Responsibilities of the External Auditors in the
Audit of an Executive Non-Departmental Public Body (NDPB)
1. The auditors of an executive NDPB have
two responsibilities. The first is to give an opinion on whether
the financial statements give a true and fair view of the state
of affairs of the NDPB at the end of its financial year, and of
its surplus (or deficit); total recognised gains and losses; and
cash flows during the year, and to report on whether the financial
statements have been properly prepared in accordance with the
directions made by the relevant Secretary of State or Minister.
2. The wording of the auditor's opinion
should be based on that given in the Auditing Practices Board's
(APB) Bulletin 1998/10 Corporate Governance Reporting and Auditors'
Responsibilities Statements issued in December 1998 (although
the reference to giving an opinion on the cash flows and on the
total recognised gains and losses goes further than the requirements
of the Bulletin).
3. Those NDPBs which are currently producing
cash-based receipts and payments accounts will receive an audit
opionion which confirms that the statements "properly present"
the receipts and payments for the year and the balances at the
year end. However, Executive Non-Departmental Public BodiesAnnual
Reports and Accounts Guidance issued by the Treasury in March
1996, requires NDPBs which report on a cash basis to change the
basis on which they prepare their accounts to an accruals basis
for 1999-2000 onwards in line with the timetable for the preparation
by central departments of accruals-based resource accounts.
4. The second responsibility is to give
a separate explicit expression of opinion on the regularity of
transactions. This will require the auditors to consider whether
in all material respects, the body has:
complied with any relevant statutory
provisions governing the financial activities of the body; and
complied with the requirements laid
down in the Financial Memorandum or elsewhere (eg in Government
Accounting, circulars, letters or other guidance);
5. The requirement for this separate opinion
is given in the APB's Practice Note (PN) 10 Audit of Central
Government Financial Statements in the United Kingdomsee
the letter to accounting officersDAO(GEN) 4/96 issued on
14 February 1996. PN 10 gives examples of recommended wording
for the opinion on regularity.
6. Auditors should also have regard to the
booklet Regularity and Propriety issued by the Treasury
Officer of Accounts team in July 1997, and to the APB's Practice
Note 17 The Audit of Regularity in Central Government issued
in September 1998see DAO(GEN) 4/98 issued on 2 September
7. Auditors should conduct their audits
in accordance with the requirement of Statements of Auditing Standards
(SAS) issued by the APB. PN 10 considers how SAS should be applied
to the audit of public sector entities.
8. Auditors should have regard to the requirements
of the APB's Bulletin 1998/10 when preparing the statement of
their responsibilities which should be included in the accounts.
9. SAS 600 requires the title of an auditor's
report to identify the person or persons to whom it is addressed,
ie on whose behalf the audit is being undertaken. In most cases
in the public sector, the audit is being undertaken on behalf
of Parliament, and the report should normally be addressed to
one or both Houses of Parliament. However, there may be exceptions,
eg, where legislation requires the auditors to report to the relevant
Secretary of State, or where the accounts are not laid before
Parliament, and auditors will need to consider on whose behalf
the audit is being undertaken.
10. As part of their audit, the auditors
consider whether the body has operated
an effective system of internal control in order to determine
the extent to which they need to undertake transaction testing
or other audit tests to ensure the reliability of information
given in the accounts;
judge whether the body has operated
effective internal audit arrangements in accordance with the Government
Internal Audit Manual; and
ensure that the body has progressed
matters identified in previous audit reports.
11. Auditors need not report formally to
the body and the sponsor department on these matters, unless
a significant matter comes to light. Such matters include:
losses due to failures of internal
control, misconduct, fraud or other irregularity;
occasions when the Board, Chief Executive
or any other official has fallen short of the highest standards
of financial integrity expected of those responsible for the management
of public assets;
occasions when the body has incurred
expenditure of an extravagant or wasteful nature.
12. Where an NDPB makes grants to other
organisations, Departments may ask for the auditors to make a
separate report confirming that those grants have been used for
the purposes intended.
13. The auditors' responsibilities in respect
of the statement on the system of internal financial control
(see also DAO(GEN) 13/97 and DAO(GEN) 4/99) are set out in
the Auditing Practices Board's Bulletin 1995/1, which was updated
by Bulletin 1996/3 (October 1996) and Bulletin 1998/10 (December
1998). The auditors should:
determine whether the statement acknowledges
that the accounting officer is responsible for the body's system
of internal financial control;
ascertain whether the statement explains
that the system of internal financial control can only provide
reasonable and not absolute assurance against material misstatement
of loss. (NB: the wording for the model statement given in DAO(GEN)
13/97 addresses these two issues specifically);
consider the description of the key
procedures established to provide effective financial control
and any related supporting documentation, and compare it to their
knowledge of the body's system of internal financial control.
Should the statement describe procedures of which the auditors
are unaware, the auditors should undertake limited enquiries to
satisfy themselves that the statement is not misleadingbut
they do not have to review the operation of these procedures;
review the documentation supporting
the assertion by the accounting officer that there has been a
review of the effectiveness of the internal financial control
systembut they do not have to assess the conclusions reached
in that review;
consider whether any comments in
the financial statements or auditor's report concerning losses
or contingencies arising from weaknesses in the system of internal
financial control are consistent with comments made in the accounting
officer's statement. The auditors should only consider whether
any such losses or contingencies should be so attributable based
on information of which they are aware from their audit; and
review any comments made by the accounting
officer regarding any corrective action already taken in respect
of losses or contingencies arising from weaknesses in the system
of internal financial control together with any supporting documentation.
The auditors do not consider any comments made by the accounting
officer regarding action that is intended to be taken, nor do
they consider whether they concur with the reasoning behind any
statement that no corrective action is considered necessary.
14. As noted in Bulletin 1995/1, the extent
to which external auditors examine controls is related to the
degree of substantive testing which they consider necessary to
undertake. It may be that, as part of their audit of the financial
statements, external auditors may not have had reason to examine
all aspects of the system of internal financial control referred
to in the accounting officer's statement. In such cases, the auditors
might need to undertake limited reviews of these other aspects
to ensure that the statement is not misleading.
15. The auditors should provide the sponsor
department with copies of any management letters and other material
correspondence addressed to the body.
16. The auditors should be prepared to meet
the sponsor department and the body to discuss issues to which
they have referred in any report or other communication made in
accordance with paragraphs 9, 11 or 12 above.
17. Details of the normal audit reporting
timetable will be agreed between the body, the auditors and, perhaps,
the sponsor department. However, they should in any event make
early contact with the sponsor department to discuss any matters
of importance which arise out of their work (for example, if evidence
of fraud, irregularity or impropriety is discovered; if accounting
systems have broken down; or if the audit report may be qualified).
18. Where the auditors are appointed by
the sponsor department, it is for the department, after consultation
with the body, to set out the responsibilities of the auditors
in the letter of appointment. It is open to the sponsor department
to require the inclusion of tasks not covered above either as
part of the normal audit duties or as the subject of a separate
investigation. Any such additional tasks should have been agreed
when the specification for the assignment was being drawn up.
19. Where the auditors are appointed by
the body itself, the sponsor department should seek to ensure
that the body similarly sets out the auditor's responsibilities
in the appointment letter.
20. Bodies should be aware of three papers
produced by the Public Audit Forum:
The Principles of Public Audit.
The Implications for Audit of the
Modernising Government Agenda.
What Public Sector Bodies Can Expect
from their Auditors.
Copies can be obtained from the Forum's website