To consider the attached report from the Authority’s External Auditors – Grant Thornton, concerning the External Audit Plan 2019-20. 

Michael Green representing the Authority’s External Auditors – Grant Thornton, provided Members with an overview of the External Audit Plan, for the audit of the financial statements and value for money conclusion, for the year ending 31^st March 2020.

Members were provided with an overview of the report, which highlighted some of the key aspects.

The significant risks identified with regard to the financial statements, based on the planning work that has been undertaken throughout the year, were highlighted to Members.

Members were informed that the risks are consistent with those identified in previous years, with the exception of one additional risk identified this year, linked to the Covid-19 pandemic.

The risk of revenue recognition was highlighted, which is a significant risk that is a feature of all audits. However, for MFRA, Members were advised that this risk has been rebutted, based on the fact that sources of funding are mainly through grant funding and other sources of statutory income. Therefore, it is believed that there is very little risk of manipulation or error in that regard.

Members were advised that another significant risk is around the management override of controls, which is a standard audit risk for all organisations, which auditors are unable to rebut under audit standards; and which are generally linked to the potential for the financial statements to be misreported through the use of journal entries or the use of management override of controls. Members were advised that the auditors do not feel that there are any specific risks for MFRA as a result of this.

A significant risk around the valuation of land and buildings was then highlighted, which Members were advised formed a key feature of the audit last year, primarily due to the level of estimation and assumption that goes into deriving the valuation of properties within the Authority’s balance sheet, which is a material amount.

A further significant risk highlighted, was around the valuation of the pension fund net liability, which is a very complex, technical area, with input from actuarial experts; and again, there is a high level of estimation and assumption associated with this area.   Members were advised that in previous years, there have been a number of issues identified which led to material adjustments to the financial statements; and that this continues to be a risk for the auditors to evaluate.

The additional risk added for this year, around Covid-19, was highlighted to Members; and they were informed that this is a risk that has been included for all audit clients for this year. Members were advised that this links to the impact of lockdown, with individuals working remotely; and auditors are simply considering whether the Authority has maintained appropriate arrangements, processes and controls, to ensure that the financial statements are prepared accurately. Members were advised that there are also issues around the fluctuation that is inherent within cross-cutting areas, such as property valuations, the impact on pensions due to changes in market activity; and several other areas, which could have been impacted due to lockdown and the state of the economy generally.

The proposed responses to those risks that Grant Thornton propose to carry out, were then highlighted to Members, which are detailed within the report.

In terms of materiality for the audit, Members were informed that this has been set at just over £1.5m for the year, which is a slight increase on the materiality for last year; and equates to around 2% of the Authority’s gross expenditure. Members were informed that any errors, or misstatements that are identified over £77k, will be reported back to the Audit Committee, within the External Audit – Audit Findings Report, later in the year.

With regards to value for money, Members were informed that the auditors conduct a review of that area as part of their audit. They were advised that based on the risk assessments carried out in planning, a significant risk has been identified around the medium and longer term financial sustainability of the organisation, which primarily reflects the fact that the Authority has a very significant capital programme underway. They were advised that the auditors want to ensure that the impact of that is well managed and planned; and that the Authority maintain a suitable level of reserves over that period.

In terms of the delivery of the audit, Members were advised that planning work has already taken place, which has resulted in this Audit Plan. They were informed that in a typical year, the audit would be carried out during June and July, with the outcomes reported towards the end of July. However, Covid-19 has had an impact on the timetable; and the Authority have now been granted an extension for producing their financial statements, to the end of August; and the audit deadline has been extended to the end of November for this year.

Members were informed that the auditors have been discussing this with officers; and plans are in place to produce the final financial statements, well in advance of the August deadline; with the audit work commencing sometime in July, and the majority of the work conducted during August.

It was confirmed to Members that Grant Thornton remain independent as the Authority’s external auditors; and the fee proposal was also highlighted to Members, which is a reduction on the outturn fee for 2019/20. Members were advised that the fee is slightly higher than the published scale fee, due to a number of reasons, some of which are recurrent in nature, due to changes in audit requirements and the level of work required to be produced.

A question was raised by Members regarding the impact of Covid-19 on the auditors proposed responses; and whether there has been any delay as a result of lockdown.

Members were informed that from the start of lockdown, auditors have all been working from home, although due to the use of technology, audits have been able to progress through to completion. Members were informed that working remotely has had a slight impact, due to the elapsed time that the audit is taking. However, Members were advised that auditors are confident that they will be able to deliver the audit; and work with officers to get the assurances that they require, to be able to report back to this Audit Committee later in the year.

Members Resolved that:

The content of the report be noted.