MP304 Puxley Ka Seme Audit Report 2010-11

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REPORT OF THE AUDITOR-GENERAL TO THE MPUMALANGA LEGISLATURE AND THE
COUNCIL ON THE PIXLEY KA ISAKA SEME LOCAL MUNICIPALITY

REPORT ON THE FINANCIAL STATEMENTS:

Introduction

1. yas engaged ta aud the accompanying Financial statements of he Pixley Ka Isaka
‘Seme Local Municipality, which comprise the statement of financial poston as at
30 June 2011, and the siatomenl of fancia performance, statement of changes in net
‘aagets and statement of cashflows forthe yeer then ended, and a summary of significant
‘accounting policies and ather axplanalory information, as sét out on pages xx to xxx

‘Accounting officer's reeponsibilty for the financial statements

2. The accounting officers responsitte forthe preperation and fair preserttion of these
financial statements in accordance with South African Standards of Generally
Recognised Accounting Praciice (SA Standards of GRAP) and tha requiromanis of the
Municipal Finance Management Act of South Affca, 2008 (Act No. 56 of 2008) (FMA),
and for such internal carirol as management determines necessary to enable the
preparation of financial statements that are free from matorial misstatement, whether due
to fraud or error.

Auditor-General's responsibilty

‘3, As required by section 188 of the Constitution ofthe Republic of South Aftica, 1996 (Act
No, 108 of 1968) and section 4 of the Public Aut Act of South Africa, 2004 (Act No. 25,
‘of 2004) (PAA), my tesponsibilty isto express an opinion on the financial statements
based on conducting the audit in accordance with the International Standards on Aulting
and General Notice 1771 of 2070 issued in Government Gazelts 33872 of
48 December 2010. Because of the matters described in the basis for cisciaimer of
opinion paragraphs, however, | ws9 unable fa obiain sufficient appropriate audit evidence
ta provide baais for an audit opinion

Basis for dleclalmer of opinion
‘Accumulated surplus.

4, The municipality cauld not provide sufficient appropriale audit evidenoe to eupport the
‘changes in accounting policy on currant perad long-oufstanding tems stated inthe
Statement of changes in nel assets al R18 772 477

5, was unable to satisfy myself as to the accuracy ofthe non-disribulable reserves
amounfing lo R851 786 980, dus to properties amounting to R26 815 071 being

‘vervalued, Accordingly | could not obtain sufiianl appropriate aucit evidence as to the

‘valuation of the closing balance of nor-iiributable reserves amounting lo

RQS1 786 60 claclaced inthe financial staternents.

6, The municipality's records did not parmit the application ofaterative audit procedures.
Accordingly, | could not obtain sufficient appropriate avxlil evidence as a the valuation
and existence of the closing balance ofthe accumulated surpiue 48 at 30 June 2011 to
‘the amount of R166 642 728 disclosed inthe statement of changes in net aesets
7. Adisclaimer of opinion was issued on the prior year’s financial statements, and Iwas
Unable to determine the extent of the effect af thecs limitations an the balances as at
30 June 2011.

Value-added tax (VAT) receivable

5. The municipality dd nol provide sulfciont appropriate aud evidence to support the net
{transactions amounting to RS 948 847 in the VAT aosount cieclozed in note 11 to the
financial statements. The municipality's rosards dis not permit the application of
‘attemative pracedures. Accordingly. I could net obtain sfcianl appropriate uct
evidencs 8s 0 (ne valuation, existance, ghia and completeness ofthe closing balance
ofthe VAT receivable amounting to R3 227 248 dieclosed in note 11 lo the nancial
statements

9. Accisolaimer of opinion was issued on the por years financial étatements, and Iwas
Unable to detennine the extent cf the affect of thes linlialions on the balances 2 ai
20 June 2011

Property, plant and equipmant

10. The opening balance of property, plant and equipment of R&17 078 O67 in the financial
statements differed from the opening balanoe of RO in the general ledger. The
‘municipality could not provide an explenation or supaovting documentation for the
sifference of R517 076 057 included in property. plant snd equipmant amounting to
R721 176 740 disclosed in note 6 to the Financial statements,

|. The adltions to property, plant and equipment of R23 70 082 in the financial
statements differed from the adlions of RO in the general ledger, The munipalty could
not provide an explanation or supporting documentation forthe diference of

R23 706 092 included in property. plant and equipment amounting to R721 176 740
disclosed in note 6 tothe financial statements,

12. The additions to property, plant and equioment amounting to 42 155 460 resulting from
‘esets funded threugh condifanal grants for which contitions were met. were not
included in property, plant and equipment, resulting in an understatement of property,
plant and equipment of R42 185 480, As the municipaliy’s records ad nol parm the
Identifation af the conira-entry, | was unable ta identify the cihar account affected by
this error,

18, The deprecation amount of thar assets amounting to RB 793 283 disclosed in note 6 to
the financial statements was understated by RS 861 625. aoa result of an incorrect
application of the uselu life, Had the useful fe been correctly apolied, depreciation
‘would have inersased by RS 861 528 and assels decrsased by the same amoutt

14, The depreciation amount of infrastrucire assets amounting to RS18 745 S14 dieclosed
in note 6 to the nancial statemenis was oversiated by RA7 422 S88, as a result of an
incorrect application ofthe useful lio. Had the comet useful fe been applied
‘depreciation would have increased by R87 422 665 and infrastructure as:
by the same amount

1

‘decreased

18, Due to limitations placed on the scope of my work, [was unable to physically went
infrastructure assets amounting ta R59 778-588, included inthe infrastructure assets
amounting to R532-248 786 disclosed in note & to the financial statements.
16. | was unable to confim the completeness of property, plant and equipments due to
limitations placed on the scopo of my work by the municypalily. The municipality s
records ld not permit the application of aliemnativa procedures, Accordingly, | could not
‘obtain sufficient appropriate audit evidence as Io the completeness of the closing
balance of property, plant and equipment amounting of R724 178 740 dieclonedin
nole 8 te the financial statements,

17. Included in property, plant and equipment were propartiog held to eam rental to the
value of RS 098 695, According to the Standard of Generally Recognised Accounting
Praches, GRAP 16 investment Propery, thase aesets are supposed la be classified as
invesiments propertos, Had Nese aesels been correctly classtied, investment
propetties would have increased

16. A discaimsr of opinion was issued an the prior years financial statements, and | was
Lnabla to determine the extent of the effec ofthese imitations on the bafances ae at
30June 2011

Trade and other payables

418, The municipality could not provide sufficient appropriate audit evidenoe to support
fransactions processed fo the ather payables acoount amounting to Rt 120 337
disclosed in note B to the financial statements, Consequently, | did not obtain suficent
‘appropriate aul evidence to satisfy mysef as fo the valuaion, existence and
obligations of the other payables arnounting to R22 346 098 diselosod in nota @ to the
Financial statement

20, Trade and other payables nora understated by R545 239 as a result of retentions nat
recognised n the finandial statements and ledgor. Had the correct amaunt been
recognised, lrade and other receivables would have increased by R545 239 and assets
‘would have increased by the same amount.

21, A clsolsimer of opinion was issued on the prior year's nancial ststernents, and Iwas
Unable to determins the extent ofthe effect ofthese imitaons on the balances as at
30 June 2011,

‘Trado and othor receivables from exchange traneastions

22. As | was unable to evaluate the reasonableness and consistency of the assumptions.
Used in developing the collecteblty of debiors, | could act varfy the method and
procedures adopted to estimate the provision for doubtful dehts amounting to
R23 858 654, Accordingly, | could not obiain sufcient appropriata audi evidence as to
the valuation of the closing balance of trade and ather recelvables from exxchang=
lransactions amounting to R69 113 285 disclosed in nete 2 to the nancial statements,

23. clsclaimar of opinion was issued on the prior year's financial statements, ard | was
Unable fo determine the extent of the elfect ofthese limtations on the Balances as at
30 June 2011

24. In tems of the Standsrd of Generally Recognised Accounting Practice, GRAP 17
Property. Plant and Equipment, te cost ofan ier af property, plant an! equiprient
includes the inital estimate ofthe costs of dsmanting and removing the itera and
restoring the sito on vihich itis located, the obligation which sn enfiyineurs either when
the itam Is acquired or as a consaquence of having used the lam during a particular
period for purposes other than to produce inventories during thet period. The
Tunicipalty had not macle provision for the renabilitation of landfilstes during the year
under review. It was impracticable to quantify tho effec ofthe miselalemert, 38 no
reverting information was available lo determina the amour

25. & aisclaimar of opinion was issued on the prior year's financial statements, and I was
tunable fo determine the extent of the effect of these linvtations en the balances as at
80.June 2011

Inventories

25. The municipality could not provice sulfiient appropriate audit evidence to support
inwentaries amounting to R174 638 disclosed In nate 4 tothe financial staternents,
Consequenily. | ci not obtain sufficient appropriate audt ovidonce to satiety myser as
{athe existence, rights, completeness and valuaten of the inventory amounting to
R6O4 667 cisclosed in nolo 4 to the financial statements,

27. A disclaimer of opinion was issued ont s2ar's financial statements, and | was
Unable to detenmine the extent of the effect af these liilafions on the balances as at
30 June 2011

Revenue

28. The municipality could nol provid suliciont appropriate aud evidence for ather incame
amounting to R18 280 224 disclosed in note 21 fo the statement of financial
performance. Consequenty, | did not obtain suffciant appropriate audit evidence to
salify myself as tothe occurrence, accuracy ard classification of other income
amounting to R18 280 224 disclosed in the statement of financial performance

29. Service charges were understated by R148 O08 as a resul of prepaid eleciricity sold by
‘vendors on behalf of the municipality not recognised in the accountng recards, Had! the
correct amount been recorded, service cra:ges would have increased by R148 008 andl
‘trade and ather receivables wuld have increased by the eame amour.

30. Services charges were understated by R23 536 as a result of amounts recorded in the
ledger not agreeing fo amounts receivedifrom venders. Had the corect amunt been
recorded, service chargos would have increased by R623 598 and trade and other
receivables would have increased by the same amount

Expenditure

21, Grants and subsidies psid were overstated by 1 529 236 as a suit of amounts
recorded in the ledger not agracing te invoicas. Had the correct smouni been recorded,
{grants and subsidies paid would have decreased by Ret §29 236 and debtors would have
increased by the same amount.

82, Contracted services were overstated by R187 210 as a result of amounts recorded in the
ledger not agreeing to invoices. Had the correct amount been recorded, contracted
sarviess would have increased by R167 210 and debtors would have increased by the
same amour.

38, General expenses were overstated by Ft S64 561 as a result of amounts recerded in
the ledger not agreeing to invcices. Had the comet amount been recoried, general
‘expenses Would have decreased by RI S64 S61 and debtors ncreasod by the same
moun
34, As the municipality's records dd not permit the application of alternative procedures, |
‘coule not obtain euffiient appropriate aud evidence as to the occurrence, accuracy and
completeness of operating expenditure amounting to F381 628 660 disclosed in
statement of financial performance,

Material oseee

‘35. Section 125(2)(c)() of the RIFMA requires the notes to the financial statements of a
municipal fo disclose any matarial losses tna! occurred during the finaneal year and
‘sholher these are recoverable. As distribution losses for elacticty and water sales wars
not reconciled, thass losses were nol disclosed in the notes to the financial e!aemenis
Itas impracticable to quantify the effect af the non-disclosure, a8 no veporting
information was available to determine the smncunt

Cash flow statement

28. | was unable to obtain appropriate auall evidence as to he completeness and accuracy
ofthe cash flaw information, due to the numerous items gorirbuting to the disclaimer of
biaion that affected the items in ths Stalament of nancial position and tha slstement af
‘inandlal performance,

Disclaimer of opinion

37, Because of the significance ofthe matters described inthe basie for disclaimer of
pinion paragraphs, have not been able to obtain sufficient appropriate audTt idence
1 provide a basis for an aucil opinion. Accordingly, | da not exeress an opinion on the
financial statements

Emphasis of matters
38. | craw attention tothe matters below. My opinion is nat mocked in respect of these
raters.
Rostatoment of corresponding figures
38. As disclosed in note xx tothe financial statements, the carrespanding figures forthe year
tended 30 June 2010 have beon restated ae a reall af an arrar Zcovered during the

year ended 30 June 2011 inthe Financial statements of the municipality a, and forthe
Year ended, 90 June 2010.

regular expen

40. As disclosed in noted 44 to the fhancal statements, the municipality incurred regular
‘expenditure of RE 145 916, as the expenditure incurred was in conltaveniion of supply
‘chain management (SCM) processes.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

41 In accordance with the PAA and in terms of Genaral Noliae 1111 of 2070 issued in
Govsmment Gazette 39872 of 15 Devcaber 2010, Yinclude below my finings on the
‘annual perfomance report 35 set out on pages... a .. are material ner-carnpliance
‘ith laws and raguistions applicable tothe municipal.
Predetermined objectives
Usefulness of information

42. The reported performance information was deficient in respect ofthe following cxiteron
+ Moasurabilty: The targata were nat messurable,
43, The following audi finding relates to the above criterion

‘+ For ll tho solected programmes and objectives, 40% of the planned targets were not
measurable,

Compliance with laws and ragulations
Strategic planning and performance management

444, The accounting officer of the municipal did not by 25 January 2041 assess the
perfomance of the municipality during the first hall of the financial year, faking into
‘2c00uNt the municipaily’s service delivery performance during the fist half of he
financial year and the service delivery target and performance indicators setin tie
service delivery and budget implementation plan, aa required by section 72 of the
MMA,

4. The municipality did not implementa framework that described and represented how the
‘municipality's cycles and processes of performance planning, monitoning, measurement
review. reporting and improvement would be conducted, organised ané managed,
including deterrining the roles ofthe diferent role players, as required in terms of
sections 36, 28 and 41(2) of the Municipal Systems Act. 2000 (Act No. 32 of 2000)
(MSA) and regulations 7 and 8 ofthe Municipal Planning and Performance Management
Regulations, 2004

Budgets

48, The municipality incurted expenditure in excess of the line of the smounts provided for
in the votes in the approved budget, in contravention of section 15 of tie MEMIA.

47. The mayor cid not submit all quarterly reports tothe council cn tha implementation of the
budget and the financial state of afalis of the municipal within 30 days after the end of
each quarter. as required by eection 82(d) of the MFA,

48. The accounting officer did not always aubmit the monthly budget statements tothe
mayor andlor the relevant provincial treasury, #8 required by section 71(1) ofthe MENA,

Annual financial statements and annual report

49, The financial statements submited for auelting were nol prepared in all mateial respects
in accordanes with the requirements of section 122 ofthe MIFMA Materia:
misstatements identified by the aucitore were net adequately corrected, which resulted in
the financial statements recsiving a disclaimer of opinion,

50. The parfarmanca report forthe fancial year under review was nol preps
required by section 48 ofthe MSA and section 121(3)ic) af the NEMA.
51. The mayor die net table in the coun the 2008-10 anual report ofthe municpalty

within seven months after the end ofthe nancial yaar, as required by section 1272} of
the MMA,

red as
152, The mayor did not submit a witten explanation tothe council setting out the reasons for
the delay in the tabling of the 2008-10 arnualrapart inthe coun, 86 required by
section 127(3) of the MFA,

£53. The municipal council dd not adopt an oversight report containing the caunci's
‘comments an the annual report within two mons fram the date on which the 20010
‘annual report was labled in the council s required by section 129(1) of the MMA
Internal audit

‘54, The municipalily did not develop and implement mechanisms, systems ans processes
for auditing the resuls of pecommance measurement as part of ts intemal audit
processes, as loquirod by section 45(1}(a) of tha MBA road wilh ragulalion 14(1}(a] of
the Municip! Planning and Performance Managernent Regulations, 2001,

Human resource management

'55. The municipal manager cid not provide job descriptions for each post onthe stat
establishment, a8 required by section 66(1}(o af he MSA.

Expenditure management
‘Transfers and conditional grants

£58, The municipality did not always submit monthly reports to the transferring national
coffer, the National Treasury and the previncial treasury on sperding and financial
performance in respect ofthe ellaostions reosived. as required by section 11(2)0b) of the
Division of Revenus Act, 2010 (ct No.1 of 2010) (DoRA) and section 715} of the
MFA,

'57, The municipality did not always submit quarterly reports tothe transfering national
cfficer on non-financial performance in respect ofthe allocations received, as required by
seation 11(2\c) of DORA,

Procuremant and contract management

58, Imagular expenditure was incurred in contravention ofthe requirements of the MMA,

59, Goode and services witha transaction value bstwoan Fe10 000 and R200 000 wars
procured without obtaining mitten price quotations from atleast three cifferent
Drospective providers as per the requirements of SCH Reguistion 17(a) and (c.

£60, Quotations were accepted from prospective providers who were not onthe ist of
-coredted prospective providers and did not meal tha listing requirements prescribed by
‘the SCM policy in contravention of SCM Reeguistions 18(b) end 17(b)

61. Invitations for competitive bidding vere not always advertised forthe required minimum
period as par the requirements of SCM Regulation 22(1) and 22/2),

62 Bid specifications ware not always drafted by bid spacificaton committags that were
composed of ane or mare officials ofthe municipality, as required by SCM
Regulation 27(3)

63. Awaris were made to suppliers who didnot submit a declaration on their employment by
{the state or their reta¥orehip to a parson employed by tho stato, a¢ per the requirements
of SCM Regulation 13(c),
164, Awards were made to provigers wha were persone in he service of other state
Insitutions in contravention of the requirements of SCM Regulation 44,
65. A list of accredited prospective providers was notin place for procuring goed and
Services through quotations, as required by SCM Reguation 14( 7).
INTERNAL CONTROL

66. in accordanoe wih the PAA and in terms of Generel Notice 1171 of 2010 issued in
Goveement Gazette 23872 of 13 December 2016, | considered internal conirol relevent
{fa my audit, but not forthe purpove af exoressing an opinion on the effectivenees of
intemal control, The matters reported below are limited to the significant deficiencies that
resulted inthe bass for the disclaimer of opinion, the findings on the annual performance
report end the ndings on compliance wih laws snd regulations included in this topo

Leaders!

67. Effective leadership was not based on a culture of honesty, ethical business pradicos
‘and good govemance. protecting and enfiancing the interests of the eniy

688. Oversight responsibilty was not exercised regarding financial and performance reporing
‘and compliance 96 well a6 related intemal contol.

68, Effective human resource manegement wae notimplamanted to eneure that adequate
and sufficiently skiled resources were in place and thal perfomance was monitored,

70, Policies and procedures were net established and communicated to enable and support
an understanding and execulian of inlarral convol objectives, processes and
responsibiliies,

71. The imlementation of action plans were not developed and monitored to address
internal cantrol derciencies.

72, An information tachnology IT) govemance framework was not established that
supported and enabled the business, delivered value and improved performance.

Financial end perfarmance management
7S. Proper record keeping was not implemented in a timely manner to eneurs that complete,

relevant and aosurate information was accessible and available fo support nancial and
performance reporting

74, Controls were not implemented over dally and montnly praoassing and réconcling of
lwansacions,

75. Regular, zosurate and compete financial and performance reports. which were
supported and avidenced by reliable information, mere not prepared.

78. Compliance wih applicable laws and rogulalions were nat reviewed and monitored.

77. Formal contrals over IT systems were not designed and implemented to ensure the
reliably of the systems and the availabilty, accuracy and protection of information
Governance

78, Appropriate risk management actities were not implemented lo ensure that reqular isk
‘assessments, including the consideration of IT risks and fraud prevention, were
‘conducted and that a risk strategy to address the risks was developed and monitored,

79. twas net ensured that there was an adequately resourced and functioning infernal auclit
Unit that identified intemal control deficiencies and recommended comectve action
etfecively

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Nelsprait

25 January 2012

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