Planning and Interim Audit Highlights - Nottingham City Homes

Planning and 

Interim audit 

highlights 

memorandum 

Nottingham City Homes 

April 2012 

FINAL

Planning and Interim audit highlights memorandum 

The contacts at KPMG 

in connection with this 

report are: 

1 Executive summary 

Page 

Steve Aggett 

Director 

Tel: 0161 2464156 

Mob: 07973 161707 

Steve.aggett@kpmg.co.uk 

Sarah Porter 

Senior Manager 

Tel: 0121 6095981 

Mob: 07920 139012 

Sarah.porter@kpmg.co.uk 

■ Introduction 2 

■ Summary of key findings 2 

2 Planning and Interim audit scope 3 

3 Key audit issues and risks 4-5 

4 Timetable, reporting and fees 6 

Appendices 

A. Your audit team 

7 

Kusha Vatish 

Assistant Manager 

Tel: 0121 232 3610 

Mob:07909 585955 

Kusha.vatish@kpmg.co.uk 

© 2012 KPMG LLP, the U.K. member firm of KPMG International, a Swiss cooperative. All rights reserved. This document is confidential 

and its circulation and use are restricted. 

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 

1

1 Executive summary 

Introduction 

The purpose of this report is to set out our planned audit approach for Nottingham City Homes 

(‘NCH’) and also matters that came to our attention during the course of our interim audit for the 

year ended 31 March 2012. The objective of our interim was to review and assess the systems 

and control environment operating at NCH and to make useful comments and suggestions for 

you to consider. However, you will appreciate that our routine audit work is designed to enable 

us to form an opinion on the financial statements of NCH and it should not be relied upon to 

disclose all irregularities that may exist nor to disclose errors that are not material in relation to 

those financial statements. 

The content of this paper comprises general information that has been provided by, or is based 

on discussions with, Management and staff of NCH. This report is provided on the basis that it 

is for the information of the Audit Committee and Management of NCH and that it will not be 

quoted or referred to, in whole or in part, without our prior written consent. 

Summary of key 

findings 

Background 

We commenced our engagement with NCH in February 2012 and this is the first year of our 

audit. Following the commencement of our work we have met with Management and started 

our planning for the audit of the 2011/12 financial statements. Our interim audit was conducted 

during the week commencing 5 March 2012. 

Results of planning procedures 

Through our planning procedures, detailed on page three, we have identified a number of key 

audit risks which may impact on our audit. We have documented our initial view of how these 

risks are being managed and the potential impact on our audit work on pages four and five. 

Highlights from interim 

The Group has effective financial reporting activities and as such we have found that the 

internal control environment operates satisfactorily. Specific highlights include: 

■ 

■ 

■ 

■ 

year end stock take was appropriately designed and executed; 

expenditure was found to be appropriately authorised; 

bank reconciliations had been undertaken effectively; and 

management supervisor controls were effective. 

We have provided more detail on the areas we have reviewed on page three. 

Areas for improvement 

Through our planning and audit work so far we have found the key financial controls to be 

operating effectively and have therefore not raised any formal recommendations at this stage. 

Our final audit is due to commence on 11 June 2012. We will continue our assessment of the 

control environment and report on any material issues noted within our audit to those charged 

with governance in the final management letter. 




2

2 Planning and Interim scope 

Planning Approach 

We use a risk based audit approach to identify the key risks affecting NCH. This is based on our sector experience and 

our planning meetings with NCH staff. Our audit work will therefore focus on your key risk areas. We set out the areas 

we have identified in section three. 

Since this is the first year of the audit, we have invested time during our planning and interim work in understanding the 

business and the environment in which NCH is operating. This has included: 

■ 

■ 

■ 

■ 

■ 

■ 

■ 

■ 

The Engagement Director meeting with Director of Finance; 

The Audit Senior Manager meeting with Head of Finance; 

Enquiries with the Company Secretary; 

Enquiries with Internal Audit; 

Review of internal audit reports; 

Review of NCH’s business plan, management accounts, risk register and other core documentation; 

Review of prior year information (e.g. financial statements, audit management letter and Council letter of support); 

and 

Review of minutes of the Board and Committees. 

Interim Scope 

Our interim audit work was undertaken during March 2012. Our audit process involves the identification of the key risk 

areas and review of NCH’s processes, systems and controls in order to assess risk and develop our audit objectives and 

focus. 

The work we carried out during our interim audit included review and documentation of key processes and identification 

and testing of key high level controls to confirm our understanding of the control framework within which the business 

operates, key controls include: 

■ 

■ 

■ 

■ 

■ 

payroll controls and control account reconciliations; 

debtors and creditors reconciliations; 

bank reconciliations; 

expenditure authorisation; and 

management supervisory controls. 

Having assessed the controls, and determined those areas where residual risk exists, where there is a material bearing 

upon the financial statements we will undertake substantive testing to gain the necessary audit assurance. 

Our interim audit and discussions with NCH’s Management enabled us to identify, as far as possible, any potential 

issues which may affect year end reporting. Our aim is to seek to ensure that there are no late surprises in the audit 

process and that any matters identified are communicated to Management at the earliest opportunity. 

Our final audit procedures will include a roll forward of our interim audit work on the control environment operating at 

NCH, in order to confirm that these controls have continued to operate effectively since our interim audit. 

During our work to date we have made no observations and recommendations for NCH management to consider. 

Stock Take Procedures 

The majority of NCH stock is held at Harvey Road, with some stock held in repairs vans. We attended the year end 

stock take on 31 March 2012 at Harvey Road. Through observations and discussions with management, we 

■ reviewed the controls and procedures around the stock count; 

■ selected a sample of items from the stock listing and re-counted; and 

■ observed obsolete stock and obtained a listing. 

We were informed that variances from the stock system to the stock count were identified. We will ensure that 

adjustments are processed appropriately and necessary write downs for obsolete stock are actioned during our final 

audit process. 




3

3 Key audit issues and risks 

We have considered some of the key risks currently facing Nottingham City Homes and the wider local government and 

housing sectors. We have discussed these risks with management during our interim review and provided an updated 

position regarding the ongoing management of these risks and considered the impact on our audit. 

Audit Issue 

Changing government policy and impact on the 

future of NCH 

The significant changes proposed in relation to welfare 

reform and a self financing Housing Revenue Account 

are expected to have an impact on management fees 

and result in pressures on Nottingham City Council’s (the 

Council’s) cost base. 

NCH are therefore under ongoing pressure to deliver 

services more efficiently and demonstrate value for 

money. 

Managing the pension deficit 

NCH operates a Local Government Pension Scheme 

(LPGS) which has a significant pension deficit. It will 

therefore will be affected by the proposed changes to 

public sector pension arrangements. Changes include: 

• Reform of the LGPS scheme, both in terms of short 

term cost reduction (through increased contributions) 

and longer term benefit changes (move from final 

salary to career average basis). Some of the 

Association’s staff are members of this scheme; and 

• Requirement to auto-enrol employees in a pension 

scheme, which will mean processes need to be put in 

place to achieve this (including the choice of 

scheme). 

As at 31 March 2011, the pension deficit was £18.6m 

Tax compliance 

Currently all ALMO’s have an arrangement with HMRC 

whereby income from the Council to fund the ALMO’s 

core activities is exempt from Corporation Tax. 

However, if the ALMO offers its services to third parties, 

those transactions will be classified as trading 

transactions and any taxable profits will be subject to 

Corporation Tax. 

Historically, NCH has generated minimal ‘other income’ 

and therefore has not been required to pay Corporation 

Tax or include a provision in its accounts. 

Interim Update and Impact on our audit 

Interim update 

NCH has faced significant funding cuts with a reduction in 

the management fee of circa £3m. 

Through discussions with Management, we have also been 

made aware that NCH is exploring other sources for 

generating income, which include the provision of services 

to Registered Providers and other local authorities, for 

example housing management and maintenance services. 

Impact on our audit 

As part of our final audit we will discuss with Management 

potential implications on the activities of the business and 

will seek to identify opportunities for cost savings, 

efficiencies and streamlining controls. 


The 31 March 2012 pension deficit position will be 

determined by Barnett Waddingham, the Nottinghamshire 

County Council Local Government Pension Scheme 

Actuary. 

Given the size of the deficit and the fact that it results in a 

negative balance sheet position for the Company, NCH 

receives a letter of support from the Council. 


We will involve our pensions experts as part of our final 

audit to assess the reasonableness of the pensions 

assumptions used by the Actuary. 

We will discuss with Management the wording required in 

the Council’s letter of support. 

In addition, we will provide updates to Management and the 

Audit Committee of the changes in local government 

pension arrangements. 


At the time of our interim review, there was a small amount 

of other income generated for the year. However, given 

NCH’s intention to explore other income generating 

activities, i.e. providing additional services to Registered 

Providers, it will need to consider the potential tax 

implications. 


We do not anticipate there to be significant income from 

non-Council sources in 2011/12, however we will review this 

at the year end and involve our tax colleagues where 

necessary. 




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3 Key audit issues and risks (continued) 

Audit Issue 

Accounting for Provisions 

As per FRS 12, a provision can be recognised if the 

following can be demonstrated; 

■ 

■ 

■ 

a present obligation (legal or constructive) has 

arisen as a result of a past event (the obligating 

event); 

payment is probable ('more likely than not'), and 

the amount can be estimated reliably. 

As at 31 March 2011, there was a provision of £2.8m in 

relation to the NCH restructure and redundancy 

programme. 

Interim Update and Impact on our audit 


Discussions with management have confirmed that part of the 

2010/11 provision has been released during the year and 

further costs are due be incurred during 2012/13, requiring 

additional provisions to be recognised. 

Impact on audit 

As part of the final audit, we will confirm that movements in 

provisions have been correctly accounted for in the year. We 

will also pick a sample of redundancy and associated costs 

and agree to supporting documents and calculations. 

Expenditure Cut Off 

Repairs and Maintenance is a significant cost for NCH 

with services provided through NCH’s Direct Labour 

Organisation (DLO), with all costs directly reimbursed 

by the Council once jobs are complete. 

It is important that this expenditure and associated 

income is correctly recognised in the accounts of NCH, 

recorded in the correct period and that stock and work 

in progress (WIP) are identified and accounted for 

appropriately. 


We have attended the year end stock take and documented 

processes and controls over the processing and management 

review of non-pay expenditure. 

Impact on audit 

During our final audit we will review cut off procedures to 

assess whether costs are accounted for in the correct period 

and work in progress is correctly recognised. 

We will also review the accounting for variations and 

adjustments highlighted as a result of the year end stock 

take. 




5

4 Timetable and reporting 

Timing of our work 

We commenced our audit of NCH in February 2012. We have summarised below the timeline for our work in 2011/12 to 

indicate when each component of the audit will be delivered and how this will be aligned to your reporting dates. 

From 2012/13 onwards, our planning will commence from September. 

February 2012 

KPMG 

commenced 

audit planning 

May 2012 

Presentation of 

Planning and Interim 

Audit Memorandum to 

Audit Committee 

11 June 2012 

Final audit 

commences 

July 2012 

Presentation of Highlights 

Memorandum and 

Management Letter to Audit 

Committee 

Sep 2011 Jan 2012 Feb Mar Apr May Jun Jul Aug Sep 

5 March 2012 

Interim audit starts 

June 2012 

Final Audit Clearance 

Meeting 

August 2012 

Audit opinion issued 

Fees 

Our fees for the 2011/12 audit (excluding VAT) is £19,000. 

The fee based on the following assumptions: 

• We will not charge out of pocket expenses; 

• Your management will prepare financial statements in-house and to a good standard. These will be ready on 

the first day of our final accounts audit – 11 June 2012; 

• A full Prepared by Client list is available on the first day of the audit – 11 June 2012; 

• We will only receive two draft iterations of the financial statements (the first draft and a second draft) prior to 

the final set being made available for signing; 

• We are able to conduct normal audit procedures; 

• The annual report is available on the first day of our final accounts audit; 

• We are able to place reliance upon the work of your internal auditors (to the extent that work is agreed at the outset 

of each financial year); 

• There are no significant changes to the size or scale of operations of NCH; and 

• Group reporting to Nottingham City Council auditors is not required. 

If there are any variances to the above timetable or information is not made available to us in a timely manner, we will 

discuss the impact on our audit fee with you before any additional costs are incurred. 




6

Appendix A 

Your audit Team 

Name 

Position 

Steve Aggett 

Director 

Role ■ Steve will lead our audit service to NCH and will be responsible for 

ensuring that we provide the highest quality of audit and that your 

needs and expectations are met. Steve will be the key point of contact 

for the Audit Committee and Director of Finance. 

Contact details Tel: 0161 2464 156 

Mob: 07973 161 707 

Steve.aggett@KPMG.co.uk 

Name 

Position 

Sarah Porter 

Senior Manager 

Role ■ Sarah will be responsible for the management of the audit and the day 

to day decisions. Sarah will ensure that Management are made 

aware of any issues that may arise and will be the day to day contact 

for the Director of Finance and Head of Finance. 


Mob: 07920 139 012 

Sarah.porter@KPMG.co.uk 

Name 

Position 

Kusha Vatish 

Assistant Manager 

Role ■ Kusha will be responsible for overseeing the delivery of the audit, and 

will lead the team on site during our final audit visit. She will ensure 

that Company personnel are made aware of any issues that may 

arise. 


Mob: 07909 585 955 

Kusha.vatish@KPMG.co.uk 




7

© 2012 KPMG LLP, the U.K. member firm of KPMG 

International, a Swiss cooperative. All rights reserved. This 

document is confidential and its circulation and use are 

restricted. 

KPMG and the KPMG logo are registered trademarks of 

KPMG International, a Swiss cooperative. 

The KPMG name, logo and ‘cutting through complexity’ are 

registered trademarks or trademarks of KPMG International 

Cooperative (KPMG International).

Planning and Interim Audit Highlights - Nottingham City Homes

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