1. Consolidation challenges experienced and what audit committees can focus on when finalizing departmental AFS

2. Page 2 Overview 1. Can the economy afford 2. Role of Audit Committees on AFS 3. National Treasury – balancing the books 4. What we found on consolidation 5. Conclusion 5 th Annual Audit Committee Conference

3. Page 3 Can the economy afford Minister Nene highlights “The fiscal gap” Economic is weak due to a number of factors including higher electricity tariffs and security of supply by Eskom Projected growth of 2% this year, up from last year’s 1,5% with 2.4% and 3% in the next 2 years. Risk of high wage settlement for public servants Short term prospects for faster growth lay in less energy intensive, high job- creating sectors such as tourism, agriculture, light manufacturing and housing construction 5 th Annual Audit Committee Conference

4. Page 4 Role of Audit Committees on AFS Consider the effectiveness of the financial reporting process a. Can the controls yield correct financial information. b. How were these controls tested and by whom (reasonable assurance) c. Did the assurance provides deploy the right assurance skills c. How robust are the IT controls in particular (general and application controls) d. How strong is the IT function 5 th Annual Audit Committee Conference

5. Page 5 Role of Audit Committees on AFS Consider the effectiveness of the financial reporting process a. What about the competence of the finance function The Chief Finance Officer Support team Performance Reviews Feedback from internal and external audit Feedback from Management 5 th Annual Audit Committee Conference

6. Page 6 National Treasury – balancing the books There is not enough money in the purse Eskom South African Airways SA Post Office The wage bill 5 th Annual Audit Committee Conference

7. Page 7 The consolidation process Consolidation process starts in October each year (NT already considered by now) Review through a Special AC meeting in November each year Consider National Revenue Fund, Public Entities and Departments Consider Management Reports from AG on the consolidated annual financial statements 5 th Annual Audit Committee Conference

8. Page 8 What we found on consolidation - Departments Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements Part B. Matters to be brought to the attention of the users Part C. Findings on non-compliance with legislation Part D. Internal Control Part E. Assessment of assurance providers Part F. Fraud 5 th Annual Audit Committee Conference

9. Page 9 What we found on consolidation – Nat Departments Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidates financial statements 5 th Annual Audit Committee Conference Disclosure Note- Commitments NoteOccurred in the Previous year Impact R Current Year Impact R Prior Year Number of depts qualified or adverse opinions due to respective audit teams not able to obtain sufficient appropriate audit evidence to substantiate the amounts, in particular - commitments. AG unable to determine whether any adjustments to the disclosure note in the consolidated financial statements were necessary. YESR8.4 bilR5.9 bil

10. Page 10 What we found on consolidation – Nat Departments Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements 5 th Annual Audit Committee Conference All National DepartmentseOccurred in the Previous year Impact R Current Year Impact R Prior Year Number of depts submitted financials containing uncorrected misstatements, immaterial at departmental level. On consolidation, the cumulative effect of misstatements materially impacts the statement of financial position (SoFP), the statement of financial performance (SoCI) and disclosure notes. YESSoCI R3.1 bil SoFP R3.4 bil Notes R10 bil SoCI R0.9 bil SoFP R2.2 bil Notes R3.4 bil

11. Page 11 What we found on consolidation – Public Entities Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements – Not corrected 5 th Annual Audit Committee Conference Material misstatements not corrected Revenue from non-exchange transactions Revenue from exchange transactions General exp, Provisions, Operating leases commitments, Irregular expenditure, Operating lease receivables Occurred in the Previous year Impact R Current Year Impact R Prior Year Number of entities qualified or adverse opinions due to respective audit teams not able to obtain sufficient appropriate audit evidence to substantiate the amounts, in particular - commitments. AG unable to determine whether any adjustments to the disclosure note in the consolidated financial statements were necessary. YESR7.2 bil R8.2 bil R8.5 bil R18.4 bil R7.1 bil R37.9 bil R7.2 bil R2.8 bil R7.4 bil R6.7 bil R8. bil R7.4 bil R4.0 bil R7.4 bil

12. Page 12 What we found on consolidation – Public Entities Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements – Not Corrected 5 th Annual Audit Committee Conference AllOccurred in the Previous year Impact R Current Year Impact R Prior Year Number of entities submitted financials containing uncorrected misstatements, immaterial at departmental level. On consolidation, the cumulative effect of misstatements materially impacts the statement of financial position (SoFP), the statement of financial performance (SoCI) and disclosure notes. YESSoCI R5.4 bil SoFP R17.4 bil Notes R8.3 bil SoCI R4.6 bil SoFP R1.8 bil Notes R1.2 bil

13. Page 13 What we found on consolidation – Public Entities Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements – Not Corrected 5 th Annual Audit Committee Conference AllOccurred in the Previous year Impact R Current Year Impact R Prior Year AG not able to obtain sufficient appropriate audit evidence as to the completeness and accuracy of the elimination of inter-entity transactions and balances. Alternative procedures could not be performed to obtain reasonable assurance that inter-entity transactions and balances were eliminated in full. YESUnknown

14. Page 14 What we found on consolidation – Public Entities Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements – Not Corrected 5 th Annual Audit Committee Conference AllOccurred in the Previous year Impact R Current Year Impact R Prior Year AG not able to obtain sufficient appropriate audit evidence with respect to a number of GBEs that prepared and submitted for consolidation, unaudited financial statements for the year ended 30 June 2014. Alternative procedures could not be performed to obtain reasonable assurance that the financial statements of these entities present fairly its financial position, financial performance and cash flows. YESUnknown

15. Page 15 What we found on consolidation – Public Entities Section 2. Matters relating to the auditor’s report Part A. Misstatements in the consolidated financial statements - Corrected 5 th Annual Audit Committee Conference AllOccurred in the Previous year Impact R Current Year Impact R Prior Year Conversion journals submitted by individual entities were incorrectly processed resulting in misstatements on multiple accounts and thus misstatement of the statement of financial position (SoFP) and the statement of financial performance (SoCI). -SoCI R6.7 bil SoFP R14.8 bil SoCI R33.3 bil RSoFP R105.4 bil

16. Page 16 Lessons from these findings 5 th Annual Audit Committee Conference Root CauseHow can we correct this Lack of sufficient audit evidence – failure to maintain proper accounting records and journals (including for commitments) Recording of income of accrual basis instead of cash basis Back to basics. Training of staff on record keeping, review by management on approvals, better utilization of risk management and internal audit Training on accounting standards, increased supervision and review. Internal involvement (FDR)

17. Page 17 Lessons from these findings 5 th Annual Audit Committee Conference Root CauseHow can we correct this Failure to record transactions on uploading to systems – GRAP 9 Revenue from exchange Operating leases not correctly recorded- poor state of accounting records Improved IT systems and regular testing. Supervisory control Appreciation of accounting standards. Training on record keeping, supervisory controls, internal audit & risk management involvement

18. Page 18 Lessons from these findings 5 th Annual Audit Committee Conference Root CauseHow can we correct this Failure to review and assess capitalized value of pensions and pension actuarial adjustments. Non compliance with GRAP 19 Provisions Lack of adequate system for identifying and recognizing all irregular expenditure Training on accounting standards, supervisory controls Better utilisation of IT system

19. Page 19 Lessons from these findings 5 th Annual Audit Committee Conference Root CauseHow can we correct this Material errors due to basic errors e.g. guarantee recorded as a long loan, incorrect exchange rate used, recurring misstatements Lack of consequence management – leadership issues.

20. Page 20 Lessons from these findings Do we have the right people on these jobs- recruitment process – quality of supervision Is the combined assurance model effective How effective is risk management in the entities and departments How do we support the CFOs so that they can perform better What about the IT systems For how long do we entertain these repeat findings What is the role of the Audit Committee on all these. 5 th Annual Audit Committee Conference

21. Page 21 Conclusion – Emerging risks IT Governance and IT risks- Cyber risks (Corporate governance of information technology and communication technology policy framework – DPSA and GITO) Increasing compliance environment Revision of Treasury Regulations Continued enhancement of according standards Strengthening of finance departments More vigilant Audit Committees 5 th Annual Audit Committee Conference

22. Page 22 THANK YOU 5 th Annual Audit Committee Conference