Select Committee on Treasury Appendices to the Minutes of Evidence

Annex C

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 Bodies—Annual 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 Kingdom—see the letter to accounting officers—DAO(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 1998—see DAO(GEN) 4/98 issued on 2 September 1998.

  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 should:

    —  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 misleading—but 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 system—but 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 (

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Prepared 7 November 2002