The Ondangwa Town Council, again, received a qualified audit opinion from the Auditor-General (AG), which means that the books and records of the Council are still not in order.
Problems related to external loans, VATs and the bank reconciliations remained unsolved since the previous audit report. Many of the other issues raised have since been addressed but new ones have surfaced.
This time, the AG qualified his opinion based on eight shortfalls:
1. External loans
The opening balances have been misstated by N$272 449. Other issues raised by the auditors in the report dealt with non-reconciliation of balances with the source documents received from the bank. A misrepresentation of the outstanding balance of N$92 962 occurred and redemption and interest charges revealed differences of N$41 959 and N$16 037, respectively.
What is difficult about ensuring that the opening balances of a financial year agree with the closing balances of the previous year? No differences may occur, any changes must be brought about with journals in the current financial year with proper documentation to support such a transaction.
Other differences can be easily solved by comparing the general ledger with the records of the various lenders. Any difference must be cleared and, where necessary, adjustments made.
2. Unrecorded liabilities
Liabilities to the amount of N$1 060 449 have not yet been recorded in the books of the Council.
This is serious stuff, as the reader of the financial statements is misled into believing the Council is much better off than is the case. It also creates incorrect cash-flow projections of the cash-flow, which may lead to wrong financial decisions.
The expenditure vouchers have to be scrutinised for three months after year-end and all invoices, which relate to the previous financial year brought to account as liabilities (creditors).
3. NATIS income
NATIS/Roads Authority income was materially misstated by an amount of N$521 124. The auditors found that this was mainly due to an amount of
N$664 962, which had erroneously been paid into the bank account of Ondangwa instead of Ongwediva. This was subsequently disbursed to Ongwediva but the corresponding debit entry could not be traced. Outstanding invoices to the amount of N$144 215 have also not been accounted for as debtors by the Council.
One should be able to trace any disbursement made through the bank statements, but obviously, the auditors were unable to trace such a disbursement. Of course one would be of the opinion that such a disbursement never took place. It would be interesting to hear from Ongwediva whether or not they received such an amount. An affirmative response could solve the problem.
All outstanding invoices must be recorded as debtors at year-end as such amounts are due to the Council in that financial year and income has to be recorded as such.
VAT receivables have been understated by N$1 100 744 in the financial statements. VAT refunds to the amount of N$1 077 180 have been incorrectly stated as operational income in the financial statements.
VAT receivables must be reconciled with the VAT returns on a monthly basis. The general ledger should include all VAT transactions. If there are differences between the records of the Receiver of Revenue and those of the Council, consultations between the two parties are inevitable.
All VAT refunds must be credited to the VAT control account and not be treated as income. The result of the above-mentioned misallocation is that the deficit for the financial year has been understated by that amount.
Payroll reconciliations reflect a difference of N$846 724.
According to the auditors, this difference is mainly due to the Council being unable to submit the earnings report of February 2010 at the time of the audit. Such records are of course very important to be properly kept and submitted for audit purposes. The financial statements may as such not be wrong but how can the auditors confirm the correctness thereof if the source document has gone missing?
6. Bank reconciliations
The Council was unable to reconcile the bank balance with the cash-book balance and the auditors revealed a significant difference of N$3 955 910.
In the 2009 financial year, the Council was unable to produce a bank reconciliation. In the year under review, the Council did produce a reconciliation, which did not correlate with the said amount. The reconciliation between the cash-book and the bank statement serves the purpose of ensuring that all transactions have been brought to account. This means that transactions such as outstanding cheques (cheques that appear in the cash-book but which have not yet passed through the bank), unrecorded deposits, cash-on-hand, bank charges, direct deposits and others must be brought to account, either in the cash-book or be dealt with as reconciling items.
7. Insurance expenses
Insurance expenses have been overstated by N$791 641.
The auditors indicated that the Council incorrectly allocated Nedbank investments as inter-bank transfers amounting to N$791 641 to insurance expenses. Such mistakes should be picked up through proper internal controls.
8. Fixed assets
Fixed asset values have been overstated by N$774 992.
According to the auditors, this overstatement resulted from the incorrect treatment of VATs. VATs are not part of the costs of an asset and must be booked to the VATs account. This is probably one of the reasons why the VATs account does not balance and Council is losing money, which should have been claimed back from the Receiver of Revenue.
Generally, there are other issues raised in the report such as salary increases, which do not conform to the recommendations of the Ministry as these are much higher, e.g. 11% instead of 5%, CEO salary not exceeding N$240 000 per annum (but Council increased it to N$266 400) and housing allowances should be 30% (but Council adjusted that to 35%).