4. Annual Report on the 2021-22 Audit V2
North Ayrshire Council · 15 November 2022
Back to Audit and Scrutiny Committee — 15 November 2022 and its agenda
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NORTH AYRSHIRE COUNCIL 15 November 2022 Audit and Scrutiny Committee Title: Annual Report on the 2021/22 Audit Purpose: To invite Committee to note the annual audit report for 2021/22 and to consider a verbal report by the external auditor. Recommendation: That Committee: (a) Notes the findings of the 2021/22 audit of the financial statements as contained in the External Auditor’s annual report at Appendix 2; (b) Considers the verbal report by the External Auditor; (c) Notes the agreed Action Plan as outlined on Page 30 of the final report; and (d) Approves the audited Annual Accounts for signature. 1. Executive Summary 1.1 As part of the external audit for 2021/22, Deloitte LLP have produced two reports. The initial report, covering Audit Dimensions and Best Value, was considered by the Audit and Scrutiny Committee on 31 May 2022. The second report is the Final Report and includes an opinion on the Council’s financial statements. 1.2 The unaudited accounts for the year to 31 March 2021 were approved by Council on 22 June 2022 and submitted to the Council’s external auditor, Deloitte LLP, for audit. The Audit Director for Deloitte LLP has now issued his proposed Independent Auditor’s Report on the financial statements which is free from qualification and confirms that the accounts give a true and fair view of the state of affairs of the Council, its group and the Council’s charitable trusts as at 31 March 2022. 1.3 As detailed in paragraphs 2.5 to 2.6, a number of adjustments have been identified during the audit process. However, these adjustments do not impact on the reported balance of Unearmarked Reserves which remain unchanged at £11.315m. 1.4 Deloitte LLP’s final report includes an action plan in relation to one recommendation for improvement identified during the course of the audit. This relates to the useful economic lives of assets classed as Infrastructure Assets. Full details of this and the proposed management action are included at Page 30 of the Auditor’s Report.
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2. Background 2.1 The 2021/22 audit of the Council’s accounts was conducted by Deloitte LLP, the final year of a six year cycle as the Council’s appointed external auditors. 2.2 As well as auditing the financial statements, Deloitte LLP considered the Council’s arrangements in relation to best value and the four audit dimensions of financial sustainability, financial management, value for money and governance and transparency. An initial report covering the audit dimensions and best value was considered by the Audit and Scrutiny Committee on 31 May 2022. 2.3 The Council’s accounts for the year to 31 March 2022 were submitted to Deloitte LLP for audit by the deadline of 30 June 2022. Following an extension to the statutory dates under the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2022, the external auditor is required to complete the audit by 30 November 2022 and to report on certain matters arising to those charged with governance in sufficient time to enable appropriate action to be taken before the financial statements are approved and certified. 2.4 Appendix 1 includes letters of representation to be signed by the Head of Finance as the responsible officer for North Ayrshire Council. Deloitte LLP’s annual report to members, which summarises the findings of their audit, is attached at Appendix 2. 2.5 Accounting adjustments totalling £0.679m have been identified during the audit process. These adjustments were related to the treatment of insurance excess transactions and the valuation provided for “experience losses” in relation to our share of the liabilities of Strathclyde Pension Fund. 2.6 In relation to the insurance excess transactions, adjustments have been made to recognise the correct treatment of these transactions and upgrade internal procedures to prevent any further recurrence. This resulted in a net reduction of £0.212m in the level the Council’s Insurance Fund. 2.7 In relation to the valuation of pension liabilities, an adjustment to the actuarial valuation has been made. This resulted in a net increase of £0.467m in the value of the Council’s share of Strathclyde Pension Fund’s net long term liability. 2.8 Further adjustments were identified in relation to transfers between the Council’s unusable reserves in relation to the impairment of assets and the restatement of the previous year’s service income and expenditure analysis to reflect changes in North Ayrshire Council’s internal reporting structure. An upgrade to the Council’s financial ledger system linked to revised internal procedures will be undertaken to prevent any further recurrence. The overall level of unusable reserves was not affected and the reported balance of Unearmarked Reserves has remained unchanged at £11.315m. 2.9 Pages 9 to 18 of the attached Audit Report (Appendix 2) outline the significant risks and other matters identified in the audit plan for 2021/22 together with the auditor’s views of the key judgements and controls in place. These risks relate to: • Recognition of Covid-19 Related Income; and • Management Override of Controls.
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The report confirms that no material issues were identified in relation to these matters. 2.10 The report notes that final testing of the charitable trust accounts has been completed and that no issues have been identified. It is anticipated that an unmodified opinion will be issued in relation to this. 2.11 The report also notes one issue in relation to an internal control arising from the recognition of the impairment of some assets within our Unusable Reserves, as noted at 2.8 above. Actions to upgrade the financial ledger system are being implemented. 2.12 In addition, in relation to the financial statements, the Audit Report has noted that: • The Council’s Management Commentary has been prepared in accordance with the statutory guidance; • The auditable parts of Remuneration Report have been properly prepared in accordance with the regulations; and • The Annual Governance Statement is consistent with the financial statements and has been prepared in accordance with the Delivering Good Governance in Local Government Framework. 2.13 An Action Plan which sets out the main areas identified for action from the annual audit is detailed on page 30 of the final report. The only area identified is in relation to the accounting for Infrastructure Assets which has been subject to an ongoing national review. In order to support this, the nature of the assets held under Infrastructure Assets will be reviewed and engineering advice will be sought to ensure that the assigned useful economic lives are consistent with the nature of the assets in question. 2.14 It should be noted that the auditor has received a statutory objection to the accounts relating to the Common Good and Trust Funds and has met with the objector to consider the issues and evidence provided. The auditor has concluded that the issues raised are not material to their opinion and no further adjustments to the financial statements are anticipated. 2.15 A link to the final audited accounts will be issued to all members for their information. 2.16 Representatives from Deloitte LLP will be in attendance at Committee and will present a verbal report highlighting the main findings of the 2021/22 audit. 3. Proposals 3.1 It is proposed that Committee: (a) Notes the findings of the 2021/22 audit of the financial statements as contained in the External Auditor’s annual report at Appendix 2; (b) Considers the verbal report by the External Auditor; (c) Notes the agreed Action Plan as outlined on Page 25 of the final report; and (d) Approves the audited Annual Accounts for signature.
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4. Implications/Socio-economic Duty Financial 4.1 The financial implications are as outlined in the report. Human Resources 4.2 None. Legal 4.3 Under the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2022, the external auditor is required to complete the audit by 30 November 2022. Equality/Socio-economic 4.4 None. Climate Change and Carbon 4.5 None. Key Priorities 4.6 This report and the annual accounts directly support the Council Plan 2019 to 2024 by maximising resources and providing value for money to support financially sustainable delivery models. Community Wealth Building 4.7 None. 5. Consultation 5.1 The Chief Executive, Executive Directors and other appropriate officers have been consulted as part of the audit process. Mark Boyd Head of Service (Finance) For further information please contact David Forbes, Senior Manager (Strategic Business Partner), on 01294 324551 or DavidForbes@north-ayrshire.gov.uk. Background Papers North Ayrshire Council Unaudited Annual Accounts 2021/22 - Council 22 June 2022; North Ayrshire Charitable Trusts: Unaudited Trustees’ Annual Report 2021/22 – Council 22 June 2022; External Audit Report on Audit Dimensions and Best Value for the year ended 31 March 2022 – Audit and Scrutiny Committee 31 May 2022.
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HEAD OF FINANCE: Mark Boyd Cunninghame House, Irvine KA12 8EE Tel: 01294 310000 Fax: 01294 324544 www.north-ayrshire.gov.uk Your Ref: Our Ref: PK/NAC/2022 If telephoning please ask for: Mark Boyd 01294 324560 15 November 2022 Dear Pat Kenny, NORTH AYRSHIRE COUNCIL AUDIT – YEAR ENDED 31 MARCH 2022 This representation letter is provided in connection with your audit of the financial statements of North Ayrshire Council (‘the entity’) for the year ended 31 March 2022 for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the financial position of the entity as of 31 March 2022 and of the results of its operations, other comprehensive net expenditure and its cash flows for the year then ended in accordance with the .applicable accounting framework as interpreted by the Code of Practice on Local Authority Accounting in the United Kingdom. In addition to the above, this representation letter is provided in connection with your audit of the other information in the Annual Accounts, for the purposes set out in the Code of Audit Practice 2016. We are aware that it is an offence to mislead an auditor of a public body. On behalf of the entity, I confirm as Responsible Financial Officer, to the best of my knowledge and belief, the following representations. Financial statements 1. We understand and have fulfilled our responsibilities for the preparation of the financial statements in accordance with the applicable financial reporting framework, as set out in the Code of Practice on Local Authority Accounting in the United Kingdom, which give a true and fair view, as set out in the terms of the audit engagement letter. 2. Significant assumptions used by us in making accounting estimates, including those measured at fair value and assessing the impact of COVID-19 on the entity are reasonable. We have made sufficient and appropriate disclosure of the general increased estimation uncertainty arising from the impact of COVID-19. 3. Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of IAS24 “Related party disclosures”. 4. All events subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment of or disclosure have been adjusted or disclosed. Appendix 1
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5. There are no uncorrected misstatements and disclosure deficiencies. 6. We confirm that the financial statements have been prepared on the going concern basis and disclose in accordance with IAS 1 all matters of which we are aware that are relevant to the entity’s ability to continue as a going concern, including principal conditions or events and our plans. We do not intend to cease operations as we consider we have realistic alternatives to doing so. We are not aware of any material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. We confirm the completeness of the information provided regarding events and conditions relating to going concern at the date of approval of the financial statements, including our plans for future actions. 7. The entity has satisfactory title to all assets and there are no liens or encumbrances on the entity’s assets and assets pledged as collateral. 8. We have recorded or disclosed, as appropriate, all liabilities, both actual and contingent. 9. We have reconsidered the remaining useful lives of the property, plant and equipment and confirm that the present rates of depreciation are appropriate to amortise the cost less residual value over the remaining useful lives. 10. We are not aware of events or changes in circumstances occurring during the period which indicate that the carrying amount of property, plant and equipment may not be recoverable. 11. With respect to accounting estimates, we confirm: • the measurement processes, including related assumptions and models used to determine accounting estimates in the context of the applicable financial reporting framework are appropriate and have been applied consistently; • the assumptions appropriately reflect our intent and ability to carry out specific courses of action on behalf of the entity where relevant to the accounting estimates and disclosures; • the disclosures related to accounting estimates under the entity’s applicable financial reporting framework are complete and appropriate; and • there have been no subsequent events that require adjustment to the accounting estimates and disclosures included in the financial statements. 12. We confirm that we consider the depreciated historic cost is an appropriate proxy for the fair value of non-property assets, and are not aware of any circumstances that would indicate that these assets require revaluation. 13. We confirm that the provisions included within the financial statements are our best estimate of the liability due by the entity. 14. We confirm that: • all retirement benefits and schemes, including UK, foreign, funded or unfunded, approved or unapproved, contractual or implicit have been identified and properly accounted for; • all settlements and curtailments have been identified and properly accounted for;
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• all events which relate to the determination of pension liabilities have been brought to the actuary’s attention; • the actuarial assumptions underlying the valuation of the scheme liabilities (including the discount rate used) accord with our best estimates of the future events that will affect the cost of retirement benefits and are consistent with our knowledge of the entity; • the actuary’s calculations have been based on complete and up to date member data as far as appropriate regarding the adopted methodology; and • the amounts included in the financial statements derived from the work of the actuary are appropriate. 15. We have made a reclassification to the prior period financial statements to ensure transparent comparison for the users of the financial statements. This is in relation to the income and expenditure charged to “Chief Executive” and “Other Corporate Items”. Information provided 16. We have provided you with all relevant information and access as agreed in the terms of the audit engagement letter with Audit Scotland. 17. All transactions have been recorded and are reflected in the financial statements and the underlying accounting records. 18. We acknowledge our responsibilities for the design, implementation and maintenance of internal control to prevent and detect fraud and error. We are not aware of any deficiencies in internal control of which you should be aware. 19. We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. 20. We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entity or group and involves: (i) management; (ii) employees who have significant roles in internal control; or (iii) others where the fraud could have a material effect on the financial statements. 21. We have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others. 22. We are not aware of any instances of non-compliance, or suspected non-compliance, with laws, regulations, and contractual agreements whose effects should be considered when preparing financial statements. 23. We have disclosed to you the identity of the entity’s related parties and all the related party relationships and transactions of which we are aware.
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24. All known actual or possible litigation and claims whose effects should be considered when preparing the financial statements have been disclosed to you and accounted for and disclosed in accordance with the applicable financial reporting framework. No other claims in connection with litigation have been or are expected to be received. 25. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements. 26. We confirm that: (i) we consider that the entity has appropriate processes to prevent and identify any cyber breaches other than those that are clearly inconsequential; and (ii) we have disclosed to you all cyber breaches of which we are aware that have resulted in more than inconsequential unauthorised access of data, applications, services, networks and/or devices. 27. We have performed an assessment of the impact on the financial statements of events in Russia and Ukraine including consideration of the impact of sanctions and have disclosed the results of that assessment to you. 28. All minutes of Council and Committee meetings during and since the financial year have been made available to you. 29. We have drawn to your attention all correspondence and notes of meetings with regulators. 30. We confirm that all of the disclosures relating to sections of the Annual Accounts which are considered ‘other information’ as set out in the Code of Audit Practice 2016 have been prepared in accordance with relevant legislation and guidance. We confirm that the above representations are made on the basis of adequate enquiries of management and staff (and where appropriate, inspection of evidence) sufficient to satisfy ourselves that we can properly make each of the above representations to you. Yours faithfully Head of Finance Signed as Responsible Financial Officer, for and on behalf of North Ayrshire Council
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HEAD OF FINANCE: Mark Boyd Cunninghame House, Irvine KA12 8EE Tel: 01294 310000 Fax: 01294 324544 www.north-ayrshire.gov.uk Your Ref: Our Ref: PK/NACT/2022 If telephoning please ask for: Mark Boyd 01294 324560 15 November 2022 Deloitte LLP Dear Pat Kenny, NORTH AYRSHIRE COUNCIL AUDIT – YEAR ENDED 31 MARCH 2022 This representation letter is provided in connection with your audit of the financial statements of North Ayrshire Council Trust Funds (‘the entities’) for the year ended 31 March 2022 for the purpose of expressing an opinion as to whether the financial statements properly present the receipts and payments of the charities as of 31 March 2022 and their statement of balances at that date in accordance with the applicable accounting framework and the Charities and Trustee Investment (Scotland) Act 2005. We are aware that it is an offence to mislead an auditor of a public body. On behalf of the entities, I confirm as a Trustee, to the best of my knowledge and belief, the following representations. Financial statements 1. We understand and have fulfilled our responsibilities for the preparation of the financial statements in accordance with the applicable financial reporting framework and the Charities and Trustee Investment (Scotland) Act 2005 which present fairly, as set out in the terms of the audit engagement letter. 2. Significant assumptions used by us in making accounting estimates, including those measured at fair value and assessing the impact of Covid-19 on the entities are reasonable. We have made sufficient and appropriate disclosure of the general increased estimation uncertainty arising from the impact of Covid-19. 3. Related party relationships and transactions have been appropriately accounted for and disclosed in accordance with the requirements of IAS24 “Related party disclosures”. 4. All events subsequent to the date of the financial statements and for which the applicable financial reporting framework requires adjustment of or disclosure have been adjusted or disclosed. 5. There are no uncorrected misstatements and disclosure deficiencies.
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6. We are not aware of events or changes in circumstances occurring during the period which indicate that the carrying amount of property, plant and equipment may not be recoverable. Information provided 7. We have provided you with all relevant information and access as agreed in the terms of the audit engagement letter with Audit Scotland. 8. All transactions have been recorded and are reflected in the financial statements and the underlying accounting records. 9. We acknowledge our responsibilities for the design, implementation and maintenance of internal control to prevent and detect fraud and error. We are not aware of any deficiencies in internal control of which you should be aware. 10. We have disclosed to you the results of our assessment of the risk that the financial statements may be materially misstated as a result of fraud. 11. We have disclosed to you all information in relation to fraud or suspected fraud that we are aware of and that affects the entities or group and involves: (i) management; (ii) employees who have significant roles in internal control; or (iii) others where the fraud could have a material effect on the financial statements. 12. We have disclosed to you all information in relation to allegations of fraud, or suspected fraud, affecting the entities’ financial statements communicated by employees, former employees, analysts, regulators or others. 13. We are not aware of any instances of non-compliance, or suspected non-compliance, with laws, regulations, and contractual agreements whose effects should be considered when preparing financial statements. 14. We have disclosed to you the identities of the entities’ related parties and all the related party relationships and transactions of which we are aware. 15. All known actual or possible litigation and claims whose effects should be considered when preparing the financial statements have been disclosed to you and accounted for and disclosed in accordance with the applicable financial reporting framework. No other claims in connection with litigation have been or are expected to be received. 16. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements. 17. We confirm that: (i) we consider that the entities has appropriate processes to prevent and identify any cyber breaches other than those that are clearly inconsequential; and (ii) we have disclosed to you all cyber breaches of which we are aware that have resulted in more than inconsequential unauthorised access of data, applications, services, networks and/or devices. 18. All minutes of Council and Committee meetings during and since the financial year have been made available to you. 19. We have drawn to your attention all correspondence and notes of meetings with regulators.
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We confirm that the above representations are made on the basis of adequate enquiries of management and staff (and where appropriate, inspection of evidence) sufficient to satisfy ourselves that we can properly make each of the above representations to you. Yours faithfully Head of Finance Signed for and on behalf of the Trustees
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Issued on 27 October 2022 for the meeting on 15 November 2022 North Ayrshire Council Report to the Audit and Scrutiny Committee, Members of the Council and the Controller of Audit on the 2021/22 audit Deloitte Confidential - Approved External Use only
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2 Contents 01 Final Report Introduction 3 Financial Statements Audit Quality Indicators 7 Our Audit Explained 8 Significant Risks 9 Other Areas of Audit Focus 14 Other Significant Findings 19 Our Audit Report 21 Your Annual Report 22 Audit Dimensions and Best Value Overview and Conclusions 24 Purpose of our Report and Responsibility Statement 25 Audit Adjustments 27 Action Plan 30 Our Other Responsibilities Explained 31 Independence and Fees 32 02 Appendices Deloitte Confidential - Approved External Use only
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33 Introduction The key messages in this report I have pleasure in presenting our final report to the Audit and Scrutiny Committee (“the Committee”) of the North Ayrshire Council (“the Council”) for the year ending 31 March 2022 audit. The scope of our audit was set out within our planning report presentedto theCommittee inMarch2022. Thisreportincludesthecharitabletrusts(“theTrusts”) Thisreportsummarises ourfindingsandconclusions in relationto: • The auditof the Annual Accounts;and • Consideration of the four audit dimensions that frame the wider scope of public sector audit requirements as illustrated in thefollowingdiagram.Thisincludesourconsiderationof theCouncil’s dutyto secure bestvalue. Audit quality is our number one priority. We plan our audit to focus on audit quality and have set the following audit quality objectives for this audit: • A robust challenge of the key judgements taken in the preparation of the Annual Accounts. • A strong understanding of your internal control environment. • A well planned and delivered audit that raises findings early with those charged with governance. Deloitte Confidential - Approved External Use only
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4 Introduction (continued) The key messages in this report (continued) Conclusions fromour testing Based on our audit work completed to date we expect to issue an unmodifiedauditopinion. The Management Commentary and Annual Governance Statement comply with the statutory guidance and proper practice and are consistent with theannualaccounts andourknowledge of the Council. The auditable parts of the Remuneration Report have been prepared in accordance with the relevantregulations. A summary of our work on the significant risks is provided in the dashboardon page 9. We have identified four financial statement adjustments above our reportingthreshold of £250k. These relate to a reclassification of prior year income and expenditure, a misstatement within the revaluation reserve andpensions.These are summarised on pages27 – 29. Statusof thefinancial statementsaudit Outstandingmattersto conclude the auditinclude: • Finalisationof theauditof charitabletrusts; • Finalisationof internalqualitycontrol procedures; • Receipt of signed managementrepresentationletter;and • Our reviewof eventssince 31 March2022. Conclusions on audit dimensions and best value As set out on page 3, our audit work covered the four audit dimensions. Our separate detailed report presented to the Committee in May 2022 set out our findings and conclusions on each dimension. In accordance with the Code of Audit Practice, we have included our overall conclusions within thisreporton page 24. Key highlightsinclude: Financial Management - The Council continues to have robust budget setting and monitoring arrangements in place. This is supported by an experienced finance team and a robust internal audit function, as well as appropriate arrangements for the prevention and detection of fraud and error. Financial sustainability - The Council has set a balanced budget for 2022/23 and holds unearmarked reserves at a level consistent with its Reserves Strategy, therefore is financially sustainable in the short term. However, it continues to be faced with significant financial challenges over themedium andlonger-term. It is positive to see the work progressing with the sustainable Change Programme, incorporating a comprehensive benefits tracker and a clear commitment to invest in recovery and renewal. However, progress continues to be impacted by the pandemic. It is critical that this work is progressed at pace and scale to ensure that the planned benefits are realised. I would like to draw your attention to the key messages of this paper: Deloitte Confidential - Approved External Use only
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5 Introduction (continued) The key messages in this report (continued) Conclusions on audit dimensions and best value (continued) Governance and transparency – The Council continues to have strong leadership, which has been enhanced in the year with the creation of additional capacity at Head of Service level to focus on priorities. The governance arrangements also continue to be robust, with a comprehensive review of the infrastructure to enable hybrid meetings and an effective Audit and Scrutiny Committee. The Council continues to be open and transparent and demonstrates a culture of continuous improvement,with the planneddevelopmentof a ParticipationStrategy. Value for money –– The Council continues to have a clear and robust performance management framework in place which has been enhanced in the year with the Performance Management Strategy and new Performance Dashboard. It has continued to report its performance against the priorities within the Council Plan and also against the Local Government Benchmarking Framework (LGBF) with clear actions in place to addressindicatorsthatare adriftof target. Best value - The Council has robust arrangements in place to secure best value and has a clear understanding of areas which require further development. Next steps An agreed Action Plan was included in the separate wider scope report that was presented to Audit and Scrutiny Committee in May 2022. We also have an Action Plan on page 30 of thisreport. Added value Our aim is to add value to the Council by providing insight into, and offering foresight on, financial sustainability, risk and performance by identifying areas for improvement and recommending and encouraging good practice. In so doing, we aim to help the Council promote improved standards of governance, better management and decision making, and more effectiveuse of resources. In addition, we included our “sector developments” in the separate wider scope report that was presented to Audit and Scrutiny Committee in May 2022 which covers our research, informed perspective and best practice from our work across the wider public sector that are specifically relevant to the Council. Managing transition to 2022/23 audits 2021/22 is the final year of the current audit appointments. We will minimise disruption to all parties, and maximise the transfer of knowledge of the Council, by working in partnership with Audit Scotland and the incomingauditors. We would like to put on record our thanks to the Board, management and staff for the good working relationship over the period of our appointment. Pat Kenny Associate Partner Deloitte Confidential - Approved External Use only
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6 Annual Accounts Audit
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77 Area Grading Reason FY22 FY21 FY20 Timing of key accounting judgements Management demonstrated a clear understanding of key accounting judgements and estimates made in the preparation of the Annual Accounts and provided sufficient appropriateevidenceof good qualityto supportthese. Adherence to deliverables timetable Management provided all evidence in a timely manner, in advance of agreed timelines. Any follow-up requests during the audit were quickly actioned. Access to finance team and other key personnel Deloitte and North Ayrshire Council have worked together to facilitate remote communication during the audit which has been successful. There have been no issues with access to thefinanceteam or otherkey personnel. Quality and accuracy of management accounting papers Documentation provided has been of a high standard, which enabled an efficient audit. This is demonstrated by the fact that we only returned 7% of working papers provided by officersfor furtherclarification. Quality of draft financial statements A full draft of the Annual Accounts were received for audit on 23 June 2022. We identified a small numberof requiredchanges primarilyrelatingto formatting. Response to control deficiencies identified We identified one control deficiency during our audit. Further insight can be seen on page 19. Volume and magnitude of identified errors We identified 4 misstatements and 2 disclosure misstatements at the time of writing this report. Management have corrected for these adjustments. For further detail see pg. 27- 29. Quality Indicators Impact on the execution of our audit Management and those charged with governance are in a position to influence the effectiveness of our audit, through timely formulation of judgements, provision of accurate information, and responsiveness to issues identified in the course of the audit. This slide summarises some key metrics related to your control environment which can significantly impact the execution of the audit. We consider these metrics important in assessing the reliability of your financialreportingandprovidecontext forothermessages in thisreport. Lagging Developing Mature! ! ! Deloitte Confidential - Approved External Use only !
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88 Our Audit Explained We tailor our audit to your business and your strategy Identify changes in your business and environment Determine materiality Scoping Significant risk assessment Conclude on significant risk areas Other findings Our audit report Identify changes in your business and environment In our planningreport we identified the key changes in your business and articulated how these impactedour auditapproach. Scoping Our planning report set out the scoping of our audit in line with the Code of Audit Practice. We have completed our audit in line with our auditplan. Significant risk assessment In our planning report we explained our risk assessment process and detailed the significant risks we have identified on this engagement. We report our findings and conclusions on these risks in thisreport. Determine materiality When planning our audit we set our materiality at £10.6m (Council only £10.07m) based on forecast gross expenditure. We have updated this to reflect final figures and completed our audit to group materiality of £10.51m (Council only £10.50m), group performance materiality of £7.36m (Council only £7.35m) and report to you in this paper all misstatements above £250,000. Other findings As well as our conclusions on the significant risks we are required to report to you our observations on the internal control environment as well as any other findings from the audit. Our audit report Based on the current status of our audit work, we envisage issuing an unmodifiedauditreport. Conclude on significant risk areas We draw to the Audit and Scrutiny Committee’s attention our conclusions on the significant audit risks. In particular the Committee must satisfy themselves that management’s judgementsare appropriate. Deloitte Confidential - Approved External Use only
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99 Overly optimistic, likely to lead to future debit. Overly prudent, likely to lead to future credit Significant Risks Dashboard Risk Material Fraud risk Planned approach to controls testing Controls testing conclusion Consistency of judgements with Deloitte’s expectations Comments Page no. Recognition of COVID-19 related income D+I Satisfactory Satisfactory 10 Management override of controls D+I Satisfactory Satisfactory 11 D+I: Testing of the design and implementation of key controls Deloitte Confidential - Approved External Use only
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10 Recognition of COVID-19 related income Significant Risks (continued) Risk identified and key judgements Deloitteresponseand challenge ISA 240 states that when identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue,revenuetransactionsor assertions give rise to such risks. We have assessed the income streams of the Council, the complexity of the recognition principles and the extent of any estimates used, and concluded that, with the exception of the funding received in 2021/22 in response to theCOVID-19 pandemic,thereis no significantrisk of fraud. During 2021/22, the Council has received additional funding in relation to COVID-19 mobilisation costs. In addition, there are a number of business support schemes designed to help eligible businesses during the COVID-19 pandemic that are being administered by Councils on behalf of the Scottish Government. We have pinpointed the significant risk to the completeness and occurrence of the funding for COVID-19 mobilisation costs and the completeness and accuracy of the agencyarrangementdisclosures. The key judgementsfor managementare assessing: • Anyconditionsassociated with themobilisationcost funding;and • Whether the Council is acting as a principal or agent in administering the businesssupportschemes. We have performedthefollowing: • Assessed the design and implementation of the controls in relation to the accountingtreatmentof all COVID-19 relatedfunding; • Tested a sample of funding for COVID-19 mobilisation costs and confirm these have been recognised in accordance with any conditions applicable; and • Tested the agency arrangement disclosures to confirm, where it is concludedthattheCouncil is actingas an agent,that: • Transactions have been excluded from the Comprehensive Income andExpenditureStatement; • The Balance Sheet reflects the debtor or creditor position at 31 March 2022 in respect of cash collected or expenditure incurred on behalfof the principal; and • The net cash position at 31 March 2022 is included in the financing activitiesin the Cash Flow Statement. Deloitte view We have concluded that income has been correctly recognised in accordance with the requirements of the Code of Practice on Local Authority Accounting and the “Guidance on Accounting for Coronavirus (COVID-19)Grants/ Funding Streams” issued byLASSAC. Deloitte Confidential - Approved External Use only
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11 Management override of controls Significant Risks (continued) Risk identified Management is in a unique position to perpetrate fraud because of their ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Although management is responsible for safeguarding the assets of the entity, we planned our audit so that we had a reasonable expectation of detecting material misstatements to the Annual Accounts and accounting records. Deloitteresponseand challenge In considering the risk of management override, we have performed the followingauditproceduresthatdirectlyaddressthisrisk: Journals We have tested the appropriateness of journal entries recorded in the general ledgerandother adjustmentsmadeinthe preparation ofthe Annual Accounts. Indesigningandperformingauditproceduresforsuchtests,wehave: • Tested the design and implementation of controls over journal entry processing; • Made inquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entriesandotheradjustments; • Selected journal entries and other adjustments made at the end of a reportingperiod;and • Tested journal entries throughout the year based on fraudulent characteristics. Accountingestimatesand judgements We have reviewed accounting estimates for biases and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement duetofraud.Inperformingthisreview,wehave: • Evaluated whether the judgments and decisions made by management in making the accounting estimates included in the Annual Accounts, even if they are individually reasonable, indicate a possible bias on the part of the entity'smanagementthatmayrepresentariskofmaterialmisstatementdue to fraud. From our testing we did not identify any indications of bias. A summaryofthe keyestimatesconsideredisprovidedonthefollowingpage; and • Performed a retrospective review of management judgements and assumptions related to significant accounting estimates reflected in the AnnualAccountsoftheprioryear. Significant and unusual transactions We did not identify any significant transactions outside the normal course of businessor anytransactionswhere thebusinessrationalewas notclear. Deloitte view We have not identified any significant bias in the key judgements made bymanagement. We have not identified any instances of management override of controls in relationto the specific transactionstested. Deloitte Confidential - Approved External Use only
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12 Management override of controls (continued) Significant Risks (continued) Key judgements The key judgment in the annual accounts relates to our significant risk around the recognition of COVID-19 income (page 10). While not considered to be significant audit risks, we have considered the assumptions used to calculate the pension liability (page 14), and the recognition of expenditure (page 17). In the table below, we set out our challenge of the assumptions used in the determination of propertyvaluations,PFIprojects andprovisions. Estimate / judgement Details of management’s position Deloitte Challenge and conclusions Property valuations The Council is required to hold property assets within Property, Plant and Equipment at existing use value provided that an active market for the asset exists. Where there is no active market, because of the specialist nature of the asset, a depreciated replacement cost approach may be needed which provides the current cost of replacing an asset with it modernequivalentasset. The valuations are, by nature, significant estimates based on specialist and management assumptions and which can be subject to materialchanges in value. The Council has had an independent valuation carried out at 31 March 2022 by its internal valuers to include valuation of 20% of all of the Council’s land and property in accordance with its 5-yearrollingprogramme. The valuation method has not changed from the prior year and is in line with International Financial Reporting Standards. The Council’s revaluation reserve has experienced a surplus position of £11.509m and the net revaluation movementin the yearequatedto £11.994m. We did not identify this as a significant risk in our Audit Plan as our property specialists, Real Asset Advisory, reviewed the methodology applied by the Council’s valuer in previous years and concluded it was robust. We have confirmed that the valuerandthemethodologyappliedhasnot changedin theyear. We also tested a sample of revaluations in the year by agreeing this to the valuer’s report and tracing the impact to the Revaluation Reserve and/or CIES. An error was identified in relation to the Revaluation Reserve. Further insight can be seen on page 27. We have completed input testing of valuations back to source documentation includingfloorareas to individualasset site plans. We have challenged management’s assessment for those assets not subject to valuation in the year and consulted with our internal property experts. For those valued on Existing Use Value on a market comparable basis, our property experts have confirmedthatminimal market valuemovementwould be expected in 2021/22. For those valued on a Depreciated Replacement Cost basis, which would be impacted by changes in build costs during the year, we have performed an analysis of changes in the Build Costs Information Service (BCIS) index and concluded that no material movement would be expected. We are therefore satisfied that there is no indication of a material movementin assets not formallyrevaluedduringtheyear.
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13 Management override of controls (continued) Significant Risks (continued) Estimate / judgement Details of management’s position Deloitte Challenge and conclusions PrivateFinance Initiatives (‘PFI’) and similar contracts The Council currently has 3 PFI and similar projects: Clyde Valley Waste, North Ayrshire Council Schools and Largs Campus. Each PFI liability is valued based on the value of the remaining lease payments under the relevant accounting standards. The minimum lease rental is split between interestandprincipalusingthe actuarialmethod. We obtained and assessed the initial PFI agreements in place and reconciled to the payment schedules for each model. We identified a factual disclosure error in Note 18 equating to £8.46m for service charges and contingent rentals. Management have corrected this error and we have confirmed that it has not had any impact on the PFI liability.Furtherdetailscan be viewed on page 29. We have conducted a retrospective review of the prior year liability to assess accuracy, and have challenged any changes made to the model. We have assessed the value of the underlying buildings through our Valuationswork. We are satisfied that the PFI liability recognised in the accounts is in line with themodels andthereis no indicationof managementbias. Provisions The total provisions held within the Council’s balance sheet is immaterial, at £1.217m. This comprises of a number of individuallyimmaterial provisions,including: • EqualPay / SingleStatus£0.130m • TerminationBenefits£0.161m • LandfillSite Restoration£0.363m • Employee Costs – PaidAbsences £0.148m • Teachers Maternity£0.198m • FormerAuthorities£0.217m We examined the rationale for each provision, including a retrospective review of amounts provided in 2020/21. We have consulted with the Council’s legal experts to confirm completeness of theprovisions. We concludedthatthe provisionsmade were reasonable. Deloitte Confidential - Approved External Use only
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14 Other Areas of Audit Focus Defined benefits pension scheme Background The Council participates in two defined benefits schemes: • Scottish Teachers’ Superannuation Scheme, administered by the Scottish Government;and • The StrathclydePension Fund,administeredbyGlasgow CityCouncil. The net pension liability has decreased from £180.577m in 2020/21 to £56.983m in 2021/22. The decrease is a combination of an increase of £94m in the fair value of the assets and a reduction of £30m in the liabilities as a resultof demographicchanges andfinancialassumptions. Deloitte response • We assessed the independence and expertise of the actuary supporting thebasis of relianceupontheirwork; • We reviewed and challenged the assumptions made by Hymans Robertson, including benchmarking against nine leading actuarial firms thatwe consider appropriateas shown thetablebelow; • We have obtained assurance from the auditor of the pension fund over thecontrols for providingaccurate datato theactuary; • We assessed the reasonableness of the Council’s share of the total assets of the scheme with the PensionFundfinancialstatements; • We have reviewed and challenged the calculation of the impact of the McCloudandGoodwin cases on pensionliabilities;and • We reviewedthedisclosureswithin theaccounts againsttheCode. Council Comments Discount rate (% p.a.) 2.7 Within reasonable RangeRPI Inflation (% p.a.) 3.65 CPI Inflation (% p.a.) 3.2 Pension increase in payment (% p.a.) 3.2 Salary increase (% p.a.) 3.9 In line with funding valuation Mortality- Life expectancy of a male/ female pensioner from age 65 (currently aged 65) 19.6/ 22.4 Within reasonable range Mortality- Life expectancy of a male/ female pensioner from age 65 (currently aged 45) 21/ 24.5
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15 Other Areas of Audit Focus (continued) • Goodwin – this is a legal challenge made against the Government in respect of unequitable benefits for male dependants of female members (based on service after 1988) following the earlier Walker ruling. The 31 March 2020 triennial funding valuation did not allow for the impact of Goodwin, therefore the Council’s actuary has used the same percentage allowance that was used last year (0.1% of the liability). Given the lack of relative data available, we have concluded that the actuary’s calculation approachis reasonable. • McCloud – this case is in respect of possible discrimination in the implementation of transitional protections following the introduction of the reformed public services pension schemes from 1 April 2014 and 2015. The actuary has advised that an estimated allowance for McCloud has been included within the current service cost, consistent with the prior year. We have concluded that the allowance made and approach taken is reasonable. There is still uncertainty about the form of compensation that will be provided to members and therefore the final actual cost of complyingwith therulingmay be differentto the estimate. Defined benefits pension scheme (continued) The Council’s pension liability continues to be impacted by the ongoing legal cases – known as McCloud and Goodwin, as well as the Guaranteed Minimum Pensions (GMP) indexation. Our pension specialists have consideredtheimpact andconcludedas follows: Deloitte view Management have agreed to adjust the annual accounts for the above issue. We have therefore concluded that the pension liability in relation to the definedbenefitspensionscheme is fairlystated. • GMP indexation – in order to ensure smooth transition to the single tier State pension and equalisation of GMP benefits between males and females, the Government introduced an interim solution in March 2016 in respect of people who are in public service pension schemes and who have a State Pension Age (SPA) between 6 April 2016 and 5 December 2018, whereby full inflationary increases will be provided by the LGPS. An announcement on 23 March 2021 confirmed that all public service pension schemes, including the LGPS, will need to provide full indexation to members with a SPA beyond 5 April 2021. This is a permanent extension of the previous interim solution. We have confirmed that the 31 March 2020 funding valuation for the whole Fund included an allowance for the additional liability arising as a result of GMP indexation. As this valuation was used as the starting point for the 31 March 2022 valuation, this has also been included in the current year liability. We have concludedthattheapproachtaken is reasonable. From review of the actuary report, our pension specialists identified the followingissue: • The actuary has calculated an “experience loss” of £1.946m. Based on the data provided during the audit, we have estimated that this should be circa. £2.413m. In the absence of further information to justify the quantum of the experience loss, there is a potential misstatement of £0.467m.
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16 Other Areas of Audit Focus (continued) Infrastructure Assets Background Infrastructure assets are inalienable assets, expenditure on which is only recovered by continued use of the asset created. They include carriageways, structures, street lighting, street furniture and traffic managementsystems, andare measuredat historical cost. The CIPFA Code requiresthatwhere a componentof an asset is replaced: • the cost of the new component should be reflected in the carrying amountof theinfrastructureasset; and • the gross costs and accumulated depreciation of the old component shouldbe derecognisedto avoid doublecounting. Auditors have identified that local authorities in the UK have not been properly accounting for infrastructure assets since the move to IFRS in 2010/11 due to information deficits. This is particularly the case in relation to roads, where the engineering records used for maintenance have not beencreatedto map againstidentifiablecomponents. CIPFA/ LASAAC attempted to resolve the issues and undertook an urgent consultation on temporary changes to the accounting code. However, it was unable to agree an approach that addressed the concerns of all stakeholders whilst also supporting high quality financial reporting. The Scottish Government has therefore provided temporary statutory overrides while a permanentsolutionis developed. Deloitteview We have assessed the impact of the adoption of the statutory overrides and confirmed the updated Annual Accounts correctly reflect the required disclosure. We are also satisfied that the depreciation charge for the year, based on UEL’s set out within the Council’s accounting policy, is not materially misstated. As the Council's Fixed Asset Register has a degree of detail in terms of different types of infrastructure assets held, the Council should revisit its UEL policy to consider whether alternativeUEL's shouldbe set for differenttypesof assets. The Scottish Government expects that Councils will begin to address information deficits to ensure adequate accounting records for the measurement of infrastructure assets and timely adoption of the Code requirementsonce a more permanentsolution is delivered. Deloitte response • We have considered the statutory overrides issued by the Scottish Government and confirmed that the Council has opted to adopt both, as summarised above, due to not readily having the information to evidence thederecognitionof replacedcomponentsof infrastructureassets. • We have reviewed the updated Annual Accounts and revised disclosures andconfirmedthatit is compliant with thestatutoryoverrides. • We have assessed the reasonableness of the Useful Economic Lives (UEL’s) applied by the Council in its depreciation calculation and concluded that the UEL’s are reasonable,in line with other similar Council and the risk of a materialmisstatement on thedepreciationcharge is remote. Statutory override 1 For accounting periods commencing from 1 April 2021 until 31 March 2024, a local authority is not required to report the gross cost and accumulated depreciation for infrastructure assets. Statutory override 2 For accounting periods commencing from 1 April 2010 until 31 March 2024, the carrying amount to be derecognised in respect of a replaced part of an infrastructure asset is to be taken to be and accounted for as a nil amount No subsequent adjustment shall be made to the carrying amount of the asset with respect to that part.
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1717 Other Areas of Audit Focus (continued) Expenditure recognition Risk identified In accordance with Practice Note 10 (Audit of financial statements of public sector bodies in the United Kingdom), in addition to the presumed risk of fraud in revenue recognition set out in ISA (UK) 240, auditors of public sector bodies should also consider the risk of fraud and error on expenditure. This is on the basis that most public bodies are net spending bodies, therefore the risk of material misstatement due to fraud related to expenditure may be greaterthantherisk of material misstatementdueto fraudrelatedto revenuerecognition. We have considered this risk for the Council and concluded that we are satisfied that the control environment is strong and there is no history of errors or auditadjustments. Thiswas thereforenot beenassessed as a significantrisk area, butcontinuedto be an areaof auditfocus. Deloitte response We performed the following procedures to address the above risk: • A review of the number and median value of invoices processed in the year. As illustrated in table opposite, based on the medium amount, the Council would need to omit over 46,620 invoices at year-end to result in a material error. We noted that in the month following the year-end, a total of 7,557 invoices were processed. We therefore concluded that a risk of material misstatement was remote. • An analytical review to test the completeness and accuracy of year-end creditor balances was carried out. We are satisfied that the amount recorded is reasonable. Deloitte view We have concluded that expenditure has been correctly recognised in accordance with the requirements of the Code of Practice on Local Authority Accounting. Invoice Analysis Medianinvoice amount £216 Average number of invoices processed per month 6,311 Number of invoices that would need to be unrecorded to cause a material misstatement 46,620 Total invoices processed in April 2022 (one month after year-end) 7,557 Deloitte Confidential - Approved External Use only
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1818 Other Areas of Audit Focus (continued) Charitable trusts Risk identified From 2013/14, all Scottish Councils who act as sole trustees for any registered charities have to fully comply with the Charities Accounts Regulations. This requires Charities SORP compliant accounts to be prepared for each charity, and a separate audit of each. North Ayrshire Council administers eight such registeredcharities,disclosed in a single set of annualaccounts.This is in accordance with theconnectedcharitiesrules. As the gross income of each of the Trusts is less than £100,000, the Council has opted to prepare the charitable trust accounts on a receipts and payments basis in accordance with The Charities Accounts (Scotland) Regulation 2006. Fully compliant Charities SORP accounts are therefore not required and disclosure is limited to thatspecifiedin theRegulations. Deloitteresponse We have assessed that the Statement of Receipts and Payments and the Statement of Balances to ensure these have been prepared in accordance with theCharitiesAccounts (Scotland)Regulations2006. A summary is provided in the table adjacent. From an initial review of draft annual accounts we note that there has been a large movement in payments which have increased by £7,553 since 2020/21. This is due to the increase in grant awardsduringtheyear. Deloitte view Our testingof thecharitabletrustsis complete with no issues identifiedWe anticipateissuingan unmodifiedopinion. Deloitte Confidential - Approved External Use only 0 5,000 10,000 15,000 20,000 Payments Receipts Charitable Trust Balances (£) 2020/21 2021/22
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1919 Other Significant Findings Internal control The purpose of the audit was for us to express an opinion on the financial statements. The audit included consideration of internal control relevant to the preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. The matters being reported are limited to those deficiencies that we have identified during the audit and that we have concludedare of sufficientimportanceto merit beingreportedto you. During the course of our audit we have identified one internal control finding, which we have included below for information. Area Observation Priority Revaluation Reserve Postings During the course of our audit engagement, management informed us of an error in relation to the revaluation reserve. The error arose as a result of the Integra system inadvertently recognising devaluations in the revaluation reserve. The result of this brought two assets to a negative value. We have summarised this misstatementon page 27. As a result of this, we recommend that management investigate this fault within Integra system with immediate effect. Management should rectify this and input pre-emptive measures to prevent similar errors occurring in the future. We also recommend that management review the revaluation reserve postings prior to preparing the Annual Accounts. This shouldensurethatsimilar errorsdo not occur in the future. Low Priority Medium Priority High Priority
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2020 Qualitativeaspectsof your accountingpractices: The Council has prepared its Annual Accounts in line with the Code of Practice on Local Authority Accounting. We are satisfied that the Council’saccountingpractices are appropriate. Other mattersrelevantto financial reporting: We have not identified other matters arising from the audit that, in the auditor's professional judgement, are significant to the oversight of the financialreportingprocess. We received an objection to the Council’s accounts in accordance with section 1010 of the Local Government (Scotland) Act 1973 in relation to the Common Good and Trust funds. We have provided an initial response and currently considering the detail. Any significant matters arising will be reported to the Audit and Scrutiny Committee prior to the approvalof theaccounts. Significant mattersdiscussed with management: Significant matters have been discussed with management throughout the audit engagement. In particular, we discussed the treatment of the prior year reclassification of income/expenditure adjustment (as outlined on page 28). We also discussed the treatment of infrastructure assets (as outlinedon page 16). Regulatory Change: IFRS 16, Leases, comes into effect on 1 April 2022, therefore will be implemented in financial year 2022/23. This will require adjustments to recognise on balance sheet arrangements currently treated as operating leases. We have considered the preparatory work carried out by management and the disclosures made in the 2021/22 Annual Accounts and are satisfied that the new standard has been appropriately considered. Other Significant Findings Financial reporting findings We will obtain written representations from the Council on matters material to the Annual Accounts when other sufficient appropriate audit evidencecannotreasonablybe expectedto exist. A copyof thedraftrepresentationsletterhas beencirculatedseparately. Below, we set out the findings from our audit surrounding your financial reporting process. Deloitte Confidential - Approved External Use only
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2121 Our opinion on the financial statements Based on our audit work completed to date, we expect to issue an unmodifiedauditopinion. Material uncertainty related to going concern We have not identified a material uncertainty related to going concern and will report by exception regarding the appropriateness of the use of the going concern basis of accounting. Practice Note 10 provides guidance on applying ISA (UK) 570 Going Concern to the audit of public sector bodies. The anticipated continued provision of the service is relevant to the assessment of the continued existence of a particularbody. Emphasis of matter and other matterparagraphs There are no matters we judge to be of fundamental importance in the Annual Accounts that we consider it necessary to draw attention to in an emphasisof matterparagraph. There are no matters relevant to users’ understanding of the audit that we consider necessary to communicate in an other matter paragraph. Other reportingresponsibilities The narrative parts of the Annual Accounts is reviewed in its entirety for material consistency with the annual accounts and the audit work performed and to ensure that they are fair,balancedandreasonable. Our opinion on matters prescribed by the Controller of Audit is discussed furtheron page 22. Our Audit Report Other matters relating to the form and content of our report Here we discuss how the results of the audit impact on other significant sections of our audit report. Deloitte Confidential - Approved External Use only
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2222 Requirement Deloitteresponse Management Commentary The management commentary comments on financial performance, strategy and performance review and targets. The commentary included both financial and non financial KPIs and made good use of graphs and diagrams. The Council also focuses on the strategicplanningcontext. We have assessed whether the management commentary has been prepared in accordance with the statutoryguidance. We have also read the management commentary and confirmed that the information contained within is materially correct and consistent with our knowledge acquired during thecourse of performingtheaudit,andis nototherwise misleading. Following amendments for minor improvements in the final version of the Annual Accounts, we are satisfied that the management commentary has been prepared in accordance with guidance, is consistent with our knowledge and is not otherwise misleading. Remuneration Report The remuneration report has been prepared in accordance with the 2014 Regulations, disclosing the remuneration and pension benefits of Senior councillors andSeniorEmployees of the Council. We have audited the disclosures of remuneration and pension benefits, pay bands, and exit packages, and we can confirm that they have been properly prepared in accordance with theregulations. Annual Governance Statement The Annual Governance Statement reports that the Council’s governance arrangements provide assurance, are adequateandare operatingeffectively. We have assessed whether the information given in the Annual Governance Statement is consistent with the financial statements and has been prepared in accordance with the Delivering Good Governance in Local Government Framework. We conclude that the Annual Governance Statement is consistent with the financial statements, our knowledge andtheaccounts regulations. Your Annual Report We are required to provide an opinion on the auditable parts of the Remuneration Report, the Annual Governance Statement and whether the ManagementCommentaryis consistent with thedisclosures in theaccounts. Deloitte Confidential - Approved External Use only
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23 Audit Dimensions and Best Value
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24 Audit Dimensions and Best Value Overview and conclusions Financial management The Council continues to have robust budget setting and monitoring arrangements in place. This is supported by an experienced finance team and a robust internal audit function, as well as appropriate arrangements for thepreventionanddetectionof fraudanderror. Financial sustainability The Council has set a balanced budget for 2022/23 and holds unearmarked reserves at a level consistent with its Reserves Strategy, therefore is financially sustainable in the short term. However, it continues to be faced with significantfinancialchallenges overthe mediumandlonger-term. It is positive to see the work progressing with the sustainable Change Programme, incorporating a comprehensive benefits tracker and a clear commitment to invest in recovery and renewal. However, progress continues to be impacted by the pandemic. It is critical that this work is progressed at pace and scale to ensure that the planned benefits are realised. Governanceand transparency The Council continues to have strong leadership, which has been enhanced in the year with the creation of additional capacity at Head of Service level to focus on priorities. The governance arrangements also continue to be robust, with a comprehensive review of the infrastructure to enable hybrid meetings and an effective Audit and Scrutiny Committee. The Council continues to be open and transparent and demonstrates a culture of continuous improvement, with the planned development of a Participation Strategy. Value formoney The Council continues to have a clear and robust performance management framework in place which has been enhanced in the year with the Performance Management Strategy and new Performance Dashboard. It has continued to report its performance against the priorities within the Council Plan and also against the Local Government Benchmarking Framework (LGBF) with clear actions in place to address indicatorsthatare adriftof target. As set out in our audit plan and separate report on the “Audit Dimensions and Best Value” presented to the Committee in, May 2022 public audit in Scotland is wider inscope thanfinancialaudits. Ours separatereportsets outourfindingsandconclusions on our auditwork coveringtheareasset outbelow. In accordance with the Code of AuditPractice, ouroverall conclusions on each auditdimensionandbest valueare summarised on thefollowingpage. Deloitteview – Best Value The Council has robust arrangements in place to secure best value and hasa clear understandingof areaswhich requirefurtherdevelopment. Deloitte Confidential - Approved External Use only
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2525 Purpose of our Report and Responsibility Statement Our report is designed to help you meet your governance duties What we report Our report is designed to help the Audit and Scrutiny Committee and the Council discharge their governance duties. It also represents one way in which we fulfil our obligations under ISA (UK) 260 to communicate with you regarding your oversight of the financial reporting process and your governancerequirements.Our reportincludes: • Results of our work on key audit judgements and our observations on the qualityof yourAnnualAccounts; • Our internalcontrol observations;and • Otherinsightswe have identifiedfrom ouraudit. What we don’t report As you will be aware, our audit was not designed to identify all matters that may be relevantto the AuditandScrutinyCommittee. Also, there will be further information you need to discharge your governance responsibilities, such as matters reported on by management or byotherspecialist advisers. Finally, our views on internal controls and business risk assessment should not be taken as comprehensive or as an opinion on effectiveness since they have been based solely on the audit procedures performed in the proceduresperformedin fulfillingourauditplan. The scopeof our work Our observations are developed in the context of our audit of the annual accounts. We describedthescope of ourwork in our auditplan. We welcome the opportunity to discuss our report with you and receive yourfeedback. Use of this report This report has been prepared for the Council, as a body, and we therefore accept responsibility to you alone for its contents. We accept no duty, responsibility or liability to any other parties, since this report has not been prepared,andis notintended,foranyotherpurpose. Pat Kenny, CPFA For and on behalf of Deloitte LLP Glasgow | 27 October 2022 Deloitte Confidential - Approved External Use only
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26 Appendices
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2727 Audit Adjustments Unadjusted misstatements Thereare no uncorrectedmisstatementsupto thedateof thisreport. Corrected misstatements The following misstatements have been identified up to the date of this report which have been corrected by management. We nonetheless communicate them to you to assist you in fulfillingyour governanceresponsibilities,includingreviewingthe effectivenessof thesystem of internalcontrol. Debit/(Credit) Comprehensive Income and Expenditure Statement (CIES) £k Debit/(Credit) in Net Assets £k Debit/(Credit) prior year Reserves £k Debit/(Credi t) in Income £k If applicable, control deficiency identified Misstatements identified in current year: Impairment Charge [1] 1,272 Revaluation Reserve [1] (1,272) Prepayments [2] 212 (212) Pension experience items [3] 467 (467) Total 679 (679) - - [1] The Integra system inadvertently recognised devaluations in the revaluation reserve bringing two assets to a negative value. We have discussed this with management and reviewed their workings. We have also recalculated the correcting adjustments and, we have comfort that this only occurred in isolation for two assets. This has been corrected by management and a control deficiency has been summarised on page 19. [2] An insurance prepayment was made in the year totalling £250,000 and a subsequent reversal should have been made totalling £212,000 as this was no longer a valid prepayment as at 31/03/2022. The closing prepayment at year-end is £38,000. Management has corrected for this misstatement. [3] As discussed on page 15, In the absence of further information to justify the quantum of the experience loss, there is a potential misstatement of £0.467m.
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2828 Audit Adjustments (continued) Corrected misstatements (continued) The following misstatements have been identified up to the date of this report which have been corrected by management. We nonetheless communicate them to you to assist you in fulfillingyour governanceresponsibilities,includingreviewingthe effectivenessof thesystem of internalcontrol. Debit/(Credit) Comprehensive Income and Expenditure Statement (CIES) £k Debit/(Credit) in Net Assets £k Debit/(Credit) prior year Reserves £k Debit/(Credit) in Income £k If applicable, control deficiency identified Misstatements identified in prior year: Chief Executive Income [4] 39,394 Other Corporate Items Income [4] (39,394) Chief Executive Expenditure [4] (41,802) Other Corporate Items Expenditure [4] 41,802 Total - [4] Management reclassified housing discretionary income and expenditure in the current year to Other Corporate Items but did not reclassify the prior year equivalent income and expenditure to this cost centre. This was not in accordance with IAS 1 and the Code which requires entities to present financial statements in a comparative format. Management have correctly restated these figures from Chief Executive to Other Corporate Items for the prior year.
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2929 Audit Adjustments (continued) Disclosures Disclosure misstatements The following misstatements have been identified up to the date of this report which have been corrected by management. We nonetheless communicate them to you to assist you in fulfillingyour governanceresponsibilities,includingreviewingthe effectivenessof thesystem of internalcontrol. Disclosure Summaryof disclosure requirement Quantitativeor qualitative consideration Prior Year Reclassification Disclosures in relation to a prior period reclassification did not initially comply with the Code, which requires thefollowing: a) The natureof thereclassification; b) The amount of each item or class of items that is reclassified, and c) The reason forthereclassification. Management have since revised the disclosure in accordance with the Code. The misstatement is quantitatively and qualitatively materialfor theusers of the financialstatements. PrivateFinanceInitiative(“PFI”) Note 18 of the Annual Accounts details contracts that the Council have in place with PFI holders. This includes North Ayrshire Council Schools, Largs Campus andClyde ValleyWaste. We discovered a factual disclosure error in Note 18 equating to £8.46m for service charges and contingent rentals. This did not impact the liability position at the year-end. This was due to a fault within management’s working paperwhich calculates thesplit of Note 18. The error is above performance materiality is therefore quantitativelymaterial.
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30 Action Plan Recommendations for Improvement No. Area Recommendation Management Response Responsible person Target Date Priority 1 Infrastructure Assets The Council's Fixed Asset Register has a degree of detail in terms of different types of infrastructure assets held, the Council should revisit its UEL policy to consider whether alternative UEL's should be set for differenttypesof assets. In order to support the ongoing review of the Code requirements in relation to accounting for Infrastructure Assets, the nature of assets held under Infrastructure Assets will be reviewed and engineering advice will be sought to ensure that the assigned UEL’s are consistent with the nature of the assets. Head of Finance March 2023 High
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3131 Responsibilities: The primary responsibility for the prevention and detection of fraud rests with management and those charged with governance, including establishing and maintaining internal controls over the reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicablelaws andregulations. As auditor, we obtain reasonable, but not absolute, assurance that the financial statements as a whole are free from material misstatement, whethercaused byfraudor error. Required representations: We have asked the Council to confirm in writing that you have disclosed to us the results of your own assessment of the risk that the financial statements may be materially misstated as a result of fraud and that you have disclosed to us all information in relation to fraud or suspected fraud thatyouare aware of andthataffectstheentityor group. We have also asked the Council to confirm in writing their responsibility for the design, implementation and maintenance of internal control to prevent anddetect fraudanderror. Audit work performed: In our planning we identified the risk of fraud in relation to recognition of COVID-19 related income and management override of controls as key audit risks for yourorganisation. During course of our audit, we have had discussions with management, those chargedwith governanceandtheinternalauditdepartment. In addition, we have reviewed management’s own documented procedures regardingfraudanderror in theAnnualAccounts. Our Other Responsibilities Explained Fraud responsibilities and representations Deloitte Confidential - Approved External Use only Deloitteview – Conclusion: We have not identified any errors concerning our fraud risks in relation to the recognition of COVID-19 related income and management overrideof controls. We have informed management, the Council and the Committee of their overallfraudresponsibilities. In addition, we have reviewed management’s own documented procedures regarding fraud and error in the Annual Accounts. We have also explained throughout our audit report, how we considered the auditcapable of detectingirregularities,includingfraud.
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3232 Independence and Fees Independence confirmation We confirm the audit engagement team, and others in the firm as appropriate, Deloitte LLP and, where applicable, all Deloitte network firmsare independentof the Councilandandour objectivityis not compromised. Fees The audit fee for 2021/22, in line with the expected fee range provided by Audit Scotland, is £316,670, as analysed below: £ Auditor remuneration 194,200 Audit Scotland fixed charges: Pooled costs 20,240 Contribution to PABV 91,869 Audit support costs 10,370 Total fee 316,670 In addition to the above, the audit fee for the charitable trusts audit is £1,200. No non-audit services fees have been charged for the period. Non-audit services In our opinion there are no inconsistencies between the FRC’s Ethical Standard and the Council’s policy for the supply of non- audit services or any apparent breach of that policy. We continue to review our independence and ensure that appropriate safeguards are in place including, but not limited to, the rotation of senior partners and professional staff and the involvement of additionalpartnersandprofessionalstaffto carry outreviewsof thework performedandto otherwise advise as necessary. Relationships We are required to provide written details of all relationships (including the provision of non-audit services) between us and the organisation, its board and senior management and its affiliates, including all services provided by us and the DTTL network to the audited entity, its board and senior management and its affiliates, and other services provided to other known connectedpartiesthatwe consider may reasonablybe thoughtto bear on ourobjectivityandindependence. We are notaware of anyrelationshipswhich are requiredto be disclosed. As partof ourobligationsunderInternationalStandardson Auditing(UK), we are requiredto reportto youon thematterslisted below: Deloitte Confidential - Approved External Use only
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