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Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
Interim Financial Audit Report 2007-08
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Interim Financial Audit Report 2007-08

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  • 1. Overview and Scrutiny Forum for Resources Part 1 25 September 2008 Item No. 5 Subject External Audit interim financial audit report 2007/8 Purpose To consider the attached report and action plan from the External Auditor. Author Head of Finance Ward Not applicable Summary The attached report will be presented by the External Auditor. It is presented for information and comment. Each of the recommendations is scheduled on the action plan at the end of the report. You will note that each recommendation is accepted at least in part. I would particularly welcome Members observations on the second and third recommendations and comments made. Proposal To note and comment on the report. Contact Mrs Joyce Steven 01633 232201 joyce.steven@newport.gov.uk Action by Head of Finance Timetable Immediate
  • 2. Audit Year: 2007/2008 August 2008 Authors: Colin Davies and Steve Wyndham Ref: Interim Financial Audit Report Newport City Council
  • 3. The Council has established appropriate arrangements to produce materially accurate and timely financial statements, although scope exists for these arrangements to be further strengthened Contents Summary 4 Recommendations 6 Detailed Report The Main Accounting System controls were operating satisfactorily and we 7 assess the risk of failures occurring which would lead to material errors in the accounts to be low Budgetary control arrangements were generally robust and certain elements 7 represent good practice. However, our work also identified opportunities for the Council to improve upon its current arrangements The closedown arrangements for the production of the financial statements 11 were satisfactory The Council had effective systems in place to produce materially accurate 12 financial statements, although some minor system weaknesses were identified The Council’s Internal Audit section complied with the CIPFA standards and we 13 could place assurance on its work, where appropriate, for our audit opinion purposes Appendices Action Plan 15 Page 2 of 18 Newport City Council - Interim Financial Audit Report
  • 4. Status of this report This report has been prepared for the internal use of Newport City Council. Our reports are prepared: • In relation to audit, under the relevant enabling legislation and the responsibilities detailed in the Code of Audit and Inspection Practice, and in the context of the ‘Statement of Responsibilities’, issued by the Auditor General for Wales. • In relation to inspection, following inspection work carried out under the Local Government Act 1999, as amended by the Public Audit (Wales) Act 2004, and in accordance with guidance issued by the National Assembly for Wales. Reports are prepared by the staff of the Wales Audit Office and appointed auditors, and addressed to members or officers including those designated as accounting or accountable officers. They are prepared for the sole use of the named body, and no responsibility is taken by the Wales Audit Office or appointed auditors to any director/member or officer in their individual capacity, or to any third party. Page 3 of 18 Newport City Council - Interim Financial Audit Report
  • 5. Summary 1. As your external auditors, our objective is to carry out an audit which discharges our statutory duties in relation to the financial statements of Newport City Council (the Council). 2. In fulfilling this responsibility, we are required to issue an audit report on the financial statements which includes an opinion on ‘whether the financial statements present fairly the state of affairs of the Council’, and in doing so provide assurance that the financial statements: • are free from material misstatement, whether caused by fraud or other irregularity or error; • comply with the statutory and other applicable requirements; • comply with all relevant requirements for accounting presentation and disclosure; and • present a Statement of Internal Control (SIC) that meets relevant requirements and is not inconsistent with our knowledge of the Council. 3. We completed an initial risk assessment that identified the high level audit risks to the financial statements. The results of this exercise were summarised in our Regulatory Plan. We then designed a more detailed Financial Accounts Plan1 to identify the audit work necessary on each area/balance presented in the Council’s financial statements to: • mitigate the identified audit risks to an acceptably low level; and • obtain the level of assurance required to provide our audit opinion by the statutory deadline of 30 September 2008. We have shared this Plan with your officers and are making progress in its implementation. 4. Before the Council prepared its 2007/2008 financial statements we carried out an Interim Financial Audit that sought to answer the question, ‘Does the Council have effective systems and arrangements in place to produce materially accurate and timely financial statements?’ 5. Our work included: • reviewing the Council’s financial arrangements in relation to the main accounting system, budgetary control and accounts close-down processes; • documenting and ‘walk-through’ testing the key financial systems to gain an understanding of the Council’s control environment and to verify that controls are operating as intended by management; and • evaluating whether the Council’s Internal Audit function provides an effective service that meets CIPFA Internal Audit Standards. 1 This Plan is a requirement of International Auditing Standard (ISA) 300 Page 4 of 18 Newport City Council - Interim Financial Audit Report [
  • 6. 6. We concluded that the Council has established appropriate arrangements to produce materially accurate and timely financial statements, although scope exists for these arrangements to be further strengthened. 7. We found that: • The Main Accounting System controls were operating satisfactorily and we assess the risk of failures occurring which would lead to material errors in the accounts to be low; • Budgetary control arrangements were generally robust and certain elements represent good practice. However, our work also identified opportunities for the Council to improve upon its current arrangements: − More information should be presented to Members in seeking their approval of the Council’s annual revenue budget; − Budget monitoring reports to Cabinet should be more frequent and there is scope to improve the quality of financial and narrative information provided; − Budget data needs to be reconciled to the Main Accounting System following upload; and − Nominated budget holders should receive financial awareness training. • The closedown arrangements for the production of the financial statements were satisfactory; • The Council had effective systems in place to produce materially accurate financial statements, although some minor system weaknesses were identified: − The Council appears to have insufficient insurance cover in relation to its fidelity guarantee and cash policies; and − Creditor payment run reconciliations need to be evidenced on completion. • The Council’s Internal Audit section complied with the CIPFA standards and we could place assurance on its work, where appropriate, for our audit opinion purposes. We identified only two areas for improvement: − IA staff should be required to complete a statement disclosing any potential independence issues or conflicts of interest; and − where the scoring system utilised by IA to determine the final audit opinion results in a borderline reasonable/unsatisfactory conclusion, sufficient evidence should be placed on the working paper file to record the key judgements made in deciding the eventual conclusion. Page 5 of 18 Newport City Council - Interim Financial Audit Report
  • 7. Recommendations 8. We made the following key recommendations: Budgetary Control R1 Present the annual revenue budget at both a service area and objective analysis level to full Council for approval. R2 An additional budget monitoring report should be provided to Cabinet following the Period 7 report and prior to the year-end out-turn report. R3 Include more appropriate detail of corporate and service financial performance within budget monitoring reports together with sufficient financial and non- financial information to provide all senior officers and Members with: • a timely and accurate financial position and context; • a clear explanation for any significant variances from budget; and • realistic and up to date financial projections. R4 Reconcile data uploaded to the Main Accounting System in relation to service area budgets. R5 Design and deliver financial awareness training to all nominated budget holders. Key Financial Systems R6 Review the level of insurance cover in place in relation to the fidelity guarantee and cash policies. R7 The reconciliation between the creditors preliminary and final creditor payment run reports should be signed and dated on completion. Internal Audit R8 IA staff should complete an annual written declaration statement to disclose any potential independence issues or conflicts of interest. R9 Where IA’s audit opinion is borderline, sufficient evidence should be placed on the working paper file to record the key judgements made in deciding the eventual conclusion. Page 6 of 18 Newport City Council - Interim Financial Audit Report
  • 8. Detailed Report The Main Accounting System controls were operating satisfactorily and we assess the risk of failures occurring which would lead to material errors in the accounts to be low 9. The Main Accounting System (MAS) collates output from all accounting systems and forms the basis for preparing the Council’s financial statements. Our review of this system involved identifying and testing those key controls that we expect to be in place in order for the system to produce reliable outputs. We found that appropriate MAS controls were in place and were operating satisfactorily. No significant weaknesses were identified. 10. We are in the process of finalising a review of the Council’s IT infrastructure supporting the MAS and payroll systems which will be the subject of a separate report to officers. Initial findings from this review suggest that whilst good support arrangements exist there is scope to improve some aspects of the arrangements and controls that are currently in place. Whilst none of the issues identified significantly influence our overall conclusion upon the MAS, officers will need to ensure that those recommendations arising are addressed during 2008/09. Budgetary control arrangements were generally robust and certain elements represent good practice. However, our work also identified opportunities for the Council to improve upon its current arrangements 11. The budgetary control system is fundamental to the Council in planning and managing its finances, ensuring that revenue budgets and the capital programme are soundly based and designed to deliver the Council’s strategic priorities. Budget setting arrangements need to be comprehensive and balanced based on realistic projections about pay, inflation, external influences and known service and capital development plans. Arrangements for monitoring performance against budgets need to be effective in enabling corrective action to be taken where appropriate, and in reporting the results to senior officers and Members to inform decision-making and scrutiny. 12. Budget monitoring arrangements are instrumental in enabling budget holders and other officers to identify any significant anomalies which may be posted to the various cost centres within the MAS. As such the existence of effective budgetary control arrangements is critical in enabling us to obtain assurance that the outputs generated by the MAS and, in turn, the Council’s financial statements are not materially misstated. Page 7 of 18 Newport City Council - Interim Financial Audit Report [
  • 9. Detailed Report 13. We carried out our assessment of the Council’s budgetary control arrangements both at the corporate level and across the four service areas. This was supplemented by a high level review of the budgetary control arrangements over the capital programme. 14. We found the Council’s arrangements to be generally robust, and we identified examples of good practice including: • the preparation of a detailed whole Authority budget book; and • the budgetary control arrangements operating within the Lifelong Learning and Leisure (LLL) service area, including regular monthly meetings between the budget holder and the nominated finance lead and the commitments monitoring arrangements. 15. However, our work also identified opportunities for the Council to improve upon its current arrangements and these are set out below together with our recommendations. More information should be presented to Members in seeking their approval of the Council’s annual revenue budget 16. The Council’s 2007/08 revenue budget was approved by full Council on 20 February 2007. However the budget information presented to Members for approval was at service area level only and not at the objective analysis level upon which both the Council’s budget book and its virement rules are based. 17. To better inform Member decisions and ensure consistency with other aspects of the budgetary control arrangements the Council should ensure that the annual revenue budget subject to approval is at both a service area and objective analysis level. Recommendation R1 Present the annual revenue budget at both a service area and objective analysis level to full Council for approval. Budget monitoring reports to Cabinet should be more frequent and there is scope to improve the quality of financial and narrative information provided 18. Robust budget monitoring and accurate financial projections are vital elements of the Council’s financial management arrangements. Members need financial information to be accurate, relevant, up to date, understandable and sufficient to inform decision-making and discharge their responsibilities for the overall financial stewardship of the Council. 19. We reviewed the timing and content of revenue budget monitoring information reported to Cabinet during the 2007/2008 financial year. The Council’s aggregate financial position was reported to Cabinet three times during the year as has been the practice in recent years: Page 8 of 18 Newport City Council - Interim Financial Audit Report
  • 10. Detailed Report • the position as at the end of July 2007 was reported in September 2007; • the October 2007 position was reported in December 2007; and • the final year end position (at 31 March 2008) was reported in June 2008. 20. There was no formal budget monitoring report to Cabinet between December 2007 (reporting October data) and June 2008 (after the financial year end had passed). We recognise that Cabinet briefing sessions provide an opportunity for officers to provide additional verbal information to supplement the budget monitoring reports, and that individual Cabinet Members request and receive additional information directly from the service accountants for those areas within their respective portfolios. However, these less formal arrangements do not in our view mitigate the risks and we recommend that the Council increases the frequency of budget monitoring reports to Cabinet so as to provide appropriate financial information in the key period prior to year-end. 21. In our view, the revenue budget monitoring information reported to Cabinet during the 2007/2008 financial year also lacked sufficient detail in that: • the financial data provided is overly ‘high level’, with only the aggregated net position for each service area being reported; • additional information in the form of context and commentary is limited; and • significant variances are not always clearly explained (e.g. a £1.6m overspend by Social Services reported in December.) 22. The financial projections and eventual outturn reported to Cabinet during the 2007/08 financial year are shown in Exhibit 1 below, and it is apparent that the eventual year end result (i.e. £3.3m contribution to balances) was significantly better than that which had been projected and reported to Cabinet in budget monitoring reports during the year. The equivalent information for 2006/07 and 2005/06 has been included for comparative purposes. Exhibit 1: Projected and actual revenue out-turn 2007/08, 2006/07 & 2005/06 £m 4 3 2 1 2007/08 2006/07 0 2005/06 Original budget Period 4 (reported Period 7 (reported Final out-turn -1 in Sept) in Dec) -2 -3 Page 9 of 18 Newport City Council - Interim Financial Audit Report
  • 11. Detailed Report 23. Whilst the eventual out-turn has contributed to an improvement in the overall financial health of the Council, due to an increase in overall balances, such volatility in financial projections is not beneficial to informing in-year Member decisions on service planning and developments. 24. The outturn report to Council of 24 June 2008 reflected that “possible overspending (of the originally approved budget) had led to restrictions being placed on all non essential spending on supplies and services and staffing where that could be achieved without affecting front line services. Those instructions have had a significant effect so the figures should not be interpreted as a loss of budgetary control but as a definite management response to the overall financial position to protect the longer term financial health of the Council.” 25. We recognise that specific reports requiring Cabinet decisions contain additional information regarding the financial implications of those options presented for consideration by Members; and that officers provide additional verbal information to Members to appraise them of actions taken to mitigate against any adverse financial projections. 26. However, we consider that more work should be undertaken to ensure that regular budget monitoring reports and projections reflect that same additional information to provide clarity as to the Council’s financial position and outlook at any point in time for all senior officers and Members. Recommendation R2 An additional budget monitoring report should be provided to Cabinet following the Period 7 report and prior to the year-end out-turn report; and R3 Include more appropriate detail of corporate and service financial performance within budget monitoring reports together with sufficient financial and non-financial information to provide all senior officers and Members with: • a timely and accurate financial position and context; • a clear explanation for any significant variances from budget; and • realistic and up to date financial projections. Budget data should be reconciled to the Main Accounting System following upload 27. We examined the arrangements in place to ensure that the Council’s approved budget for 2007/08 had been correctly recorded on the MAS. Overall, we found the arrangements to be satisfactory but identified some minor errors that had occurred on the upload of the budget for the Social Wellbeing and Housing service area. 28. Whilst those identified errors net to zero and are not significant, there is a risk that any future errors could be significant. The Council needs to ensure that budget data is fully reconciled to the MAS following upload. Page 10 of 18 Newport City Council - Interim Financial Audit Report
  • 12. Detailed Report Recommendation R4 Reconcile data uploaded to the Main Accounting System in relation to service area budgets. Nominated budget holders should receive financial awareness training 29. Nominated budget holders exist for each area cost centre upon the general ledger and these officers perform a key role within the Council’s budget monitoring arrangements. As the majority of these budget holders tend to be operational managers with little or no formal financial training it is good practice to provide them with financial awareness training to assist them in fulfilling their responsibilities effectively. 30. The Council has not implemented any such training in recent years. Some informal support has been provided by service accountants, but this has been on an ad hoc basis and it is unlikely that this has been consistently provided to all budget holders. Recommendation R5 Design and deliver financial awareness training to all nominated budget holders. The closedown arrangements for the production of the financial statements were satisfactory 31. Sound closedown procedures are necessary to ensure that financial information is brought together accurately and promptly at year-end and included appropriately in the financial statements. 32. The Council had detailed closedown plans and associated guidance in place for the production of the 2007/2008 financial statements and these were monitored closely by central finance. Page 11 of 18 Newport City Council - Interim Financial Audit Report
  • 13. Detailed Report The Council had effective systems in place to produce materially accurate financial statements, although some minor system weaknesses were identified 33. ISA 315 requires auditors to obtain an understanding of internal control relevant to the financial accounts audit. Internal control consists of the following components: • the control environment; • the entity’s risk assessment process; • the information system (including the related business processes) relevant to financial reporting and communication; • control activities; and • monitoring of controls. 34. Obtaining an understanding of internal control involves evaluating the design of a control and determining whether it has been implemented. We perform ‘walk through’ tests for all key systems/controls to confirm the accuracy of our system documentation and verify that the controls are operating as intended by management. 35. We analysed the various account areas and balances within the 2006/07 financial statements in order to identify the key underlying financial systems operated by the Council. We have in turn, as per ISA requirements, documented and “walked through” these systems in order to ensure that we have obtained an accurate understanding of these systems, and to identify potential risks to the financial statements that warrant further consideration during our audit. It should be noted that we did not undertake a detailed audit of these systems. 36. We are satisfied that there are no significant system weaknesses which could have a material impact upon the financial statements. Nevertheless, we identified some opportunities for the Council to improve its systems as outlined below. The Council appears to have insufficient insurance cover in relation to its fidelity guarantee and cash policies 37. In completing our documentation of the Council’s significant financial systems we identified two areas where it appeared that the Council’s insurance cover was insufficient to meet potential losses in the event of possible fraud and/or theft. These areas were as follows: • The fidelity guarantee insurance policy covered the Council for claims up to £1m. This is significantly lower than the value of many of the transactions that the Council would engage in as part of its treasury management activities. • We identified that the Council occasionally holds cash balances greater than the current level of cover of £50k. 38. Whilst both matters are considered to be low risk the Council may wish to reassess its level of cover in these areas. Page 12 of 18 Newport City Council - Interim Financial Audit Report
  • 14. Detailed Report Recommendation R6 Review the level of insurance cover in place in relation to the fidelity guarantee and cash policies. Creditor payment run reconciliations need to be evidenced on completion 39. Prior to making creditors payment runs officers within the Creditors section review the preliminary payment reports for reasonableness, and following the payment run the report is checked against the final preliminary report to confirm the accuracy of actual payments made. Whilst we were satisfied that this later reconciliation was completed there was no evidence to record this. Recommendation R7 The reconciliation between the creditors preliminary and final creditor payment run reports should be signed and dated on completion. The Council’s Internal Audit section complied with the CIPFA standards and we could place assurance on its work, where appropriate, for our audit opinion purposes 40. The Council’s IA function is a fundamental element of the Council’s systems of internal control. 41. Every year, IA provides an annual assurance statement on the adequacy of the systems of internal control in place following completion of their annual programme of work. This is then used to inform the Statement of Internal Control (SIC) for inclusion within the financial statements. 42. To ensure the IA service provided is in accordance with the CIPFA Code of Practice for Internal Audit in Local Government (the Code), we completed an assessment of the service, considering whether the standards detailed within the Code have been satisfied. In doing so, we: • considered the activities of internal audit and their effect, if any, on external audit procedures; • obtained an understanding of IA activities to identify and assess the risks of material misstatement of the financial statements and to design and perform further audit procedures; and • undertook an assessment of the IA function. 43. Based on our assessment we are satisfied that IA complies with the Code, and following a detailed review of their supporting working paper files we are also satisfied that we are able to rely on the work of IA for opinion purposes. Page 13 of 18 Newport City Council - Interim Financial Audit Report
  • 15. Detailed Report 44. We identified only two areas for improvement: • IA staff should be required to complete a statement disclosing any potential independence issues or conflicts of interest; and • where the scoring system utilised by IA to determine the final audit opinion results in a borderline reasonable/unsatisfactory conclusion, sufficient evidence should be placed on the working paper file to record the key judgements made in deciding the eventual conclusion. Recommendations R8 IA staff should complete an annual written declaration statement to disclose any potential independence issues or conflicts of interest. R9 Where IA’s audit opinion is borderline, sufficient evidence should be placed on the working paper file to record the key judgements made in deciding the eventual conclusion. Page 14 of 18 Newport City Council - Interim Financial Audit Report
  • 16. Appendices Action Plan Recommendation Priority Agreed Comments Date Budgetary Control R1 Present the annual revenue budget at both a service area High Yes Feb 2009 and objective analysis level to full Council for approval. R2 An additional budget monitoring report should be provided High In The only sensible other date is March and that is March 2009 to Cabinet following the Period 7 report and prior to the principle too late in the financial year for any further year-end out-turn report management action. Further consideration will be given nearer that time as to its relevance R3 Include more appropriate detail of corporate and service High In part More noted than agreed although it is accepted Ongoing financial performance within budget monitoring reports that using only the published Cabinet reports to together with sufficient financial and non-financial amount of information could be seen as information to provide all senior officers and Members with: inadequate. There are other ways in which the Leader, Deputy Leader, Cabinet Members and the • a timely and accurate financial position and context; whole Cabinet are kept fully informed of the • a clear explanation for any significant variances from position none of which is formally recorded for budget; and public access. • realistic and up to date financial projections. R4 Reconcile data uploaded to the Main Accounting System in Medium Yes ongoing relation to service area budgets. R5 Design and deliver financial awareness training to all Medium Yes Has in fact already begun but will be subject to when possible nominated budget holders. having the resources etc. to do so which will but to be depend upon other pressures on accountancy revisited July staff 2009 Page 15 of 18 Newport City Council - Interim Financial Audit Report [
  • 17. Recommendation Priority Agreed Comments Date Key Financial Systems R6 Review the level of insurance cover in place in relation to Medium Yes For 2008/9 the fidelity guarantee and cash policies. closing of accounts R7 The reconciliation between the creditors preliminary and Medium Yes immediate final creditor payment run reports should be signed and dated on completion. Internal Audit R8 IA staff should complete an annual written declaration Medium Yes already done statement to disclose any potential independence issues or conflicts of interest. R9 Where IA’s audit opinion is borderline, sufficient evidence Medium In Any future such changes will be more formally immediate should be placed on the working paper file to record the key principle documented judgements made in deciding the eventual conclusion. Page 16 of 18 Newport City Council - Interim Financial Audit Report
  • 18. Wales Audit Office 2-4 Park Grove Cardiff CF10 3PA Tel: 029 2026 0260 Fax: 029 2026 0026 Textphone: 029 2026 2646 E-mail: info@wao.gov.uk Website: www.wao.gov.uk

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