Kingston Council's Audit, Governance and Standards Committee has approved the external audit plan for the 2025-26 financial year, presented by KPMG. The plan outlines the approach to auditing the council's statement of accounts and the Kingston Pension Fund accounts.
Key risks identified for the council's accounts include the valuation of post-retirement benefit obligations and the potential for management override of controls. If management override of controls is realized, the primary consequence is the potential for fraud and the preparation of fraudulent financial statements by overriding effective controls. This is a presumed risk across all audits.
KPMG partner Joanne Lees presented the plan, noting that the scope of the audit is consistent across local authorities and determined by auditing standards. The audit fee for the council's accounts is set at £353,000, with an additional £63,000 for non-audit services. The fee for the pension fund audit is £100,000.
Addressing Identified Risks
KPMG will employ several methodologies to address the identified risks. For the valuation of post-retirement benefit obligations, KPMG plans to understand the council's processes for setting actuarial assumptions, evaluate the competency and objectivity of actuaries, and assess their methodology and key assumptions. They will also agree on the data provided by the council to the Scheme Administrator, evaluate the design and implementation of controls for setting assumptions, and challenge key assumptions such as the discount rate, inflation rate, and mortality/life expectancy with their own actuarial specialists. Furthermore, they will confirm that the accounting treatment aligns with IFRS and the CIPFA Code, consider the adequacy of disclosures regarding the sensitivity of the deficit/surplus, and assess the impact of a new triennial valuation model and any special events.
For the valuation of Level 3 investments within the Pension Fund audit, KPMG's approach includes understanding the processes for valuing these investments, inspecting internal control reports from pooling arrangements and custodians, and obtaining direct confirmations from custodians and investment managers to vouch asset valuations. They will reconcile holdings, prices, and valuations to two independent sources, obtain and inspect unaudited Net Asset Value (NAV) statements for Level 3 pooled investment vehicles, and vouch valuations. To assess the reliability of NAV statements, KPMG will inspect audited financial statements of underlying funds and their audit reports, and compare unaudited pricing to audited valuations.
Downgraded Asset Valuation Risk
The assessed risk for the valuation of council dwellings, other land and buildings, and investment properties has been downgraded from 'significant risk' in the 2024/25 plan to 'higher assessed risk' in the 2025/26 plan. This reassessment is attributed to the use of recognized valuation and indexation methodologies, the engagement of an external independent valuer (Cluttons LLP), and the absence of significant issues identified in prior year audits.
Non-Audit Services and Rationale
The non-audit services being provided by KPMG to Kingston Council include housing benefit grant certification, the Teachers Pensions Agency (TPA) Annual Return, and pooling for housing capital receipts return. While a specific strategic rationale for engaging the same firm for both audit and non-audit services is not explicitly stated, the audit plan notes that non-audit services often involve grant claims where it is expected the auditor will perform them alongside the audit. Additionally, there is a cap set by the Public Sector Audit Appointments (PSAA) on the level of non-audit fees relative to audit fees, which is set at 70%.
Potential Consequences of Realized Risks
If risks such as management override of controls or inaccurate contribution data are realized, the implications could be significant. As mentioned, management override of controls can lead to fraud and the preparation of fraudulent financial statements. For the Pension Fund, inaccurate contribution data could mean that contributions into the Fund are not completely identified and recorded, may not exist, or may not be in compliance with regulations and the Fund's Rates and Adjustments Schedule. This is classified as an 'other audit risk' for the Pension Fund.
For more details on the meeting, refer to the Agenda frontsheet and the Public reports pack.
