External Audit Planning Report
To consider a report from Ernst & Young LLP which provides the Audit Committee with a basis to review the company’s proposed audit approach and scope for the 2018/19 audit and ensure that the audit is aligned with the Committee’s service expectations.
The Committee considered a report which provided Members with a basis to review the proposed audit approach and scope for the 2018/19 audit by the Council’s external auditors, Ernst & Young LLP, and ensure that the audit was aligned with the Committee’s service expectations.
Points and comments included:
· The Ernst & Young Associate Partner briefly outlined the forthcoming changes which would impact over the new financial year.
· At the next meeting of the Committee EY would be reporting on the company’s strategy for the audit of the Council’s asset base and show what the disaggregation was and how EY proposed to target its testing,
· The EY Associate Partner referred to a possible significant risk in the form of the valuation of property. In clarification he explained that valuation of the Council’s property did not include dwellings. These would be tested but their valuation was not regarded as a significant audit risk. Part of the reason was the amount of observable market data which could be used for corroboration purposes. The valuation of schools and other specialised assets were far harder to value and used more complex assumptions.
· A query arose regarding the significance of a deliberate undervaluation of the Council’s assets in relation to depreciation, insurance charges and so forth. The Director of Resources stated that the Council had a high value of assets on the balance sheet so a minor percentage change could create a large financial issue. However, he gave the Committee full assurance that there was no deliberate attempt to misstate the value. The valuation was a transparent process and it was right that it was an area of audit focus. He stressed that he would not wish to see an alternative value arising from the audit given that this was not its function.
· If there was a major difference in asset value following valuation by EY then it was a valid challenge which would be examined. Processes had been agreed to try and speed up the exchange of this information based on last year’s experience. By providing the values to EY earlier it enabled a greater opportunity to deal with any issues which arose. The Director stressed that these were all standard audit issues and did not highlight Central Bedfordshire Council as a particular risk.
· On the matter of the incorrect capitalisation of revenue expenditure the Director commented that it was actually the inappropriate use of capital receipts to reduce revenue expenditure which was appearing in some local authorities. This had been an issue at Northamptonshire County Council and, more recently, Peterborough City Council had come under scrutiny for its actions. He did not have any concerns with regard to Central Bedfordshire Council though fully recognised the need for independent examination.
· In response to a Member’s comments regarding the auditing of areas of ‘orphan’ land in towns the Director stated that this matter had been investigated to ensure records were as up to date as possible. The Director asked for notification of specific examples of such land so action could be taken. The Chairman stated that this was not of concern in relation to the asset valuation.
· In response to a Member’s reference to the possibility of fraudulent activity involving regular but low level payments, the Director stated that the possibility of such fraud arising could not be totally discounted but, to combat this, a number of controls and processes existed, including the complete disaggregation of duties. No evidence of fraud of any significance had been discovered and there was a policy of zero tolerance towards fraudulent action in place. In addition the anti-fraud controls and processes themselves were audited.
· The Associate Partner outlined the methods used by EY to detect fraudulent activity.
· Following a query the Director confirmed that the salaries of the Council’s proposed wholly owned housing development company would be transparent. The Associate Partner stated that the Council’s arrangements undertaken prior to possibly setting up the housing company had been carried out in an appropriate way.
· The Director advised that the Corporate Resources Overview and Scrutiny Committee had already received a presentation on the proposed housing company and it was envisaged that there would be continued scrutiny interest.
· Comment was passed on the forthcoming local elections on 2 May 2019 and the possible impact on the make-up of the Audit Committee and continuity. It was felt that the report submitted by EY had an important role in briefing new Members on the detail of the Committee’s work and what was expected of the Council’s external auditors. In response the Associate Partner suggested that he resubmit the report to the next meeting of the Committee, the first in the new municipal year, in order to provide an overview of his company’s work. He added that the company also provided training and workshops for Members.
that the Audit Planning report for the year ending 31 March 2019 be resubmitted to the next meeting of the Audit Committee on 29 May 2019 for background/training purposes.