Audit Management Letter

Transcription

1 Audit Management Letter Year Ended 31 March 2015

2 Contents Page No. 1. Introduction 1 2. Summary of key audit issues Independence 8 4. Qualitative Aspects of Financial Reporting 9 5. Management Representation Letter Audit Opinion Audit Adjustments Accounting and Internal Controls Systems 12 Audit Management Letter

3 1. Introduction Our audit of the financial statements of Fortis Living ( the Group ) is complete. The purpose of this letter is to bring to your attention the findings from our audit of the group and subsidiaries for the year ended 31 March We appreciate that you will already be aware of the majority of the matters contained in this letter. In order to comply with the provisions of International Standard on Auditing (ISA) 260 Communication of Audit Matters with those Charged with Governance, we are required to report to management on the findings of our audit, with particular reference to: views about the qualitative aspects of the Group s accounting practices and financial reporting; the final draft of the letters of representation; unadjusted misstatements; matters specifically required by other Auditing Standards to be communicated to those charged with governance (such as fraud and error); expected modifications to the auditor s report; material weaknesses in the accounting and internal control systems; and any other relevant and material matters relating to the audit. We also take this opportunity to comment on the Group s performance for the year and to confirm our professional integrity, objectivity and independence. We see effective communication with the Group s Audit and Risk Committee as being a key part of our audit, and it is important that there is effective two way communication. We welcome any feedback or questions regarding the conduct of the audit process. This report is not intended to cover every matter which came to our attention during the audit. We do not accept any responsibility for any reliance placed on it by third parties. Our procedures are designed to support our audit opinion and cannot be relied upon to identify any weakness in systems or controls which may exist. Audit Management Letter 1

4 2. Summary of key audit issues The following table summarises the key audit issues we identified as requiring specific consideration and our findings in relation to them. Risk per Audit Plan Overview Future Viability and Treasury Management The Group s business plan is a key document in its on-going management and viability. The economic outlook is more positive than in recent times although uncertainties remain particularly over the impact of the government s welfare reform programme. Long term financing is harder to secure and lenders are taking a strict view on covenant compliance. The Group has been extremely successful in raising new finance during the year which will primarily assist the development programme into the future. This consisted of 70m via the Affordable Homes Guarantees Scheme and 20m from Santander. Audit Work Performed Our audit work included: Assessing the monitoring arrangements in place for loan covenant compliance; Agreeing the debt in the Group to accounting records; Agreeing the debt held by the Group to external confirmations from funders; Obtaining and reviewing the supporting documentation for interest payments and receipts in the year; Reviewing the Group s 2015/16 budget and the underlying assumptions; Reviewing longer term budgets, business plans and cashflow forecasts; Reviewing capital commitments at the year end; and Testing the detailed calculations for loan covenant compliance prepared by management. New Group Structure On 1 April 2014 Festival Housing and Worcester Community Housing merged to form a new Group. Management has considered whether this is to be accounted for as an acquisition or a merger, and the conclusion is to follow merger accounting which will treat the new structure as if it had always been in place such that the financial statements of each organisation are simply added together for the comparative financial year. Our audit approach included: Reviewing the key accounting systems and controls at each Association separately; Assessing the accuracy of the prior year Group comparative balances; Assessing the alignment of accounting policies for the Group accounts; Reviewing the consolidation process to ensure inter group transactions and year end debtors / creditors are correctly adjusted in the financial statements; and Reviewing disclosures of the merger in the financial statements. Audit Management Letter 2

5 2. Summary of key audit issues Risk per Audit Plan Overview Assessment of Fraud Risk ISA 240 The Auditor s responsibility to consider fraud requires us to consider the risk of fraud and the impact that this has on our audit approach. There is a presumed significant risk of fraud in two areas: Revenue Recognition Material misstatements due to fraudulent reporting often result from an overstatement of revenues, for example through premature revenue recognition or recording fictitious revenues. The auditor therefore presumes that there are risks of fraud in revenue recognition and considers which types of revenue may give rise to fraud risks. For the Group the main income stream is rental income. The processing of rent charges is highly automated and rent increases are restricted. We therefore have assessed the risk of fraud in the recognition of rental income as low. Management Override Under ISA 240 there is a presumed risk of management override of the system of internal controls. Material misstatements can arise from management overriding the controls which are in place or by manipulating the results to achieve targets and the expectations of the stakeholders. Audit Work Performed Our audit is designed to provide reasonable assurance that the accounts are free from material misstatement whether caused by fraud or error. In particular, we reviewed revenue recognition and management control override. As part of the audit planning: We met management to discuss fraud related risks and the risk of material misstatement in the financial statements; Reviewed the Group s anti-fraud policies; Reviewed relevant internal audit work; and Reviewed the fraud register. At the audit visits: We assessed and tested the controls over income from rents and service charges, supporting people and other material sources if income, for example sales of properties; Assessed and tested the controls over cash and debtors and the segregation of duties in place; Assessed the controls over the maintenance of supplier details and changes to bank account details; and Assessed the controls over the raising and approval of manual journals and accounting estimates. Our audit did not highlight any significant errors in revenue recognition. Audit Management Letter 3

6 2. Summary of key audit issues Risk per Audit Plan Overview Housing Properties and Development The Group s funding structure has enabled a substantial development programme of approximately 500 units per year, although over 600 units is expected in the current year. During the year the Group acquired 42 units from AssetTrust. The audit risks for housing properties include: additions, including expenditure on replaced components, are not authorised or are not recorded correctly; additions to housing properties are not complete or the cut off at the year end is incorrect; the annual valuation is not performed on an appropriate basis; the annual valuation is not applied correctly in the financial statements; the carrying amount of housing properties in the balance sheet (particularly those held for sale given the annual valuation of other housing stock) is impaired; components which have been replaced are not removed from the carrying value; grants received becoming repayable due to delays in development completions; the depreciation charge is incorrectly calculated; and accurate reflection of the surplus/deficit on outright sales and shared ownership first tranche sales and subsequent staircasing. Audit Work Performed For the Group, works to existing properties (component additions) amounted to 7.7M and development costs to 45M. The revaluation at the year end added 24M to the property note. At our audit visits we: Evaluated and tested the key controls over the approving and recording of development expenditure, including development appraisal assumptions; Evaluated and tested the controls over the capitalisation of expenditure on major repairs and components versus the requirements of the SORP; Assessed the accounting policies for capitalising development overheads and interest on loans; Reviewed the useful economic lives of components to ensure they accord with best practice in the sector; Agreed the movements in the housing properties notes and the closing balances to valuation reports (see entry in Note 7); Considered whether there is any evidence of impairment and reviewed the Group s own assessment of impairment. Which did not highlight any matters; Considered the carrying amount of unsold properties for sale at the year end to ensure they are stated at the lower of cost and net realisable value; Assessed whether any grants received are repayable at the year end; Recalculated a sample of disposals to agree the resulting surplus or deficit; Reviewed the treatment of grant on a sample of disposals and transactions within the Recycled Capital Grant Fund; Performed a proof in total test on the depreciation charge for the year; and Agreed that accruals have been made for all development expenditure incurred up to 31 March (see entry in Note 7). Audit Management Letter 4

7 2. Summary of key audit issues Risk per Audit Plan Overview Welfare Reforms and Debtor Recoverability The Group s performance on rent arrears and bad debts is a key audit area given the recent difficult economic conditions and the introduction of the welfare reforms: 2013/14 saw the under occupancy charge and the benefit cap coming into effect. The Group is managing the impact of the welfare reforms through increasing the advice and support on money matters and benefits that it is providing to tenants. Audit Work Performed At the interim visit: We evaluated and tested the procedures for recovering rent arrears from current and former tenants; Reviewed relevant internal audit work; Discussed the impact of the under occupancy and welfare reforms on the Group s rent arrears; Discussed any changes in the methodology for the provisions against rent arrears with the Finance Team; and Assessed the adequacy of the provision at 31 March 2014 compared to the rent losses experienced in the current year. At the final audit visit: We agreed the calculation of the provision against current and former tenant rent arrears to the respective methodology. Both Festival and Worcester provide for 100% of former tenant arrears, whilst for current tenant arrears Festival applies an escalating percentage based on age, whereas Worcester also applies an escalating percentage but based on the value of the debt. A summary of the year end position is included on page 7 and we comment on the accounting estimate on page 9. VAT Cost Sharing Agreement Fortis Property Care (FPC) established a VAT Cost Sharing scheme on 1 October 2013 with Rooftop Housing and this will be in operation for its first full financial year to 31 March We reviewed the detailed cost sharing workings for the year and compared the rationale to that used and agreed in the prior year. Our work included detailed cut off testing at the year end to ensure transactions are in the correct period which drives the final cost sharing calculation which this year is a 236K debtor. Audit Management Letter 5

8 2. Summary of key audit issues Risk per Audit Plan Overview Financial Performance As part of our audit planning we will review the management accounts to date, for each Group entity, to gain an understanding of the issues specific to each Association for the year and to highlight any significant variances from budget. Audit Work Performed We compared financial performance in the management accounts to previous financial statements and related operational performance indicators to gain an understanding of each business and identify any areas that may have particular significance in the year to 31 March Any significant variances in the management accounts were identified and investigated to assess whether they are the result of control weaknesses. Right to Buy (RTB) Sales A RTB clawback agreement is in place. Under the terms of the agreement, RTB sales proceeds are shared between the Group and the relevant Council. We reviewed RTB sales in the year and the Group s calculation of the amount to be shared with the respective Council to ensure it is in line with the relevant agreement. Total RTB proceeds being 2.7M (2014: 2.5M) and retained surplus of 357K (2014: 282K). Asset Management Asset Management is of constant significance in terms of continuing Decent Homes Standards and planning future works to ensure that tenant homes are adequately maintained. Our audit included an assessment of the use of the stock condition survey as a planning and budgeting tool. We reviewed the programme of work for the year and performance versus the budget. We reviewed maintenance and voids expenditure and the controls over ordering and authorisation of repairs expenditure and that it is accounted for correctly. We also reviewed and tested the Group s capitalisation policy for expenditure on works to housing properties. Our work identified no significant weaknesses in the treatment of capitalised costs. Audit Management Letter 6

9 2. Summary of key audit issues An overview of Group financial results: Turnover 96,702 79,857 Operating costs and cost of sales (60,530) (49,683) Operating surplus for the year 36,172 30,174 Actuarial (loss) / gain on pension scheme (7,899) 5,645 The Group surplus has increased primarily due to: An increase in surplus within Festival Housing Limited which is partly driven by 2.4m of additional net rent receivable as a result of the annual rental uplift and also new properties being available to rent for the first time. Social Housing Letting costs increased to a lesser degree at 649k. Further, sales of 1 st tranche shared ownership properties also contributed an additional 1m and other outright sales generated an additional 1.5m compared to the prior year; and Similarly, an increase in surplus within Worcester Community Housing Limited which is driven by 1.8m of additional rent and service charge income as a result of the annual rental uplift and also new properties being available to rent for the first time. In addition, the Group s two defined benefit pension schemes both increased in liability at the year end following their respective actuarial assessment: Festival s actuarial loss being 5.1M and Worcester s being 2.8M. Group Key Performance Indicators Arrears 4.1M 3.4M As an indicator, overall arrears as a percentage of the rent debit increased compared to last year at 6.3% (2014: 5.6%). Voids 0.775M 0.525M Void losses comprise 1.08% of gross rental income (2014: 0.78%). For comparison, in the 2014 Global accounts for the sector voids for stock transfer associations averaged at 1.7%. Bad Debt Provision 1.6M 1.4M The bad debt provision has been reviewed and the proportion covered of former tenant and current tenant balances is appropriate. Coverage of the consolidated rental debtor amounts to 39.7% (2014: 40.3%). Audit Management Letter 7

10 3. Independence We have reviewed our independence and confirm that, in our professional judgement, this firm is independent within the meaning of regulatory and professional requirements and the objectivity of the audit engagement partner, Maria Hallows, and the audit staff is not impaired. In our review we concluded that: the firm is not dependent on the Group as a client due to the significance of the audit fee to the firm; the firm is not owed significant overdue fees; there is no actual or threatened litigation between the firm and the Group; no benefits have been received by the audit team which are not modest; the firm does not have any mutual business interest with the Group; no members of the audit team have any personal or family connections with the Group or officers; and independence is not impaired through the provision of services other than the statutory audit. Other services provided on an on-going basis to the Group include taxation services and the review of service charge accounts. In 2014/15 we also provided a review of the impact of FRS 102, particularly on financial instruments, and due diligence ahead of the new Group structure. We do not believe that the provision of these other services compromises our independence as auditors. Audit Management Letter 8

11 4. Qualitative Aspects of Accounting Practices and Financial Reporting Accounting Policies FRS 18 requires that entities should review their accounting policies regularly to ensure they are appropriate to its particular circumstances for the purposes of giving a true and fair view. The Group s Audit and Risk Committee plays a key role in this process. We have reviewed the Group s accounting policies as stated in the latest financial statements in detail and confirm that we judge them to be appropriate to provide relevant, reliable, comparable and understandable information. We suggested minor changes and presentational amends in our audit closing meeting which included additional policies for Recycled Capital Grant Fund, Disposal Proceeds Fund, Service Charges and Leaseholder Funds, Provisions, Property Managed on Behalf of Others, Bond Premium and Loan Finance Issue Costs. We note that the alignment of accounting polices across the individual entities was considered by the Group in the prior year and adjusted where necessary, for example, in stating housing properties at valuation in Worcester Community Housing Limited. Accounting Estimates Key accounting estimates for all Registered Providers concern the depreciation of housing properties, the level of bad and doubtful debt provision against tenant arrears and impairment provisions. We confirm that these estimates have been made appropriately in line with our knowledge of the Group and the industry, and are disclosed satisfactorily in the financial statements. We noted differences between Festival Housing Limited and Worcester Community Housing Limited in estimating asset lives and the provision for current tenant arrears. Such differences are not a particular issue of concern providing each entity can support their own accounting estimates; however, in the future it is worth monitoring asset lives and profile of tenant debt across the Group to ensure the respective estimates remain appropriate. We also noted a provision balance of 200K in Festival Housing Limited. This has been discussed with management post year end and the provision covers the expected costs. Timing of Transactions Our audit work confirmed that material transactions were recorded in the correct accounting periods. Accruals and prepayments were made for material items. Going Concern The financial statements have been prepared on a going concern basis. We have evaluated your assessment of the Group s ability to continue as a going concern for the foreseeable future and confirm that this assumption is appropriate. Board Report We have reviewed other information in the document containing the financial statements. We confirm that there is no material inconsistency between it and the financial statements. Audit Management Letter 9

12 5. Management Representation Letter In accordance with ISA 580, we obtain written representation from management that they acknowledge their responsibility for preparing the accounts and have made all information available to us. We presented our management representation letters to the Board to be signed off at the same time as the financial statements. There are no non-standard issues included in the management representation letter. 6. Audit Opinion We have provided an unqualified audit opinion on the financial statements for the year ended 31 March Audit Adjustments Our audit work is based upon an assessment of materiality to ensure there is no material misstatement contained in the financial statements. In assessing materiality we take into account both the materiality of the class to which the balance belongs and the overall impact of the balance on the income and expenditure account and balance sheet. ISA 260 requires us to report to management on all uncorrected misstatements identified during the audit, and to include in this report how we have calculated materiality, and any misstatements identified during the audit which have been corrected. We are not required to report on corrected or uncorrected misstatements we believe are clearly trivial. Materiality Our assessment of materiality was based on the first draft accounts received prior to the audit and calculated using a proportion of turnover, result for the year, net assets and liabilities and gross assets. This materiality level was reviewed over the course of the audit and was judged appropriate. We used a different materiality figure for Balance Sheet, and Income and Expenditure account items to reflect the Group s large asset base. Triviality is the value above which we report errors to you. A summary of the final assessment of materiality is as follows over the page: Audit Management Letter 10

13 7. Audit Adjustments (continued) Materiality (continued) I & E Materiality Balance Sheet materiality Triviality Fortis Living (parent) 43,645 23,012 1,151 Festival Housing Limited 804,095 2,136, ,810 Worcester Community Housing Limited 346,675 1,275,778 63,789 Fortis Property Care Limited 105,325 74,492 3,725 Corrected Misstatements Fortis Living (parent) - There are no corrected misstatements to report for the parent. Festival Housing Limited No corrected misstatements were identified that impact on the reported surplus for the year. The following items relate to balance sheet only: - Adjusted long term debtors of 28.1m to be disclosed on the face of the balance sheet as well as within the notes to the accounts due to the significance of the balance; - Amendments made to movements within the Housing Property note during the year to reflect reclassifications rather than include within the opening balances; and - Entries within creditors reclassified to more appropriate headings but within the same note. Worcester Community Housing Limited No corrected misstatements were identified that impact on the reported surplus for the year. The following items relates to balance sheet only: - Capital invoice received post year end but relating to the year of 470K adjusted to Housing Property costs under construction and accruals; and - The year end valuation adjustment to general and shared ownership properties has been amended (overall net movement 438K) which also adjusts reserves and the statement of total recognised surpluses and deficits. Fortis Property Care Limited - There are no corrected misstatements to report for Fortis Property Care Limited. Presentational and disclosure points on the Group s financial statements were discussed and agreed with the Finance Team prior to adjustment. Uncorrected Misstatements There are no uncorrected misstatements as a result of our audit work in the financial statements that are not of a trivial nature to the results of the Group or individual group members. Audit Management Letter 11

14 8. Accounting and Internal Control Systems We have tested the systems of internal financial control to the extent that we intended to place reliance on them in forming our audit opinion on the accuracy of the figures in the financial statements. Our audit work enabled us to place substantial reliance on the operation of key controls, as planned. ISA 260 requires that we report to those charged with governance any material weaknesses in internal control that we identify in the course of our audit work. A material weakness is one that could adversely affect the Group s ability to record, process, summarise, and report financial or other data so as to result in a material misstatement in the financial statements. Our audit work identified no such weaknesses. There were also no such weaknesses identified in last year s management letters (issued by us for Festival Housing Group and by Mazars LLP for Worcester Community Housing Limited). There were no significant issues raised following this year s review of key controls.. Beever and Struthers Date: Audit Management Letter 12