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Independent Auditor's Report

Australian National Audit Office letterhead

INDEPENDENT AUDITOR’S REPORT

To the Prime Minister

Opinion

In my opinion, the financial statements of the Department of the Prime Minister and Cabinet (the Entity) for the year ended 30 June 2020:

  1. comply with Australian Accounting Standards – Reduced Disclosure Requirements and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and
  2. present fairly the financial position of the Entity as at 30 June 2020 and its financial performance and cash flows for the year then ended. The financial statements of the Entity, which I have audited, comprise the following as at 30 June 2020 and for the year then ended:
  • Statement by the Secretary and Chief Financial Officer;
  • Statement of Comprehensive Income;
  • Statement of Financial Position;
  • Statement of Changes in Equity;
  • Cash Flow Statement;
  • Administered Schedule of Comprehensive Income;
  • Administered Schedule of Assets and Liabilities;
  • Administered Reconciliation Schedule;
  • Administered Cash Flow Statement; and
  • Notes to the financial statements, comprising a summary of significant accounting policies and other explanatory information.

Basis for opinion

I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the Entity in accordance with the relevant ethical requirements for financial statement audits conducted by me. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) to the extent that they are not in conflict with the Auditor-General Act 1997. I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Key audit matters

Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the current period. These matters were addressed in the context of my audit of the financial statements as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters.

Key audit matter

How the audit addressed the matter

Valuation of the Administered Investments in Corporate Commonwealth entities and companies

Refer to Note 4.1C ‘Investments in Corporate Commonwealth entities and companies’

I focused on this balance given the significant value of these investments to the financial statements and the judgement and estimation involved in determining the fair value of these investments.

These investments are valued by the Entity at the reported net assets of each investee. A significant portion of some investees’ assets are valued using discounted cash flow methods.

The complexity of these valuations increased in comparison to prior years due to uncertainty associated with determining the impact of COVID-19 pandemic on future cash flow estimates used in the assets valuation models. This was particularly the case for the following investees as the value of these entities’ assets are significantly based upon discounted cash flow models:

· Indigenous Business Australia (IBA), given the number of loans under the Home Ownership Program and the Business Development and Assistance Program that are impacted by a forward looking estimate of expected credit losses which needs to take into account current and future economic conditions; and

· Indigenous Land and Sea Corporation (ILSC), given the significant decrease in domestic and international travel as a result of the pandemic which has impacted the valuation of its non-financial asset, Ayers Rock Resort due to the impact of reduced visitor numbers on the expected future cash flows.

As at 30 June 2020 the value of the investments recognised for:

· IBA was $1.552 billion; and

· ILSC was $455 million.

To address the key audit matter I have:

· for each investee whose net assets are significantly based on discounted cash flow models:

§ assessed the competence and objectivity of management’s experts who valued those assets;

§ assessed the reasonableness of assumptions underpinning future cash flows, particularly future revenue and cost assumptions against estimates contained within corporate plans produced by each investee;

§ assessed the reasonableness of the probabilities of scenarios applied within the models in respect of the impact of COVID-19 against experience during the pandemic period up to 30 June 2020 and market expectations around the timing of border restrictions easing, leading to increased travel and improved economic conditions;

§ assessed the reasonableness of the methodology used for estimating forecast inputs to the credit risk margin which included comparing for consistency against principles applied in management’s expert’s reports and where possible assessing the inputs adopted against observable or other corroborative information;

§ assessed the reasonableness of assumptions underpinning the selection of an appropriate discount rate, particularly specific risk and market premiums; and

§ considered the sensitivity of the valuation by adjusting the discount rate, terminal value growth rate and probabilities attached to future scenarios to other outcomes that I considered reasonably foreseeable, in order to confirm the value of the investment calculated was within a reasonable range.

Existence, completeness and valuation of assets and liabilities transferred to the National Indigenous Australians Agency

Refer to Note 8.2 Restructuring

On 1 July 2019, the Indigenous Affairs functions of the Entity transferred to the newly created National Indigenous Australians Agency (NIAA). Assets and liabilities associated with those functions transferred from the Entity to the NIAA.

The Entity transferred $140.7 million in departmental assets and $66.8 million in departmental liabilities. It also transferred $1.125 billion in administered assets and

$35.0 million in administered liabilities. I focused on the existence, completeness and valuation of the Entity’s recording of that transfer, as it constituted majority of assets and liabilities of the Entity.

Significant disclosure related to the transfer of functions is also required by the Entity in accordance with the Public Governance, Performance and Accountability Financial Reporting Rule 2015 and Australian Accounting Standards.

To audit the existence, completeness and valuation of the assets and liabilities transferred, I performed the following audit procedures:

· assessed whether the assets and liabilities transferred were recorded in accordance with the agreement between the Entity and NIAA;

· assessed whether the assets and liabilities were recorded at net book value immediately before the transfer of functions; and

· assessed the Entity’s Restructuring note disclosure accorded with the Public Governance, Performance and Accountability Financial Reporting Rule 2015 and Australian Accounting Standards.

Accountable Authority’s responsibility for the financial statements

As the Accountable Authority of the Entity, the Secretary is responsible under the Public Governance, Performance and Accountability Act 2013 (the Act) for the preparation and fair presentation of annual financial statements that comply with Australian Accounting Standards – Reduced Disclosure Requirements and the rules made under the Act. The Secretary is also responsible for such internal control as he determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Secretary is responsible for assessing the ability of the Entity to continue as a going concern, taking into account whether the Entity’s operations will cease as a result of an administrative restructure or for any other reason. The Secretary is also responsible for disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the assessment indicates that it is not appropriate.

Auditor’s responsibilities for the audit of the financial statements

My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

  • identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
  • obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Entity’s internal control;
  • evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Accountable Authority;
  • conclude on the appropriateness of the Accountable Authority’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity’s ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor’s report. However, future events or conditions may cause the Entity to cease to continue as a going concern; and
  • evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

I communicate with the Accountable Authority regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

From the matters communicated with the Accountable Authority, I determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. I describe these matters in my auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, I determine that a matter should not be communicated in my report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Australian National Audit Office

Grant Hehir - Auditor-General

Grant Hehir

Auditor-General

Canberra

22 September 2020