27 August 2020
Following on from part 1, in this article we again use the Q & A format to explore service performance reporting. This time we specifically address this in terms of preparing for an audit.
Q. What do I need to know about the new audit standard?
In December 2015 the XRB issued EG Au9 “Guidance on the audit or review of the performance report of Tier 3 not-for-profit public benefit entities”. But it was clear that a new standard applying to a wider field than just Tier 3 entities and addressing service performance information more specifically was needed:
To meet this need, the NZ Auditing and Assurance Board (NZAASB) released NZ AS 1 “The Audit of Service Performance Information”. This is effective from 1st of January 2021 (but with early adoption permitted), and provides much more clarity.
EG Au9 provided limited help through a simple set of prescriptive guidelines referencing ISAE (NZ) 3000, whereas NZ AS 1 provides clear objectives, principles, requirements, and application material. NZ AS 1 applies to a much broader range of potential service performance reporting (including Tier 1 and 2 PBE as per PBE FRS 48) .
The new standard better addresses problems such as:
- Changes made to information presented year on year to present the organisation in the best possible light
- Reporting the “easy” results and omitting the important ones
- Reporting outcomes and outputs which are often unsubstantiated and with little evidence to support the claims made
- Inconsistent reporting year to year
Q. What are the key objectives of the new audit standard?
NZ AS 1 paragraph 6 outlines five objectives that need to be satisfied for the auditor to express an unmodified opinion on service performance (SP) information. These are summarised as follows:
- To understand the process applied by the entity to select what and how to report on its service performance;
- To evaluate whether the entity’s service performance criteria are suitable (per the financial reporting framework);
- To obtain reasonable assurance about whether the service performance information is free from material misstatement;
- To report about whether the service performance information is prepared, in accordance with the applicable financial reporting framework; and
- To communicate further as required by the ISAs (NZ) and NZ AS 1, in accordance with the auditor’s findings.
Q. What does NZ AS-1 expect to see in performance reports?
Although the specific term “outcome” or “output” is not used in As-1 the requirements of paragraph 15 (below) do equate to the mission statement (in the Equity Information) and the Outcomes and Outputs of the Tier 3 and 4 standards.
Para 15 says: “An entity’s service performance information shall:
(a) Provide users with sufficient contextual information to understand why the entity exists, what it intends to achieve in broad terms over the medium to long term, and how it goes about this; and
(b) Provide users with information about what the entity has done during the reporting period in working towards its broader aims and objectives, as described in (a) above.”
There is no requirement to use any specific language in NZ AS-1, or in PBE FRS-48, however, the Tier 3 and 4 standards do specify the use of the specific descriptions for reporting elements wording.
Note that the term “impacts” was also considered, but this concept was also excluded from the final reporting and audit standard.
Q. What will auditors be looking for in our Service Performance Report?
For “outcomes” (what it intends to achieve in broad terms over the medium to long term, and how it goes about this) they will be asking questions like:
- Is it relevant to organisation?
- Is the information complete?
- Is it clearly and understandably presented?
- Is it consistent with prior year reporting?
- Does it agree to founding documents and to published information?
- Is it consistent with rest of the financial statements?
For “outputs” (what the entity has done during the reporting period in working towards its broader aims and objectives) they will be asking:
- Is it relevant to organisation?
- Is information complete?
- Is cutoff accurate?
- Is it measurable?
- Is it clearly and understandably presented?
- Is it comparable to prior year reporting?
- Are allocation methods accurate?
- Does it agree to underlying financial records?
- Does it agree to other supporting documentation?
- Is cross-referencing to other parts of the financial statements accurate?
- Is it consistent with the rest of the financial statements?
- Is the treatment consistent with the relevant reporting standard?
Q. What can we expect auditors to ask?
They will ask for evidence to back up the assertions made in the report, just as they do for financial information. You should also have clear written information about:
- Why the specific items were chosen to be in the report
- What consideration was given to other items that could have been included and why they were not
- What criteria were used to make these choices and who decided on the criteria
- How the entity identifies the intended users and the decisions that may be influenced by the service performance information
- How laws and regulations that apply specifically to the service performance information are identified and how compliance with these is monitored
- Whether the entity uses any significant service organisations relating to reporting service performance information (e.g. outsourcing of satisfaction surveys)
- What judgements are made in deciding when to provide comparative narrative and descriptive information (where quantitative information is used prior year should always be disclosed)
- Where the data comes from and how it was calculated
- What systems are in place to generate the reported data (the auditors may test the system to see if the data produced is likely to be reliable)
They will also be considering the risk of bias – is the report neutral or are we just reporting what makes the entity look good (say to secure funding)? So consider in the choice of what to report that a balanced view is taken.
As part of the process, they will also request written representations from governance, that they have fulfilled their responsibility:
(a) For the preparation of service performance information in accordance with the applicable financial reporting framework.
(b) To select service performance criteria that are suitable in order to prepare service performance information in accordance with the applicable financial reporting framework.
Q. How accurate is the service performance information expected to be?
For example, in relation to volunteer hours, what supporting documentation is expected to be provided?
Auditors always consider materiality. ISA 320 says that: “Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.”
For non-financial but quantitative they may express this as something like “a 5% variance would not be regarded as material”. While one item may not be material alone, in combination with other small misstatements the reporting may be materially misstated.
The auditor will always identify risks – what factors could contribute to the entity creating a materially unrealistic picture of its achievements and how could this be done?
Volunteer hours are always going to be difficult to audit because there are often no defined “edges” to where volunteer work starts and stops. Entities should make a good attempt to record events, count numbers, estimate hours and perhaps have someone else sign this off as a good record. File these reports away for the auditor.
Where there are a few people doing significant work voluntarily perhaps a job description or contract that specifies the hours volunteered would be useful. This will then make the auditor’s work easier. They may also choose to confirm directly with a sample of volunteers that they actually did do this work.
Q. Does the auditor need to check comparative information?
PBE FRS 48 (37) says: “An entity shall report comparative information in respect of the preceding period. … An entity shall report comparative information for all amounts reported in the current period and, where relevant, for the narrative and descriptive information reported in the current period. Explanations for major variances shall be given.”
There is provision for these amounts to be excluded from the scope of the audit, particularly if they were prepared prior to the mandatory application of PBE FRS-48 (see above). ISA 710 (14) says. “If the prior period financial statements were not audited, the auditor shall state in an Other Matter paragraph in the auditor’s report that the corresponding figures are unaudited.”
So the best option in many cases would be to agree with the auditors to include this in their report as an Other Matter. Note that narrative and description information from a prior period may not be required to be included – just for amounts.
Q. Can I exclude service performance information from the scope of the audit?
From the time that PBE FRS 48 is mandatory service performance information will need to be audited (as noted, now from periods beginning 1 Jan 2022, with early adoption permitted).
In the meantime if service performance is reported (as a “practice run”) it may be excluded from the scope of the audit and treated as “Other Information” i.e. part of the reporting package but excluded from the scope of the audit.
Many smaller charities do this when they are not required to be audited as they are under the statutory limits but do so voluntarily. The auditor must read the “other information” to make sure that nothing contradicts the audited content.
Q. Will service reporting increase the cost of the audit work?
Unfortunately yes. However, from the evidence of Tier 3 and 4 entity reporting, I would argue there have been clear benefits to audit quality as the auditor must look at the charity as a whole.
They are then likely to have a broader view of the entity and its environment and more understanding of the financial results through looking at the service performance results.
The best way to keep increases to a minimum is to talk to your auditors early, agreeing from the outset on the process for gathering information for the service information reporting, talking about systems, criteria for what to report, and potential pitfalls.
NOTE: This article is designed to give accurate but general information, however, Audit Assistant Ltd accepts no liability in any way to any person arising out of reliance on the contents for any purpose. Talk to your auditor or accountant for more information.