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Mhlontlo Municipality Audit Report For the year ended 30 June 2016 Report of the auditor-general to the Eastern Cape Provincial Legislature and the council on Mhiontlo Local Municipality Report on the financial statements Introduction 4. [hava audltad the finanelal statements of Nihtontia Local Municipality set out on pages to .... which comprise the statement of financial pasition az at 20 June 2016, the Statement of financial performance, stolement of changas in nol assots, cash Maw statement and the statement of comparison of budget infomation with actual information for the yesr then andad, 3¢ wall ae the notes, comprising a summary of slgnticant accounting policies and other explanatory information. Accounting officer's responsibility for the financial statements 2. The accounting atfieer is rasponsible for the preparation and fair presentation of these financial statementa in accordance with South African Standarda of Generally Recognised Account Practice (SA standards of GRAP} and the requirements of the Municipal Finance Management Act of South Africa, 2003 (Act No. 56 of 2003) (MFMA) ‘and the Division of Revenue Act of South Africa, 2014 (Act No. 10 of 2044) (DoRRA) and for such intemal control as the accounting officer determines is necessary to enable the preparation of financial statements that aro free from materiel misstatement, whether ‘due to fraud or ema. Auditor-general's responsiblity 3. My responsibilty is to express an opinion on these financial statements based or my uct I conducted ry auct in accordance with Intemational Standards on Auditing. ‘Those siandarde require that | comply with ethical raqulremanis, and plan and parform the audit to obtain reasonable assurance about whether the financial statements are {ree from material miastatement, 4, An audit involves performing procedures to ablain audi evidence about the amounts and disciosurea in the financial statements. The procedures selected depen on the auditors judgement, including tha asseesment of the risks of material misstatement of the financial statements, whether cue to fraud or ertor, in making those risk ssegemants, the auditor coneldere Intomal contol relovent to the entity's preperation and fair presentation of the nancial statements in order ta design audit procedures that ‘re appropriate in the circumstances, but net for the purpose of expressing en opinion ‘on the effacivaness af the enity'sintaral control. An aut alsa inclades evaluating the ‘appropriateness of accaunting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 5. I believe that the auelt evidence | have obtained is auffciant and appropriate to provide: ‘a basis for my audit opinion. Opinion @ tn my opinion, the financial statements preeent faly, In all materal respects, the financial position of the Mblonllo Lacal Munlelpally as at 30 June 2016 and its financial arformenca and cash flows for the year then ended, in accordance with the SA standards of GRAP and the requirements of the MENA snd DORA, Emphasis of matters 7. I draws atlonton lo the maltare below. My opinion is not modified in respect of these matters Irregular expenditure Ae dizeloged ln nole $0 10 tha financial statements, imegutar expenditure amounting to R1B2,6 milian accumulated over @ number of years. Ths amount Includes 51,87 millon that was incured by the munidpalty during the year ended 30 June 2016 as a rasult of non-compliance with supply chain management principles. No steps have been taken al this slege (9 recover any monks. Unauthorised expenditure 9. AS disclosed in note 33 to the financial statements, Unaulhoread expenditure amounting te R78,28 mrllon accumuleted over a number of years. This amount includes 16,24 millon that was incured by the municipality during the year ended 30 June 2016 a8 a recult of depreciation adjustments after budgel adoption and adjustments to the asset reglstars Frultlege and wasteful expenditure 10. As disclosed in note 38 to the financial elalements, initlass and wasteful expenditure amounting to RO16 619 has accumuated over a number of years. This amount Includes REG 878 thet was incured by the municipliy during the yoar ended 30 June 2018 ss @ roeull of Iniarast and peruties on overdue suppliers account. No 169s have bean taken at this stage to recover any monies, Additional matter 11. | draw attention to the matir below. My opinion isnot modified in respect ofthis matte. Unaudited diseloaure notes 42. In terms of section 125(2} {e] of the MEMA the muricipalily is required to disclose particulars of non-compliance with this leglstation. This disclosure requirement did not from part of the aucit ofthe financial statements and accordingly we do nol exprase an ‘opinion thereon. Repori on other legal and regulatory requirements 43. In accordance with the Pubic Aud Act of South Africa, 2004 (Act No. 25 of 2004) and the general note Issued in terms thereof, | have @ responsiblity to renott findings on the reported performance information agalnet predetermined abjectives. of salacied objectives presented in the annual perfomance repart, compllanee with fegisation and Iniamal control. The objective of my tests was to Menlify reportable findings 23 described under each eubheadng but not fo gather evidence to express assurance on these matters. Accordingly, I do not exprees ani opinion or conclusion on these matters. Prodatermined objectives 14, I performed procedures tw obtain evidence about the usefulness and ralabity of the reported perfomance information of the following selected development priority presented in the ennual performance report of the Mhlontto Lecsl Municipality for the year ended 30 June 2018: KPA 4: Basic Servica Delivery and Infrastructure on pages x tox 16. | evslualed the usefulness of the reported performanca Information to detenmine Whether it was presented in accordance wih the National Treasury's annual reporting principles end whether Ihe reported performance was coneletont with the planned objectives | further parformed tests to determine whether indicators and targets vers well defined, veriiabla, susctic, measurable, time bound and relevant, es required by the National Treasury's Framework for mensging pragrsmme performanes information (MPP 16. ‘ asneeed! the reliably af the reported performance information tp determine whather it ‘wes valld, accurale and complete. 17. The material findings in respect ofthe selected objective are ae follows: Basic service delivery and tnfrasirscture Usefulness of reported performance information 18. | did not identity any material findings on tho usefulness of the reported performance information for the following development objective: Basle Service Delivery and Infrasieueture Reliability of reported performance information 49, The FMPP! requires ausitees to have appropriate systams to collec, colate, verfy and store perfomance information {0 ensure reliable reporting of actual achievements against planned objectives, indicators andl targets. The reported achievements againat planned targets of four {4) imporian! Indleators were not relable when comperad to the evidence provided. Additional matter 20, | draw attation tothe following matters: Achievement of planned targets 21, Refer to the annual performance reporl on pages x to x: x la x for information on the achievemant of planned targets for the year. This information should fe considered in the context of the qualified conclusions expressed on the usefulnase and reliably of the reported perfermanee information In paragraphs x; x; ofthis report ‘Compltance with lealelatlon 22. | performed procedures to oblain evidence thet the muntcipalty had complied with applicable Iegislalion regarding financial matters, financial management and ether related mallers. My material findings on compliance with specific matters in kay legistation, 2s set out in the general nalce Issued In terms of the PAA, are as follows: ‘Annval financial statements, performance and annual reports 23, The financial statements submitted for audiling were not prepared In all material respecte in accordance th the requiranisnis of vevtion 122 of the MFMA, Material misstatements of non-current assets, current assets and disclosure tems Identified by the auditors in the submitted francial slalarments were subsequently corrected. 24. The annual performance report for the year under review did not include the performance of the rmunicipalty and its externst service providers and a comparison of the performance with eet targets ‘wth the pravious financial year as required by section 48 (*){a}and (b) ofthe MSA. Expenditure management 25, Reasonable steps wera nol laken Io prevent unauthorised, regular expenditure as well a frutlass and wasteful expenditure, as required by section 82{1}fd] of the MEMA. Asset management 28. An effective eyetom of internal control for assets (inciting an asset register) was not in place, as required by section 8342)(c) / B2HDI] of the MFMA. Consequence management 27. Unauthorised expenciture incurred by the municipality was not investigated to determina: Hf any person is liable for the expenditure, 95 required by section 82(2}a) of the Municipal Finanea Management Act 28, brragular expenditure incurred hy the municipality wes nol invastigalad to defermine It ny perecn is liable for the expenditure, as required by section 32(2\(b) of the Municipal Finance Management Act 28, Fruitess and wastetul expenditure incurred by the muniepalily was not investigated to ddotemnina if any person is liable for the expenditure, as required by section 32{2Kb) of ‘the Muricipel Finanes Management Act Procuramant and contract managemant 90, Goods and services of a transaction value above R200 000 were prosured without inviting competitive bids, a5 required by SCM regulation 19(a). 31. Contracts wore extended without tabling the reasons for the proposed amendment in the council of the municipality, as required by section 116(3) of the MFMA. 52, The performanes of contractors or providers was not rionitoyed on a monthly basis, as requited by section 116(2}(b) of the MMA. 133, The eaniracl patormanca and manitaring measures and methods wera insufficient to censure effective cantract managemert, in contravention of section 116(2Xc) of the MEMA. Intemal control 34, | considered internal control relevant to my audit of the Mnanclal statamente, annual performance report and compliance with legisiation. The matters reported below are limited to the significant interat contro deticiencies that reeulted in the basis for qualified opirion, the findings on the annual performance report and the findings on ‘compliance with legislation included in this report. Leadership 35. Monitoring at sn oversight level was not fuly effective as some assurance was provided by leadership with reepaet La the funelloning of fnternal contals In the current yaar. Lack of adherence to policies and procedures, 2s well as the late implementation ofthe aut action plan, resulted in a breakdown in the credlbllty of Inforetion end the material rmistalarnanis identified inthe financial statements Financtal and performance management 38, Thera is an inadequate control environment atthe municipalily with ineffective dally and ‘monthly progessing and reconciliation of transections occuring in non-ourrent assets, Tiabities and discloeure ems. Misstatemanls existed In the submitted tihanclal slatemenls that were not identified by the municipality's system of inlemal conti Furtheernore, compllanes wih laws and regulations is not monitorad adequately, resulting in findings of non-compliance in the curtent yaar. 87. The annual performance report also included material misststemants, dus to the lack of oversight of the collection, callatian and reporting af performance information. There is limited accountabiity and ownership over the performance management system. Govemence 38. A risk assessment was conducted by the municipalty to idently and respond to the risks identified; however meterlal misstalements were identified in the financial statements snd annual performance report due fo weaknesses in the monitoring ot Controls ta mitigate the risks Wentfie. 39, The internal auxit unit was considered ineffective, due lo the unit being understaffed and unable ta fuly implement the internal aut plan. Due 10 the ineffactivanass af Internal uct, and the misstatements identified through the audit process, the audit committee ‘only proved ceme sssurance to council onthe infernal controls ofthe municality Audible Cerercl East London 48 December 2016 oxi ta ald pubs condense