An important aspect of the financial statements preparation process is the implementation of a quality control and assurance regime, to provide assurance about the accuracy and completeness of the statements, and that they comply with all relevant legislative and policy requirements.
9.1 Finance team quality control and assurance processes
While the extent and nature of such a regime will vary between entities, it is expected that entities would, as an integral element of the process, put in place review arrangements at key points during the preparation process.
Matters that can usefully be covered by a quality control and assurance regime include:
- the calculation of balances that require complex computation and the collation of information from a variety of sources
- large and unusual transactions and journal entries
- key documentation supporting the financial statements balances, including lead schedules
- complex accounting matters
- information provided by business areas or external parties, and
- key reconciliations.
9.1.1 Analysis and adjustment of errors or misstatements
Better-practice entities will promote an environment in which the correction of errors or misstatements is seen as the appropriate course of action, regardless of whether or not they are considered to be material. Such an approach will also help to remove the difficulties that can arise in relation to the effect on current year financial statements of uncorrected prior year misstatements.
When errors or misstatements are identified during the year-end process, it is important for entities to:
- analyse the misstatements to consider their implications for the financial statements
- assess the risk of other similar misstatements or omissions occurring
- assess, in consultation with the ANAO, if there is a need to investigate and quantify possible errors in a particular financial statements line item
- correct all errors or misstatements, unless they are trivial
- maintain a listing of any uncorrected misstatements, including those that arose in earlier periods and are of continued applicability in the current period, and assess their effect on the financial statements, and
- advise appropriate levels of management, the audit committee and the ANAO of all unadjusted errors or misstatements.
9.1.2 Involvement of internal audit and/or independent parties
Some entities find it beneficial for internal audit and/or independent parties to be involved in the conduct of quality assurance processes. The involvement of these parties brings an element of independence to the task, but will only be of benefit if the personnel involved have sufficient understanding and knowledge of the technical requirements and the entity’s particular processes and arrangements.
Template: Adjustments schedule
This schedule allows an agency to keeps a record of all adjustments proposed/ made and to enable the changes to be considered and actioned as a whole.
9.2 Documenting issues and decisions in working papers
Financial statement working papers to support and validate the financial statements are essential for establishing a management trail, as well as expediting the quality assurance review and audit processes. The benefits of complete and well-structured working papers include:
- aiding certification by the accountable authority in the discharge of their responsibilities
- facilitating the preparation and quality assurance review processes, minimising rework, and providing information on how decisions are made on significant matters
- responding to questions from stakeholders, including parliamentary committees, and
- having a record of information for the next set of financial statements, including identification of significant matters and comparisons in planning future work.
9.2.1 Focus on explanatory information
In assessing the documentation to be collated and prepared, it may be useful to consider what would be necessary to explain the financial statements, and to provide sufficient information on the principal decisions taken.
Working papers should include analyses, third party confirmations, management representation and sign-offs, checklists, technical advice, extracts of important documents, correspondence concerning significant matters and work schedules.
The type and content of supporting documentation required is a matter of professional judgement, but also depends on factors such as:
- the nature and complexity of the business
- nature and conditions of the entity’s internal controls and its financial systems, and
- the technology used during preparation.
9.2.2 Structuring the content of working papers
Standardising the form and organisation of working papers is likely to improve the efficiency with which the financial statements are prepared and reviewed. Standardisation facilitates the delegation or allocation of work while, at the same time, providing a means to control its quality. At a minimum, working papers should include:
- a clear title that properly describes the working paper and contains the date of creation
- a brief statement of the purpose of the working paper
- clear links to the specific balances or notes to the financial statements
- alterations are clearly identified, dated and explained
- identification and dates of sign-offs of the preparer and reviewer, including the timing, and
- clear cross-reference to sources of information such as supporting documents, files, reports or ledger codes, with sufficient detail for the sources to be retrieved with minimal time and effort.
Template: Working Papers Cover Sheet
This template can be used to assist in providing a reference to all relevant documents that support each financial statements item or note.
9.3 Preparing lead schedules for assurance processes
A lead schedule is a summary schedule that serves as a systematic means of providing assurance to management that:
- all figures are complete, accurate and supported by evidence
- the balances have been reviewed
- variances from previous years and budgets are explained, and
- checking or sign-off has occurred.
A lead schedule should explain the composition of a financial statements item, identifying the detailed general ledger accounts making up the item. Each general ledger account is, in turn, supported by appropriate working papers and cross referenced to the trial balance.
Lead schedules are usually filed in front of each segment of the working papers, providing easy reference for preparation and review. Lead schedules should only record the final, verified balances that agree with the final financial statements.
9.3.1 Content and format of lead schedules
The content and format of lead schedules will depend on the specific circumstances of each entity. However, they should:
- reference all the documentation needed to support each financial statements line item
- contain analytical reviews explaining movements from budget and the prior year, and
- include preparation and review sign-offs from responsible officers.
A standardised checklist attached to the lead schedule assists in reviewing and sign-offs.
A summary schedule of accounting adjustments for errors found during preparation processes is an important document to monitor accumulated errors and adjustments made.
9.3.2 Automation of lead schedules
Automation reduces the potential for errors, and is an efficient approach to extracting and formatting relevant financial data. While most balances can be automated, some manual entries may be required because of the specific nature of disclosures required.
Better-practice entities have automated their lead schedule system by:
- resetting to the current year —this involves moving the balances from the previous year-end to the comparatives column in each lead schedule, creating a comparative set of figures that are useful for analytical and review work:
- sometimes the figures may need to be adjusted, due to changes in accounting standards and policies, and
- this automated process is usually done once each year and well in advance of the year-end, to ensure that correct figures are used.
- uploading the current year-end balances in the FMIS —to lead schedules in a specified, pre-determined manner, and
- updating the lead schedule numbers each time new entries are posted to the general ledger —movements in balances are detailed in computer-generated worksheets to track and explain updates.
Example: Requirements for supporting documentation
The example documentation requirements outline the types of supporting evidence required for selected financial statements items.
9.4 Certification by the accountable authority and CFO
The accountable authority and the CFO are required to certify that, in their opinion, the financial statements:
- comply with the AAS, any other requirements prescribed under the PGPA Act and its rules, and other entity-specific legislation
- present fairly the entity’s financial position, financial performance and cash flows, and
- have been prepared on the basis of properly maintained financial records.
To enable the accountable authority to provide this certification, and the required written representations to the ANAO (known as representation letters), entities commonly establish a structured process of management sign-offs.
The accountable authority should acquire a degree of financial literacy, including a knowledge of accounting practices and accounting standards so they are able to review and monitor the entity’s financial statements. The accountable authority should carefully read, understand and focus upon the content of financial reports, consider whether the financial statements are consistent with his or her knowledge of the entity’s financial position, consider the statutory requirements, apply the knowledge he or she has of the affairs of the entity, and if necessary, make further inquiries if matters revealed in the financial statements call for such inquiries.
9.4.1 Representations by the accountable authority
An important aspect of the financial statements process is the provision of one or more representation letters to the ANAO. Representations in the form specified by the ANAO are required prior to issuing the auditor’s report on the entity’s financial statements.
To meet the ANAO’s responsibilities, the ANAO Auditing Standard require these representations to address the following matters:
- compliance with the applicable financial reporting framework
- that the auditor has been provided with all relevant information and access to all data and records
- that all transactions have been recorded and are reflected in the financial statements
- acknowledgement of responsibility for the design, implementation and maintenance of internal controls to prevent and detect fraud
- an assessment of the risk that the financial statements may be materially misstated as a result of fraud
- the entity’s knowledge of fraud or suspected fraud affecting the entity
- details of allegations of fraud, or suspected fraud, affecting the entity’s financial statements communicated by employees, former employees, analysts, regulators or others
- instances of non-compliance or suspected non-compliance with laws and regulations
- the effects of uncorrected misstatements, both individually and in aggregate, to the financial statements
- actual or possible litigation and claims
- significant assumptions used in making accounting estimates
- events occurring subsequent to the date of the financial statements, and
- details of the entity’s related parties and all the related party relationships and transactions.
9.4.2 Signatories for representations
For Commonwealth entities where the accountable authority is a single director or chief executive, representations are to be made by the accountable authority and the CFO.
For Commonwealth entities whose accountable authority consists of a board of directors, separate representations are to be made by a director, the chief executive and the CFO.
Where a director/board member signs the representations, they must be in a position to represent the views of the accountable authority. It is therefore preferable that the signing director is the chair of the accountable authority.
9.4.3 Management sign-offs to support assurance and certification
Management sign-offs provide assurance to the CFO on the quality of the entity’s financial statements and management’s compliance with a range of internal control and legislative compliance issues that underpin the statements. Such sign-offs are generally accepted as an integral component of management’s responsibility and accountability and, through the CFO’s assurance processes, support the audit committee’s assurance to the accountable authority.
The content and form of management sign-offs should be agreed as part of the planning process. Further information is at: 4.9 Planning for quality assurance processes.
9.4.4 Reporting significant non-compliance with finance law
Section 19 of the PGPA Act requires, among other things, that accountable authorities of Commonwealth entities notify their responsible Minister, as soon as practicable, of any significant issues including non-compliance with the finance law.
For further information on reporting significant non-compliance, refer to RMG 214: Notification of significant non-compliance with the finance law ( RMG 214 ).
An example of a management sign-off.
An example of financial statement assertions, adapted from the Australian Auditing Standard ASA 315.
A checklist considering a range of issues relating to the preparation of an entity’s financial statements and may assist the CFO in discharging his/her responsibilities.
This online resource links sections of the PGPA Act to related rules and guidance.
A Finance guide on requirements for the notification of significant non-compliance with the finance law.
9.5 Audit committee financial reporting assurance reviews
The review of the appropriateness of the entity’s financial reporting is one of four key audit committee functions under s.17 of the PGPA Rule. In carrying out the financial reporting review and providing its independent advice, the audit committee assists the accountable authority in discharging their duties and obligations under the PGPA Act and supports the development of key practice and capacity within the Commonwealth entity.
The review of an entity’s financial statements is an important aspect of a committee’s responsibilities under their financial reporting review function. Some audit committees may prefer to schedule a separate meeting to consider the draft financial statements. It may assist the finance team, in planning their work, to consider when and how the audit committee intends to review the draft financial statements.
The audit committee’s review of the appropriateness of the accountable authority’s financial reporting for the entity could entail a review of financial information systems and processes for preparing financial statements. This would include review of compliance with the mandatory requirements of the PGPA Act, rules and the AAS. The audit committee may also consider guidance supporting the mandatory requirements.
Audit committee reviews may also include whether:
- any audit findings and management actions have been addressed in a timely manner
- any errors or adjustments identified during the audit process have been actioned, or been informed of reasons for not actioning these, and
- financial statements have been prepared in an efficient and effective manner, including having effective sign-off and quality assurance processes in place.
Appendix A of RMG202: Audit Committees provides examples of matters that could assist audit committees reviewing the entity’s financial reporting. Audit committees have knowledge and experience to ask more specific, fit for purpose questions, relevant to the entity’s particular operating context.
For more guidance on the role of audit committees, see RMG 202.
9.5.1 Alerting the committee to significant issues
To be able to perform this function effectively, it is necessary for the audit committee to be continually kept abreast of all significant issues that may affect the financial statements (not just at year-end).
Checklist: Finance team assurance processes for audit committee
This checklist is an example of a what a Finance Area/CFO might provide to the Audit Committee to provide assurance in regards to the financial statements process.
The Federal Register of Legislation site for the PGPA Rule.
This online resource links sections of the PGPA Act to related rules and guidance.
Provides guidance on the role of audit committees including matters that the accountable authority could consider when determining the audit committee's functions, structure and conduct.
9.6 Chief Financial Officer’s report to the audit committee
The CFO’s report is one of the key sources of information and advice that the committee considers in advising on the appropriateness of the entity’s financial reporting.
9.6.1 Factors influencing the Chief Financial Officer’s report
The content of the CFO’s report to the audit committee will typically be determined by a number of factors including:
- the complexity of the entity and the financial statements themselves
- the extent of estimates and judgements involved in preparing the financial statements
- the level of risk that the financial statements may contain errors or misstatements, and
- the extent and nature of changes to the financial statements compared with prior years.
9.6.2 Content to be covered in the report
As a minimum, it is recommended that the CFO’s report will:
- summarise the key results for the year and the main business and financial factors that have affected the financial statements (significant variations with budget should be satisfactorily identified and explained, highlighting factors responsible for the budget variance)
- provide details of relevant changes in legislative requirements, accounting standards, the FRR and accounting policies and their effect on the financial statements
- outline the effect that relevant changes in government policies or programs have on the financial statements
- provide assurance that:
- the year-end results are consistent with internal management reports
- the financial statements are supported by appropriate management sign-offs and have been subject to appropriate management review
- the statements reflect, where appropriate, instances of non-compliance identified by the entity’s compliance reporting process, and
- the ANAO has been provided with full access to all entity records and information
- explain all significant movements between the current year’s results and the prior year’s comparative figures
- explain all material accounting estimates and judgements that have been made in the preparation of the statements
- include details of the entity’s liquidity position
- outline the reliance placed on external parties and external information in preparing the financial statements
- provide details of how the entity’s key internal controls address the entity’s key financial risks
- outline how the entity’s materiality approach has been applied
- detail all unadjusted audit differences and those adjusted differences that the CFO considers should be brought to the attention of the committee, and
- make recommendations that support the audit committee’s advice to the accountable authority on the appropriateness of financial reporting, noting in particular any significant issues or judgements that should be brought to their attention prior to the statements being signed.
Template: Chief Financial Officer's report
Template for the CFO’s report to the audit committee and accountable authority to provide assurance.
9.7 Continuously improving assurance processes
In view of the importance of preparing accurate and timely financial statements, and consistent with a culture of continuous improvement, entities should build into their processes a ‘lessons learned’ review of their assurance performance.
This may involve the establishment of appropriate performance measures.
9.7.1 Set performance indicators for assurance processes
Entities should consider the benefits of developing performance measures for key elements of the financial statements development process and reporting on actual performance once the statements have been finalised and the annual report tabled.
Aspects of performance that could be measured include
- the extent and nature of changes between the first draft and the signed financial statements
- compliance with the reporting framework, and
- the efficiency and timeliness of activities.
Any performance indicators established should be readily measurable and recorded.
9.7.2 Examples of useful performance indicators
Examples of performance indicators that may be useful include the:
- number and significance of adjustments made to the financial statements as a result of internal reviews and ANAO audits
- number of versions prepared in drafting the financial statements
- number of issues of non-compliance with legislation and accounting standards
- number and significance of issues raised by audit (internal and external)
- percentage of activities completed on schedule (for example, reconciliations), and
- number of days late where a reporting timeline is not met.
By reporting performance information of this type, entities can identify opportunities for improving existing processes and procedures. Any unsatisfactory results should be investigated to ascertain the reasons why, and to implement remedial action, if appropriate.