report of the auditor-general to the limpopo provincial

Sep 1, 2008 - The Auditor-General's responsibility. 3. ... amounting to R38 390 167, and the asset register and the trial balance amounting to. R38 20...

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REPORT OF THE AUDITOR-GENERAL TO THE LIMPOPO PROVINCIAL LEGISLATURE AND THE COUNCIL ON THE FINANCIAL STATEMENTS AND PERFORMANCE INFORMATION OF THE MAKHUDUTHAMAGA LOCAL MUNICIPALITY FOR THE YEAR ENDED 30 JUNE 2009 REPORT ON THE FINANCIAL STATEMENTS Introduction 1. I was engaged to audit the accompanying financial statements of the Makhuduthamaga Local Municipality which comprise the balance sheet as at 30 June 2009, and the income statement and the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes, as set out on pages xx to xx. The accounting officer’s responsibility for the financial statements 2. The accounting officer is responsible for the preparation of these financial statements in accordance with the entity-specific basis of accounting, as set out in accounting policy note 1 and in the manner required by the Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (MFMA) and for such internal control as the accounting officer determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Auditor-General’s responsibility 3. As required by section 188 of the Constitution of the Republic of South Africa, 1996 read with section 4 of the Public Audit Act, 2004 (Act No. 25 of 2004) (PAA) and section 126(3) of the MFMA, my responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with the International Standards on Auditing and General Notice 616 of 2008, issued in Government Gazette No. 31057 of 15 May 2008. Because of the matters discussed in the Basis for disclaimer of opinion paragraphs, however, I was not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for disclaimer of opinion Corresponding figures 4. In my previous audit report dated 13 October 2009, I was unable to express an audit opinion on the annual financial statements of the municipality for the year ended 30 June 2008. The qualification matters have not been resolved while no alternative procedures were possible and my audit report is disclaimed regarding the opening balances as discussed hereunder:  Reserves amounting to R208 418  Accumulated surplus amounting to R191 763 211  Prior year adjustment amounting to R766 198  Fixed assets amounting to R100 628 960  Investments amounting to R63 272 572  Debtors amounting to R14 638 034  Cash amounting to R13 411 034  Creditors amounting to R1 100 122  Provisions amounting to R332 927  Suspense account amounting to R1 302 728  Revenue amounting to R82 569 369  Expenditure amounting to R27 163 143  Employee cost amounting to R14 995 173  Irregular expenditure amounting to R1 404 982

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Reserves 5. Documentation supporting transactions appearing in reserves amounting to R208 418 as disclosed in the balance sheet and note 2 to the financial statements could not be provided. The municipality’s records did not permit the application of alternative audit procedures. Consequently, I did not obtain all the information and explanations I considered necessary to satisfy myself that all transactions have taken place and have been recorded at the appropriate amounts. Assets 6. My audit of assets revealed the following material errors and inconsistencies between the accounting records and financial statements:  Unreconciled differences between the annual financial statements and the trial balance amounting to R185 880, the annual financial statements and the asset register amounting to R38 390 167, and the asset register and the trial balance amounting to R38 204 286.  The physical verification of assets was not possible due to an incomplete asset register.  Supporting documentation for additions amounting to R16 413 490, and journals processed in the ledger amounting to R15 515 378 could not be provided  Additions amounting to R25 830 611 as per the general ledger were not recorded in the assets register.  The municipality maintains a capital projects register listing all projects in progress at year-end. None of the projects in progress were included in the balance sheet. Furthermore, documentation supporting projects in progress to the value of R32 455 599 could not be provided.  Capital project assets amounting to R15 798 671 were completed during the year. However, these assets were not recorded in the asset register. I was also not able to conclude whether these balances were included in the annual financial statements or not.  The depreciation method used by the municipality was not in line with the standards laid down by the Institute of Municipal Finance Officers in its Code of Practice for Local Government Accounting (1997) and the published Annual Financial Statements for Local Authorities (2nd edition, 1996, as amended). As per the above, the depreciation should have been disclosed as loans redeemed and other capital receipts, whereby the assets were written off over their estimated useful life. The municipality did not follow this policy and did not disclose the depreciation accordingly. 7. The municipality’s records did not permit the application of alternative procedures regarding assets and as a result, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for fixed assets amounting to R131 066 656, the surplus for the year amounting to R62 403 976, and the accumulated surplus amounting to R254 167 187. Investments 8. My audit of investments revealed the following material errors and inconsistencies between the accounting records and financial statements:  Unreconciled differences between the annual financial statements and the bank confirmations amounting to R11 904 556.  Unreconciled differences between the annual financial statements and the trial balance amounting to R10 996 549.  Authorisation letters for transfers of R17 200 000 between the investment accounts, were not submitted for audit purposes.

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9. The municipality’s records did not permit the application of alternative procedures regarding investments. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for investments amounting to R48 415 416. 10. The traffic bank account amounting to R7 139 175 was incorrectly classified as an investment instead of cash. Debtors 11. My audit of receivables revealed the following material errors and inconsistencies between the accounting records and financial statements:  Current consumer debtors were disclosed in note 8 to the financial statements in the current and prior financial years at an amount of R402 467. The balance from the prior financial year was, however, not updated with the billings for the current financial year, as the Sekhukhune District Municipality took over the billing process of the municipality from October 2007. Documentation supporting the takeover of these consumer debtors to the amount of R402 467 could not be provided for audit purposes. The municipality also did not pass an accounting entry for this takeover.  Included in the debtors balance is an amount of R4 005 360 in respect of the Department of Water Affairs and Forestry. No supporting documentation was provided to substantiate the same.  No provision for doubtful debts was made in the financial statements. The amount could not be recalculated as I was not provided with the details of debtors.  Supporting documentation of R13 202 461 relating to value added tax (VAT) was not provided for audit purposes. There is an unreconciled difference of R3 507 025 between the VAT return submitted and the general ledger. 12. The municipality’s records did not permit the application of alternative procedures regarding debtors. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for debtors amounting to R17 625 680, the surplus for the year amounting to R62 403 976, and the accumulated surplus amounting to R254 167 187. 13. VAT refunds amounting to R15 067 043 received from the South African Revenue Service (SARS) were incorrectly included in other income and not adjusted to the VAT account. Cash 14. My audit of cash revealed the following material errors and inconsistencies between the accounting records and financial statements:  Unreconciled differences between the annual financial statements and the trial balance/general ledger amounting to R12 900 263.  An unreconciled difference between the annual financial statements and bank statements of R5 357 140.  Supporting documentation for journals amounting to R50 593 846 were not provided. 15. The municipality’s records did not permit the application of alternative procedures regarding cash. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for cash amounting to R61 499 123, the surplus for the year amounting to R62 403 976, or the accumulated surplus amounting to R254 167 187.

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Creditors 16. My audit of creditors revealed the following material errors and inconsistencies between the accounting records and the financial statements:  Unreconciled differences between the annual financial statements and the general ledger amounting to R9 800 564.  A list of creditors with outstanding balances which agree to the financial statements was not provided. 17. The municipality’s records did not permit the application of alternative procedures regarding creditors. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for creditors amounting to R10 408 443. Provisions 18. Documentation supporting transactions appearing in provisions amounting to R332 927 as disclosed in the balance sheet and note 10 to the financial statements could not be provided. The municipality’s records did not permit the application of alternative audit procedures. Consequently, I did not obtain all the information and explanations I considered necessary to satisfy myself that all transactions have taken place and have been recorded at the appropriate amounts. Suspense account 19. Documentation supporting transactions appearing in the suspense account amounting to R6 274 505 as disclosed in the balance sheet and note 9 to the financial statements could not be provided. Furthermore, I could not determine which balances have been affected as a result of this uncleared account. The municipality’s records did not permit the application of alternative audit procedures. Consequently, I did not obtain all the information and explanations I considered necessary to satisfy myself that all transactions have taken place and have been recorded at the appropriate amounts. Income 20. My audit of income revealed the following material errors and inconsistencies between the accounting records and the financial statements:  Supporting documentation for traffic revenue amounting to R3 958 926 could not be provided.  Supporting documentation for interest on investment amounting to R8 015 687 could not be provided.  An Unreconciled difference in the interest earned between the annual financial statements and the bank confirmation of R3 126 865, and a difference of R2 709 470 between the annual financial statements and the investment register. 21. The municipality’s records did not permit the application of alternative procedures regarding revenue. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for operating income amounting to R31 554 321, the surplus for the year amounting to R62 403 976, and the accumulated surplus amounting to R254 167 187.

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Expenditure 22. My audit of expenditure revealed the following material errors and inconsistencies between the accounting records and the financial statements:  Unreconciled differences between the annual financial statements and the trial balance amounting to R4 564 533.  Supporting documentation for expenditure amounting to R10 053 076 was not provided. 23. The municipality’s records did not permit the application of alternative procedures regarding expenditure. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for expenditure amounting to R30 133 373, the surplus for the year amounting to R112 733 873, and the accumulated surplus amounting to R254 167 187. Employee cost 24. My audit of employee cost revealed unreconciled differences amounting to R696 241 between the trial balance and the annual financial statements in respect of Councillors remuneration. 25. The municipality’s records did not permit the application of alternative procedures regarding employee cost. Accordingly, I was not able to determine whether any adjustments might be necessary to the amounts shown in the financial statements for employee cost amounting to R20 198 525, the surplus for the year amounting to R62 403 976, and the accumulated surplus amounting to R254 167 187. 26. Retirement benefits were not disclosed or recognised in the annual financial statements as required by the standards laid down by the Institute of Municipal Finance Officers in its Code of Practice for Local Government Accounting (1997) and the published Annual Financial Statements for Local Authorities (2nd edition, 1996, as amended). Unauthorised expenditure 27. Contrary to section 125(2)(d) of the MFMA, the municipality has omitted disclosure of material unauthorised expenditure amounting to R11 562 972 which was incurred during the financial year. Irregular expenditure 28. Contrary to section 125(2)(d) of the MFMA, the municipality has omitted disclosure of material irregular expenditure amounting to R8 946 034 which was incurred during the financial year as a result of non-compliance with the supply chain regulations. 29. Contrary to section 43(2) of Division of Revenue Act, 2008 (No.2 of 2008) the municipality has omitted disclosure of material irregular expenditure amounting to R259 920, which was incurred during the financial year in contravention of the conditions of the grant. Disclosure 30. The municipality has omitted compulsory disclosures as required under section 125(1) (c) and 125(2)(a) of the MFMA. Disclaimer of opinion 31. Because of the significance of the matters described in the Basis for disclaimer of opinion paragraphs, I have been unable to obtain sufficient appropriate audit evidence to provide a

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basis for an audit opinion. Accordingly, I do not express an opinion on these financial statements. Emphasis of matter I draw attention to the following matter on which I do not express a disclaimer of opinion: Basis of accounting

32. The entity’s policy is to prepare financial statements on the entity-specific basis of accounting, as set out in accounting policy note 1.

OTHER MATTERS I draw attention to the following matters that relate to my responsibilities in the audit of the financial statements: Information included in the annual report

33. I have not obtained the other information included in the annual report and have not been able to identify any material inconsistencies with the financial statements. Non-compliance with applicable legislation Local Government: Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (MFMA) 34. A cash management and investment policy was not established as prescribed by the Municipal Investment Regulations in Government Notice R.308 of 1 April 2005 and section 13(2) of the MFMA. Local Government: Municipal Systems Act, 2000 (Act No. 32 of 2000) (MSA) 35. The accounting officer did not exercise his responsibility to ensure that the tariff policy was prepared and approved in terms of section 74. Division of Revenue Act (Act No.2 of 2008) (DoRA) 36. The accounting officer did not exercise his responsibility to ensure that a DoRA reconciliation was prepared in terms of sections 5(1), (3) and (4), 8(1) and (3), 23(1), 29(2) and (3), 34(1), (2), (3) and (4), and 37. Governance framework 37. The governance principles that impact the auditor’s opinion on the financial statements are related to the responsibilities and practices exercised by the accounting officer and executive management and are reflected in the internal control deficiencies and key governance responsibilities addressed below: Internal control deficiencies 38. Section 62(1)(c)(i) of the MFMA states that the accounting officer must ensure that the municipality has and maintains effective, efficient and transparent systems of financial and risk management and internal control. The table below depicts the root causes that gave rise to the deficiencies in the system of internal control, which led to the disclaimer of opinion. The root causes are categorised according to the five components of an effective system of

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internal control. In some instances deficiencies exist in more than one internal control component. Par. no. 5 6 7 10 13 16 19 22 23 24 27 30 33 34-35 36

Basis for disclaimer of opinion Reserves Accumulated surplus Assets Investments Debtors Cash Creditors Provisions Suspense account Revenue Expenditure Employee cost Unauthorised expenditure Irregular expenditure Disclosure

CE 5 6 5 1 5 5 1 5 5 5 5 5

RA

CA

IC

M

4 1 4

6 1 3 3 3

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39. Overall reflection on qualifications:  The accounting officer did not ensure that there is a proper registry system in place where the documents are stored and can be retrieved for audit and other purposes.  The acting deputy CFO did not ensure that monthly reconciliations are prepared for cash and bank, fixed assets, creditors, revenue and employee cost.  The financial statements were prepared for the municipality by a consultant and a proper quality review thereof was not done prior to submission for audit purposes. The review would normally be the responsibility of internal audit and the audit committee. In the absence of these structures the review should have been done by the acting deputy CFO. Legend CE = Control environment The organisational structure does not address areas of responsibility and lines of reporting to support effective control over financial reporting. Management and staff are not assigned appropriate levels of authority and responsibility to facilitate control over financial reporting. Human resource policies do not facilitate effective recruitment and training, disciplining and supervision of personnel. Integrity and ethical values have not been developed and are not understood to set the standard for financial reporting. The accounting officer/accounting authority does not exercise oversight responsibility over financial reporting and internal control. Management’s philosophy and operating style do not promote effective control over financial reporting. The entity does not have individuals competent in financial reporting and related matters. RA = Risk assessment Management has not specified financial reporting objectives to enable the identification of risks to reliable financial reporting. The entity does not identify risks to the achievement of financial reporting objectives. The entity does not analyse the likelihood and impact of the risks identified. The entity does not determine a risk strategy/action plan to manage identified risks. The potential for material misstatement due to fraud is not considered. CA = Control activities There is inadequate segregation of duties to prevent fraudulent data and asset misappropriation. General information technology controls have not been designed to maintain the integrity of the information system and the security of the data. Manual or automated controls are not designed to ensure that the transactions have occurred, are authorised, and are completely and accurately processed. Actions are not taken to address risks to the achievement of financial reporting objectives. Control activities are not selected and developed to mitigate risks over financial reporting. Policies and procedures related to financial reporting are not established and communicated. Realistic targets are not set for financial performance measures, which are in turn not linked to an effective reward system. IC = Information and communication

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1 2 3 4 5 6 7 1 2 3 4 5 1 2 3 4 5 6 7

Pertinent information is not identified and captured in a form and time frame to support financial reporting. Information required to implement internal control is not available to personnel to enable internal control responsibilities. Communications do not enable and support the understanding and execution of internal control processes and responsibilities by personnel. M = Monitoring Ongoing monitoring and supervision are not undertaken to enable an assessment of the effectiveness of internal control over financial reporting. Neither reviews by internal audit or the audit committee nor self-assessments are evident. Internal control deficiencies are not identified and communicated in a timely manner to allow for corrective action to be taken.

1 2 3

1 2 3

Key governance responsibilities 40. The MFMA tasks the accounting officer with a number of responsibilities concerning financial and risk management and internal control. Fundamental to achieving this is the implementation of key governance responsibilities, which I have assessed as follows: No. Matter Clear trail of supporting documentation that is easily available and provided in a timely manner 1. No significant difficulties were experienced during the audit concerning delays or the availability of requested information. Quality of financial statements and related management information 2. The financial statements were not subject to any material amendments resulting from the audit. 3. The annual report was submitted for consideration prior to the tabling of the auditor’s report. Timeliness of financial statements and management information 4. The annual financial statements were submitted for auditing as per the legislated deadlines (section 126 of the MFMA). Availability of key officials during audit 5. Key officials were available throughout the audit process. Development and compliance with risk management, effective internal control and governance practices 6. Audit committee  The municipality had an audit committee in operation throughout the financial year.  

The audit committee operates in accordance with approved, written terms of reference. The audit committee substantially fulfilled its responsibilities for the year, as set out in section 166(2) of the MFMA. 7. Internal audit  The municipality had an internal audit function in operation throughout the financial year.  The internal audit function operates in terms of an approved internal audit plan.  The internal audit function substantially fulfilled its responsibilities for the year, as set out in section 165(2) of the MFMA. 8. There are no significant deficiencies in the design and implementation of internal control in respect of financial and risk management. 9. There are no significant deficiencies in the design and implementation of internal control in respect of compliance with applicable laws and regulations. 10. The information systems were appropriate to facilitate the preparation of the financial statements. 11. A risk assessment was conducted on a regular basis and a risk management strategy, which includes a fraud prevention plan, is documented and used as set out in section 62(c)(i) of the MFMA. 12. Delegations of responsibility are in place, as set out in section 79 of the MFMA. Follow-up of audit findings 13. The prior year audit findings have been substantially addressed. Issues relating to the reporting of performance information 14. The information systems were appropriate to facilitate the preparation of a performance report that is accurate and complete. 15. Adequate control processes and procedures are designed and implemented to ensure the accuracy and completeness of reported performance information. 16. A strategic plan was prepared and approved for the financial year under review for purposes of monitoring the performance in relation to the budget and delivery by the municipality against its mandate, predetermined objectives, outputs, indicators and targets (section 68 of the MFMA). 17. There is a functioning performance management system and performance bonuses are only paid after proper assessment and approval by those charged with governance.

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Y

N   

 

               

41. Mainly as a result of a lack of the required skills in top management:  Requested information was not made available in time as a proper document management system was not in place.  A proper quality review of the financial statements was not done prior to submission for audit purposes.  Despite numerous requests, key officials were not available throughout the audit process as they were attending training and did not delegate their responsibilities to other officials in the municipality.  The audit committee was dissolved during the year.  The internal auditor, who was appointed with effect from 1st September, 2008 did not draft a plan to ensure that responsibilities as set out in section 165(2) of MFMA are adhered to.  The municipality did not ensure compliance with section 131(1) of the MFMA in addressing issues raised in my prior audit reports.  A risk assessment was not prepared.  Proper information systems to facilitate the preparation of performance information that is accurate and complete were not put in place. Investigations 42. An investigation was conducted by an independent consulting firm on request of the entity. The investigation was initiated based on allegations of the possible misappropriation by employees of the municipality’s funds. The investigation resulted in criminal proceedings being instituted against two employees. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Report on performance information 43. I was engaged to review the performance information. The accounting officer’s responsibility for the performance information 44. In terms of section 121(3)(c) of the MFMA, the annual report of a municipality must include the annual performance report of the municipality prepared by the municipality in terms of section 46 of the MSA. The Auditor-General’s responsibility 45. I conducted my engagement in accordance with section 13 of the PAA read with General Notice 616 of 2008, issued in Government Gazette No. 31057 of 15 May 2008 and section 45 of the MSA. 46. In terms of the foregoing my engagement included performing procedures of an audit nature to obtain sufficient appropriate evidence about the performance information and related systems, processes and procedures. The procedures selected depend on the auditor’s judgement. 47. I believe that the evidence I have obtained is sufficient and appropriate to provide a basis for the findings reported below.

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Findings on performance information Non-compliance with regulatory requirements No reporting of performance information 48. The annual report of the municipality did not include the annual performance report of the municipality, prepared by the municipality in terms of section 46 of the MSA, as required by section 121(3)(c) of the MFMA. Existence and functioning of a performance audit committee 49. The municipality did not appoint and budget for a performance audit committee, nor was another audit committee utilised as the performance audit committee, as required by regulation 14(2) of the Municipal Planning and Performance Management Regulations, 2001. Internal auditing of performance measurements 50. The municipality did not develop and implement mechanisms, systems and processes for auditing the results of performance measurement as part of its internal audit processes, as required in terms of section 45 of the MSA. Content of integrated development plan 51. The integrated development plan of the Makhuduthamaga Local Municipality did not include the input indicators, output indicators and outcome indicators in respect of each of the development priorities and objectives. APPRECIATION 52. The assistance rendered by the staff of the municipality during the audit is sincerely appreciated.

Polokwane 1 February 2010

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