DEPARTMENT OF DEFENCE Briefing on Audit Outcomes Year ended 31 March 2010 AGSA AUDIT TEAM

2 Reputation promise/mission The Auditor-General of South Africa has a constitutional mandate and, as the Supreme Audit Institution (SAI) of South Africa, it exists to strengthen our country’s democracy by enabling oversight, accountability and governance in the public sector through auditing, thereby building public confidence.

3 Audit OpinionDescription Unmodified An unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view (or are presented fairly, in all material respects) in accordance with the applicable financial reporting framework. Unmodified (with emphasis of matter) The addition of such an emphasis of matter paragraph(s) does not affect the auditor’s opinion on whether the financial statements are fairly presented. Modified (Qualified) A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed but that the effect of any disagreement with management regarding departures from financial reporting framework, or limitation on scope is not so material and pervasive as to require an adverse opinion or a disclaimer of opinion. Summary of audit opinions

4 Audit OpinionDescription Disclaimer A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence to form an opinion and accordingly is unable to express an opinion on the financial statements. Adverse An adverse opinion is expressed when the effect of a disagreement with management regarding departures from the financial reporting framework is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements. Summary of audit opinions

55 Qualification: Tangible and intangible assets The department did not disclose any financial information for both the current and prior year. The department did not maintain a proper asset register, supported by relevant documentation. Existence, rights and obligations, completeness and valuation with regard to tangible and intangible assets could not be verified. Control deficiencies/ root causes Leadership Management did not have approved policies and procedures to guide management at the lowest level to ensure compliance with National Treasury disclosure requirements with regard to the recording and disclosure of the various categories of tangible and intangible assets. Financial and performance management Manual and automated systems are not adequate to facilitate the preparation and accurate recording and disclosure of the various categories of assets in the financial statements as required by National Treasury.

66 Qualification: Tangible and intangible assets (continue…) System deficiencies Insufficient direct involvement by the Accounting Officer and Chief Financial Officer in prior years. Management does not have approved policies and procedures. Project plans are not adequately monitored. Management did not ensure compliance with existing policies and procedures. Personnel are not aware of the requirements. Policies/instructions regarding asset counts are outdated. Lack of training of staff. The accounting officer and Chief Financial Officer do not exercise oversight responsibility over the progress of current projects. All assets and inventory are recorded on a system which is primarily a inventory system. All values are reflected at the latest purchase price. No interface between LOG and financial systems. No roll-up of various LOG and manual systems. No reconciliations between LOG and financial systems.

77 Qualification: Tangible and intangible assets (continue…) Actions by auditee A project plan to address the deficiencies in the assets register is in progress. Operation clean audit – Consortium.

88 Emphasis of matter: Irregular expenditure Irregular expenditure to the amount of R1 billion relating to employee cost. Control deficiencies/ root causes Leadership Insufficient monitoring of compliance with laws, regulations and policies. (Sec 55 of DOD act and DPSA regulations) System deficiencies Lack of leadership to ensure the effective monitoring of compliance with laws, regulations and policies. Actions by auditee Department in process of appointing a compliance officer.

99 Predetermined objectives: Reliability of reported performance information Validity, accuracy, and completeness of some of the reported targets could not be Verified. Control deficiencies/ root causes Leadership The department did not have the necessary key controls in place to effectively manage performance against predetermined objectives. Financial and performance management The record keeping pertaining to performance information was not adequate, resulting in information not always being readily available for audit. The performance information in the annual report was not adequately reviewed for completeness and accuracy prior to submission for audit.

10 Predetermined objectives: Reliability of reported performance information (continue…) System deficiencies Management does not have sufficient approved set procedures in place. No proper record keeping. No high level monitoring to ensure accurate reporting. Actions by auditee Implementation of standard operating procedures to ensure accuracy, completeness and validity. Isolation of responsibilities for reporting and record keeping.

11 Control deficiencies: Fundamental key controls Leadership Management did not have approved policies and procedures to guide management at the lowest level to ensure compliance with National Treasury disclosure requirements with regard to the recording and disclosure of the various categories of tangible and intangible assets. The department did not have the necessary key controls in place to effectively manage performance against predetermined objectives. Insufficient monitoring of compliance with laws, regulations and policies.

12 Control deficiencies: Fundamental key controls Financial and performance management Manual and automated systems are not adequate to facilitate the preparation and accurate recording and disclosure of the various categories of assets in the financial statements as required by National Treasury. The record keeping pertaining to performance information was not adequate, resulting in information not always being readily available for audit. The performance information in the annual report was not adequately reviewed for completeness and accuracy prior to submission for audit.

13 Control deficiencies: Fundamental key controls Governance The department did not have an approved fraud prevention plan. The internal audit function was not fully operational for the year under review. The Head of Internal Audit was not appointed.

14 Matters that could affect 2010/11 audit outcomes Background: Although no new qualifications for 2009/10 incurred, the following could impact on 2010/11. Contract with consortium expires 31/12/2010. Skills level of staff. Standard operating procedures. Possible risk areas: –Accruals –Leases –Employee benefits (leave, reserve force)

15 Contribution of audit team towards unqualified audit outcomes Actively monitor key controls – discuss with TCWG. Ensure clarity, simplicity and relevance of audit findings. Monitor progress against action plans. Audit of interim Annual Financial Statements. Communication process to enhance efficiencies. Timely identification of risks, linked to control weaknesses. Improve on current target dates.