BRIEFING ON AUDIT REPORT Economic Development Department 2010/11 Economic Development Portfolio Committee 18 October 2011 Parliament

2 Reputation promise/mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

3 Agenda 1.Legislative requirements 2.Opinions 3.Summary of audit outcomes 4.Audit report structure 5.Audit outcome achieved 6.Compliance 7.Internal controls 8.Other matters 9.Audit outcomes of public entities in the EDD portfolio

4 1.Legislative requirements Legislative requirements 1.Public Finance Management Act (Act No.1 of 1999) Accounting Officer: Section 40(1)(a) & (b) – Record keeping responsibilities by accounting officer and preparing financial statements for audit Section 40(1)(c) – Submission of financial statements to Auditor-General for audit Auditor-General: Section 40(2) – Audit financial statements and submit report to accounting officer 2.Constitution of the Republic of South Africa (1996) Section 188 – must audit and report on accounts, financial statements and financial management of government institutions 3.Public Audit Act (Act No.25 of 2004) Sections 20 – Auditor-General must prepare audit report containing opinion/conclusion on: –Financial statements and financial position –Compliance and financial management –Predetermined objectives

5 2.Opinions Different audit opinions: –Unqualified (unmodified) –Qualified –Disclaimer –Adverse

6 2.Opinions Overall summary description per opinion: Audit OpinionDescription Unmodified An unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable financial reporting framework. Unmodified (with emphasis of matter) The addition of such an emphasis of matter paragraph(s) does not affect the auditor’s opinion on whether the financial statements are fairly presented. Modified (Qualified) A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management regarding departures from financial reporting framework, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.

7 2.Opinions Overall summary description per opinion: Audit OpinionDescription Disclaimer A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence to form an opinion and accordingly is unable to express an opinion on the financial statements. Adverse An adverse opinion is expressed when the effect of a disagreement with management regarding departures from the financial reporting framework is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

8 Audit opinion 2010/11: 3. Summary of audit outcome Opinion Disclaimer Adverse Qualified Unqualified with other mattersX Unqualified with no other matters Goal: Unqualified opinion with no findings on predetermined objectives or compliance with laws and regulations

9 4. Audit report structure Report on the financial statements  Introduction  Accounting officer/authority’s responsibility  Auditor-General’s responsibility  Opinion  Emphasis of matters  Additional matters Report on other legal and regulatory requirements  Predetermined objectives  Compliance with laws and regulations Internal control  Leadership  Financial and performance management  Governance Internal control  Investigations  Performance audits  Agreed up procedures Now please refer to handout for actual report audit report of Economic Development

10 4. Audit report structure Emphasis of matter/Additional matter Why? To draw the users of financial statements’ attention to a matter HIGHLIGHT! Difference? Opinion? “My opinion is not modified in respect of these matter(s)” Emphasis of matterAdditional matter to draw users’ attention to a matter presented or disclosed in the financial statements which is of such importance that it is fundamental to their understanding of the financial statements to draw users’ attention to any matter other than those presented or disclosed in the financial statements which is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report

11 4. Audit report structure Matters highlighted Emphasis of matter:  Financial reporting framework  Significant uncertainties  Revision of previously issued AFS  Restatements of corresponding figures  Material under-spending  Accruals  Going concern/funding/financial sustainability Additional matter:  Prior year audited by predecessor auditor  Material inconsistencies included in annual report  Unaudited supplementary schedules  Revision of previously issued AFS  Financial reporting framework

12 5. Audit outcomes achieved 2010/11 Actual audit report of Economic Development : refer to annexure 1.Opinion: Unqualified audit opinion 2.Other matters highlighted: Additional matter  Financial reporting framework

13 5. Audit outcomes achieved 2010/11 Actual audit report of Economic Development department: refer to annexure 4.Compliance  PFMA  National Treasury Regulations  Other legislation (Public Service Regulation) 5.Internal control Summary of control deficiencies in 3 Fundamentals:  Leadership  Financial and performance management

14 6. Compliance Category of findingActDescription Strategic planning and performance management TR (d) The three year strategic plan did not include targets of the departments programmes. Employee Cost (HR) PSR 1/III/B.2 (d) There was no HR plan in place. TR 8.3.4Payroll report not certified Expenditure Management TR 8.2.3Audit evidence could not be obtained that payments made to creditors were settled 30 days from receipt of invoice. Procurement and contract management PSR : chapter 3 (C1) Two instances were identified where SMS members did not disclose their interest in a supplier to the department. (No procurement was made from the supplier, however disclosure was not made to the Executive Authority as required by the Public Service Regulations) Summary of compliance findings

15 6. Compliance Category of findingActDescription Annual Financial Statements PFMA 40 (1)(b) The financial statements were subject to material adjustments. The material misstatements identified by the audit were with regards to disclosure.

16 6. Compliance Recommendation Implementation of an adequate review process of financial statements prior to submission for audit to ensure compliance. The development of policies and procedures to guide the operations of the department which are aligned to legislation.

17 Internal control deficiency Leadership Financial and performance management Governance Lack of adequate policies and procedures in place to guide the operations of the entity to comply with relevant legislation. X Insufficient procedures in place to prepare accurate and complete annual financial statements. X 7. Internal controls

18 8. Other matters Going forward The department needs to function independently of the department of Trade and Industry. It is now critical that polices and procedures be developed. Approval of new organisational structure and filling of key positions. EDD must develop an action plan to address all audit findings. This action plan will be monitored regularly at audit steering committees and feedback will be provided at audit committee meetings. Greater focus on compliance matters.

19 9. Audit outcomes of the public entities in the EDD portfolio Name of entity Anticipated audit opinion Audit outcomeFindings on Predetermined objectives Findings on Compliance Areas in which there were significant deficiencies in internal control LeadershipFinancial and performance management Governance Industrial Development Corporation (IDC) UnqualifiedNone South African Micro-Finance Apex Fund (samaf) Unqualified with Emphasis of matter relating to the restatement of corresponding figures, Going concern, irregular expenditure and material write offs. Indicators not well defined. Reported indicators not complete when compared to source information  Material adjustment to AFS.  Procurement and contract management  Expenditure management (irregular expenditure)  Human resource management (No CFO) XX

20 9. Audit outcomes of the public entities in the EDD portfolio Name of entity Anticipated audit opinion Audit outcomeFindings on Predetermined objectives Findings on Compliance Areas in which there were significant deficiencies in internal control LeadershipFinancial and performance management Governance Khula Enterprise Finance limited Unqualified  None International Trade and Administration Commission (ITAC) UnqualifiedObjectives, indicators and targets not consistent with the approved strategic plan. Indicators not well defined and verifiable. Procurement and contract management Expenditure Management (irregular expenditure) XX Competition Tribunal UnqualifiedNoneProcurement and contract management Expenditure Management (irregular expenditure) X

21 9. Audit outcomes of the public entities in the EDD portfolio Name of entity Anticipated audit opinion Audit outcomeFindings on Predetermined objectives Findings on Compliance Areas in which there were significant deficiencies in internal control LeadershipFinancial and performance management Governance Competition Commission Unqualified with Emphasis of matter relating to the restatement of corresponding figures.  None  Material adjustment to AFS.  Procurement and contract management.  Expenditure management. XX

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