EC127 Nkonkobe Audit report 2014-15

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Report of the audifor-general to the Eastern Cape
Provincial Legislature and the council on Nkonkobe
Local Municipality

Report on the financial statements

Infreduction

1. Ihave audited the financial statements of the Nkonkobe Local Municpalily set aut on
pages ... to... which comprise the statomant of financial pasion es st 30 June 2016,
the statement of financial performance, statement of changes in net asses, cash flow
statement and the slalement of comparison of budget and actual amounts for he year
then ended, as well as the notes, comprising a summary of significant accounting
policies and other explanstory information.

Accounting officer's responsibility for the financial statements

2. The accounting officer le responsible for the preparation and fair presentation of these
financial statements in accordance with Soul African Standards of Generally
Recognised Accounting Practice (SA Standards of GRAP) and the requirements of the
Municipal Finance Management Art of Sauth Affi, 2003 (Act No. 56 of 2003) (MFMA}
ind the Division of Revenus Act of South Africa, 2014 (Act No, 10 of 2014) (DORA), and
{or such inlemat control as the accounting officer detormines Is necessary to enable the
preparation of financial sislements thal are free from material misstatement, whether
ue to fraud or error.

Audilor-general’s responsibility

3. My responsibiliy is to express an opinion on these financial statements based on my
audit. | conducted my audit in accordance with Intercational Slandards on Auditing
‘Those standards require that | comply with ethical requirements, and plan and perform
the audil to obtain reasonable assurance about whether the Francia statements are
free from material misstatement.

4. An audit involves performing procedures to obiain audit evidence about the amounts
and disclosures in the financial statements, The procedures selected depend on the
‘auditor's judgement, including the assessment ofthe rieks of material misstatement of
the financial statements, whether due to fraud or amor. In meking those risk
assessments, the audilor considers infernal control relevant to the municipality's
preparation and fair presentation of the financial stalements in order fo design auelt
procedures that ars appropriate in the circumstances, bul nol for the purpose of
expressing an opinian on the eflectivenese of the municipality's internal control. An
audit also includes evaluating the appropriataness of accounting policies used ang the
reasonableness of accounting estimates made by management, 28 well as evaluating
the overall presentation of the financial statements

5, I believe that the audit avidence | hava obtained is sufficient and appropriate to provide
a basis for my qualified audit opinion.

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Basis for qualified opinion
Property, plant and equipment

6, In tems of GRAP 17, Property plant and equipment, the cost of an item of property.
plant and equipment’ shall be recognised as an asset f itis probable that fulure
‘economic banelits or service potential associated with the tern will flow to the ently, and
the cost or fair value af the isin can be measured reliably. In addlilon GRAP 73,
Leases, assets and labililes shall be recognised al amounts equal to the far value of
the leased property or, fJower, the present value of the minimum lease payments, each
determined at the incoption of the lease, The municipality did not:

‘+ Recognise all tems of propesy, plant and equipment from which future
economic banefis wil flow ta the entity

+ Excluda sil refundable purchase taxes from the cost ofall propery, plant and
equipment recognised during the financial year.

+ Accurately record depreciation on all tems on property, plant and equipment.

* Accurately recognise all ilems of finance leased propany, plant and
‘equipment atthe lower of fair value or the presen valve of the minimum lease
payinents, determined at the inception ofthe lease,

7. As a result, property, plant and equipment, disclosed in note 4 to the finenciat
slatemenis is understated by R66 milion and accumulated surplus is understated by
the same amount. In addition workin progress, incuded In tha balance of property, plant
fnd equipment is overslaled by R4.3 million (2014: R17.8 millon} and additions to
property, plan ane equipmentis understated by the same amount

8. In addition, | was unable to obtain sufficient, appropriata audit evidence that
management had properly accounted for property, plart and equipment disclosed in the
statement of financial position and in note 4 to the financial siaiements dus to
inadequate racord management, | was unable to confirm the balance of property, plant
‘and equipment by aliainative means. Consequently, | was unable fo determine whether
any adjustment was necessary to properly, plant and equipment stated at R269 milion
in the financial statements.

Imegular expenditure

8. Irregular expenditure of 30,7 millon is disclosed in note 40. The municipality's process
for the recording and recognition of iregular expenciture was insufficient as amounts
wore not recorded and te disclosure was incomplete, Consequently, iegular
expenditure is understated by RB.9 millon. Due to the lack of systems, it was
impracticable to determine the full extent of the understatement of imegular expenciture,
{Iwas unable to confirm the disclosure by alternative means. Consequenty, | was unable
to determine whether any further adjustment to itregular expenditure as disclosed in
note 40 was necassary

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Investment property

10. In terms of GRAP 16, investment property, investment property is property held to earn
rentals or for capital appreciation or both. Investment property shall be recognised as an
assel when. itis probable that the future economic benefts or service potential that are
‘associated with the investment properly wil low lo the entity; and the cost ar fat value
of the invesiment property can be measured reliably. The municipality

+ Incomectly classifieg owner accupied property as investment proporty

» Did not include all tems of investment praperty to which it has title in the
investment property raglster.

» Incorrectly included items of investment property to which il does net have
{ite in the investment property register.

11. As 2 rasull, investment progerty, disclosed in note 3 lo the financial statemants ie
Understated. Duc [othe lnck of systems, it was impracticable to dalurmina the fll extent
fof the understatement of investment property

12. In_ addition, | was unable to obtain sufficient, appropriate suit evidence that
‘management had properly eccounted for investmert property disclosed in the statement
of financial position and in nolo 3 to the financial staiements due to inadequate record
‘management. | was unable to confirm the balanco of investment propery by aiternative
means. Consequently, | was. unable to determine whather any adjustment was
necessary to investment propery slated at F183 milion in the financial slataments,

Bulk purchases

13, In terms of GRAP J. Presentation of Fioancial Statements, an entity shall prepare its
financial statements, exoept for cash flow information, using the acoruel basis of
‘accounting. The municipality incorrect recorded bulk purchases in relalion tothe prior
financial year in the current financial period. Subsequently bulk purchases as disclosed
In note 92 to the financial statements is overstated by R2,7 milion (2014 R2,7 milion)
and payables from axchange transactions is understated by the same amount

General expenses

14, In terms of the GRAF Framework information must represent faithfully the transactions
und olher events it purports to cithar represent, or could reasonably be expected to
feprasenl. The municipality did nt:

+ Accurately record all general expenses related to the financial year as
‘supplier invoices did nol agree ta racorded values in he general ledger.

+ Recognise all ganerel expenses relating to the financial yoar in the financial
statements of he municipal.

15. Consequently, due to the lack of systems, it was impracticable to determine the full
extent ofthe understatement of general expenses of R32.6 milion (2014: R50,6 milion)
innole 23 to the financial statements and payables from exchange transactions,

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Cash flow statement

16. Supporting evidence for the cash flow statement, in both the current and eomesponding
financial years, was not available and no alternative audi procedures were possible,
Consequently, | was unable to determine the value of adjustments required to the cash
flows as disclosed in the cash flow statement and note 36 tothe financial statements

Aggregation of immaterial uncorrected misstatements

17. The financial statements as a whole were materially misstated due to the cumulative
offect of individually immaterial uncorected misstatemants making up the statement of
financial position. Inventories as disclosed in note & to the financial slalements was
understated by R4.8 milion

18. In addition, | was unable to obisin sufficient, appropriate audit evidence regarding
‘amounts disclosed for cash and cash equivalents of R05 740 included In the disciosee
balance of R3,8 milion 35 per note 11 to the nancial slalements, | was unable to
confirm this tern by alternative means. Consequently, | was unable to detemnine
‘whether any adjustment to this tem was necessary

Payables from exchange transactions

19. The corresponding figure for payables from exchange transactions and the related
expenditure were overstated by RZ millon 3s a result of the municipality not having
adequate systems ta identify and account for expenditure in accardance with GRAP 1,
Presentation of fhancial statements,

20. Sufficient appropriate audit evidence could not be obtained due to poor receré
management for Ihe items set out below:

* Amounts due for third party payments
> Salary suspense accounts
‘+ Unalacsted deposits
+ Allisting of creditors
Payments received in advance
21. | was unablo to conflem this corresponding balance by alternative meane. Consequertly,
| could mot determine if any adjustments ware necessary to the payables from exenenge
transactions, amounting to R763 million as disclosed in the statement of financial
position and note 17 ta the financial statemerts,
22, My aut opinion on the financial statemants for the period ened 2013-14 was modified
accordingly My opinion on the curent period's Minancial statements is alsa modiiad

because of tha possible affect of these matters on the comparabilly of the current
perioc's figures.
Repairs and maintenance

29. Sufficient appropriate audit evidence wes not submited to substantiate repairs. and
maintenance, in the corresponding figure, inthe financial stalements. | vas unable to
confirm this expenditure by alternative means. Consequenlly, | wae unable 10
detemiine whether any adustmont was necessary to the repairs and malntenance
expendilure of R7.9 milion disclosed in the statement of financial performance and
nate 43 ta the financial statements.

24. My audit opinion on the financial sistements for the period ended 2013-14 was
moctfied accordingly. My opinion on the current period's tmancial statements is also
modified because of the possible effect of these matters on tho comparably of the
current period's figures.

Aggregation of immaterial uncorrected missiatemenis in
corresponding figures

25. The financial statements as a whole were materially misstated due to the cumulalive
effect of numerous individual immateral uncorrected misstatements, in the
corresponding figures, in the folowing elements making up the statement of financial
postion, the statement of financial performance and the notes to the financial
statements:

‘Revenue fom exchenge raneactons was understate by R.€ millon
+ Fair value adjustments was overstated by R12 milon
+ Cash and cash equivalents was overstatad by ROBE 500,
+ VAT raceivable was understated by R841 785.
+ Finance lease obigation was understated by R68? 700,
+ lnvostment property was overstated by R632 590
+ Receivables from exchange and norrexchange Is overstated by RB74 069
28.My audit opinion on the financial statements for the period ended 2013-14 was
madified accordingly. My opinion on the current period's fmancal statements is alco
tmodiied because ofthe possible flac of thave mallers on the comparably of the
atvon ponod's figures.
Qualified opinion
27. tn my opinion, except forthe effects ofthe matters described in the base for quslited
opinion paragraphs, the fnancialsialerents present fay, in all matedal respects, the
Financisi position of the Nkorkobe Local Municipelty &¢ at 30 June 2015 and’ iis

financial performance and cash flows for the year then ended, in accerdsnce with SA
standards of GRAP and the requirements of the MFNIA and DORA.
Emphasis of matters

26.1 draw attention to the matters below. My opinion is not modified in respect of these
matters

Restatement of coresponding figures

28. As disclosed in note 38 to the financial statements, the corresponding figures for 30
June 2014 have been restated as a result of errors discovered during 301 June 2015,

Material losses

90, As disclosed in note 31 to the financial statements, material lasses to the amount of
R10,8 milion were incurred as a result of a wria off of trade debtors,

31.As disclosed in note 28 to the financial statements, material losses to the amaunt of
R28 milion were incured as @ result of an impairment of property, plant and
equipment.

82. As disclosed in nole 51 to the financial statements, material losses to the amount of
RQ7 millon was incured as a result of electricity distribution losses. Further ta this, the
parosntage disclosed for electricity losses is above the acceptable range.

Events after reporting date

3.As disclosed in ncle 1.2 ta the financial statements, the boundaries of Nkankobe Lo«al
Municipality and Nxuba Local Municipality have been redefines. The two municipalities
wil be smalgamating after the local government elections, The ofidial date of the
amaigamation has not been published in the governmnant gazette and the financial
implications for Nkonkobe Lovsl Municipality cannot be reliably estimated

Unouthorised expenditure

34.As disclosed in_note 40 to the financial statements, unauthorised expenditure
‘amounting to R35.9 milion was incurtad by the muniipalay during the year ended 20
June 2016. This was as 8 result cf expenditure which was nol adequately budgeted for
‘nd expenditure in excoss of the budget,

Fruitless and wastetul expenditure
35, As disclosed in note 40 tothe franefal eatements, futless and wasteful sapsnlture of
2, lion was inired by the munilpaly curing the yar ended 30 June 2015, THis

‘was as a resul of interest and penalties charged on late payments made by the
municipality.

Additional matter

36.1 draw attention to the matter below. My opinion is net modified in respect of this matter.
Unaudited disclosure notes

37. interme of section 125(2)(e) of the MFMA the municipalty is required to disclose
Particulars of non-compliance with the MEMA, This disclosure requirement did nol form
part of the eucit of ths financial statements and accordingly l do not express an apinion
thereon,

Report on other legal and regulatory requirements

38. In accordance with the Public Aucit Act of South Africa, 2004 (Act No, 25 of 2004)
(PAA) and the general notice issued in terms thereof, | have a respansibilly ta report
findings on the reported performance infarmation against predetermined objectives for
selected davelopment priorities presented in the annual performance report,
compliance with legislation and internal control, The objective of my lesis wat {©
identify reportable findings as described under each subheading, but not to gather
evidence 10 express assurance on these matters. Accordingly, | do not express an
‘pinion oF conclusion an these matters.

Predetermined objectives

39. performed procedures to obtain evidence about the usefulness and reliably of the
roported perfarmance information for the follwing selecled development priority
presented in the annual performance report of the municipality for the yesr ended
30 June 2018:

‘» Development objective 1: Basie Service Delivery

40.1 evelvated the reported performance information against the overall crteria of
usefuinase and relabiiy.

41.1 evaluated the usefulness of tho reported performance infomation to determine
‘whether il was presented in accordance with the National Treasury's annual reporting
principles. and whether the reported performance was consistent wilh the planned
development priofias. | further performed tests ta determine whother indiestore anc
targets were well defined, veriiable, specific, measurable, time bound and relevant,
required by the National Treasury's Framework for managing programme perfarmance
information (FMPPI)

42. | assessed the reliabilly of the reported performance information to determine whather
ites valid, aecurate and complete.

43, The materlal findings in respect ofthe selected development prioitlas are a fallow

ys
Development objective 1: Basic service delivery
Usefulness of reported performance information

Consistency of objectives

44. Section 41(0) of the Municipal Systems Act requires the service delivery agreement to
form the basis for the annual report, therefore requiring consistency of objectives,
indicators and targets between planning and reporing documente, Municipal Finance
Management Act (MFMA) circular number 13 requires that the intagrated development
plan (IDP) and the service delivery budget implementstion plan {SDBIP) must be
‘consistent with the annual repon.

145, One hundred percent of the raparted development objectives wore not consistent with
the planned development objectives. This was duo lo management not agreaing the
planned objectives as per the approved IDP to the SDBIP.

Additional matter

46, | draw attention to the following matter;
Achievement of planned targets

47. Refer to the annual performance report on page x to x for information on the
sachlavement of the planned targets for the year.

Compliance with legislation

48.1 performed procedures to obtain evidence that the municipality had complied with
applicable legislation regarsing financial matters, financial management and other
related matters. My material findings on compliance with specific matters in key
legislation, as set out in the general notice issued in lerms of the PAV, are as follows:

Financial statements, performance and annual reports

49, Tha financial statements submitied for audting were nol prepared in all material
respects in accordance with the requirements of section 122 of the MFMA. Material
misstatements identified by the auditors in the submitted financial siatements were not
adequately corrected and the supporting records could not be provided subsequently,
which resulted in the financial statements receiving a qualified audit opinion,

Audit committees

50, The aust committes did not advise the council and the accounting officer on matiers
relating to internal financial control and internal audits, risk management, accounting
policies, effective govemance, porormance management snd perfarmancs evaluation
23 required by seclian 186(2\a) of the MFM,
61. The audit commitice cid not advise the council and the avcaunting officer on matters
relating to the adequacy, reliabiily and accuracy of financial reporting and Information,
2s required by section 188(2X2)(N} of the MFMA,

£52, The audit committes gid not advise the council and the accaunting officer on matters
relating to compliance wilh legislation, as required by section 166(2\a)ui) of the
MPMA,

‘53. The audlt committee did not respond to the council an the issues raised in the audit
reports of the Auditor-General, a6 required by section 166(2}(c) of the MEMA,

154, The performance audit committee or audit commitee did not review the municipality's
Performance management system andior make recommendations to the council, 28
required by MPPMR 14(4)(aNi).

185, The performance audit committee or audit committee did not review all the quarterly
internal audit reports on performance measurement, as required by MPPMR 141 4X.

56. The performance audit commiliae or audit conmmittee did not submit, at laast twice
during the financial year, an audit report an the revievr of the performance management
system to the council, a6 required by MPPMR 14(4\(a}i,

57. The audit committes did nol meet at feast four times @ year, as raquired by section
186(4)(b) ofthe MFMA,

‘5B, The performance audit committee cid not meet at least twice during the financial year,
as required by MPPMR 14(3)2).

Internal audit

158, The internal audit unit did not funetion as required by section 165(2) of the MFM, in
that it did not report to the audit committee on the Implementation ofthe intemal audit
plan and il did not advise the accounting officer and repor to the auxit commitee on
matters. relating to internal auclt, intemal controls, acsounting procedures and
practices, isk and risk management and loss contral

Procurement and contract management

60, Sufficient appropriate audit evidence could not bo obtained thet all contracts were
awarded in accordence with the legislative requirements and a procurement process
‘which is. fair, equitable, trancparent and competitive, as sufficient. supporting
documentation was not submiltad for aul

61. Sufficient appropriste audit evidence could not be obtained that invitations for
‘competitive bidding ware adverlised fer a required minimum period of days, a6 required
by SCM regulation 22(1) and 22(2).

2, Contracts were awarded to bidders based on points given for eitria thet differed from
those stpulatad in the original invitation for bidding, in contravention of SCM
Regulations 21{b) and 28()(a) and the Praferenlial Procurement Regulations,

63. Bid adjudication was not always done by committees which were composed in
‘accordance with SCM reguiation 292),
64, Sufficient appropriate audit evidence could nat be obtained that the preference point
system wae applied in all procurement of goods and seross above R3O 000 as
requirad by section 2[a) of the Preterantial Procurement Policy Framework Act and
‘SCM regulation 28(1}¢a)

65, Contracls and quolalions were awarded lo bidders based on preference points that
‘ware not allacated and calculated in accordance with the requiroments of the
Preferential Procurement Policy Framework Act and its regulations.

86, Sufficient appropriate audit evidence could not be obtained thet eontracie were
avarded to biddors that scored the highest painis in the evaluation process, af
requited by of section 2(1}( of Preferential Procurement Policy Fremework Act.

67, Contracts and quotations were awarded to bidders who ald not submit a declaration on
whether they are employed by the slate or connected to any person employed by the
slate, as required by SCM regulation 12(c).

58. Awards wore made to providers who are in the service of other state Ineltutions ar
‘whose diroctars are in the service of other siate institutions, in contravention of MFMA
112G) and SCM regulations 44, Similar awards were identified in the prior year and m2
sflective stops ware iaken fo prevant or combal the abuse ef the SCM process in
‘accardanee with SCM regulation 381)

69. Contracts and quotations were awarded to providers whose tax matters hed not been
declared by the South Alfican Revenue Service lo be in order, as requirad by SCM
regulation 43.

70. Construction projects were not ehvays registered with the Construction Industry

Bavalopment Board (CIDB), as raquired by section 22 of the CIDB Act and CIDE
regulation 18.

Human resource management and compensation
71. An acting municipal manager was appointed for a period of more than three months

‘without the approval by the MEC end for more than six morths in contravention of
seclion 54A(2A) of the Municipat Systems Act

Expenditure management

72, Reasonable steps wera not taken to prevent unauthorised, imegular and trulless and
wasteful expanditure, as required by section 62(Vd) af the MFMA.

78, Money owed by the municipaliy was not always psid within 30 days, es required by
section 65(2)(¢) of the MEMA.

Assel management

T4.An effective system of internal control for assots was nol in place, as required by
section 63(2\] of the MFMA,