NSW Audit Office - Awareness - Issue 2005 03 - April 2005
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NSW Audit Office - Awareness - Issue 2005 03 - April 2005

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AWARENESSAccounting and Auditing Developments ISSUE 3 2005AUDIT OFFICE 1 AUDIT OFFICE UPDATEUPDATEACCOUNTING 4 Auditor-General’s Report to Parliament 2005, Volume OneSTANDARDS UPDATEThis report was released on the 16 March 2005. Significant issues in this volume include: AUSTRALIAN 5 ACCOUNTING STANDARDS BOARD New South Wales Aboriginal Land CouncilUPDATEFor the first time in nine years, the financial report was not qualified. However, there are still a number of systemic and persistent problems URGENT ISSUES GROUP UPDATE 9in the Council’s financial management. Some of the issues raised have existed for several years.AUDITING 10UPDATEWorkCover Scheme Statutory FundsAUASB UPDATE 10The accumulated deficit of the Scheme decreased from $2,982 million at 30 June 2003 to $2,353 million at 30 June 2004. The Scheme is INTERNATIONAL 11undergoing significant changes to improve its financial performance.UPDATENewcastle International Sports Centre Trust OTHER ISSUES 12The Trust faces a major challenge to achieve financial self-sufficiency. MISCELLANEOUS 15Without government funding and other one-off revenue windfalls, the PUBLICATIONSTrust would have incurred losses over the past five years.LEGISLATIVE 15Wollongong Sportsground Trust CHANGES UPDATEThe Trust continues to rely on government funding to remain financially TREASURY UPDATE 16viable.PREMIER’S 17DEPARTMENTFurther InformationUPDATEBarry Underwood, Executive Officer on ...

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AUDIT OFFICE UPDATE
The full report is available from our Internet si w t w e: w  .audit.nsw.gov.au/ perfaud-rep/Year-2004-2005/Followup-IP-March2005/followup-IP-contents.htm . l
Wollongong Sportsground Trust The Trust continues to rely on government funding to remain financially viable.
Further Information Barry Underwood, Executive Officer on 9275 722 b 0 a  r o ry r .  underwood@ audit.nsw.gov.a . u
WorkCover Scheme Statutory Funds The accumulated deficit of the Scheme decreased from $2,982 million at 30 June 2003 to $2,353 million at 30 June 2004. The Scheme is undergoing significant changes to improve its financial performance.
Newcastle International Sports Centre Trust The Trust faces a major challenge to achieve financial self-sufficiency. Without government funding and other one-off revenue windfalls, the Trust would have incurred losses over the past five years.
New South Wales Aboriginal Land Council For the first time in nine years, the financial report was not qualified. However, there are still a number of systemic and persistent problems in the Council’s financial management. Some of the issues raised have existed for several years.
Auditor-General’s Report to Parliament 2005, Volume One This report was released on the 16 March 2005. Significant issues in this volume include:
AUDIT OFFICE 1 UPDATE
ACCOUNTING 4 STANDARDS UPDATE AUSTRALIAN 5 ACCOUNTING STANDARDS BOARD UPDATE URGENT ISSUES GROUP UPDATE 9 AUDITING 10 UPDATE AUASB UPDATE 10 INTERNATIONAL 11 UPDATE OTHER ISSUES 12 MISCELLANEOUS 15 PUBLICATIONS LEGISLATIVE 15 CHANGES UPDATE TREASURY UPDATE 16
PREMIER’S 17 DEPARTMENT UPDATE AUDIT OFFICE 19 BETTER PRACTICE GUIDES
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Follow-up of Performance Audit Collecting Outstanding Fines and Penalti ) es (2002
Audit Opinion The SDRO accepted most of the recommendations in our 2002 audit report, Collecting Outstanding Fines and Penal , t  i a e n s d has demonstrated commendable initiative in addressing the issues raised. Major changes include:  addressing the backlog of historical fines  strengthening enforcement  improvements in data matching  reporting and benchmarking performance   clarifying strategic priorities. The SDRO has been diligent in collecting penalties owed. It accepted short-term negative publicity in order to undertake this difficult but necessary task. This, combined with the Audit Committee’s governance of implementing the Audit report recommendations, provides an example of strong leadership on this complex issue.
Background The State Debt Recovery Office (SDRO) collects fines and debts owed but not yet paid to the NSW Government, local councils and some federal government agencies. The SDRO initiates a range of sanctions if its initial enforcement notice does not succeed in recouping payment. In April 2002, we examined how well SDRO was collecting outstanding fines and penalties. We reported that the SDRO was managing very high volumes well and was collecting substantial sums of money. However, a number of factors limited its effectiveness as a fine enforcement agency and affected its capacity to recover debts. We made recommendations about measuring effectiveness, improving efficiency, and maximising recovery. In this follow-up audit, we reviewed implementation of the recommendations following 2002 report.
Further Information Sean Crumlin, Director, Performance Audit on 02 927572 s 8 e 6 a  n o . r c  rumlin@audit.n sw.gov.a . u  
The full report is available from our Internet sit w e w : w.audit.nsw.gov.au/perfaud-rep/Year-2004-2005/Followup-Fines-March2005/followup-housing-conte l n . ts.htm
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Follow-up of Performance Audit Management of Intellectual Property (2001)
Audit Opinion The Premier’s Department recently issued a whole-of-government framework for the management of intellectual property. Some agencies had already taken the initiative to develop policies and practices to manage their intellectual property. The framework is an important development that will bring together these initiatives and guide agencies towards best practice management. The next challenge is implementation. Agencies must take responsibility for implementation but they will continue to look for central guidance and support. This will require leadership, planning and resources. Premier’s Department has the challenge of facilitating discussion and sharing ideas between agencies to foster sector-wide adoption of emerging better practice.
Background Intellectual property refers to legal rights that protect the products of creative intellectual effort. Intellectual property developed by government agencies is a major asset of the people of NSW. However, because intellectual property is not tangible like buildings or equipment, the need for properly managing it may be overlooked. In our audit in October 2001, we found that many agencies were failing to properly manage intellectual property. In fact many agencies were unaware of what it was. We recommended that a whole of government framework be established to guide management of intellectual property. In this follow-up audit, we reviewed implementation of the recommendations following our 2001 report.
Further Information Sean Crumlin, Director, Performance Audit on 02 927572 s 8 e 6 a  n o . r c  rumlin@audit.n sw.gov.a . u
The full report is available from our Internet si w te w : w.audit.nsw.gov.au/perfaud-rep/Year-2004-2005/Followup-IP-March2005/followup-IP-content . s.html
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AUSTRALIAN STANDARDS UPDATE
The Role of Accounting Standard Setters and their relationships with the IASB The International Accounting Standards Board (IASB) has issued a Draft Memorandum of Understanding (MoU) on the role of accounting standard setters and their relationships with the IASB for comment. The MoU is intended to set out a shared vision of the respective roles of National and regional standard-setters and of the IASB in working towards a single set of global accounting standards. Comments to the IASB are due by 29 July 2005. The Australian Accounting Standards Board (AASB) has also released an exposure draft (ED) on this MoU to enable them to consider Australian constituents’ comments in the process of formulating its own comments to the IASB. The AASB is in the process of considering its own strategy in order to determine how to best fulfil its role as Australia’s accounting standard setter in the changing regulatory environment. This includes considering the AASB’s relationship with the IASB and the International Public Sector Accounting Standards Board (IPSASB). p og _ The Invitation to Comment is available a w t: w  w.aasb.com.au/work r /ed index.htm . Comments to the AASB are due by 30 June 2005.
Liability Adequacy Test in AASB G 1 e 0 n 2 e 3 r  al Insurance Contracts In January 2005 the AASB became aware of widespread concerns, within the insurance industry about the liability adequacy test in AASB 1023. The AASB has considered various options for dealing with these concerns and has reached a preliminary conclusion on amendments to AASB 1023 that it plans to issue in May 2005 and that would take effect immediately. The AASB is seeking comments on its proposals. The ED is available at w : ww.aasb.com.au/workprog/ed index.h . tm _ Comments to the AASB were due by 4 April 2005.
The Definition of “Contribution by Owners” The AASB issued AASB B  u 3 siness Combinatio i n n s July 2004. The AASB has become aware of some concerns that the presence of the Australian definition of “contribution by owners” in AASB 3 appears to create inconsistencies with International Financial Reporting Standards (IFRSs). The AASB has considered various options for dealing with these concerns and has reached a preliminary conclusion on amendments to AASB 3 that it plans to reissue in May 2005 and that would take effect immediately. The AASB is seeking comments on its proposals.
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The ED is available at w : ww.aasb.com.au/workprog/ed index.h . tm _ Comments to the AASB are due by 22 April 2005.
Revised AASB 1048 Interpretation and Application of Standards The AASB has reissued AASB 1 I 0 n 4 t 8 e  rpretation and Application of Standa  r t d o s  include updated references to the UIG Interpretations that were approved by the Board since the previous version was issued in December 2004. The Standard is applicable to annual reporting periods beginning on or after 31 March 2005. A copy of the revised AASB 1048 is available w  w at w : .  aasb.com.a . u Source: ICAA Accounting and Auditing News Today (ANT) Edition 11, 24 March 2005.
AUSTRALIAN ACCOUNTING STANDARDS BOARD (AASB) UPDAT M E e  e  ting 9-10 March 2005 The AASB discussed the following matters:
UIG Interpretations Approved The Board approved UIG Interpretatio M n e 2 m  bers’ Shares in Co-operative Entities and Similar Instrument a s nd UIG Interpretation E 3 mission Right  s and made a revised Accounting Standard AASB 1 A 0 p 4 p 8 li  cation and Interpretation of Standa  rds to refer to these UIG Interpretations. UIG Interpretation 2 is applicable to annual reporting periods ending on or after 31 December 2005 and UIG Interpretation 3 is applicable to annual reporting periods ending on or after 28 February 2006.
Revenue Recognition by Not-for-Profit Entities The Board considered its approach to developing a standard on revenue recognition for not-for-profit entities, to replace AASB 10 C 0 o 4 n  tribution . s The Board decided to closely monitor the IPSASB work on a draft ED N f o o n r - Exchange Revenue Transactions a  nd issue an Australian ED using the IPSASB ED as a basis. As an interim measure, the Board will consider Australian guidance based on the proposals in ED 125 Financial Reporting by Local Governm  e t n o t  s accompany AASB 1004.
Financial Instruments - Disclosure of Capital The Board noted that the IASB intends to include the new capital disclosure requirements in IAS P 1 r  esentation of Financial Stateme  n r t a s ther than proceed with the proposal in the ED to include them in a new accounting standard. The Board discussed the impact of this in Australia and decided that the new capital disclosures will only apply to reporting entities / entities preparing a general purpose financial report, rather than the broader scope of AAS P B r  e 1 s 0 e 1 n  tation
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of Financial Statemen . t  s In addition, the Board decided that the disclosures should not be mandatory for not-for-profit entities, since they may not be relevant in this context.
Director and Executive Remuneration The Commonwealth Treasury is developing proposals to eliminate duplication of remuneration disclosures for listed companies (subject to s300A C o o f r t p h o e r  ations Act 200 ) 1 . When details of the proposed new Regulation are available, the Board will decide on the changes that should be made to AASB 1046. The Board also agreed to continue with its project to amend AASB 1046 to accord with the new Australian equivalents to IFRSs as a separate matter. It is expected that an ED, with the proposed changes, will be released mid year for public comment.
Reporting by Local Governments The Board continued its consideration of the responses to E Fi D n 1 a 2 n 5 c  ial Reporting by Local Governmen . t T s he Board decided:  not to adopt the proposals relating to the recognition and measurem  ent of land under roads controlled by local governments. Instead, the Board agreed to extend the current requirements in AAS 27, as amended by AAS 27A. This is an interim position until the Board considers the issues in a broader context of other entities, such as state government road authorities, and analogous circumstances, such as land under other infrastructure;  to adopt the proposals in relation to the disclosure of performance indicators and to note in commentary that the qualitative characteristics (relevance, reliability, comparability and understandability) are explained in the Framework;  not to adopt the proposals to disclose budgetary information. Instead, the Board decided to require ex post disclosure of the original budget that was made publicly available by the local government and that the information be disclosed in the same format as the original budget, even if that format differs from the format of the financial statements. The Board decided not to specify whether disclosure is on the face of the financial statements or in the notes. The Board also decided to require a description of the budget basis where the budget basis differs from the basis used in the financial statements. To facilitate a comparison of outcomes against the budget, the Board also decided to require outcomes to be presented in the same format as the original budget and to require an explanation of the major variances between the budget and outcomes but not to disclose a numerical reconciliation of the budget basis to the accounting basis. The Board also decided to monitor the IPSASB Budgetary Reporting project and noted that that project may result in a reconsideration of the foregoing decisions; and
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 to adopt the proposals not requiring the disclosure of a “net result” fo  r each function or activity. The Board also decided to require disclosure of the liabilities that are reliably attributable to each function or activity and to acknowledge in the commentary that the Classification of the Functions of Government (COFOG) adopted by the International Monetary Fund in its Government Finance Statistics Manual 2001 provides a basis on which local governments could identify functions for the purposes of making the disclosures. The Board also decided to compare these decisions with the requirements of IPSAS 18 Segment Reporting and how it might address any inconsistencies.
Insurance (Liability Adequacy Test) The Board discussed the concern of some members of the insurance industry with the liability adequacy test in AASB 10 G 2 e 3 n  eral Insurance Contra . cts The Board decided to issue an ED that proposes:  the liability adequacy test be performed at the entity level rather than at a class of business level; and  allow different probabilities of adequacy be adopted in the outstanding claims liability and liability adequacy test, subject to appropriate disclosure.
Definition of Contribution by Owners The Board considered whether to amend A 3 A B S u B s  iness Combinatio t n o s  quarantine for-profit entities from the potential for inconsistencies that might flow from the definition of contribution by owners to the accounting required for business combinations, share-based payment and tax consolidation. The Board decided to issue an Invitation to Comment with a 30-day comment period that proposes to withdraw the defined term “contribution by owners” from Appendix A of AASB 3 and to amend paragraph Aus56.1 to make it consistent with the Framework by making reference to equity participants. The Board noted that AASB R 1 e 0 v 0 e 4 n  u  e and UIG Interpretation 103  8 Contributions by Owners Made to Wholly-Owned Public Sector Entities , which apply only to not-for-profit sector entities (and the application of Interpretation 1038 is further restricted to public sector entities), would continue to contain the definition and the requirements for contributions by owners.
GAAP/GFS Convergence The Board reviewed the draft E Fi D n  ancial Reporting of General Government Sectors by Governmen . t  s The Board broadly agreed with the draft. The more substantive amendments to be made to the draft relate to:  requiring that the GGS asset “investments in controlled entities” be measured at fair value where fair value is measurable reliably, or at the government’s proportionate share of the net asset value of controlled entities where fair value is not measurable reliably;
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 amending the proposals relating to land under roads, disaggregated information, performance indicators and budgetary information to be consistent with the decisions made by the Board in relation to the review of AA F S i  na 2 n 7 cial Reporting by Local Governme . n H ts owever, in relation to budgetary information, the proposals will address the fact that for a GGS there may be both original and revised budgets;  requiring a note to disclose financial assets and liabilities classified into foreign and domestic components; and  requiring a note to explain key technical terms, used in the financial report. The Board noted that there are strong views (both for and against) in relation to certain proposals in the ED. In light of this, the Board decided to identify the key contentious issues in the Preface to help elicit constituent feedback. The Board will consider an amended draft ED, together with a first draft of an illustrative example of the form and content of GGS financial statements and notes, at its next meeting. In relation to the implications of the Board’s decisions to date in relation to GGS financial reporting for financial reporting by whole of governments (AAS 31), government departments (AAS 29), statutory authorities, local governments (AAS 27), universities, government business enterprises and other public sector entities, the Board will consider an issues paper at a future meeting.
Policy Statements The Board decided to revise Policy Statements:  PS1 The Development of Statements of Accounting Concepts and Acc  ounting Standard ; s  PS2 The AASB Consultative Gro ; up  PS3 Project Advisory Pane ; l  s and  PS4 International Convergence and Harmonisation Policy. The Board decided to withdraw Policy State  mPeSn5t The Nature and Purpose of Statements of Accounting Conce . pts Source: AASB Action Alert No 82 (March 2005).
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URGENT ISSUES GROUP UPD Me A e T ti E n   g 22 March 2005 The Urgent Issues Group (UIG) meeting outcomes are summarised as follows:
Revision of UIG Abstracts for AIFRS
Abstract 1 T 3 he Presentation of the Financial Report of Entities Whose Securities are “Stapled” UIG members reached a consensus based on the draft revised Interpretation 1013 Consolidated Financial Reports in relation to Pre-Date-of-Transition Stapling Arrangement . s Subject to the AASB’s approval, the Interpretation will apply for annual reporting periods ending on or after 31 December 2005.
Abstract 5 I 2 n  come Tax Accounting under the Tax Consolidation System Members reached a consensus based on the draft revised Interpretation 1052 Tax Consolidation Accounting. Subject to the AASB’s approval, the Interpretation will apply for annual reporting periods ending on or after 31 December 2005. The proposed Interpretations are available w a w t: w  .aasb.com.a . u
Service Concession (Public Infrastructure) Arrangements The UIG discussed the three Draft Interpretations (D12, D13 and D14) issued recently by the IFRIC concerning service concession arrangements. The Draft Interpretations address the accounting by concession operators but not concession grantors (which are generally public sector entities). Members considered that the present accounting by operators may need to be changed under the approach set out in the Draft Interpretations. The UIG seeks comment on the IFRIC Draft Interpretations by 22 April 2005. Comments are due to the IFRIC by 3 May 2005. Source: UIG Action Alert No 05-02 (March 2005).
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AUDITING UPDATE
Class Order 05/83 Timing of Auditor’s Independence Declarations The Australian Securities and Investments Commission (ASIC) has released this Class Order to allow an auditor’s report to be signed after the auditor’s independence declaration is given to directors. Previously, the auditor’s report would need to be signed before the director’s report as the Corporations Act 200 r 1 e  quires that the declaration and report be given to directors at the same time. However, the auditing standards require auditors to comment in the auditor’s report on any material inconsistencies between the director’s report and the financial report and consider the impact of any misstatements of fact. Therefore, it was difficult for the auditor to sign the audit report before the directors’ report is signed. A copy of the Class Order is available w at w : w.asic.gov.au/c . o Source: ASIC Media Release, 16 February 2005.
AUDITING AND ASSURANCE STANDARDS BOARD (AUASB) UPDAT M E e  e  ting 1 March 2005
Re-drafting Auditing Standards The Board considered a staff paper outlining the alternative approaches for redrafting Auditing Standards in Australia and agreed to propose maintaining the “two tier” structure of mandatory requirements and explanatory guidance as a basis for the re-draft.
Audit and Assurance Alert 14 The AUASB considered a staff paper summarising the responses received from AUASB members on the proposed amendments, which allowed for the inclusion of a general emphasis of matter paragraph in audit and review reports on financial reports prepared under Australian Equivalents to International Financial Reporting Standards (AIFRS) for the first time. Given that a number of Board members expressed reservations about the inclusion of a general emphasis of matter paragraph, and concerns raised by the ASIC Chief Accountant, the Chairman of the AASB, and a number of practitioners, the AUASB decided not to endorse or require the general inclusion of emphasis of matter paragraphs in such circumstances. Consequently, the AUASB agreed not to amend and re-issue AAA 14. For more information on other meeting outcomes, refer to the AUASB Highlights of Meetings from w  ww.auasb.gov.a . u Source: AUASB Highlights of 1 March 2005 Meeting.
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INTERNATIONAL UPDATE
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  Proposed International Standard on Auditing (ISA) 600 T ( h R e e  v A is u e di d t )  , of Group Financial Statements  The proposed ISA 600 contains standards and guidance on the audit of group financial statements. The new standard does not distinguish between sole or divided responsibility for the auditor’s opinion but requires the group auditor to perform the same work under either circumstance. To accept or continue an engagement to audit group financial statements, the group auditor should be in a position to be sufficiently involved in the audit of components of the group. In particular, the auditor is required to perform the work, or to be involved in the work performed by other auditors, on all significant components. The group auditor is also required to perform procedures in relation to any other auditor’s work and to consider its adequacy for purposes of the group audit.  Proposed ISA 260 (Revise T d h ) e ,   Auditor’s Communication with  Those Charged with Governance  The proposed ISA 260 includes new guidance dealing with the communication process and sets out a framework for communication with those charged with governance. The proposed revised ISA is more specific than the existing standard about what the auditor should communicate and why. This includes any matters beyond the financial reporting and disclosure process which the auditor becomes aware of and which the auditor considers to be so serious as to require communication. For listed entities, it also requires certain categorised disclosures about fees charged for audit and non-audit services provided by the audit firm in the previous 12 months.   Proposed ISA 7 , 0 M 5 odifications to the Opinion in the Independent Auditor’s Repor , t  and proposed ISA , 7  E 06 mphasis of Matter Paragraphs and Other Matters Paragraphs in the Independent Auditor’  s (  d R er e i p ve or d t  from ISA 701, Modifications to the Independent Auditor’s Report)  The proposed ISA 705 establishes standards and provides guidance, including illustrative examples, on circumstances that may result in a modification to the auditor’s opinion on the financial statements. It is aimed at clarifying the circumstances when the opinion should be modified and enhancing the consistency of reporting between jurisdictions.  As part of the revisions, the IAASB has proposed to separate the standards on