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Town Council of Omuthiya: Financial results improving?

Mon, 22 September 2014 03:44
by Walter Barth
Columns


The Omuthiya Town Council once again received a qualified audit opinion on its financial statements as in the previous three financial years as well. In the previous year the qualification was based on four shortfalls whereas in this year there were eight points of concern. The hopes for a clear audit opinion this year were thus not realised.
The operating surplus for the financial year ended 30 June 2013 amounted to N$ 3 206 433 (previous year: N$ 73 688). Negative adjustments amounting to N$ 575 070 (previous year: N$ 2 803 774) mainly related to transactions corrected in respect of the prior year and an adjustment to increase the provision for bad and doubtful debts by N$ 1 059 071, a positive correction relating to the income figures to the amount of N$ 1 402 694 and other negative corrections of N$ 919 000. The accumulated surplus of N$ 6 457 774 as at 30 June 2012 increased to N$ 9 088 553 in the year under review.
The current liabilities (N$ 5 196 724) exceed the current assets (N$ 2 138 447) by
 N$ 3 058 277 (previous year: N$ 263 929). The unhealthy financial situation thus worsened since the previous year. The current assets should always exceed the current liabilities which would indicate a sound financial position. Fortunately the Council has investments amounting to N$ 26 909 492 available.
The investments increased with N$ 7 007 756 to N$ 26 909 492 (previous year: 
increase of N$ 9 829 879). Taking the above-mentioned situation into consideration, one still wonders where this extra money came from.  The sale of erven amounted to N$ 2 777 075 which can explain the extra funds to some extent if this income has not been included in the income statement. Other possibilities are unspent capital contributions, but unfortunately the report does not reflect any details of the increase of the investments, as was also the case in the previous report.
The eight shortfalls on which the qualified audit opinion has been based are as follows:
Value Added Tax (VAT)
The auditors found that there was an unexplained difference of N$ 320 496 between the VAT receivable as per the annual financial statements and the VAT reconciliation.
Comment:
Last year the difference was a lot more. The report does not state whether the difference is in favour of the Council of the Receiver of Revenue. Council is once again advised to ensure correct and timeous submissions of the Vat returns and to consult the Receiver of Revenue on any difference of this kind.
Investments
The auditors observed that the investment by the Town Council in the shareholding of the Local Authorities Electricity Company (Pty) Ltd is not reflected in the financial statements.
Comment:
Unfortunately no value has been attached to this investment. The amount could be quite substantial and in order to reflect a realistic figure in the balance sheet, Council is advised to investigate this matter and come up with a representative value of the investment. This should then be included in the general ledger and as such in the financial statements.
Inventory
The auditors did not attend the annual stocktaking and there were no alternative methods to determine the value of the stock at year-end. Nevertheless they found a difference of N$ 189 452 between the inventory listing and the financial statements.
Comment:
The amount stated in the general ledger must be adjusted to the value found during the stocktaking. Any surpluses or shortages must be presented to the Council for approval. Reasons for the differences need to be investigated and the necessary corrections need to be made, with supporting documentation.
Leave pay
The auditors found that no leave pay provision was computed at 30 June 2013 and as a result they were unable to ascertain the adequacy of the amount reflected in the annual financial statements.
Comment:
Proper and complete leave records need to be kept for each and every staff member. The leave days which are available per staff member at year-end needs to be determined.  This balance then needs to be multiplied with that staff member’s remuneration in order to determine the Council’s liability. These calculations must be shown in the balance sheet and availed to the auditors for verification.
Depreciation
According to the auditors the depreciation of assets is understated by N$ 236 597 resulting in a misstatement of the carrying amount of property, plant and equipment and the related fund accounts.



Comment:
The annual depreciation needs to be in line with the Council’s depreciation policy. Calculations need to be made on every single asset and availed to the auditors for verification. The value reflected in the fixed asset register must then be agreed to the balance in the general ledger and as such in the balance sheet.
Interest on overdue accounts
The auditors found that interest on overdue accounts has been understated by N$ 209 178 as a result of a calculation error.
Comment:
A properly functional internal control system should be able to prevent such mistakes. Council should make the necessary corrections and ensure that control measures are in place to prevent future mistakes.
Adjustments
No supporting documents were found by the auditors to support material adjustments posted to the appropriation account and as a result the auditors were unable to verify the validity of these adjustments.
Comment:
No transaction should be posted to the general ledger unless it is fully supported with documents proving the validity of such a transaction. Supporting documents should be properly filed with the necessary references to the respective transaction. Council should check all unsupported transactions and make the necessary corrections where needed.
Sale of Erven
According to the auditors, instalments (deposits) received on the intended sale of erven were credited to the Revenue account instead of the liability account resulting in an overstatement of revenue and an understatement of the related liability.
Comment:
The sale of erven is not an operational income and should be credited to a capital development fund and utilised to purchase and develop future land expansions of the council for the establishment of further erven. The income should as such not be treated as operational revenue. These incorrect allocations of income should be taken out of the accumulated funds and transferred to such a capital fund.
Congratulations to the Council for submitting its financial statements timeously to the Office of the Auditor-General.





Investments
The auditors observed that the investment by the Town Council in the shareholding of the Local Authorities Electricity Company (Pty) Ltd is not reflected in the financial statements.
Comment:
Unfortunately no value has been attached to this investment. The amount could be quite substantial and in order to reflect a realistic figure in the balance sheet, Council is advised to investigate this matter and come up with a representative value of the investment. This should then be included in the general ledger and as such in the financial statements.
Inventory
The auditors did not attend the annual stocktaking and there were no alternative methods to determine the value of the stock at year-end. Nevertheless they found a difference of N$ 189 452 between the inventory listing and the financial statements.
Comment:
The amount stated in the general ledger must be adjusted to the value found during the stocktaking. Any surpluses or shortages must be presented to the Council for approval. Reasons for the differences need to be investigated and the necessary corrections need to be made, with supporting documentation.
Leave pay
The auditors found that no leave pay provision was computed at 30 June 2013 and as a result they were unable to ascertain the adequacy of the amount reflected in the annual financial statements.
Comment:
Proper and complete leave records need to be kept for each and every staff member. The leave days which are available per staff member at year-end needs to be determined.  This balance then needs to be multiplied with that staff member’s remuneration in order to determine the Council’s liability. These calculations must be shown in the balance sheet and availed to the auditors for verification.
Depreciation
According to the auditors the depreciation of assets is understated by N$ 236 597 resulting in a misstatement of the carrying amount of property, plant and equipment and the related fund accounts.



Comment:
The annual depreciation needs to be in line with the Council’s depreciation policy. Calculations need to be made on every single asset and availed to the auditors for verification. The value reflected in the fixed asset register must then be agreed to the balance in the general ledger and as such in the balance sheet.
Interest on overdue accounts
The auditors found that interest on overdue accounts has been understated by N$ 209 178 as a result of a calculation error.
Comment:
A properly functional internal control system should be able to prevent such mistakes. Council should make the necessary corrections and ensure that control measures are in place to prevent future mistakes.
Adjustments
No supporting documents were found by the auditors to support material adjustments posted to the appropriation account and as a result the auditors were unable to verify the validity of these adjustments.
Comment:
No transaction should be posted to the general ledger unless it is fully supported with documents proving the validity of such a transaction. Supporting documents should be properly filed with the necessary references to the respective transaction. Council should check all unsupported transactions and make the necessary corrections where needed.
Sale of Erven
According to the auditors, instalments (deposits) received on the intended sale of erven were credited to the Revenue account instead of the liability account resulting in an overstatement of revenue and an understatement of the related liability.
Comment:
The sale of erven is not an operational income and should be credited to a capital development fund and utilised to purchase and develop future land expansions of the council for the establishment of further erven. The income should as such not be treated as operational revenue. These incorrect allocations of income should be taken out of the accumulated funds and transferred to such a capital fund.
Congratulations to the Council for submitting its financial statements timeously to the Office of the Auditor-General.