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Financial Statements Preparation

1996


CONTENTS

Introduction

1. Financial Statement Committee

2. Implementation Plan

3. Analysis of Information Requirements

4. Agency Guidelines and Reporting Package

5. Quality Controls

6. Outcome Review

7. Further Assistance

Example Schedules in Preparation for Audit

Introduction


· establish a committee to oversight preparation of the financial statements;
· develop a project implementation plan;
· establish information requirements;
· develop agency guidelines and reporting package;
· establish quality control procedures and implement a quality control process; and
· review the outcome of the process.
1. Financial Statement Committee

The Chief Finance Officer (CFO), however described, is ultimately responsible for the preparation of the financial statements. To aid in ensuring the success of the financial statement preparation process agencies should consider the establishment of a senior executive committee to assist the CFO oversight the preparation of the statements.

Chaired at senior level

The financial statement committee may be set up as a sub-committee of the Audit Committee. Alternatively, the Audit Committee itself may operate in the role of oversighting the preparation of the statements, obviating the need for a sub-committee. However, experience indicates that the best results are achieved if the committee is chaired by an officer of appropriate seniority such as the CFO.

Membership of Committee

Where a committee is established, membership should include staff of the corporate accounting area, program managers and internal audit. We have found it valuable to attend meetings of this type in an observer/advisor role. External representation may be required where senior management does not possess high level financial expertise.

Regular meetings

Early and regular meetings can provide a means by which the financial statements preparation process is well planned and monitored, as well as acting as a forum for the resolution of problems identified during the project.

Terms of reference

The following may be included as terms of reference for a committee set up to assist the CFO :

· approve and monitor timetable and milestones;
· agree required resources and training strategies;
· provide high level liaison with ANAO and work with ANAO to resolve significant issues;
· provide clearance on accounting policies and practices;
· sponsor the reporting package; and
· monitor results of quality control procedures.

In smaller agencies there may be less need for a formalised management structure such as a financial statement committee. For these agencies, management of the project may be best achieved by a small informal group consisting of the officer delegated with the responsibility for preparing the statements, the relevant program manager, and the ANAO used on a consultative basis.

2. Implementation Plan

For statements to be prepared on a timely basis it is necessary to properly plan and project-manage the annual preparation task. The need for proper project management is even more important in decentralised agencies where financial information has to be collected from many locations and systems. The key components of a project management plan are as follows.

Identify officers responsible

By identifying officers responsible for the statements within the agency clear accountability for the successful completion of the project is established.

Establish timetable

As in any project management task there is a need for a timetable of key milestones in the statement preparation cycle. An important determinant in setting the timetable is the intended Annual Report tabling date. In drawing up the timetable consideration should be given to whether the timetable is:

· clearly stated;
· comprehensive;
· drawn up in consultation with program managers who produce information for inclusion in the statements;
· endorsed by the CFO and financial statement committee; and
· subjected to regular feedback on progress against timetable.

The timetable needs to set out when critical information for statement preparation is needed. For example, when the stocktake of property, plant and equipment needs to be undertaken so that discrepancies can be resolved prior to year end; when debtors, creditors and commitments need to be identified; and when reconciliation of account balances must be completed.

In drawing up the timetable, agencies need to be aware of the time required to complete the audit of the statements. We will provide this information in our Audit Strategy Documents (ASD).

Establish milestones

The establishment of milestones is one way of achieving a good level of control over the management of the financial statement preparation process. Milestones should have the following characteristics:

· be achievable - they should be set up in consultation with stakeholders;
· be manageable - they should correspond to discrete areas of work which relate directly to the major financial statement balances, e.g. debtors, creditors, property, plant and equipment; and
· be monitored - they should be reviewed regularly against progress.

Early completion of work

By setting out work that can be completed before year end, timing pressures can be eased. The following are examples of work that can be completed prior to year end:

· determination of the form of the statements;
· clarification of accounting policies;
· statements can be drafted, including policy notes and comparative figures;
· non current asset reconciliations can be carried out, with a later update for periods not covered; and
· trial balances can be prepared at an interim date.

Agencies may also consider the possibility of early year end close off with the rolling over of data for the last couple of months of the financial year. This is more easily achieved by those agencies with more sophisticated accounting systems.

Support from Committee

The success of the financial statements project plan is more likely if senior executive management commitment to the plan is obtained, preferably as early as possible. This can be through the financial statement committee actively sponsoring and taking responsibility for the implementation plan.

Resource needs

A key focus of the plan is the specification of the resources required for all phases of the project. Senior executive management endorsement of the plan can facilitate the commitment of resources for the duration of the project. This is essential to meet any unforseen circumstances and events, as well as to ensure a quality and timely product.

Liaison with ANAO

We will work with agencies to establish clear lines of communication early in the planning of the project. In the case of a highly devolved and/or decentralised agency, where there will be multiple points of contact, it is particularly important to establish clear detail of the communication arrangements. For our part we will at all times endeavour to cooperate fully with the wishes of the agency management with respect to the clearance of correspondence and draft reports.

We will ensure that we are aware of all key milestones in the project plan. Information such as the planned audit dates will be provided to the agency in the annual ASD referred to earlier, which will be developed after discussion with the agency.

A method favoured by some agencies is to have regular meetings with us leading up to the conduct of the final audit. The frequency of these meetings is influenced by the size and complexity of the statement preparation task. In some instances, meetings with the financial statement committee may achieve these objectives. In others, it may be appropriate to establish a lower level working group. In large devolved organisations these meetings are best held on a weekly or fortnightly basis. The meetings can be used for the:

· early exchange of ideas on solutions to potential accounting problems; and
· to keep both parties abreast of progress with the financial statement development and with the audit.

We will be available for discussions on the progress of the audit and on solutions to potential accounting problems.

Training

The release of the Agency's Guidelines and Reporting Package (see Section 4) should be accompanied by the conduct of a training program. The scope of the training will naturally be dependent on such factors as skills, qualifications and experience of the staff required to implement the Guidelines, and the extent of changes to the prior year Guidelines and Reporting Package.

Qualified accountants

Experience in agencies which have been preparing accrual financial statements for many years has shown that the use of professionally qualified accountants for the preparation of the Agency's Guidelines, the Accrual Reporting Package and the statements has resulted in cost effective completion of the project. This is because of the complexity of accrual reporting and the need to be conversant with, and understand, the Department of Finance (DoF) Accounting Guidelines and accounting standards.

Where short term staff absences occur in key areas, or where professionally qualified staff are unavailable, the use of professional consultants should be considered. However, care needs to be taken because an important component in the success of the project is the knowledge base of the financial statement preparer and an understanding of the functions and operating environment of the agency.

Contingency plan

As in the management of any major project, provision needs to be made for contingencies which may prevent the project objectives from being achieved. The project management plan needs to outline what arrangements are to be put in place if, for example, key personnel are unavailable during the preparation of the statements. This is particularly important in small agencies which are heavily dependent upon the knowledge and skills of a small number of individuals.

A method that may be considered is some form of multi-skilling whereby more than one staff member receives exposure to certain tasks which are important in the preparation of the statements. The objective is to avoid complete dependency on one or two staff members. It is also prudent to make provision for back up and recovery of the information used in the preparation of the statements whether that information is in computerised or manual form.

3. Analysis of Information Requirements

The use of Accrual Reporting Guidelines and an Accrual Reporting Package facilitates the preparation of the statements. The Guidelines set out the accounting policies and disclosure requirements for the financial statements. The reporting package is used as the source material in the preparation of the statements. In some agencies the two documents have been consolidated.

The completion of an information requirements analysis is the first step in the process leading to the preparation of Accrual Reporting Guidelines and an Accrual Reporting Package.

The source of reporting requirements and revisions to the requirements include:
Financial Statement Guidelines · the DoF Guidelines which may directly impact on the data collected in the reporting package or may result in different treatment for the data that is collected and provided to the preparers of the statements;

ANAO issues
· issues raised in previous audit qualifications or reports to the agency. We will bring these matters to your attention prior to revision and promulgation of the Guidelines;

DoF advice
· advice from DoF on the presentation and disclosure of financial statement information. Information from DoF such as Guidance Releases and Accounting Discussion and Developments series need to be reviewed prior to finalisation of a revised requirements analysis; and

Changes in accounting standards
· changes in accounting standards and new releases of the Urgent Issues Group of the Australian Accounting Research Foundation.

We will discuss the impact of any changes in disclosure or presentation requirements early in the preparation process.

4. Agency Guidelines and Reporting Package

Contents of Guidelines

The Agency's Accrual Reporting Guidelines should include the following:

Management assertions

· a clear statement that a Chief Executive or Agency Head will be required to certify to Parliament that the financial statements are fairly stated together with an explanation of this assertion. In this certification, the Chief Executive or Agency Head is asserting:
o completeness - all transactions and balances have been included;
o existence - all transactions occurred during the period, all balances exist at year end;
o accuracy - all transactions have been recorded accurately at appropriate amounts and financial statements, general ledgers and subsidiary ledgers agree;
o valuation - financial statements items are shown at appropriate values;
o ownership - all transactions and balances related to the agency were controlled by the agency; and
o presentation - the statements comply with the Minister for Finance Guidelines.
· a clear delineation of administered and departmental reporting items as they relate to the reporting entity;

Explanation of information required

· for each item to be reported separately in the statements and the notes:
o a plain-English definition of the item;
o policy on treatment of the item in the statements and notes. This needs to include specific information on what each financial statement item comprises and, where appropriate, examples of how transactions processed by the agency are to be treated. A clear statement on what information is needed to be disclosed in respect of each item and the source of that requirement should also be provided; and
o the method by which information will be collected. This may involve describing the systems and reports used to derive a particular item and providing report specifications where required. If the item is manually derived, a description of the method used is useful for all concerned.

The Accrual Reporting Guidelines should be endorsed by senior executive management.

The Agency's Accrual Reporting Package can be in a form that allows for computerised or manual entry of data. Commercially developed software packages which provide all required functionality (as specified by the users) are available. The advantage of using a commercially developed package over user developed software is that the integrity of the software is assured where the package is acquired 'off the shelf'. When it is designed by the user all necessary software development steps including rigorous user testing need to be carried out.

Contents of the reporting package

The package should include the following:

· guidance on completion of the package;
· advice of where to go for assistance in completing the package;
· provision for sign-off by a senior executive management representative, including a certification as to the completeness and accuracy of all information contained within the package;
· a check list of actions carried out in the package;
· for each item to be reported separately in the financial statements and in the notes; and
o details of action required, such as performance of a particular reconciliation;
o a lead schedule with provision for the signatures of officers preparing and checking the schedule; and
o details of supporting documents to be attached or retained for later scrutiny.

The Agency's Reporting Package should be endorsed by Senior Executive Management.

We have found that the adoption of a computerised reporting package provides advantages over the manual format particularly in respect to accuracy and timeliness of the collection of data. However, where a computerised package is adopted, agencies should be aware of the need for development standards to be maintained. In particular, agencies should ensure that a user requirements analysis is carried out and a user testing plan is established.

Guidelines to be developed in consultation

We will advise agencies on the development of the Guidelines and the Reporting Package. These should also be prepared after consultation with all internal stakeholders.

Internal stakeholders include owners and managers of systems which are used in the preparation of information to be included in the financial statements. Internal stakeholders also include managers of staff responsible for the preparation of returns that will be incorporated in the statements. In particular, these managers should be consulted to ensure that the necessary resources are made available to enable milestones set down in the project plan to be achieved.

A listing of schedules necessary to support the financial statements is included in the attachment to this guide.

It is good practice to review the guidelines and package each year taking into account any revised accounting or reporting requirements. The opportunity is also available to correct any deficiencies found in the previous year's package.

5. Quality Control

Quality control of the information contained in returns and in the draft statements is important to ensure that there are no material errors in the returns or in the statements. The quality control process is the responsibility of the senior executive preparing the financial statements.

Joint sign-off

Quality control is at two levels. It occurs at the level of the completion of the Reporting Package. At this level quality control can be enhanced through having a joint sign off of key schedules to indicate that they are mathematically and conceptually accurate and supported by appropriate documentation.

Reviewed by Corporate Accounting

The second level of quality control is at the level of preparation of the financial statements from the completed returns. Returns should be reviewed by the corporate accounting area prior to inclusion of the information in the draft statements. As a minimum, a check of completeness and reasonableness should be undertaken. The reasonableness check can be carried out on the individual returns themselves and against what could be expected to be included in the returns. This check can be achieved by reviewing current-year returns against prior-year returns or against an expected standard of achievement.

The use by agencies of Internal Audit to carry out a limited "pre-audit" of the returns has contributed to an improved standard of statement preparation. The primary focus of this activity should be the checking of schedules to supporting documentation.

Involvement of Internal Audit

The preparation of the statements can also be subject to a quality assurance process to establish that:

· the statements comply with the Minister for Finance Guidelines;
· notes to the statements are correctly referenced to the body of the statements; and
· the statements are mathematically and conceptually correct.

Use of check lists

A check-list approach is useful in the performance of this quality control role. The benefits of the use of a check-list are that it not only ensures that all required checks are undertaken but it also documents the checking carried out. This can add to the assurance provided to management.

6. Outcome Review

At the completion of the financial statements process each year we are prepared to assist agencies carry out a review of the entire process. We can provide information on matters such as the quality of the information contained in the returns and the effectiveness of the quality control procedures. This review could take the form of a recall session in which staff who participated in the project examine the outcome of each phase of the project and identify work plans for implementing any necessary changes for the forthcoming year.

This review process can also provide benefit to program areas through feedback on how they rated in the quality assurance process and recommendations on how any weaknesses observed can be remedied for the future. Program areas can also generate improvement through establishing whether there are any modifications to be made to the Guidelines or the project plan for the next year.

The ANAO will also seek feedback on client satisfaction with the audit process.

7. Further Assistance

Further assistance in relation to the preparation of the financial statements is available in several areas. These include:

· the ANAO Executive Director responsible for the audit of your financial statements;
· the Department of Finance;
· training courses on financial statement issues run by the ANAO and other agencies; and
· the financial statement preparers' network who hold regular meetings.

Further information on this guide can be obtained by contacting (06) 203 7449

Example Schedules in Preparation for Audit
Financial Statements Item (for each departmental and administered item)
Supporting Schedules

Cash at hand

Schedule of cash advance holders.

Confirmation certificates from cash advance holder stating the amount held as at 30 June 19XX.


Cash at bank

Schedule of Bank Accounts, Bank Account Numbers, Branch and domicile of Bank Account.

Prepare confirmation request letter for forwarding to bank by the auditors.

Reconciliation of Bank confirmation with general ledger account balance(s).

Reconciliation to be certified by preparer and delegated checking officer.

Explanations to be provided for unusually large balances and overdrafts.


Receivables

Schedules of receivables, classified into Current and Non-current.

Schedule of doubtful debt, bad debts written off and recovered. Outstanding Debt Analysis (Ageing of debts report).


Investments

For each investment, a schedule, showing the face value, the cost of the investment, interest rate, date of maturity, and market value (net realisable value).

A listing of all authorities and companies within the portfolio in which the department holds the investment on behalf of the government. For each of these the value of net assets of the entity.

Reconciliation to general ledger.


Other current assets

Schedule of the different categories of Other Current Assets.

e.g. Prepayments, Advances


Leases

Leasing details, especially new leases and leases terminated. Details of payment schedule, classification, operating or finance lease.

Details of lease incentives.

Financial Statements item
Supporting Schedules

Non-current assets

A copy of the assets register by asset category. Movement schedule, ie, reconciliation between opening and closing balances.

Copy of Stocktake procedures, copy of the stocktake report. Reconciliation of stocktake report to asset register. List of write-offs.

Schedule of repairs and maintenance, policy on capitalisation, to ensure repairs and maintenance are not of a capital nature.

Schedule of profit/loss resulting from sale of assets.

Valuation reports, where applicable, including basis, date and name and qualifications of valuer.


Creditors including accruals

A schedule of trade and other creditors, showing name, amount, nature and date of goods and services received, invoice number.

Provisions for Employee entitlements

Schedules to identify each officer's entitlement to recreation and long service leave; a schedule of sick leave entitlement (if applicable).

Formula and factors used in the calculation of each officer's entitlement.

Movement in provisions.

Details of classification into current and non-current Provisions.


Other Current Liabilities

A schedule showing the components of this item, together with source documents.

Net Assets

Schedule of movements in Asset Revaluation Reserve.

Schedule of movement in Accumulated Results.

Reconciliation of equity and net assets.

Statement of Cash Flows

Cash Flow Statement

Link between trial balance and spread sheet/schedules. For administered items a reconciliation between operating activities and net administered assets.
Revenue

All revenue items

Summary of reasons for variances from budget estimates.

Appropriations

Confirmation of any amounts outstanding at balance date.

Revenue items not specifically supported by one or a number of general ledger accounts

A schedule of resources received free of charge, detailing the nature and amount.
Financial Statements Item
Supporting Schedules

Expenses


All expense items

Summary of reasons for variances from budget estimates.

Employee Expenses

Schedule showing accrued salaries and superannuation contributions.

Expense items not specifically supported by one or a number of general ledger accounts.

A schedule showing the composition of the item, supported by worksheets or source documents.

Resources provided free of charge

A schedule of resources provided free of charge, detailing the nature and amount.

Administrative Expenses

Schedule to identify any sub-item that may need to explained by a note to the financial statements.
Other Notes

Agreements Equally Proportionally Unperformed

Where asset and liabilities which arise from AEPU have not been brought to account in the statement of financial position, a schedule should be provided showing the amounts payable or receivable as set out in the Minister for Finance Guidelines.

The schedule needs to be complemented by worksheets or source documents to support the balances.


Remuneration of Executives

A schedule showing the number and names of executives officers whose remuneration received or due and receivable comes within the bands of income as set out in the Minister for Finance Guidelines. Include details of performance pay.

Liabilities not recognised

(formerly Contingent Liabilities)


To comply with the new auditing standards, specific evidence has to be obtained by the auditor.

The most common evidence is a solicitor's confirmation letter, which would need to be requested at balance date. Mailing-out of letter has to be done by the auditor.


Related parties (where applicable)

To comply with the new auditing standards, specific evidence has to be obtained by the auditor.

The preferred evidence is a statement by Directors and Executive Officers about their related party status.

Statutory Records (where applicable)

Register of Directors

Register of Board member or other verifiable source. eg. copy of letter of appointment.

Minutes of all Board Meetings held since last audit.

Original Minutes signed by Chair, or copies thereof.


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