of expert valuers and review the reasonableness of assumptions used by management.

Impairment of Assets Management estimation that the carrying value of assets reflects their recoverable amount based on a valuation based on written down replacement cost.

Ensure management are performing impairment assessments as required and review them for reasonableness.

Depreciation on buildings, plant and equipment

Assessment of the estimated useful lives.

Review depreciation charges through analytical analysis and substantive testing for reasonableness.

Valuation and disclosure of financial instruments

Complex measurements and disclosures are required based on management’s

Review management's treatment of financial instruments and their fair value

Appendix "L"


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intentions in relation to the financial instruments, perception of the current market conditions and anticipation of future market movements.

for appropriateness of current market inputs and disclosure classifications.

Employee benefits provision Assumptions required for wage growth and CPI movements. The likelihood of employees reaching unconditional service is estimated. Treatment of leave under updated AASB119 standard.

Review assumptions used for wage growth and CPI movement as well as relevant NPV inputs. Consider reasonableness of assumptions made.

5.2 Fraud, irregularities or regulatory non-compliance The Council, General Manager and senior management have responsibility for maintaining internal controls that prevent or

detect fraud or error, and assuring regulatory compliance. The Council should be informed by management of any actual or

suspected fraud or material errors.

We are not responsible for preventing or detecting fraud. However, we are required to consider the risk of material misstatement

due to fraud when performing our risk assessments.

Aside from the required standard risk due to management override of controls (as detailed in section 4) we did not identify any

areas of material fraud risk or exposure, or regulatory non-compliance in our planning.

Appendix "L"


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6 Internal controls

6.1 Internal controls that mitigate risks of material misstatement Internal controls are systems, policies and procedures that help an entity reliably and cost effectively meet its objectives. Sound

internal controls enable the delivery of reliable, accurate and timely external and internal reporting.

An entity's governing body is responsible for developing and maintaining its internal control framework to enable:

preparation of accurate financial records and other information

timely and reliable external and internal reporting

appropriate safeguarding of assets

prevention or detection and correction of errors and other irregularities.

The annual financial audit enables us to form an opinion on an entity’s financial report. An integral part of this, and a requirement

of Australian Auditing Standard 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the

Entity and its Environment, is to assess the adequacy of an entity’s internal control framework and governance processes related

to its financial reporting. While this understanding has a significant impact on our audit strategy, our audit of your financial report

is not designed to assess, nor do we provide an opinion on, the effectiveness of internal controls.

We focus on the internal controls relating to financial reporting and assess whether your entity has managed the risk that the

financial statements will not be complete and accurate. Poor controls diminish management’s ability to achieve the entity’s

objectives and comply with relevant legislation. They also increase the risk of fraud.

During our planning procedures we gained an understanding of the following components of internal control:

Control environment

Risk assessment procedures

Information systems

Control activities

Monitoring procedures.

Our preliminary assessment of the internal control framework determined that the internal controls are likely to be effective in

preventing or detecting and correcting material misstatements in the financial report. As such, we plan to place reliance on the

key internal controls relating to the material components in section 7.1 to support our audit opinion.

Appendix "L"


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7 Planned audit approach

7.1 Planned audit approach to material components The table below provides an overview of our risk assessment and planned approach for each of your entity's material financial

statement components. The planned audit approach, which is based on the most effective balance of internal controls testing and

substantive audit procedures, may change to respond to new or emerging risks arising during the audit. Where we have indicated that

we plan to place reliance on controls, we need to gather evidence as to their operating effectiveness.

Table: Planned approach

Component Inherent Risk Assessment

(H/M/L)

Controls Reliance

Substantive Verification

Government Grants L Y • Agree to Department advice

• Review management controls for the monitoring of actual

grant revenue to budget

• Ensure grants, particularly capital grants, are accounted

for in accordance with AASB 118.

Fees & Charges M Y • Analytical review

• Review and description of receipting procedures and

controls, and compliance testing of selected revenue

streams.

Interest L N • Analytical review

Employee Benefits M Y • Review and description of procedures and controls, and

compliance testing

• Review budget monitoring controls for payroll expenses.

• Perform analytical review.

• Review exception reports.

Materials & Services M Y • Review and description of procedures and controls, and

compliance testing.

• Credit card testing

• Confirm operation of controls over requisitioning,

certification and authorisation of expenses

• Confirm operation of budgetary controls over expenditure

and funded programs.

• Review of Electronic Funds Transfer controls and

procedures.

Depreciation M Y • Analytical Review.

• Tested as part of property, plant and equipment testing.

Cash & Cash

Equivalents

L Y • Substantive tests of detail

• Direct confirmation of bank balance and review of year-

end bank reconciliations.

Appendix "L"


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Trade & Other

Receivables

L Y • Substantive tests of detail

• Confirmation of existence and valuation of debts.

• Analytical review over year-end debtors’ balance and

review of the adequacy of doubtful debts provisioning

Property, Plant &

Equipment

M Y • Substantive tests of detail

• Establish completeness of fixed asset registers

• Review application of fair value concepts to land &

building revaluation

• Review application of fair value concepts to plant &

• Assess the adequacy of classification processes for the

capitalisation of asset costs

• Perform analytical review over movements in fixed asset

classes

• Perform analytical review for depreciation expense

categories. Review appropriates of rates used.

Trade & Other Payables L Y • Substantive tests of detail

• Analytical review for accruals and other creditors.

• Subsequent payments testing of material balances.

• Review year end cut off procedures.

• Review basis of non-recognition as income

Provisions M Y • Substantive tests of detail

• Review the measurement and reporting requirements of

AASB 119

Loans/ Debt Servicing

Costs/Leases

L N • Direct confirmation of loan and repayment arrangements.

• Examine operating lease classifications.

• Analytical review of debt service costs

Accumulated Surplus L N • Analytical review

Reserves L N • Analytical review

Commitments &

Contingencies

M N • Review of minutes, agreements and management

representations.

Financial Statement

Disclosures

H N Review and examination of financial statements for

adherence to:

• Accounting Standards

• Other mandatory professional reporting requirements

Appendix "L"


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7.2 Management representations As part of our evidence gathering procedures and consistent with the Australian auditing standards, we will request explicit

management representations relating to a number of matters. The management representation letter will need to be signed at

the date of certification of the financial report.

7.3 Materiality, audit adjustments and unadjusted differences Our audit work is planned to provide reasonable, rather than absolute assurance, that the financial report is free from material

misstatement. A matter is considered material if its omission or misstatement could, individually or collectively, influence the

economic decisions of users taken on the basis of the financial statements.

Assessing materiality is a matter of professional judgement and includes consideration of both the nature and amount of the

misstatement.

In the course of our audit, we may identify amounts that we believe should be recorded differently in the financial report. In

accordance with ASA 320 Materiality in planning and performing an audit where these are material in amount or by nature we will

request that management adjust the financial report.

Appendix "L"


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8 Audit administration

8.1 Engagement team and how to contact us We have structured our team to achieve an appropriate skill and experience mix on the audit. The main team members on this

audit include:

Name Position Role Contact

Financial audit

Phil Delahunty Engagement Partner Client relationship manager.

Responsible for overall quality control of the audit.

[email protected]

5445 4200

5444 4344

Nick Bell Audit Manager Manage audit. Direct and supervise audit team. Key contact for operational audit matters.

[email protected]

5445 4200

5444 4344

8.2 Key milestones For an orderly audit and to assist Berrigan Shire Council achieve its financial reporting targets, planned audit visits and

deliverables have been agreed with management in line with the following important dates.

Table: Key deliverables

Deliverable Date Responsibility

Before balance date

Engagement letter issued May 2014 RSD

Audit strategy issued July 2014 RSD

Interim and Planning audit visit June 2014 RSD

After balance date

Trial Balance, working papers and supporting schedules 1st September 2014 BSC

Final Audit Visit 8th September 2014 RSD

Draft financial report prepared Mid-September 2014 RSD/BSC

Financial report and management representation letter signed Early October 2014 BSC

Audit opinion issued Early October 2014 RSD

Final management letter issued October 2014 RSD

Appendix "L"


Interim Management Letter

Financial year ending 30 June 2014



30 June 2014

RSD Chartered Accountants 2

Table of Contents

1. EXECUTIVE SUMMARY ...................................................................................................................................... 3

1.1 Purpose of the management letter ............................................................................................................. 3

1.2 Scope of work performed ........................................................................................................................... 3

1.3 Overall findings ........................................................................................................................................... 4

2. DETAILED FINDINGS AND RECOMMENDATIONS ........................................................................................... 5

2.1 Finance Team Structure ............................................................................................................................. 5

2.2 Creditor Masterfile Changes ....................................................................................................................... 5

2.3 Policies & Procedures - Procurement ......................................................................................................... 6

2.4 Cancelled Receipts ..................................................................................................................................... 7

2.5 Payroll Masterfile Changes ......................................................................................................................... 7

APPENDIX A – RATING DEFINITIONS ........................................................................................................................ 8



30 June 2014


1. Executive Summary

1.1 Purpose of the management letter The purpose of this management letter is to bring to your attention matters arising from the financial audit of Berrigan Shire Council

for the financial year ending 30 June 2014.

As explained in the audit strategy issued in June 2014, the financial audit is designed to enable the Auditor to express an opinion

on the annual financial report and whilst the audit considered internal controls relevant to the preparation of the financial report, the

audit does not express an opinion on the effectiveness of those controls.

1.2 Scope of work performed In accordance with our planned audit approach, the interim audit included examination of systems and processes supporting the

following key components of the financial statements:

Revenue & Rating

Expenses

Payroll

EFT Processes

IT Controls

GST

The work conducted was not a comprehensive audit of all systems and processes and was not designed to uncover all

deficiencies, breaches and irregularities in those systems and processes. Inherent limitations in any management process and

system of internal control may mean that errors or irregularities might occur and not be detected.



30 June 2014


1.3 Overall findings

We observed deficiencies in the design and implementation of controls during the final phase of the audit.

The ratings provided in this report reflect our assessment of the likelihood and degree of a misstatement occurring due to the

identified deficiency relating to financial reporting.

Appendix A explains the basis for the criteria used to determine ratings and includes a timetable for corrective action.

Summary of issues 2013/14

Current Issues Rating

Reference Description of finding Critical High Medium Low

2.1 Finance Team Structure X

2.2 Creditor Masterfile Changes X

2.3 Policies & Procedures - Procurement X

2.4 Cancelled Receipts X

2.5 Payroll Masterfile Changes X

Total - - 2 3



30 June 2014


2. Detailed findings and recommendations

This section outlines the observation, implication, recommendation and management comments and action plans for each

audit finding.

2.1 Finance Team Structure

Rating: Low

Observation

Council currently has the same staff member undertaking the Accounts Payable and Accounts Receivable functions. This team

structure created significant delays in the completion of some duties, mainly invoicing. As a result of the structure, if a creditor run

needs to be completed, then all invoicing work is put aside until the creditors work is completed. Discussions with management

noted that there was a backlog of work, up to a number of weeks, in this position. We understand that there has been some staff

on long term leave which has affected the workload of other staff.

Implication

With the current finance team structure, there is significantly reduced efficiencies occurring while the segregation of duties is so

limited.

Recommendation

Whilst we understand that the finance team has limited resources and staffing, we recommend that management review the

current structure and work allocation to ensure that there is clear segregation between the duties undertaken by finance team staff.

Management comments and action plan

Management agree that the current staffing structure does not meet the ideal to allow for clear segregation of duties. However

there is limited scope to relocate the Accounts Receivable function to another staff member without creating another conflict

of duties or unbalanced work allocation. To partly address the perceived workload of the Accounts Payable/Receivable Officer,

responsibility for insurance and superannuation has been removed from that position.

That said, management will continue to review all position descriptions of its finance team to attempt to address this issue.

Staff changes have made the issue of staff on long-term leave no longer relevant and the backlog identified above was

addressed prior to the end of the financial year.

2.2 Creditor Masterfile Changes

Rating: Low

Observation

Changes to the creditors masterfile, particularly bank account information, is something that needs to be reviewed critically by

management for any unauthorised changes. Discussions with management have noted that a report which shows all changes

made to the masterfile can be produced by Practical, and this report is subject to random reviews by the Finance Manager.

However, we noted no evidence that this review had actually been undertaken.



30 June 2014


Implication

If the review of this report is not completed on an ongoing and consistent basis, there is an increased risk of fraud or error through

the accounts payable system if unauthorised and inappropriate changes are made.

Recommendation

We recommend that the report is reviewed at least monthly, and that the report is signed off by the reviewing officer as evidence of

the review being undertaken.


Management agree and have formalised a monthly review of creditor masterfile changes from July 2014. The Finance

Manager will be responsible for checking changes against supporting documentation and signing off the report.

2.3 Policies & Procedures - Procurement

Rating: Medium

Observation

During our review of the accounts payable and purchasing function, we noted that Council does not have detailed policies and

procedures in place. Policy and procedure documents are required to outline the levels of purchasing delegation allocated to

various staff members across the organisation, as well as determining purchasing thresholds for when quotes are required.

Discussions with staff noted that there were some updates to policy documents occurring during our visit.

Implication

Without detailed policies and procedures in place, it is difficult for Council and management to be sure that processes are being

consistently applied by staff across the organisation. Staff should have defined delegation limits. Expectations and guidelines for

either written or verbal quotes should be documented and adherence monitored.

Recommendation

We recommend that Council review its current policy and procedure documents and ensure that purchasing authorities and

requirements are included into these, or new policies and procedures be developed to cover these items.


Management agree that the existing procurement procedures need immediate review. A Procurement Working Group has

been meeting fortnightly to review and improve the Council’s procurement policies and procedures. A revised Procurement

Policy has been adopted and other policies and procedures are being worked through on a systematic basis. It is expected

that this process will be complete towards the end of the 2014 calendar year.



30 June 2014


2.4 Cancelled Receipts

Rating: Low

Observation

Council currently does not produce or review a cancelled receipts report on a regular basis. Cancelled receipts are not common at

Council, and are only picked up through the bank reconciliation process. There is a risk of unauthorised receipt cancellations

occurring, either through error or fraud, if all cancelled receipts are not reviewed by management. Audit discussed the issue with

the Finance Manager and noted that it is possible to produce a listing of cancelled receipts from Practical.

Implication

Without a review process in place for cancelled receipts, the risk of fraud or error is increased.

Recommendation

We recommend that Council implement a process whereby the cancelled receipts report is produced on an ongoing basis and

reviewed by the Finance Manager or other member of the management team.


Management agree that a monthly review of cancelled receipts is necessary. Council staff are working with Practical and

seeking advice from other Councils about the best method of undertaking the review.

2.5 Payroll Masterfile Changes

Rating: Medium

Observation

Changes to the payroll masterfile, particularly bank account and other personal information, is something that needs to be

reviewed critically by management for any unauthorised or inaccurate changes. Discussions with management have noted that a

report which shows all changes made to the masterfile can be produced, and this report is subject to random reviews by the

Finance Manager. However, we noted no evidence that this review had actually been undertaken.

Implication

If the review of this report is not completed on an ongoing and consistent basis, there is an increased risk of fraud or error through

the payroll system.

Recommendation

We recommend that the report is reviewed following each payroll run, and that the report is signed off by the reviewing officer as

evidence of the review being undertaken.


While there is a regular check of payroll masterfile changes, management agree that this needs to be more systematic and

formalised. From July 2014, a payroll masterfile review will be conducted each pay period, signed off by the Finance Manager

and a copy placed in the Audit file.



30 June 2014


Appendix A – Rating Definitions The rating of audit issues in this report reflects our assessment of both the likelihood and consequence of each identified

issue in terms of its impacts on:

the effectiveness and efficiency of operations, including probity, propriety and compliance with applicable laws

the reliability, accuracy and timeliness of financial reporting.

The rating also assists management in its prioritisation of remedial action.

We may include extreme, high or moderate rated issues in our reports to Parliament on the results of financial statement

audits.

Figure 2A Table: Rating definitions and management action

Rating Definition Management action required

Critical The issue represents:

a control weakness which could cause or is causing

severe disruption of the process or severe adverse

effect on the ability to achieve process objectives and

comply with relevant legislation; or

a material misstatement in the financial report has

occurred.

Requires immediate management intervention with

a detailed action plan to be implemented within 1

month.

Requires executive management to correct the

material misstatement in the financial report as a

matter of urgency to avoid a modified audit opinion.

High The issue represents:

a control weakness which could have or is having a

major adverse effect on the ability to achieve process

objectives and comply with relevant legislation; or

a material misstatement in the financial report that is

likely to occur.

Requires prompt management intervention with a

detailed action plan implemented within 2 months.

Requires executive management to correct the

material misstatement in the financial report to

avoid a modified audit opinion.

Medium The issue represents:

a control weakness which could have or is having a

significant adverse effect on the ability to achieve

process objectives and comply with relevant legislation;

or

a misstatement in the financial report that is not material

and has occurred.

Requires management intervention with a detailed

action plan implemented within 3 to 6 months.

Low The issue represents:

a minor control weakness with minimal but reportable

impact on the ability to achieve process objectives and

comply with relevant legislation; or

a misstatement in the financial report that is likely to

occur.

Requires management intervention with a detailed

action plan implemented within 6 to 12 months.

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