Executive summary 1 Risk assessment and areas of audit ......Areas of audit focus Our perspective Work to be performed s Integrity of rates strike, rates invoicing and collection •

Executive summary 1

Risk assessment and areas of audit focus

3

Audit approach 9

Materiality 13

Your EY team 15

Independence 17

Appendices 19

Gisborne District Council Audit Plan for the year ending 30 June 2018

Home | Executive summary | Risk assessment and areas of audit focus | Audit approach | Materiality | Your EY team | Independence | Appendices

i | 2018 Audit Plan – Gisborne District Council

Dear Members of the Council

We are pleased to present our Audit Plan (“Plan”) for the audit of the financial statements and performance reporting of Gisborne District Council (“GDC”) and its controlled entities (“the Group”) for the year ending 30 June 2018. This Plan outlines the scope of our services, identifies Ernst & Young (“EY”) professionals that will serve you and presents our understanding of some key considerations that will affect the 30 June 2018 audit.

Our audit is designed to express an audit opinion on the 30 June 2018 full year financial statements and performance reporting. Our Plan has been prepared based on our understanding of GDC and the local government sector. We have considered, and will continue to consider GDC’s current and emerging operating risks, assess those that could materially affect the financial statements and align our procedures accordingly. The Plan will be responsive to your needs and will maximise audit effectiveness so we can deliver the high quality audit you expect.

Our commitment to quality will be reflected in every aspect of our work. If you have any questions or comments, please contact me on 021 923 431.

Yours faithfully

David Borrie Partner

1 | 2018 Audit Plan – Gisborne District Council]

Executive summary

2 | 2018 Audit Plan – Gisborne District Council


As part of our risk assessment process we have met with management to understand the key changes in the business and adapted our audit approach accordingly. Our consideration of the key operating changes and the impact on our 30 June 2018 audit have been incorporated into our key areas of audit focus and are detailed on pages 5-8. They remain broadly consistent with the prior year.

• Accounting for infrastructure assets; • Forest valuation; • Debt facilities and derivatives; • Litigation, claims and contingencies; • Integrity of rates strike, rates invoicing and collection; • Core controls over operating expenditure, procurement and

tendering; • Employee entitlements; • Transfer of assets to Gisborne Holdings Limited (“GHL”); and • Non-financial performance reporting.

Audit approach Consistent with previous years, we seek to rely on manual controls in the key financial statement processes and therefore expect to take a controls based approach wherever possible. Details of our controls based approach are outlined in detail on pages 10 and 11. The nature and extent of our controls testing is dependent on, and considers whether, the control environment of GDC is operating effectively.

We will continue to take a substantive approach in areas of significant management judgement or where this has been assessed as more efficient or effective.

Materiality Our audit is planned to obtain reasonable assurance of detecting misstatements that we believe could be, individually or in aggregate, material to the financial statements.

Our materiality threshold has been set at $1.7m being 2% of forecasted operating expenditure. This is consistent with how we have set materiality in previous years. We will continue to report to the Finance and Audit Committee errors of more than $85k.

Your EY team Key members of our team have been involved in the audit of GDC for a number of years whilst others bring new perspectives and insight. This mix provides GDC with continuity, historical knowledge of your operations and sector expertise as well as fresh thinking and ideas. Further detail on your EY team for the 2018 audit can be found on page 16.

Independence We remain in compliance with the NZICA Code of Ethics’ and the Professional and Ethical Standard 1: Code of Ethics for Assurance Practitioners’ independence requirements as well as the Office of the Auditor General independence requirements, and in our professional judgment, the engagement team and the Firm are independent. We have the appropriate controls in place to ensure we remain independent throughout the audit.

Engagement execution and reporting

Our audit engagement letter which was agreed in 2017 included the audit for the 30 June 2018 year end.

We continue to regularly engage with management and the leadership team as part of our audit planning and execution. We have set out on page 10 a summary of our communication and deliverables throughout the 2018 audit.

Proposed audit fee

The audit fee for the year ended 30 June 2018 is $178k including OAG overhead and excluding disbursements and GST as outlined on our Audit Proposal Letter.

Executive summary




We have set out on this page an overview of the risk assessment process we have conducted as part of our audit planning procedures. Our risk assessment process helps us focus our audit efforts on GDC’s key risk areas, being those risks which might lead to a material misstatement in the group financial statements, and forms the basis of our overall audit plan. We revisit the appropriateness of our view of risk throughout the audit cycle as the business, economy and industry conditions evolve.

Revisit the key areas of audit focus identified in 2017 and consideration of how the business has changed

We revisited the risks identified during our 2017 audit process and considered whether they remain appropriate for the 2018 year end.

We performed the following procedures to understand the business and any changes that occurred in the current year:

• Discussions with the finance team;

• Consideration of current year operations;

• Discussions with asset managers responsible for key infrastructure asset groups;

• Updated our understanding of the local government sector and the issues it faces;

• Discussions with the wider Council management team; and

• Discussions with management of key subsidiaries.

Areas of audit focus


Provisions Valuation of assets

Profit and loss Other

► Debt and Derivatives

► Litigation, Claims and Contingencies

► Rates

► Key Expenditure processes ► Employee Entitlements

► Assets transferred to GHL

► Non- financial performance reporting

► Infrastructure Assets

► Forestry valuation



Areas of audit focus Our perspective Work to be performed

Valu

ati

on o

f assets

Accounting for infrastructure assets

• Infrastructure assets represent a significant component of the Council's balance sheet.

• There is a risk that the useful life assumptions used in the valuations are not reflective of up to date information maintained in the Council's Asset Management plans or recent valuations

• Where assets have not been valued recently there is a risk that an asset’s carrying value does not reflect its fair value.

• Misclassification of maintenance and/or capital expenditure given nature and useful life of work done is also a risk.

• Roading assets are revalued annually by an independent third party. The “three waters” and solid waste assets will be revalued internally by Council with input from third parties if needed for the 2018 year end and are due to be revalued by an independent value the following year.

• We will examine appropriateness of depreciation against the estimated useful life in the Council’s accounting policies. This will involve consideration of the depreciation rates included in the most recent valuations.

• For asset classes that are not being revalued in the current year we will examine the assumptions underlying the historical valuation against current asset management plans to assess whether the value remains materially correct.

• For asset classes that have been revalued this year we will obtain reliance letters from the independent valuers engaged by Council.

• We will review the data provided to the valuer to assess the appropriateness of data used in the valuation.

• We will examine classification procedures relating to capital, renewal and maintenance work.

• Over the last two years, the Council has been moving their assets onto the new asset system called IPS8, we will review any assets transferred over in the current year to ensure that they have been accurately transferred.

• We will examine cut off at year end for capital works to check it is consistent with work completed at that point.

• We will examine significant asset impairments and management's assessment for indicators of impairment.

• We will examine the accounting for significant additions and disposals of assets during the year.

• We will review the fixed asset reconciliation of underlying data to the general ledger with a focus on significant additions and disposals during the year.

• As a part of our audit work over the Long Term Plan we have obtained an understanding of significant projects currently being undertaken by Council. We will check the infrastructural asset information presented in the annual report is consistent with this understanding.

Forest valuation

• The Council owns forestry assets which are valued every year-end in accordance with PBE IPSAS 27.

• Forestry valuation is a specialist field and there are inherent risks in such valuations.

• We will check the forestry assets are valued appropriately and the valuation is accurately recorded in the financial statements;

• We will assess the valuer's qualifications and independence; and

• We will assess the integrity of the underlying data and the assumptions used in the valuation model.





Pro

vis

ion

s

Debt facilities and derivatives

• The Council has several sources of debt funding. In some instances GDC have reporting requirements or collateral associated with the debt.

• The Council also maintain interest rate swaps to manage Council's exposure to interest rate fluctuations. These swaps are carried at fair value with gains and losses recorded in profit and loss.

• Over the next five years, Council is expected to increase borrowing from $37.7m in 2017 to $105m in 2023 to fund the activities and projects included in the long term plan.

• Obtain an understanding of any new debt facility agreements entered into in the year and agree these to third party confirmations.

• Independently confirm derivative positions at year end.

• Consider revaluing derivative positions to determine if they are materially correct.

• Consider long term or current classification against the requirements of PBE IPSAS 1 - Presentation of Financial Statements requirements.

• Examine disclosures associated with the debt and swap positions held.

Litigation, claims and contingencies

• The Council is potentially subject to a number of different types of threatened, or actual litigation at any point in time.

• Some of the current open cases are covered by insurance to an extent. For claims which are not covered by insurance, Council has considered the need to record a provision in the financial statements based on the likely outcome of the cases.

• Obtain legal confirmations from external legal counsel to confirm completeness of any open matters at 30 June 2018.

• Assess the appropriateness of any provisions or contingent liabilities recognised in accordance with PBE IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets.

• Obtain settlement documentation, where available, for the various legal matters and understand how this has been recorded in the financial statements.

• Hold discussions with management and external counsel to assess the status of the outstanding claims and assess the reasonableness of the provision carried.





Pro

fit

an

d loss

Integrity of rates strike, rates invoicing and collection

• is specific legislation in place which must be adhered to for the rates strike to be legal.

• database.

• The reliability of the rates billing system should ensure rates are billed appropriately.

• We will examine the rates strike for compliance with the Local Government Rating Act and test that the rates struck are being invoiced accordingly.

• whether these are operating effectively.

• Certain rate paying groups represent significant collection risk. We will examine any provision for doubtful rates debtors to consider whether it is appropriate in the circumstances.

• We will recalculate the rates strike to test the clerical accuracy of the strike.

• Trend analysis of revenue will also be performed.

Core controls over operating expenditure, procurement and tendering

• Appropriateness of Councilor and management expenditure is an area of interest to ratepayers.

• Council’s Capital works procurement programme involves significant cash flows.

• Areas of expenditure such as travel, accommodation, training and catering can present opportunities for personal benefit.

• We will examine, on a sample basis, the use of credit cards and obtain assurance that expenditure has been incurred for a reasonable Council purpose.

• We will select a sample of contracts and examine the application of the procurement policy across the samples of contracts.

• For a sample of expenses, we will complete sensitive expenditure testing to check if the expenditure is appropriate.

• over operating expenditure and Councilor’s allowances are in place.

Employee entitlements

• Employee entitlements could be misstated or incorrect entitlements paid.

• Payroll systems may not appropriately record employment expense in the general ledger.

• Local authorities are required to disclose information about severance payments in their annual report.

• We will undertake testing of controls over the payroll processes and controls utilised by management.

• We will assess the accuracy of recognised employee entitlements at year end and verify their recognition and measurement to contractual entitlements.

• Through the examination of a sample of one-off payments to employees, we will examine whether any severance payments were made during the year along with the disclosure of these payments.





Oth

er

are

as o

f fo

cu

s Transfer of assets to GHL

• Over the last three years, buildings owned by the Council were transferred to Gisborne Holdings Limited (GHL). In 2016, the Holiday Park and Vehicle Testing Station were transferred.

• The Community housing is expected to be transferred later in 2018.

• In January 2018, the building on Fitzherbert Street was completed. The council moved in and a new agreement was signed for the lease of the building from GHL.

• We will hold discussions with management over the progress and status of the community housing transaction.

• We will examine new agreements between Council and GHL for the lease of buildings and any management contracts and check these are appropriately recorded in the separate financial statements of Council.

Non-financial performance information reporting

• Under AG-4 (revised), our audit opinion on the service performance report covers compliance with generally accepted accounting practice (GAAP), and whether or not the service performance report fairly reflects the Council’s actual service performance for the period.

• There is a risk of inadequacy of reporting systems to monitor performance.

• Potential failure to adequately report the provision of core utility services to the public.

• Statement of Service Performance (SSP) of the Council to determine that the measures have been reported on and outputs have been achieved where stipulated. Our audit work will focus on the mandatory measures for infrastructure assets along with a sample of other measures.

• We will assess completeness and adequacy of the performance framework utilised including at an outcome level.

• Provide feedback on the overall annual report and the summary annual report.



Audit approach


An effective audit approach

Our audit is primarily designed to enable us to express an opinion to the Readers on the fair presentation of the Gisborne District Council year-end financial statements and service performance report.

We recognise that regular and timely communication with management and the leadership team is critical to maintaining an effective and transparent relationship. The table below summarises the timing of our key deliverables and communications:

Deliverables/Communications Timing

Discussions with management and leadership team

Ongoing

EY Audit Plan presented June 2018 - Finance and Audit Committee

Final audit work Commences 3 September 2018

Findings and conclusions from year end audit work communicated

Late September 2018

Annual report review and feedback September 2018

EY Audit Closing Report October 2018 - Finance and Audit Committee

Year end audit report issued On approval of the financial statements

Report on control findings Draft report issued to management in October 2018

Controls reliance

Our audit has been designed to obtain a significant degree of assurance from independent testing of management’s internal controls. This approach of understanding and evaluating controls is risk based and structured on a foundation of GDC having a strong control environment framework

In accordance with International Standards on Auditing (New Zealand), the external auditor must gain an understanding of the internal controls relevant to the audit. Specifically this assessment must cover:

• The control environment • GDC’s risk assessment procedures • Control activities • Monitoring of controls (self-assessment)

We will revisit our 2017 control findings during our audit to ensure that management’s responses have been implemented during the year as agreed. We provide Management with a Report on Control Findings as part of the audit process, outlining our findings and our recommendations on where improvements can be made. Where significant deficiencies come to our attention, we will communicate these to the Finance and Audit Committee.

Audit approach


Approach to key financial statement processes

We plan to test controls for the following financial statement processes:

• Expenditure and accounts payable • Payroll • Rates • Infrastructure asset recognition and measurement

In the course of any audit, there are areas where a controls reliance approach is not appropriate and where a substantive audit approach is more efficient or effective. Significant or judgemental balances that we audit substantively are:

• Infrastructure asset recognition and measurement • Other revenue (fees and subsidies) • The financial statement close process • Non-financial performance reporting

As management continue to improve the process controls we will review our approach and rely on controls where possible. We have set out to the right a table which summarises the level of controls reliance we expect to achieve in the key financial statements processes.

Approach to key financial statement processes

Process Controls reliance

Expenditure and accounts payable

Substantive Control

Payroll

Substantive Control

Rates

Substantive Control

Infrastructure asset management

Substantive Control

Other revenue (fees and subsidies)

Substantive Control

Financial statement close process

Substantive Control

Non-financial performance reporting

Substantive Control

Audit approach


Risk of fraud

The primary responsibility for the prevention and detection of fraud and error rests with those charged with the governance and management of Gisborne District Council.

Our responsibility as the external auditor is to consider the risk of fraud and the factors that are associated with it so as to provide reasonable assurance that the financial statements are free from material misstatement resulting from fraud. Professional standards require us to perform certain procedures designed to address the risks of fraud, including the risk of management override. However, it is important to note that while our external audit work is not primarily directed towards the detection of fraud or other irregularities, we will report any matters identified during the course of our work.

We evaluate the risk of management override and consider the actions management has taken to respond to those risks. We have set out to the right our approach to fraud risks within our audit process.

We will inform the Finance and Audit Committee and management should we become aware of any actual or suspected instances of fraud as a result of our audit.

Risk of fraud

Approach to fraud risks

Identifying and evaluating controls implemented by management to address fraud, including those in respect of related party transactions.

Reviewing processes in place designed to check that transactions are appropriately approved and recorded in the accounting records of GDC.

Substantive audit of manual journals including use of data analytic techniques to identify any significant unusual journals.

Specific substantive and control tests relating to general expenditure and payroll, designed to address material fraud risk (cash defalcation).

Audit and challenge of judgmental areas with sufficient level of professional skepticism and involvement of senior team members.

Consider any actual occurrences of fraud and whether they indicate a significant weakness in controls.

Audit approach


Materiality


We design our audit procedures to obtain reasonable assurance that errors in the financial statements are not material individually or in aggregate. Errors are considered to be material if, individually or in aggregate, they could reasonably be expected to influence readers of the financial statements. Our materiality is set at $1.7m but we will report identified errors in excess of $85k. Materiality is used to determine the nature and extent of our audit procedures. NZ IAS1 Presentation of Financial Statements states that omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements.

Our planning materiality for the 2018 audit is based upon 2% of expected operating expenditure of $86.3m. Our materiality levels are set out in the table below:

Detail $m 2018 Audit Estimate ($000)

2017 Audit Actual ($000)

Operating Expenditure 86,337 86,115

Planning materiality – 2 % 1,700 1,700

Threshold for reporting audit differences 85 85

As a matter of course, all identified audit and review differences in excess of $85k will be brought to the attention of management for further consideration and action as appropriate. We will communicate to you any of these audit differences that are not adjusted by management, as well as significant corrected misstatements.

We will regularly review the level of materiality throughout the engagement and where a change is necessary we will advise the Finance and Audit Committee accordingly.

Materiality


Your EY team


Your audit team for 2018 provides continuity and fresh ideas. This helps to ensure that we build on previous experience and make the audit process as smooth as possible.

Your EY team

We understand that our team is the most important element of your relationship with us. We have effectively balanced the ongoing continuity of our core team with the input of innovation and fresh insights.

Our team has been involved in the audit of GDC for a number of years. This stability provides GDC with continuity, historical knowledge of your business and industry expertise. These combined factors enable us to focus on the significant issues facing your business.

Your EY team

Core audit team

David Borrie Lead Audit Engagement Partner

Kieron Wright Manager

Robert Holland Senior Accountant

Specialists

Lara Truman Technical Executive Director

Marcus Henry Independent Partner


Independence


We are committed to being and being seen to be independent. There are no matters that, in our professional judgement, bear on our independence which need to be disclosed to the Finance and Audit Committee.

We understand the importance of independence to you. We have been rigorous in maintaining our independence and managing conflicts. We will remain independent, and be seen to be independent.

Independence is fundamental to EY as our ongoing reputation and success is connected to our ability to meet both GDC’s and broader regulatory independence requirements.

We have consistently complied with all professional regulations relating to auditor independence including those outlined in:

• PES1 Code of Ethics for Professional Accountants • CAANZ Code of Ethics • Independence requirements of the Office of the Auditor-General

Accordingly, we ensure that there are controls in place and actions taken on a regular basis that mitigate any risks to our independence.

Independence

We have no conflict of interest:

• All team members (Including specialists) have personally confirmed their independence

• We adhere to strict client confidentiality requirements

The scope of any non audit services provided to you is based upon both the letter and spirit of the current rules governing auditor independence

We do not provide any prohibited services

We comply with all independence legislation and guidelines, both locally and globally

We have a strong independent review process in place for addressing significant areas of judgement

EY, its Partners and current service team members do not hold any financial interests in the Council.

Independent in “appearance”

Independent in “mind”

Meeting your

independence requirements

Integrity I Objectivity I Professional scepticism

We adhere to the Independence requirements of the OAG.

We bring differences in opinion to

management


Appendices


Audit of the full year financial statements

Our audit will be conducted to provide reasonable assurance as to whether the financial statements and performance reporting for the year ending 30 June 2018 are free of material misstatement. We will conduct our audit in accordance with Auditing Standards issued by the Auditor-General, which incorporate the International Standards on Auditing (New Zealand).

Other reports

In conjunction with our audit of the Annual Report we will also provide the other assurance services listed below.

Type of Report

Opinion on Summary Financial Statements

Trustee Reporting

Compliance audit of the Register of Stock

Appendix A – Reports to be issued


Matter Required communication Reference

Terms of engagement • Confirmation by the Committee of acceptance of terms of engagement

• Ernst & Young to provide a copy of the engagement letter

Engagement letter

Planning and audit approach • Communication of the planned scope and timing of the audit including any limitations Audit Plan

Significant audit findings • Our view about the significant qualitative aspects of accounting practices including accounting policies, accounting estimates and financial statement disclosures

• Significant difficulties, if any, encountered during the audit

• Significant matters, if any, arising from the audit that were discussed with management

• Written representations that we are seeking

• Expected modifications to the audit report

• Other matters if any, significant to the oversight of the financial reporting process

Audit Closing Report or earlier if needed.

Misstatements • Uncorrected misstatements and their effect on our audit opinion

• The effect of uncorrected misstatements related to prior periods

• A request that any uncorrected misstatement be corrected

• In writing, corrected misstatements that are significant

Audit Closing Report.

Fraud • Enquiries of the Committee to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity

• Any fraud that we have identified or information we have obtained that indicates that a fraud may exist

• A discussion of any other matters related to fraud

Audit Closing Report or earlier if needed.

Related parties • Significant matters arising during the audit in connection with the entity’s related parties including, when applicable:

• Non-disclosure by management

• Inappropriate authorisation and approval of transactions

• Disagreement over disclosures

• Non-compliance with laws and regulations

• Difficulty in identifying the party that ultimately controls the entity.

Audit Closing report or earlier if needed.

Appendix B – Communication with those charged with governance


Matter Required communication Reference

External communications • Management’s refusal for us to request confirmations

• Inability to obtain relevant and reliable audit evidence from other procedures Audit Closing report or earlier if needed.

Consideration of laws and regulations

• Audit findings regarding non-compliance where the non-compliance is material and believed to be intentional

• Enquiry of the Committee into possible instances of non-compliance with laws and regulations that may have a material effect on the financial statements that the Committee may be aware of

Audit Closing report or earlier if needed.

Independence • The auditor shall communicate with those charged with governance:

• A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network firms have complied with relevant ethical requirements regarding independence

• All relationships and other matters between the firm, network firms, and the entity that, in the auditor’s professional judgement, may reasonably be thought to bear on independence

• The related safeguards that have been applied to eliminate identified threats to independence or reduce them to an acceptable level.

Audit Plan and Audit Closing Report.

Going concern • Events or conditions identified that may cast significant doubt on the entity's ability to continue as a going concern, including:

• Whether the events or conditions constitute a material uncertainty

• Whether the use of the going concern assumption is appropriate in the preparation and presentation of the financial statements

• The adequacy of related disclosures in the financial statements.

Audit Closing report.

Control findings • Significant deficiencies in internal controls identified during the audit Audit Closing Report or earlier if needed.

Appendix B – Communication with those charged with governance

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Documents

Executive summary 1 Risk assessment and areas of audit ......Areas of audit focus Our perspective Work to be performed s Integrity of rates strike, rates invoicing and collection •