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Victorian Coat of Arms

Annual Plan 2016–17

The Victorian Auditor-General's Annual Plan 2016–17 was prepared pursuant to the requirements of section 7A of the Audit Act 1994, and tabled in the Victorian Parliament on 8 June 2016.

4. Financial Audit work program

4.1 Overview of our financial audit program

Key products produced as part of our financial audit program are summarised below.

Opinions on financial statements of public sector entities

The Auditor-General issues audit opinions on whether the financial statements of public sector entities fairly present their financial position and performance for the year, in accordance with applicable Australian Accounting Standards and the relevant legislative reporting framework.

Opinions on performance statements of public sector entities

Some entities are also required to prepare performance statements for audit by the Auditor-General. These present an entity's performance against key performance indicators. The Auditor-General produces an opinion on whether the performance statements are fairly presented in accordance with the relevant reporting framework.

Opinion on the Annual Financial Report of the State of Victoria

The Annual Financial Report (AFR) of the State of Victoria sets out the consolidated financial position and performance of the State of Victoria and the Victorian General Government Sector. It is a key accountability document for informing Parliament and the public. The Audit Act 1994 requires the Auditor-General to express an opinion as to whether the AFR is fairly presented in accordance with the relevant legislation and applicable Australian Accounting Standards.

Review of Estimated Financial Statements of the Victorian general government sector

The Audit Act 1994 requires the Auditor-General to review the Estimated Financial Statements of the Victorian general government sector and provide a report on that review. The review is not an audit as it is a limited assurance engagement and it also examines prospective information. The Auditor-General's review report is included in the State Budget Papers together with the Estimated Financial Statements.

Parliamentary reports on results of financial audits

At the conclusion of each audit cycle, VAGO tables reports in Parliament about the results of our audits of public sector entities' financial statements and, where applicable, performance statements, and our audit of the AFR. Our reports include comment on selected areas of focus, covering key elements of financial and resource management, and governance.

4.2 Delivering our audits

Financial audits are conducted by our staff or with the assistance of externally engaged firms. All audits conducted with the assistance of external firms—known as audit service providers—are subject to project management and quality assurance by our staff and all audit opinions are issued by the Auditor-General.

Our medium-term aim is to resource more of the higher-risk, material and/or strategic audits using our staff. Our resourcing decisions also take into account the level of highly specialised technical skills or expertise required in an audit, which may not currently exist within our organisation. In instances where it is not practical or viable to build this expertise internally, external specialists may be contracted to provide this capability.

Timing of our key products and services

The majority of our annual financial audits relate to entities with financial year-end dates of 30 June and, to a lesser extent, 31 December.

Our audit and assurance services, including our Parliamentary reporting program, are undertaken progressively across the entire calendar year to enable the efficient and effective delivery of our key products and services.

4.3 Planned financial audit outputs for 2016–17

We will continue to deliver a diverse range of auditing and assurance services in 2016–17 pursuant to the Audit Act 1994. Figure 6 provides an overview of those activities and any other applicable legislative frameworks.

Figure 6: Audits and assurance activities expected to be conducted in 2016–17

Basis

Number (a)

Financial statement audits

Financial Management Act 1994 (including the AFR) and/or Corporations Act 2001

325

Local Government Act 1989

91

Other legislation or reporting frameworks

127

Audits by arrangement

4

Total

547

Performance statement audits

Financial Management Act 1994 (water entities) (b)

19

Local Government Act 1989

79

Ministerial request (technical and further education entities)

12

Total

110

Review reports

Audit Act 1994 (Review of Estimated Financial Statements)

1

Parliamentary reports

Audit Act 1994 (Reports on the results of audits)

7

Other

Financial Management Act 1994 (Warrants)

15

Various legislation (Acquittals of funds) (c)

86

Total other

101

Total audit and assurance activities

766

(a) The number of audits conducted varies year on year due to changes in the number of public sector entities and their associated entities.

(b) Following the release of Financial Reporting Direction 27C Presentation and Reporting of Performance Information all 19 water entities are required to prepare and have audited their performance reports.

(c) Based on 2015–16 data. Acquittals are only conducted if required under agreements relating to specific funding programs.

Our financial audit program is dynamic, reflecting changes such as the creation of new entities and the cessation of others, including the impacts of machinery-of-government (MOG) changes in the composition of portfolio departments and associated entities. As such, the number of audit and assurance activities we conduct can change throughout the year and over time in accordance with changes in the number of public sector entities.

Areas of focus 2016–17 and 2017–18

As part of our annual financial audits, we identify key areas of focus for our parliamentary reporting program that target matters that would provide the greatest value to Parliament and the citizens of Victoria.

In 2016–17, we plan to table seven reports in Parliament arising from the conduct of our annual financial audits.

Figure 7 lists the reports to Parliament and areas of focus to be reported on for 2016–17 and 2017–18.

Figure 7: Financial audit reports to be tabled in 2016–17 and 2017–18, including areas of focus

Report

Areas of focus 2016–17

Areas of focus 2017–18

Sector-wide

Auditor-General's Report on the Annual Financial Report of the State of Victoria

Report on the outcomes and issues arising from the financial audit of the ▲

Report on the outcomes and issues arising from the financial audit of the AFR of the State of Victoria ▲

Portfolio Departments and Associated Entities: Audit Snapshot

Machinery-of-government changes ▲

Procurement

Education

Technical and Further Education Institutes: Audit Snapshot

Asset maintenance

Management of sessional academic staff ▲

Universities: Audit Snapshot

Telecommunication costs ▲

Executive remuneration

Environment

Water Entities: Audit Snapshot

Asset valuations ▲

Procurement ▲

Health

Public Hospitals: Audit Snapshot

Capital funding ▲

Private patient revenue ▲

Local government

Local Government: Audit Snapshot

Asset valuations

Rate capping ▲

▲ indicates a new report not in the previous annual plan.

The areas of focus for 2016–17 and 2017–18 are discussed in more detail in the following section.

AUDITOR-GENERAL'S REPORT ON THE ANNUAL FINANCIAL REPORT OF THE STATE OF VICTORIA, 2016–17 AND 2017–18

The AFR of the State of Victoria presents the consolidated financial outcome for the State of Victoria and the Victorian general government sector.

The Auditor-General tables a report on the AFR late each calendar year. The report provides the results of the audit of the AFR. It also provides analysis of, and commentary on, key aspects of the financial performance and position of the State of Victoria and Victorian general government sector, drawing attention to significant trends, events, projects and developments that influenced the outcomes.

PORTFOLIO DEPARTMENTS AND ASSOCIATED ENTITIES AUDIT SNAPSHOT REPORTS
Machinery-of-government changes, 2016–17

Changes in MOG can significantly affect internal control frameworks and practices within public sector agencies. These changes are large scale and can be difficult to implement. The implementation of such changes can disrupt normal operations and increase the risk of error and internal control breakdown throughout affected entities. Victoria's most recent MOG changes took effect in January 2015.

We will perform a review of the implementation of these MOG changes at two portfolio departments, focusing on the impact on risk-management practices, internal controls and financial reporting.

Procurement, 2017–18

Internal control frameworks and practices within public sector agencies should assure that procurement activities satisfy the entity's business needs and are suitably authorised, in line with policies and procedures, and consistent with the principles of value for money, open and fair competition, accountability, risk management, probity and transparency.

Portfolio departments are required to implement and maintain an effective internal control framework for procurement.

TECHNICAL AND FURTHER EDUCATION INSTITUTES AUDIT SNAPSHOT REPORTS
Asset maintenance, 2016–17

The move to a competitive operating environment for technical and further education (TAFE) institutes has seen their revenue decline, making it a challenge for TAFEs to achieve a targeted return on investment, as set by the Minister for Training and Skills. This has encouraged TAFEs to review operations to identify efficiencies, maximise revenue and reduce expenditure. In reviewing their operations, there is a risk that TAFEs may reduce discretionary expenditure on asset maintenance. Over time, asset condition will be impacted if asset maintenance is not being performed as required.

We will review the asset maintenance plans and asset maintenance framework at each TAFE institute. This will include a review of management controls and oversight of asset maintenance plans, asset condition assessments and spending on maintenance.

Management of sessional academic staff, 2017–18

Salaries are the most significant expenditure at technical and further education (TAFE) institutes. Salary expenditure comprises both permanent ongoing staff and sessional teaching staff who are engaged to deliver course content on a needs basis. The oversight and control of salaries is therefore an important cost control activity for TAFE institutes.

We will assess the policies relating to management of sessional academic staff and the related management practices, governance and oversight at TAFEs. We will include comment on the cost of engaging sessional staff compared to permanent staff, the patterns and trends in sessional staff, and the cost of recruiting sessional staff.

UNIVERSITIES AUDIT SNAPSHOT REPORTS
Telecommunications costs, 2016–17

Telecommunications devices are an important tool in any business, including public sector entities. Such devices can be an effective and efficient means of communication. However, where such devices are provided to employees, there must be adequate control over the cost and appropriate usage. Universities should have a framework in place to manage and control expenditure on mobile phones and personal devices, which should include a requirement for monitoring expenditure, trends and patterns in usage.

We will review the policies, management practices, oversight of telecommunications expenditure and use of personal devices across Victorian universities. Further testing and analysis will be undertaken at a sample of universities.

Executive remuneration, 2017–18

Executives form the key leadership and management group of a university. Remuneration for an executive should be set based on a policy framework, and any adjustments made should be subject to clear processes and parameters, with any key performance criteria articulated and assessed. University councils should oversee the nature and level of executive remuneration, and transparent disclosure of executive remuneration is expected to be made annually in audited financial statements.

We will review the controls, policies and processes, monitoring and oversight of executive remuneration in place at each university. We will analyse and assess the levels of, and trends in, executive remuneration over time.

WATER ENTITIES AUDIT SNAPSHOT REPORT
Asset valuations, 2016–17

At 30 June 2015, the state's 19 water entities collectively held $42.9 billion in non-financial assets, used in the delivery of water and water-related services to the citizens of Victoria. These assets are required to be reported at fair value in entities' financial statements, as prescribed by the Financial Reporting Directions in the Financial Management Act 1994.

Accurate and timely asset valuations are essential to the quality, accuracy and reliability of financial reports. Any material misstatements of asset values in these reports can lead to inaccuracies in assessing a water entity's financial position, allocating resources and planning for future infrastructure asset needs.

Issues regarding the valuation process, methodology and quality assurance over completed valuations were identified in the 2010–11 financial year and reported to Parliament. Our 2014–15 audit of water entities identified material errors regarding the model used to value infrastructure assets at four metropolitan water entities, resulting in their financial reports receiving a qualified audit report. The state's 19 water entities are required to revalue their assets during the 2015–16 financial year.

We will assess whether previous issues regarding asset valuations have been rectified. This review will include a case study review of management practices and oversight arrangements at a sample of water entities.

Procurement, 2017–18

In 2014–15, the state's 19 water entities had a combined operating expenditure of $1.2 billion and, given the asset-intensive nature of their businesses, combined capital expenditure of approximately $1.3 billion.

Internal control frameworks and practices within public sector agencies should assure that procurement activities satisfy the entity's business needs and are suitably authorised, in line with policies and procedures, and consistent with the principles of value for money, open and fair competition, accountability, risk management, probity and transparency.

Our review of policies, procedures and a sample of tenders as part of the 2012–13 financial audit revealed deficiencies in conflict-of-interest declarations and issues regarding water entities' responsiveness to internal audit findings concerning procurement.

We will assess whether water entities have maintained an effective internal control framework for procurement as required by the Standing Directions issued by the Minister for Finance pursuant to the Financial Management Act 1994.

PUBLIC HOSPITAL AUDIT SNAPSHOT REPORTS
Capital funding, 2016–17

The public hospital sector held $12.3 billion worth of assets at 30 June 2015. During 2014–15, the sector received $672 million in capital funding from the Department of Health & Human Services and incurred $770 million in depreciation expenses. Our 2014–15 Audit Snapshot report found that public hospitals face long-term financial sustainability risks around the replacement and renewal of assets.

We will assess the capital funding policies and processes used by the department and hospitals to allocate funding toward the replacement and renewal of assets.

Private patient revenue, 2017–18

The public hospital sector generated private patient revenue of $203.8 million for 2014–15, which was 1.6 per cent of all revenue received by the sector. Hospitals are looking into increasing alternative revenue streams beyond traditional grants from government, such as private patient revenue.

We will assess the trends in private patient revenue received by public hospitals, to ascertain if this revenue stream is being maximised.

LOCAL GOVERNMENT AUDIT SNAPSHOT REPORTS
Asset valuations, 2016–17

Under the accounting standard for Property, Plant and Equipment (AASB 116), local councils must report major classes of non-financial assets at fair value in their AFR. These assets—such as land and buildings, road networks and infrastructure—are subject to periodic revaluations by external consultants or by in-house valuers.

At 30 June 2015, net valuation increases recorded by Victoria's 79 local councils totalled $2.6 billion, bringing the total value of non-financial assets to $77.5 billion.

We will assess management practices and oversight arrangements for asset revaluations performed on local councils' non-financial assets, including a deeper review of related practices at a sample of councils.

Rate capping, 2017–18

The Local Government Amendment (Fair Go Rates) Act 2015 came into operation in
December 2015. The legislation requires local councils to cap their annual rate increase to a combination of the consumer price index plus or minus any adjustment set by the Minister for Local Government. Any variation to the set annual rate index is to be accepted or rejected by the Essential Services Commission. This is effective from 1 July 2016.

The introduction of rate capping will require local councils to reassess their capital spending, what services they deliver, how they deliver those services, and the associated cost structures. Local councils may also seek to increase alternative sources of revenue. They will also need to appropriately consult with their communities.

We will assess how local councils have responded to rate capping and the impact of rate capping on local councils' operations and capital expenditure.

We will perform a review of the procurement policies, practices and management oversight at two portfolio departments.

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