Auditing of Local Government in terms of the Municipal Finance Management Act 56 of 2003

Jurisdiction
South Africa
Citation
General Notice 1512 of 2006
Primary work
Public Audit Act, 2004
Date
27 October 2006
Language
English
Type
Legislation
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Taxonomies
South Africa
Public Audit Act, 2004

Auditing of Local Government in terms of the Municipal Finance Management Act 56 of 2003

General Notice 1512 of 2006

Under the powers vested in me by section 3 of the Public Audit Act, 2004 (Act No. 25 of 2004) (hereinafter referred to as the PAA), I, Shauket Allie Fakie, Auditor-General of the Republic of South Africa, hereby determine the following:

1. Audit opinion

The objective of an audit of financial statements is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.In terms of section 13(3) of the PAA I hereby advise that, for the 2005-06 audits, I have determined that the approach set out in annexure A to this notice be followed in the formulation of my audit reports on the financial statements of municipalities and municipal entities. This is in response to the financial reporting frameworks prescribed by the National Treasury in terms of the MFMA for application by municipalities and municipal entities.
a.GRAP & GAAP and GRAP & GAMAPThe National Treasury has determined the GRAP & GAAP basis of accounting to be as follows:“The financial statements have been prepared in accordance with the South African Statements of Generally Accepted Accounting Practice (GAAP) including any interpretations of such Statements issued by the Accounting Practices Board, with the prescribed Standards of Generally Recognised Accounting Practice (GRAP) issued by the Accounting Standards Board replacing the equivalent GAAP Statement...” (This is more fully set out in annexure B to this notice.)The National Treasury has determined the GRAP & GAMAP basis of accounting to be as follows:"The financial statements have been prepared in accordance with the Standards of Generally Recognised Accounting Practice (GRAP) and the Standards of Generally Accepted Municipal Accounting Practice (GAMAP) prescribed by the Minister of Finance in terms of:General Notice 991 of 2005, issued in Government Gazette no 28095 of 15 December 2005; andGeneral Notice 992 of 2005, issued in Government Gazette no 28095 of 7 December 2005;Accounting policies for material transactions, events or conditions not covered by the above GRAP and GAMAP Standards ... have been based on the South African Statements of Generally Accepted Accounting Practice (GAAP) including any interpretations of such Statements issued by the Accounting Practices Board. ...” (This is more fully set out in annexure C to this notice.)I have recognised the GRAP & GAAP and GRAP & GAMAP bases of accounting set out above as comprehensive bases of accounting and my audit report will therefore be issued in terms of ISA 800.
b.IMFOThe IMFO basis of accounting constitutes the standards determined by the Institute of Municipal Treasurers and Accountants (now the Institute of Municipal Finance Officers) in its Code of Accounting Practice (1997) and Report on Published Annual Financial Statements (second edition - January 1996).I have recognised the IMFO basis of accounting as an entity-specific basis of accounting and I will therefore issue a “prepared in accordance with...” audit opinion in accordance with SAAPS 2.

2. Compliance with applicable legislation and reporting relating to performance against predetermined objectives

In terms of section 20(2)(b) and (c) of the PAA, an audit report must reflect an opinion or conclusion on (b) the auditee’s compliance with any applicable legislation relating to financial matters, financial management and other related matters, and (c) the reported information relating to the performance of the auditee against predetermined objectives.
a.Municipal entitiesI have determined that, until further information is published in this respect, no separate opinion or conclusion on compliance with legislation or performance against pre­determined objectives should be included in the audit reports. Conclusions in this regard will be reached as part of the financial auditing process. Reporting will be in respect of material non-compliance with applicable legislation relating to financial matters or material shortcomings in the process of reporting against predetermined objectives that may come to the attention of the auditor during the audit.
b.MunicipalitiesI have determined that, until further information is published in this respect, no separate opinion or conclusion on compliance with legislation should be included in the audit reports. Conclusions in this regard will be reached as part of the financial auditing process. Reporting will be in respect of material non-compliance with applicable legislation relating to financial matters that may come to the attention of the auditor during the audit. Reporting on the performance measurement system in terms of section 46 of the Municipal Systems Act, 2000 (Act No 32 of 2000) will be undertaken in a separate report in accordance with ISRS 4400.

3. Disclosure of budget information

GRAP 1 paragraph 11 et seq. requires that financial reporting by entities shall provide information on whether resources were obtained and used in accordance with the legally adopted budget. As the budget reporting standard is still in the process of being developed, I have determined that my audit of any disclosures made by the entities in this respect will be limited to reporting on non-compliance with this disclosure requirement.

4. Period of application

The guidance provided in this document comes into immediate effect, but will not influence any audit reports already issued.Regardless of any changes to international auditing standards regarding the audit report that may come into effect after the date of this directive, the reporting requirements outlined above will apply to all audit reports dated on or before 31 May 2007, issued in respect of audits conducted on entities subject to the MFMA.

5. Glossary of terms

GAAP: South African Statements of Generally Accepted Accounting PracticeGAMAP: Generally Accepted Municipal Accounting PracticeGRAP: Generally Recognised Accounting PracticeMFMA: Municipal Finance Management Act. 2003 (Act No. 56 of 2003)PAA: Public Audit Act, 2004 (Act No. 25 of 2004)ISA: International Standards on AuditingISRS: International Standards on Related Services

Annexure A

Type of entitySeparate financial statementsConsolidated financial statements
Mandatory basis of accountingAudit reportVoluntary alternative basis of accountingMandatory basis of accountingAudit reportVoluntary alternative basis of accounting
       
High-capacity municipalitiesGRAP & GAMAPISA 800: “Comprehensive basis of accounting”Audit opinion: “Present fairly” in accordance with the basis of accounting in annexure B, i.e. GRAP, GAMAP & GAAPa GRAP & GAMAPIf a proper GRAP & GAMAP compliant consolidation was attempted:ISA 800: “Comprehensive basis of accounting”Audit opinion: “Present fairly" in accordance with the basis of accounting in annexure B, i.e. GRAP, GAMAP & GAAPaIf a proper GRAP & GAMAP compliant consolidation was not attempted:ISRS 4400: “Agreed-upon procedures”No audit opinion: “Report of agreed-upon procedures” 
Medium-capacity municipalitiesIMFOSAAPS 2 “Entity-specific basis of accounting”Audit opinion: “Prepared in accordance with ...”GRAP & GAMAPIMFONo audit opinion will be expressed on the consolidated” financial statements bGRAP & GAMAP
Low-capacity municipalitiesIMFOSAAPS 2: “Entity-specific basis of accounting”Audit opinion: “Prepared in accordance with...”GRAP & GAMAPc 
       
Municipal entities that:are subject to the Companies ActGRAP & GAAPISA 800: “Comprehensive basis of accounting”Audit opinion: "Present fairly” in accordance with the basis of accounting in annexure A, i.e. GRAP & GAAP 
Municipal entities that:adopted SA Statements of GAAP in the previous financial yearGRAP & GAAPISA 800: “Comprehensive basis of accounting”Audit opinion: “Present fairly” in accordance with the basis of accounting in annexure A, i.e GRAP & GAAP 
Municipal entities that:are not subject to the Companies Act; anddid not adopt SA Statements of GAAP in the previous financial yearGRAP & GAMAPISA 800: “Comprehensive basis of accounting”Audit opinion: “Present fairly” in accordance with the basis of accounting in annexure B, i.e. GRAP, GAMAP & GAAPdGRAP & GAAP 
aIn accordance with correspondence from the National Treasury it is assumed that the correct application of the principles in paragraphs 7, 11 and 12 of GRAP 3 on the development of accounting policies and disclosures for transactions, events or conditions not covered by the three GRAP and eight GAMAP standards will result in municipalities only applying SA Statements of GAAP for such transactions, events or conditions.aIn accordance with correspondence from the National Treasury it is assumed that the correct application of the principles in paragraphs 7, 11 and 12 of GRAP 3 on the development of accounting policies and disclosures for transactions, events or conditions not covered by the three GRAP and eight GAMAP standards will result in municipalities only applying SA Statements of GAAP for such transactions, events or conditions.bMedium-capacity municipalities are required to prepare consolidated financial statements for the 30 June 2006 financial year-end. In the absence of an IMFO consolidation specimen, this is interpreted by the National Treasury as requiring medium-capacity municipalities to only include an audited set of financial statements for each of its municipal entities, together with the municipality's own audited financial statements, in the municipality's annual report. As an audit opinion will be expressed on each individual set of financial statements, no audit opinion will be expressed on the "consolidated” financial statements.cLow-capacity municipalities are not required to prepare consolidated financial statements for the 30 June 2006 financial year-end.d(content missing)

Annexure B

“GRAP & GAAP basis of preparation

The financial statements have been prepared in accordance with the South African Statements of Generally Accepted Accounting Practice (GAAP) including any interpretations of such Statements issued by the Accounting Practices Board, with the prescribed Standards of Generally Recognised Accounting Practice (GRAP) issued by the Accounting Standards Board replacing the equivalent GAAP Statement as follows:
Standard of GRAPReplaced Statement of GAAP
GRAP 1: Presentation of financial statementsAC101: Presentation of financial statements
GRAP 2: Cash flow statementsAC118: Cash flow statements
GRAP 3: Accounting policies, changes in accounting estimates and errorsAC103: Accounting policies, changes in accounting estimates and errors
The recognition and measurement principles in the above GRAP and GAAP Statements do not differ or result in material differences in items presented and disclosed in the financial statements. The implementation of GRAP 1, 2 & 3 has resulted in the following significant changes in the presentation of the financial statements:
1Terminology differences:
Standard of GRAPReplaced Statement of GAAP
Statement of financial performanceIncome statement
Statement of financial positionBalance sheet
Statement of changes in net assetsStatement of changes in equity
Net assetsEquity
Surplus/deficit for the periodProfit/loss for the period
Accumulated surplus/deficitRetained earnings
Contributions from ownersShare capital
Distributions to ownersDividends
Reporting dateBalance sheet date
2.The cash flow statement can only be prepared in accordance with the direct method.
3.Specific information such as:
(a)receivables from non-exchange transactions, including taxes and transfers;
(b)taxes and transfers payable;
(c)trade and other payables from non-exchange transactions;
must be presented separately on the statement of financial position
4.The amount and nature of any restrictions on cash balances is required to be disclosed.
Paragraph 11 - 15 of GRAP 1 has not been implemented as the budget reporting standard is in the process of being developed by the international and local standard setters. Although the inclusion of budget information would enhance the usefulness of the financial statements, non-disclosure will not affect fair presentation.”

Annexure C

“GRAP & GAMAP basis of preparation

The financial statements have been prepared in accordance with the Standards of Generally Recognised Accounting Practice (GRAP) and the Standards of Generally Accepted Municipal Accounting Practice (GAMAP) prescribed by the Minister of Finance in terms of:General Notice 991 of 2005, issued in Government Gazette no. 28095 of 15 December 2005; andGeneral Notice 992 of 2005, issued in Government Gazette no. 28095 of 7 December 2005;The Standards comprise the following:
GRAP 1Presentation of financial statements
GRAP 2Cash flow statements
GRAP 3Accounting policies, changes in accounting estimates and errors
GAMAP 4The effects of changes in foreign exchange rates
GAMAP 6Consolidated financial statements and accounting for controlled entities
GAMAP 7Accounting for investments in associates
GAMAP 8Financial reporting of interests in joint ventures
GAMAP 9Revenue
GAMAP 12Inventories
GAMAP 17Property, plant and equipment
GAMAP 19Provisions, contingent liabilities and contingent assets
Accounting policies for material transactions, events or conditions not covered by the above GRAP and GAMAP Standards have been developed in accordance with paragraphs 7, 11 and 12 of GRAP 3. These accounting policies and the applicable disclosures have been based on the South African Statements of Generally Accepted Accounting Practice (GAAP) including any interpretations of such Statements issued by the Accounting Practices Board. A summary of the significant accounting policies is disclosed below.”
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27 October 2006 this version
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