1. AUDIT REPORT National Department of Human Settlements 2010/11 Human Settlements Portfolio Committee 11 October 2011 Parliament

2. 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. 3 Agenda 1. Executive summary 2. Legislative requirements 3. Focus areas 4. Opinions 5. Summary of audit opinions 6. Audit report structure 7. Audit outcomes achieved 2010/11 8. Emphasis of matters 9. Predetermined objectives 10. Compliance 11. Internal controls 12. Other matters

4. 4 1. Executive summary Human Settlements Audit Report – Discussion of the audit report of the national Department of Human Settlements for the 2010/11 audit cycle for the financial year ended 31 March 2011. Objective – What opinion means? – Significant findings? – Public interpretation? – Conclusion?

5. 5 2. 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

6. 6 3. Content of audit report Focus areas and content of audit report: – Opinion – Matters highlighted :  Matters important to users of financial statements:  Disclosed by department  Detected by audit  Predetermined objectives  Compliance matters  Internal Controls  Other i.e investigations

7. 7 4. Opinions Different audit opinions: –Unqualified (unmodified) –Qualified –Disclaimer –Adverse

8. 8 4. 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.

9. 9 4. 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.

10. 10 History of audit opinions: 5. Summary of audit outcomes Opinion2010-112009-102008-92007-8 Disclaimer Adverse Qualified Unqualified with other mattersXXXX Unqualified with no other matters Goal: Unqualified opinion with no other matters highlighted!!!!

11. 11 6. Audit report structure Index: 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 Other reports Investigations Performance audits Agreed up procedures Now please refer to handout for actual report audit report of Human Settlements

12. 12 6. 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

13. 13 6. Audit report structure Matters highlighted Emphasis of matter:  Financial reporting framework  Significant uncertainties  Revision of previously issued AFS  Restatements of corresponding figures  Material underspending  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

14. 14 7. Audit outcomes achieved 2010/11 Actual audit report of Human Settlements: refer to annexure 1. Opinion: Unqualified audit opinion 1. Other matters highlighted: Emphasis of matters  Irregular expenditure  Significant uncertainties  Restatement  Material underspending

15. 15 7. Audit outcomes achieved 2010/11 Actual audit report of Human Settlements: refer to annexure 3. Predetermined objectives  Usefulness of information  Reliability of information 4.Compliance  PFMA  National Treasury Regulations  Other legislation 5. Internal control Summary of control deficiencies in 3 Fundamentals:  Leadership  Financial and performance management  Governance

16. 16 8. Emphasis of matters NB! Audit only highlight if matter is disclosed in the financial statements of the entity 1.Significant uncertainties Litigation against department of R4 920 000: highlighted as outcome is unknown 1.Restatement of corresponding figures Prior year figures (R264 119 000) corrected in current year financial statements: highlighted if material or significant 1.Irregular expenditure Expenditure of R12 100 000 incurred in contravention of act, law or regulation. Majority related to expenditure incurred in contravention of the PPPFA and PFMA: highlighted as it is material and significant to users.  expenditure = spending of public funds  Indication of financial management 1.Material underspending RHIP grant not spent (38.4%) of allocation of R100 000 000: highlighted as it is public interest = service delivery

17. 17 8. Emphasis of matters Recommendation  Department should implement a review process to ensure compliance with laws and regulations in preparation of financial statements.  The department must strengthen controls to:  Prevent;  Detect; and  Adequately disclose irregular expenditure  Adequate planning and project management to ensure that allocated funds are spent appropriately and timely in order to achieve objectives.

18. 18 9. Predetermined Objectives Usefulness of information  Measurability: the planned and reported targets were not measurable in identifying the required performance. Reliability of information  Validity: The following matters were noted:  Sufficient appropriate evidence to support the reasons for major variances between the planned and the actual reported targets could not be obtained.  Source information or evidence provided was not valid. Recommendation  The department must ensure that the targets in the strategic plan conform to the “SMART” principle as required by the Treasury Framework  Maintain sufficient and appropriate support evidence for reported targets, collecting and collating of evidence to ensure correct reporting.

19. 19 10. Compliance Category of findingActDescription Annual financial statements, performance and annual reports PFMA 40(1)(a)& (b) Financial statements submitted were subject to material and/or significant adjustments and certain supporting evidence for AoPO was not provided to audit Expenditure management PFMA(38 (1)(c)(ii) TR 9.1.1 Irregular expenditure was not prevented by the department PFMA(38 (1)(f) TR 8.2.3 Payments due to creditors were not always settled within 30 days from receipt of an invoice Procurement and contract management TR 16A6.3 (c) Competitive bid advertised for only 19 days and not required 21 days PPPFA 7Preference point scoring system to be applied was not specified in bid documentation to suppliers Transfer of funds and/ or conditional grants DoRA 10(1)(a) Compliance certificate was not completed and submitted to National Treasury for Rural Household infrastructure Grant Summary of compliance findings

20. 20 10. Compliance Recommendation  Implementation of a adequate review process of financial statements prior to submission for audit to ensure compliance.  A system to ensure that the department procures goods and services in a transparent, cost effective and efficient manner. Compliance to laws and regulations should be adhered to during procurement in order to prevent irregular expenditure i.e (signed off checklist indicating steps followed prior to approval for payment)  Despite a concerted effort to ensure payments are affected within 30 days, instances of non-compliance were still noted. Action needs to be taken against non-complying individuals as the processes are in place and just require adherence thereto.  Risk management processes need to ensure compliance with required laws and regulations.

21. 21 Internal control deficiency Leadership Financial and performance management Governance The accounting officer did not exercise oversight responsibility regarding financial and performance reporting and compliance with laws and regulations and related internal controls X Management did not prepare regular, accurate and complete financial and performance reports that are supported and evidenced by reliable information. X Management did not review and monitor compliance laws and regulations. X 11. Internal controls

22. 22 12. Other matters Going forward  NDHS has developed an action plan to address all audit findings. This action plan is monitored regularly at audit steering committee and feedback is provided at audit committee meetings.  The department has affected material adjustments to its disclosures in the financial statements (irregular expenditure and lease commitments).  Vacancies in key management positions were filled during the period under review (Compliance officer and CIO) also post year end (CFO)  Proper planning is required to ensure adequate implementation of Sanitation function in order to ensure service delivery. Note allocation increase in MTEF.  Audit opinion of predetermined objectives in audit report in future. Ultimate GOAL!!!!!!

23. Q U E S T I O N S ? ? ?