1. CLEAN AUDIT PROGRAMME - COMMUNITY DEVELOPMENT 2012/13 07 January 2014 Community Development

2. INDEX  Introduction  Strategic Approach  Clean Audit  Core Reporting Findings Related Party and Grants Leases and Receivables Payables and Provision Disclosure  Core Asset Management  Other findings leading to sec 122  Compliance and AoPO

3. INDEX Introduction: Strategic Intent:  To sustain the unqualified audit opinion of the 2012/2013 financial year  To achieve a clean audit opinion for the 2013/2014 financial year

4. INDEX Strategic Approach  Confirmation of the resolution and management control of findings that led to a qualification 2011/2012.  Sustain the unqualified audit opinion of the 2012/2013 financial year.  Resolution that led to a qualified conclusion on AOPO.  Clean audit opinion 2013/2014.

5. INDEX Clean Audit  28 February 2014: hard close  Develop Action Plan to address the gaps  Define clean audit and list critical focus areas  Develop an action plan  List risks  Develop a mitigation plan  List internal controls deficiencies  Develop action plan to address internal controls deficiencies

6. Material Amendments- Section 122 Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Annual Financial Statement (Summary Of all Misstatements) Sec 122 27 findings relating to material misstatements Completeness Valuation, Existence, Rights and obligations. HIGHTotal value of adjustments of AFS was over R6 billion Controls were not implemented by management over daily and monthly processing of transactions to ensure that correct balances were recorded in the AFS. Management must ensure implementation and monitoring of controls over daily and monthly processing of transactions to ensure that correct balances were recorded in the AFS. Timeous review of AFS by independent parties other than the preparer Timeous correction of errors before AFS are finalized ( Water, Power and Pikitup and other journals)

7. Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Related Parties 2 Classification and Completeness HIGH The whole related party note changed by R 6 billion and net effect was R 94 million  Lack of review and monitoring of related party confirmations and transactions.  Intercompany transactions and balances will be confirmed between counterparties on a monthly basis by senior officials and in a standardized template across the City.  As part of monthly reviews all confirmations will be compared to the General Ledger to ensure that they agree  At interim, a draft consolidation will be prepared which will require all departments and entities to close off intra and intercompany transactions and balances and the relevant elimination entries prepared Obligations arising from conditional grant 1ClassificationHIGHTotal adjustment: R75 million  The financial statements and the supporting information were not adequately reviewed for compliance with the GRAP 23.  AFS to be reviewed extensively by Reporting then Submitted to internal audit/service provider for independent review before submission to audit.  Training to be conducted on new accounting developments. Related Parties and Grants

8. Leases and receivables Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Lease 3 Valuation, Disclosure (Completeness) Medium Total value of adjustment: R9 million Net effect R7 million on Lease obligation  Inadequate review of lease schedule to ensure that the correct spot rate is used  Finance heads should review financial information and sign- off after a proper review has been done.

9. Payables and Provisions Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Trade and other payables 3 Existence and Completeness HIGH Total value of adjustment: R204 million Net effect R79 million on Lease obligation  Regular review of creditors listing  Proper record keeping was not implemented by management to ensure that complete, relevant and accurate information is accessible and available to support financial reporting.( i.e. creditors listing, ageing of creditors etc.)  All amounts to be supported by a creditors listing.  Review and follow up the creditors listing for overdue payments.  Record transactions when they occur and timely i.e. accruals.

10. Disclosure Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Presentation and Disclosure 3 HIGH  Lease disclosure changed  Accounting policies changed  Related party disclosure changed  Inadequate review of financial statements disclosure to ensure they fully comply with GRAP.  Develop a checklist that covers both the standard of GRAP and laws and regulations (MFMA, SCM etc.)  Use the checklist to review the AFS before submission for audit.

11. CORE ACCOUNTING: ASSETS

12. ASSETS Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Assets14 Completeness Disclosure (Classification) Valuation HIGHTotal value of Adjustment: R 2.6 Billion Net effect: R304 million  Lack of robust reconciliation process  Different registers are manually run off the system and consolidated to make the Final fixed asset register  Timely review and capitalisation of completed projects.  Consolidations of asset register on SAP.  Regular review of Assets register by appropriate level of management  A regular reporting of projects stage of completion by departments and MoE’s.

13. ASSETS Area No. Of Finding Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Depreciatio n on the fixed asset register is overstated / Completed assets classified as Work In Progress 3Classification and Valuation HIGHTotal value of adjustment: R1.6 Billion  Departments waiting for completion of the entire project to be completed and not account for the project in phases as and when a significant identified asset is ready and available for use.  Not have sufficient site visits from both the finance team at the department level and the central office. Management will ensure that regular review of work in progress accounts are performed regularly to ensure that assets are recognized as and when they are ready and available for use. Conducting Site visits A standard procedure (template) for the accounting of WIP will be developed; this will be the procedure that MoE’s and Departments will use going forward. A report detailing all projects not capitalized and the problems which hindered such capitalization must be sent to Director Financial Reporting so that he is able to report to the Group CFO if necessary On a monthly basis, MoE’s must submit a progress report for each project under construction.

14. Impairment Area No. Of Findings Assertions Level of Risk Value of Adjustment s WeaknessProposed Controls Impairment Assessment on Assets (Buildings) 1 Valuation Medium Total value of adjustment: Not quantified  Lack of understanding of the impairment assessment process for an indicator.  Update the existing impairment policy  Conduct training and workshops with Department to create the awareness of the updated policy and assist in the implementation process.

15. ASSETS Other findings affecting section 122

16. Employee costs and Consumer Debtors/Deposits Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Employee Costs 6 Compliance to HR Policy Authorization Medium Total value of adjustment: R1.3 million Net effect R 800k on Employee Costs  Human resources personnel do not adhere to the recruitment selection and appointment process when appointing new candidates  Human resources management does not review policies and procedures on an annual basis.  there’s lack of monitoring of compliance by senior management  Timely review and approval of policies.  Regular follow up by Internal Audit to ensure proper recruitment processes for all newly employed individuals.

17. Compliance and AOPO related findings

18. Area No. Of Findings Assertions Level of Risk Value of Adjustments WeaknessProposed Controls Governance and Related Matters 2ComplianceHIGH No financial adjustment  Lack of monitoring of legislative requirements.  Monitor the legislative requirements and report on non-adherence to those on a quarterly basis. Operating expenditure ComplianceHIGHNo adjustment value  Record keeping was not implemented properly to ensure that complete, relevant and accurate information is accessible and available on time to support compliance with relevant laws and regulation on all competitive awards made.  Management to review the municipality's expenditure and follow up on invoices which have not been paid within 30 days and invoices which are close to the due date and ensure that they're paid before the 30 days lapses.  Review transactions on a monthly basis to ensure that they are recoded in the correct financial period. Compliance and AoPO