To review and agree the external auditor’s draft audit plan for 2021/22.  The external audit of the council’s statement of accounts for 2021/22 is due to commence in July 2022 and their approach and plan is attached at Appendix A.

The Key Audit Partner for Grant Thornton presented the external auditor’s draft plan; the ‘Audit Plan for the year ending 31 March 2022’ was provided in Appendix A and the ‘Informing the audit risk assessment for Herefordshire Council 2021/22’ was provided in Appendix B to the report. 

The key points of the ‘Audit Plan for the year ending 31 March 2022’ included:

i)             External audit had determined planning materiality to be £7.864m for the group and £7.7m for the Council, with any figure over this to be subject to detailed testing. 

ii)           The risks requiring special audit consideration and procedures to address the likelihood of a material financial statement error were identified as: management of override of controls; valuation of land and buildings and investment properties; and valuation of pension fund net liability.

iii)          The risk assessment regarding arrangements to secure value for money (VFM) had identified the following risks of significant weakness for the council: the failure to meet the statutory needs of children in its care; the lack of effective contract management arrangements for its public realm and facilities management contracts; the contract appointment and management arrangements; and a repeated history of not learning from past events.  External audit would work with the officers to understand how each of these areas had been progressed and continue to be progressed.

iv)          Attention was drawn to audit logistics (agenda page 54), noting that the draft financial statements for 2021/22 were due to be provided to the external auditor on 1 July 2022, and to audit fees (agenda page 55), noting that this reflected the need to undertake additional and more robust testing and the quantity of work required on VFM.

The Key Audit Partner responded to questions and comments from committee members, including:

1.           In terms of the audit fees, the role of the external auditor was becoming more involved, there was a shortage of skilled auditors, and the baseline fee may increase in future years.

2.           The purpose of VFM in the context of the public sector was outlined; this focussed on financial sustainability, governance, and improving economy, efficiency, and effectiveness. 

Referring to Action 109, the Chairperson noted that the committee had requested training on the changes to the regulations, particularly in relation to VFM.

3.           It was recognised that the ‘Auditor’s Annual Report 2020/21’, presented to the committee at the meeting on 10 May 2022 (minute 95 of 2021/22 refers), had taken longer to prepare than expected due to it being the first year of the new VFM arrangements.  The aspiration to present the 2021/22 report before the end of the 2022 was noted.

4.           The statement ‘No specific work is planned as the presumed risk has been rebutted’ was explained in relation to ‘Presumed risk of fraud in revenue recognition ISA (UK) 240’ and ‘Presumed risk of fraud in expenditure recognition ISA (UK) 240’, and the committee was assured that external audit would look at all areas of key expenditure.

5.           It was confirmed that work on IT systems involved a substantive audit approach and experts were brought in to support this activity.

6.           An overview was provided of the approach to the valuation of land and buildings and investment properties.

The Director of Resources and Assurance advised that the council did not have an impairment reserve, but the valuers were instructed to consider impairments.

7.           It was noted that references to Torridge District Council were erroneous.

8.           In relation to the identified risk about the management override of controls, the Director of Resources and Assurance confirmed that the council had not made any fundamental changes; it was noted that the external auditor had made a valid observation, but it was choice how the council operated given the resources allocated.

9.           It was reported that the group audit scope and risk assessment considered the financial impact of the subsidiary upon the single entity.

Referring to Action 153, a committee member noted that the committee had requested further details on the governance and oversight arrangements for Hoople Limited. 

The Chairperson said that the committee would be interested in any comment from external audit in relation to Hoople Limited.

10.        With reference made to the appendices, the committee was advised that it was usual practice for Grant Thornton to label its reports as ‘Commercial in confidence’.

It was confirmed that senior officers within the council reviewed reports and appendices prior to publication.

The key points of the ‘Informing the audit risk assessment for Herefordshire Council 2021/22’ included:

v)           As part of the risk assessment procedures, Grant Thornton was required to obtain an understanding of management processes and the authority’s oversight of the following areas: general enquiries of management; fraud; laws and regulations; related parties; going concern; and accounting estimates.

vi)          Appendix B was a version complete with management responses and the committee was invited to identify any other matters it wished to bring to the attention of the external auditor.

Responses were provided to questions and comments from committee members, including:

11.        The Director of Resources and Assurance clarified that the ‘advisors consulted during the year’ (general enquiries of management, question 10, agenda page 68) related to advisors paid for specific advice on financial elements.

12.        The Key Audit Partner provided further details about the approach to VFM work which included the review of documents, supplemented by interviews with key personnel.

13.        The Key Audit Partner said that it was difficult to compare local authorities, but Grant Thornton was keen to identify and share best practice.

14.        The Director of Resources and Assurance commented that the quicker production of the accounts meant that there was increasing emphasis on accounting estimates.

The Key Audit Partner added that a change to the International Standard on Auditing (ISA) 540 required auditors to dig deeper into accounting estimates, and there was a responsibility on those charged with governance to understand and challenge how officers had produced the accounts.

Resolved:      That

a)           The proposed external audit plan 2021/22, Appendix A to the report, be approved;

b)          The ‘Informing the Audit Risk Assessment’ document, Appendix B to the report, be noted; and

c)      The committee did not determine any further recommendations it wished to make to maximise the value of the combined internal and external audit process at this time.