5 Internal Audit Reports Issued and Update
North Ayrshire Council · 27 August 2026
Back to Audit and Scrutiny Committee — 27 August 2026 and its agenda
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NORTH AYRSHIRE COUNCIL 27 August 2026 Audit and Scrutiny Committee Title: Internal Audit Reports Issued and Update Purpose: To inform the Committee of the findings of Internal Audit work completed since June 2026 and the progress made by Council Services in implementing the agreed actions from Internal Audit as at 30th June 2026 Recommendation: That the Committee considers the outcomes from the Internal Audit work completed and the current position with the implementation of Internal Audit actions. 1. Executive Summary 1.1 The Council's local Code of Corporate Governance requires effective arrangements to be put in place for the objective review of risk management and internal control. Internal Audit is an important element in this framework as it reviews internal controls and offers Elected Members and officers an objective and independent appraisal of how effectively resources are being managed. 1.2 The remit of the Audit and Scrutiny Committee includes the monitoring of Internal Audit activity. The submission of regular reports assists the Committee in fulfilling this remit. 1.3 Since the previous Committee meeting, one audit has been finalised and issued with a Substantial Assurance opinion. No high priority recommendations were raised. Two medium priority improvement actions were agreed with management. In addition, as at 30 June 2026, there were no overdue Internal Audit recommendations requiring separate reporting to Committee. 2. Background 2.1 This report provides information on Internal Audit work completed since June 2026. Internal control reviews have been completed in respect of the areas detailed in Appendix A to this report. The aim of these reviews is to provide assurance that the internal control framework within the areas examined is appropriate and operating effectively. 2.2 The findings from each audit assignment have been notified in writing to the Chief Executive, the Section 95 Officer and the relevant Executive Director and Head of Service on the completion of each assignment. Where appropriate, this has included an action plan with recommendations for improving internal control. Appendix A includes the report and action plan from each audit. 2.3 Whilst only one final audit report is presented within this report, a number of additional reviews have reached the draft reporting stage and are currently progressing through
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management clearance processes. These audits are expected to be reported to a future meeting of the Committee and include Social Work Establishments, ICT Asset Management, Information Security, IJB Financial Sustainability and Neighbourhood Services – Overtime. 2.4 The findings from the audit assignment completed are detailed at Appendix A to this report and the levels of assurance for each are noted in the table below: Audit Title Assurance Level ELC Payments to Partner Providers Substantial 2.5 The audit identified a generally effective control framework within the area reviewed. The recommendations raised relate to opportunities to strengthen ongoing contract monitoring arrangements and do not materially affect the overall assurance opinion. 2.6 There are no overdue Internal Audit recommendations requiring reporting to Committee. 3. Proposals 3.1 It is proposed that the Committee notes the outcomes from the Internal Audit work completed since June 2026 and the current position with respect to the implementation of Internal Audit Actions. 4. Implications/Socio-economic Duty Financial 4.1 None. Human Resources 4.2 None. Legal 4.3 None. Equality/Socio-economic 4.4 None. Climate Change and Carbon 4.5 None. Key Priorities 4.6 The work of Internal Audit helps to support the efficient delivery of the strategic priorities within Our Council Plan 2023-2028. Community Wealth Building 4.7 None.
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Islands Communities Impact Assessment (ICIA) 4.8 None. United Nations Rights of the Child (UNCRC) 4.9 None. Consumer Duty 4.10 None. 5. Consultation 5.1 The relevant Services are consulted on Internal Audit findings during each audit assignment. Mark Boyd Head of Service (Finance) For further information please contact Paul Brown, Senior Manager (Audit, Fraud, Health, Risk & Insurance), on paulbrown1@north-ayrshire.gov.uk. Background Papers None.
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Appendix A ELC Payments to Partner Providers 1 Background 1.1 The Scottish Government provided local authorities with additional funding of £9.7 million in 2025-26 to enable childcare workers delivering funded Early Learning and Childcare (ELC) in private and third sector services to be paid at least the new Real Living Wage rate of £12.60 per hour from April 2025. Local authorities are required to pass this additional funding to funded providers through a minimum 3.75% uplift to all 2024-25 sustainable rates. The uplift reflects the estimated increase in the average staff cost element of the sustainable rate, approximately 75%, required to meet the real Living Wage uplift from April 2025. North Ayrshire Council opted to apply an uplift of 4% to the sustainable rate in light of this, along with the variations in cost circumstances across its partner funded providers. This resulted in rates of £6.77 per hour for 3–5-year-olds and £7.08 for eligible 2-year-olds from April 2025-March 2026. 1.2 North Ayrshire Council currently contracts with 16 funded provider nurseries and 51 childminders to deliver up to 1140 hours of funded early learning and childcare to families. The current contracts commenced in August 2025 for 5 years. Funded providers enter a contract with North Ayrshire Council requiring them to meet the National Standard for Early Learning and Childcare Providers. In return, North Ayrshire Council pay an hourly (sustainable) rate for up to a maximum of 1140 hours per annum per child. 2 Objectives and Scope 2.1 The main objectives for this audit were: • To ensure that there are suitable policies and procedures in place regarding the provision of early years childcare. • To ensure that conditions of Scottish Government Funding are being adhered to. • To ensure that payments to providers are made correctly and promptly and reflect the agreements made with providers. 2.2 The scope of this audit is focussed on partner providers of early years learning and childcare. This includes childminders and partner nurseries. It excludes nurseries run by North Ayrshire Council directly. 3 Findings Policies and Procedures 3.1 The auditors reviewed relevant policies and procedures relating to the provision of early years childcare, including Early Learning and Childcare Model Terms and conditions, to ensure that they are suitable and fit for purpose. 3.2 It was noted that the Terms and Conditions document, which forms part of the latest 5-year contracts with partner early years providers, included links to Scottish Government guidance which has been superseded. Education confirmed that Terms and Conditions documents, incorporating the up-to-date Scottish Government guidance, were prepared in September 2025, but had not yet been issued to providers. A contract amendment was issued near the end of the audit process to require providers to adhere to the latest Scottish Government guidance.
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Appendix A Scottish Government Funding 3.3 Cabinet reports presented on 30 April 2024 and 3 June 2025 set out how the Council were using the funding from the Scottish Government to increase the rates paid to external providers and financial documentation provided showed the applicable budget calculation. In June 2025, providers were asked to agree to pay childcare workers a minimum of £12.60 an hour in return for the increase in the hourly rate paid to the provider by NAC. All providers agreed to this rate increase. 3.4 From August 2025, the contracts with providers require them to pay all individuals delivering the funded hours at least the Real Living Wage. The questionnaire for the annual review of contract compliance asks providers to confirm that this is the case. The service agreed that the Link Officer will also spot-check compliance with this requirement during quality improvement visits. (Action a) Payment of Providers 3.5 A procedure note for processing claims from providers, including processes to check the payment and authorisation, was provided but found to be designed for someone with a high level of understanding of the existing process. Another procedure note for approval of payments was provided and found to be suitable for the part of the process it covers. There were no other procedure notes for other processes. However, the service were already in the process of implementing new procedures and preparing accompanying notes. The new procedures were provided near the end of the audit period and were found to be clearly presented and comprehensive. 3.6 The auditors tested a sample of 30 payments to partner providers to ensure that: • payments reflected the agreement with the provider, including the uplift for the payment of the Real Living Wage. • payments reflected the arrangements agreed for the individual children. • all uplift agreements for the sample had been completed and signed. • all payments were arithmetically correct. • all payments had been checked and authorised properly. 3.7 There were some discrepancies regarding the agreements with the individual children in the registration forms provided by the partner providers. However, none had a material or financial impact. These have been highlighted and either corrected or will be addressed in the new process. 3.8 The majority of payments were checked and authorised in line with the correct procedure at the time of payment. In one instance, a payment was not authorised in line with the current procedure as the authoriser had not been copied into the email to Accounts Payable and the payment went ahead regardless. However, Accounts Payable have since amended their process so that authorisations must be submitted directly from the authoriser, with copied in approvals no longer accepted. As a result, this type of error should not recur. 3.9 Contract monitoring arrangements, including compliance and provider sustainability, were discussed with the service. The service have regular contact with all the providers, including monthly meetings, Council-led training sessions (including for child protection) and quality improvement visits. Teacher Team visits are undertaken across all providers, reviews of the nursery providers take place and childminders receive Link Officer visits. These visits and reviews are delivered as part of a rolling programme.
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Appendix A 3.10 The service also monitor reports issued by the Care Inspectorate, as one of the Terms and Conditions requires that providers must not fall below a level 4 in any category of the Care Inspectorate ratings. Where a provider falls below this standard, the Council issues notice of a Service Improvement Period (SIP) requiring them to make improvements in order to regain the required grade from the Care Inspectorate. Evidence was shared with the auditors of such an instance. The service had supported the provider to create and implement an improvement plan which had allowed them to achieve the required standard when the Care Inspectorate re-visited them. Therefore, the Council had formally notified them of the conclusion of the SIP. 3.11 The contracts are still in their first year, but plans are in place to commence an annual review of contract compliance via a questionnaire asking providers to confirm compliance with various aspects of the Terms and Conditions and to provide up-to- date copies of documentary evidence. The auditors noted when looking at the questionnaire that the section entitled "Insolvency, Conflicts of Interests or Professional Misconduct” didn’t include a question on Conflicts of Interest. This was corrected during the audit. 3.12 Financial sustainability of the providers is checked as part of the procurement process but there is currently no pro-active checking of sustainability during the contract period. Therefore, the service added a reference to the Council getting access to annual business accounts into the annual self-assessment questionnaires. The Senior Manager also agreed that the Link Officer would discuss sustainability with the providers as part of the quality improvement visits. The service have prepared a procedure for the event of a provider ceasing trading, which they would follow to place any children who lost their placement in such an event. (Action b) 4 Internal Audit Opinion 4.1 Overall, substantial assurance was obtained with regard to the management of payments to partner ELC providers. Generally, processes for managing ELC partner providers are operating effectively but a few points for improvement were identified. Errors identified during sample testing were not material and improvements being made to the processes should reduce the risk of recurrence. The service have started to implement the suggestions for improvement discussed during the audit. Definitions of Assurance Levels: Substantial A sound system of governance, risk management and control exist, with internal controls operating effectively and being consistently applied to support the achievement of objectives in the area audited. Reasonable There is a generally sound system of governance, risk management and control in place. Some issues, non-compliance or scope for improvement were identified which may put at risk the achievement of objectives in the area audited. Limited Significant gaps, weaknesses or non-compliance were identified. Improvement is required to the system of governance, risk management and control to effectively manage risks to the achievement of objectives in the area audited.
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Appendix A None Immediate action is required to address fundamental gaps, weaknesses or non-compliance identified. The system of governance, risk management and control is inadequate to effectively manage risks to the achievement of objectives in the area audited. NB The level of assurance given is at the discretion of Internal Audit.
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Appendix A KEY FINDINGS AND ACTION PLAN ELC PAYMENTS TO PARTNER PROVIDERS Action a Finding Checking of the compliance with the requirement to pay the Real Living Wage to employees delivering funded hours is currently based on self-declaration during the annual compliance questionnaire. Action Description The Link Officer should spot-check that employees delivering funded hours are paid the Real Living Wage during quality improvement visits. Risk The Real Living Wage is not being paid to employees delivering funded hours. This would be a breach of the provider’s contract with North Ayrshire Council and the Scottish Government guidance. Priority (1, 2, 3) 2 Paragraph Reference 3.4 Managed by Head of Service (Education) Assigned to Senior Manager (Education) Due Date 31 October 2026 Management Comment The link officer has added this to her QIF agendas and will be completed through her planned QIF visits throughout the year. Action b Finding Financial sustainability of the providers is checked as part of the procurement process but there is currently no pro-active checking of sustainability during the contract period. Action Description The Link Officer should include discussion of provider sustainability as part of the quality improvement visits. Risk The Council has no warning of providers that face sustainability issues and potentially cease trading, leading to a requirement to find new placements for children at short notice with associated costs. Priority (1, 2, 3) 2 Paragraph Reference 3.12 Managed by Head of Service (Education) Assigned to Senior Manager (Education) Due Date 31 October 2026 Management Comment The link officer has added this to her QIF agendas and will be completed through her planned QIF visits throughout the year. Priority Key used in Action Plan 1 (High) Control weakness where there is a material impact on the achievement of the control objectives, generally requiring prompt attention. 2 (Medium) Control weakness which needs to be rectified, but where there is no material impact on the achievement of the control objectives. 3 (Low) Minor weakness or points for improvement.