Auditor-General’s Report on the Annual Financial Report of the State of Victoria: 2016–17

The 2016–17 Annual Financial Report of the State of Victoria (AFR) informs Parliament and the citizens of Victoria about the financial transactions and financial position of the State. It was tabled in Parliament by the Treasurer on 21 September 2017.

Each year, we issue an audit opinion on the AFR to provide independent assurance to Parliament on the finances of the state.

This report provides Parliament with information about matters arising from our 2016−17 financial audit of the AFR. It also provides our assessment of the financial sustainability of the State of Victoria at 30 June 2017.

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Ordered to be published

VICTORIAN GOVERNMENT PRINTER November 2017

PP No 345, Session 2014–17

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The Treasurer tabled the 2016–17 Annual Financial Report of the State of Victoria (AFR) in Parliament on 21 September 2017. The AFR includes the financial statements of the State of Victoria (the State) and the general government sector (GGS).

This report provides Parliament with information about matters arising from our financial audit of the 2016–17 AFR. It also provides our assessment of the financial sustainability of the State at 30 June 2017.

Conclusion

We issued a clear audit opinion on the AFR for the financial year ended 30 June 2017.

The State continues to operate sustainably and is well positioned financially.

Findings

Audit opinions

This year we provided clear audit opinions on the financial statements of the 47 significant state-controlled entities included in the AFR, and consequently on the AFR.

The Department of Treasury and Finance (DTF) produced a timely, accurate and relevant AFR, and tabled it in Parliament significantly earlier than in 2016 and within the statutory time frame.

Internal controls

We assessed the internal controls implemented by DTF as adequate to support the preparation of a complete and accurate AFR.

We also judged that the overall internal control frameworks at the 47 significant state-controlled entities were adequate to support their preparation of complete and accurate financial reports. However, some agencies need to strengthen some important internal controls.

Financial sustainability

We assessed the State's financial sustainability in the following key areas:

• operating result
• debt
• a target to fully fund its superannuation liability by 2035.

Operating result

The State generated a 'bottom line' operating surplus of $6.6 billion in 2016–17, compared to a deficit of $1.6 billion in 2015–16. The positive turnaround is a result of the strong performance of financial markets and a change in the economic assumptions that underpin the valuation of insurance claim provisions.

In terms of future operating financial risks, the State will need to continue to closely monitor growth in its employee costs, which account for one third of its total expenditure. Unlike discretionary grants, and much expenditure on supplies and services, staff costs tend to be effectively fixed over the short to medium term.

The State also needs to monitor and manage the backlog maintenance for its infrastructure assets, to guard against the risk that these assets will not reach their intended service levels and lives.

Debt

There was a net reduction in borrowings by the State of $5.1 billion over the year, to $48.8 billion at 30 June 2017. The proceeds from the Port of Melbourne lease were used to pay down much of this debt.

Government use of debt for major projects is an important source of finance, particularly in a low-interest-rate environment. Over the next four financial years, debt is estimated to increase by $12.7 billion to fund capital projects and public services.

Since 2013, debt has grown at a slower rate than both gross state product (GSP) and operating income. This puts the State in a relatively better position to service its debt as it becomes payable. The State's balance sheet can accommodate higher levels of debt without significantly increasing operating financial risk.

Superannuation liability

As at 30 June 2017, the State owed $24.9 billion to four superannuation funds. This represents the gap between the estimated future amounts the funds will be required to pay to their members, and the value of the assets held by the funds to meet these payments.

The state government has maintained its target to reduce its obligation to zero by 2035. Each year, actuaries provide the state government with a plan detailing the payments that need to be made each financial year to reduce the liability to zero by 2035. Over the past five financial years, the State has been meeting these payments.

Submissions and comments received

As required by section 16A of the Audit Act 1994, we gave a draft copy of the current report to the Treasurer of Victoria and asked for his submissions or comments.

As required by section 16(3) of the Audit Act 1994, we gave relevant extracts of the current report to named agencies and asked for their submissions or comments. We have considered their views when reaching our audit conclusions. We also provided a copy of the report to the Department of Premier and Cabinet.

The following is a summary of those responses. The full responses are included in Appendix A.

The Treasurer of Victoria was pleased that the report confirmed the clear opinion. He also highlighted the positive assessment of the State's finances and sustainability.

The Chief Executive of Eastern Health noted and accepted the internal control issues identified during the audit of Eastern Health, and confirmed a comprehensive action plan has been developed.

The Chief Executive Officer of the Country Fire Authority noted the reference to the Authority in the report and had no further comment.

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Each year, we audit the AFR. It measures the State's financial position at the end of the financial year, and how it performed during the year.

Section 16A of the Audit Act 1994 requires that we report to Parliament on our audit. This report satisfies our obligation.

1.1 Entities included in the AFR

The AFR combines the financial results of 276 state-controlled entities. These are classified into three types:

• general government sector (GGS)
• public financial corporations (PFC)
• public non-financial corporations (PNFC).

Figure 1A
Categories of state-controlled entities

Source: VAGO.

We audit, and provide an opinion on, the financial statements of the 276 state‑controlled entities each year. Appendix B details the date and type of financial audit opinion we issued.

Significant state-controlled entities

The financial results of 47 state-controlled entities, listed in Appendix B, were significant to the financial performance and position of the State in 2016–17. Collectively, these entities accounted for more than 90 per cent of the State's assets, liabilities, revenue and expenditure.

We focused our audit attention on the financial transactions and balances of these 47 entities when forming our opinion on the AFR.

1.2 Entities excluded from the AFR

The AFR reports only on state-controlled entities. Other entities that provide public services are excluded because the State does not control them for financial reporting purposes—see Figure 1B.

Figure 1B
Sectors not included in the AFR

Source: VAGO.

1.3 Results of the State of Victoria

In 2016–17, the State generated $68.8 billion of revenue and outlaid $68.1 billion in costs. At 30 June 2017, it controlled assets worth $301.8 billion and owed suppliers and employees $129.6 billion. Figure 1C shows the type and value of state revenue, expenses, assets and liabilities in 2016–17.

Figure 1C
Revenue, expenses, assets and liabilities of the State, 2016–17

Source: VAGO.

1.4 Our audit

We apply Australian Auditing Standards to our audit of the AFR and provide an audit opinion on it in accordance with Section 9A of the Audit Act 1994. The Department of Treasury and Finance pays for the audit.

The cost of preparing this report was $165 000, which is funded by Parliament.

1.5 Report structure

Figure 1D outlines the structure and contents of this report.

Figure 1D
Report structure

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This year we provided clear audit opinions on the financial statements of the 47 significant state-controlled entities included in the AFR, and consequently on the AFR.

A clear audit opinion adds credibility to the financial statements by providing reasonable assurance that reported information is reliable, accurate and in keeping with the requirements of relevant accounting standards and applicable legislation.

2.1 Key audit matters for 2016−17

A new auditing standard applicable this financial year requires the auditors of listed entities to include a description of key audit matters (KAM) in the auditor's report. KAMs are matters that the auditor determines to be of most significance to the audit.

We have voluntarily adopted the new standard as we believe this will enhance the value of our auditor's report by providing greater transparency and insights about our audit process.

The two KAMs for the 2016–17 AFR were the fair value of the State's defined benefit superannuation and outstanding insurance claims liabilities. Appendix C includes a copy of the 2016–17 auditor's report, which includes the reason why we considered these items KAMs, and our audit responses to each.

2.2 Quality of reporting in 2016−17

Despite the low number of significant state-controlled entities meeting the AFR milestone for finalising their financial statements, DTF was able to produce a timely, accurate and relevant AFR.

Timeliness

The timeliness of the AFR is measured against the statutory reporting deadline established in the Financial Management Act 1994, and against the annual production timetable set by DTF.

DTF provided the 2016–17 AFR to Parliament on 21 September 2017. This is before the statutory reporting deadline of 15 October 2017, and consistent with the annual production timetable. The Treasurer requested this year that the AFR be tabled while Parliament was sitting which meant it was tabled 22 days earlier than the 2015–16 AFR.

The earlier time frame was achievable because we—and entity management—did not have to contend with:

• significant and complex transactions similar to those experienced in the past, such as the valuation of assets at the Port of Melbourne or accounting for fixed assets at the Department of Education and Training
• significant machinery-of-government changes—for example, the creation or merging of government agencies
• significant changes in accounting standards.

It would have been difficult to manage the compressed time frame if we had encountered any of these matters.

Timeliness of significant entities

The timely preparation and audit of the AFR depends on the 47 significant state‑controlled entities meeting key milestones in the AFR preparation timetable, and the early identification and resolution of significant accounting issues.

DTF set a milestone of 18 August 2017 for all significant state-controlled entities to finalise their financial statements, including an audit opinion. This date was set to allow enough time for the preparation and audit of the AFR. Figure 2A shows the performance of relevant entities against the DTF milestone over the past five financial years.

Figure 2A
Timeliness of significant state-controlled entities against the DTF milestone

Source: VAGO.

Only five of the 47 significant state-controlled entities met the milestone in 2016–17, which is the lowest number over the last five financial years. Despite this fact, the AFR was signed earlier than in 2016. This would suggest that the milestone date could be revised without compromising the AFR reporting date.

In total, 43 entities fulfilled their statutory obligation to finalise their financial statements within 12 weeks of 30 June. Figure 2B shows when significant state‑controlled entities finalised their financial statements against the DTF milestone and statutory reporting obligation.

Figure 2B
Timeliness of significant state-controlled entities against the DTF milestone and legislative time frame

Source: VAGO.

Figure 2C outlines the reasons why the four entities did not meet the 12-week statutory obligation for completion of their financial statements.

Figure 2C
Reasons why significant state-controlled entities did not meet their statutory reporting obligation

Source: VAGO.

Reliability

The frequency and number of material adjustments arising from the audit is a measure of the accuracy of the draft AFR. Ideally, no material adjustments should be required once the draft AFR is submitted for audit.

To prepare the 2016–17 AFR, DTF planned to provide three drafts of the financial statements for audit, the first on 29 August 2017. DTF achieved these targets.

One material adjustment was required to the first draft provided for audit, indicating that the quality control procedures adopted by DTF were for the most part adequate. The adjustment was required to reclassify $1.3 billion of short‑term deposits from investments, loans and placements to cash and deposits.

Usefulness

The 2015–16 and 2016–17 AFRs were prepared in a streamlined format to make them easier to understand. The objectives of streamlined financial reporting are to:

• maintain compliance with the Australian Accounting Standards and relevant legislation
• present only relevant information by removing disclosures that are immaterial in the context of the financial statements taken as a whole
• organise and communicate financial information in a manner that aligns with the objectives, service delivery, financial performance and financial position of the reporting entity
• enhance the readability and user-friendliness of the financial report.

Government departments were required to report under the streamlined format for the first time in 2016–17, and all other agencies were encouraged by the Minister for Finance to do so. It is pleasing that 39 of the 47 significant state-controlled entities included in the AFR adopted the streamlined format.

We commend DTF for providing entities with a systematic eight-step process for streamlining their financial reports in the 2016-17 Model Financial Report. This process is outlined in Figure 2D.

Figure 2D
Process for streamlining financial reporting

Source: VAGO, based on DTF's eight-step process.

In 2016–17, DTF reviewed the content of the 2015–16 streamlined AFR against the requirements of relevant Australian Accounting Standards, and removed disclosures that it believed were not relevant to users of the report.

We encourage all entities to undertake a similar exercise when preparing their financial statements and remove disclosures that are immaterial.

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Effective internal controls help entities reliably and cost-effectively meet their objectives. They are also a prerequisite for delivering sound, accurate and timely external financial reports.

In our annual financial audits, we consider the internal controls relevant to financial reporting and assess whether entities have managed the risk that their financial reports will not be complete and accurate. Poor internal controls make it more difficult for the management of entities to comply with relevant legislation, and increase the risk of fraud and error.

As part of our audit of the AFR, we assess how the internal control deficiencies we identified at the significant state-controlled entities may impact DTF's ability to prepare a complete and accurate AFR.

3.1 Overall findings

We assessed as adequate the internal controls implemented by DTF to support the preparation of a complete and accurate AFR.

Overall, we judged that the internal control frameworks at the 47 significant state‑controlled entities were adequate to support them preparing complete and accurate financial reports. However, some agencies need to strengthen some important internal controls.

In 2016–17, we identified 151 internal control deficiencies at the 47 significant state‑controlled entities. We reported these to each entity as required by auditing standards.

Figure 3A shows the number of extreme-, high- and medium-rated internal control deficiencies we identified. We exclude low-rated internal control deficiencies because they are minor or present opportunities to improve existing processes or internal controls. See Appendix D for definitions of the risk ratings.

Figure 3A
Internal control deficiencies by risk rating

Note: These results include 21 control deficiencies at water entities and 61 control deficiencies at hospitals that are also reported in VAGO's 2016–17 sector reports.

Source: VAGO.

3.2 Internal control deficiencies

The Standing Directions of the Minister for Finance 2016 require the accountable officer of each entity to establish an effective internal control system in relation to financial management, performance and sustainability. The internal control system must include the elements shown in Figure 3B.

Figure 3B
Elements of an internal control system

Source: VAGO.

Control environment

The control environment is the attitudes, awareness and actions of management. It is the 'tone at the top'.

As part of a financial audit, we evaluate whether:

• management has created and maintained a culture of honesty and ethical behaviour
• the control environment provides an appropriate foundation for the other components of internal control.

We did not identify any serious deficiencies relating to those elements of the control environment that we examined in our audits of the 47 significant state‑controlled entities.

Risk assessment

Risk assessment relates to management's processes for identifying, analysing, mitigating and controlling risks that may prevent an entity from achieving its objectives.

As part of a financial audit, we examine whether management has a process for:

• identifying business risks relevant to financial reporting objectives
• estimating the significance of the risks
• assessing the likelihood of risks occurring
• deciding on actions to address those risks.

We identified one medium-rated risk-assessment deficiency related to cash management in one of the 47 significant state-controlled entities.

Control activities

Control activities are the policies, procedures and practices implemented by management to help meet an entity's objectives. These activities operate at all levels and in all functions, can be manual or automated, and, if operating effectively, can prevent or detect errors in financial information.

As part of a financial audit, we analyse the control activities that support the preparation of accurate financial statements. In 2016–17, we identified 124 control deficiencies.

We separate control activities into manual and information technology (IT) control activities.

Manual control activities

Employees manually perform these control activities to assess the reasonableness and appropriateness of transactions≠—for example≠≠, by manually validating, calculating or reviewing something. These controls may be less reliable than IT controls because they are susceptible to human error and can be more easily bypassed or overridden.

Twenty-one significant state-controlled entities had control deficiencies in this area, which primarily related to:

• payroll—lack of segregation of duties, employee master files not being kept up to date, and staff not using system-generated exception reports
• assets—incomplete asset registers and incorrect capitalisation of costs
• expenses—non-use of purchase orders, breaching delegations and vendor master file changes not approved.

Figure 3C summarises the deficiencies we identified in manual control activities. There were eight high-rated deficiencies in total, concerning payroll areas at the Royal Children's Hospital (6 deficiencies), Eastern Health (1) and the Public Transport Development Authority (1).

Figure 3C
Manual control activities

Source: VAGO.

IT control activities

IT control activities support the operating capability of an IT system. Strong IT controls are a prerequisite for the smooth day-to-day operations of agencies and the reliability of financial information. They reduce the risk that employees or third parties can circumvent processes and the risk of unauthorised access to systems, which may result in the destruction of data or recording of non‑existent transactions. They also decrease the risk of a successful cyber‑attack—a deliberate act by a third party to gain unauthorised access to an entity's data with the objective of damaging, denying, manipulating or stealing information.

To reduce the risk of a successful cyber-attack, it is imperative that entities address IT control deficiencies in a timely manner.

Twenty-three significant state-controlled entities had IT control deficiencies, which primarily related to:

• user access management—inappropriate privileged access and a lack of periodic review of users and their system access requirements
• system software—inappropriately configured software and system updates and patches not applied in a timely manner
• software support—some system software is, or will be, unsupported by the vendor
• disaster recovery plans—plans not updated or tested in a timely manner.

There was one extreme-rated IT control deficiency identified at Eastern Health, concerning a potentially compromised system. This was investigated by management and found to be a known 'false positive' result that exists within the anti-malware software used.

There were 25 high-rated IT control deficiencies, as shown in Figure 3D. These were identified at Eastern Health (9 deficiencies), Barwon Health (4), Melbourne Water Corporation (3), the Department of Health and Human Services (3), the Melbourne Metropolitan Fire and Emergency Services Board (2), Monash Health (2), the Department of Economic Development, Jobs, Transport and Resources (1) and Yarra Valley Water Corporation (1).

Figure 3D
IT control activities

Source: VAGO.

Outsourced IT systems

A number of significant state-controlled entities use outsourced service providers to process transactions on their behalf, or to house and run their IT systems.

Management of significant state-controlled entities is responsible for ensuring that effective controls operate at the service providers, and that entity management remains accountable for the quality of the information stored in its systems. To assist in discharging these responsibilities, management generally engages an independent auditor to review, test and report on the design and operating effectiveness of IT controls.

Control deficiencies identified at service organisations in 2016–17 were similar to those listed above—that is, user access management and system software updates. Management should work with service providers to ensure they resolve identified control deficiencies in a timely manner.

Monitoring of controls

Monitoring activities are the methods that management uses to observe internal controls in practice and assess their effectiveness. This may be through ongoing supervision, periodic self-assessments or separate evaluations.

As part of a financial audit, we gain an understanding of the major activities management uses to monitor the internal controls that are relevant to financial reporting, and how management initiates remedial actions to address deficiencies.

Three significant state-controlled entities had medium-rated control deficiencies in this area, related to how management monitors and manages excessive leave balances.

Information and communication

Information and communication involve providing information in a form and time frame that allows staff to effectively and efficiently discharge their responsibilities and effectively transmit control tasks throughout the entity.

This aspect of internal control also considers how management generates financial reports, and how it communicates them to internal and external parties.

As part of a financial audit, we examine the information systems and related business processes relevant to financial reporting, as well as how management communicates financial reporting roles and responsibilities and other significant matters to interested parties.

Sixteen significant state-controlled entities had control deficiencies in information and communication, primarily related to:

• processes for capturing and reporting related-party information
• quality assurance processes concerning financial statement preparation
• accounting for fixed assets
• noncompliance with Australian Accounting Standards, the Financial Management Act 1994 or guidance from DTF.

As shown in Figure 3E, there were 10 high-rated deficiencies in this area. These were identified at the Department of Premier and Cabinet (3 deficiencies), Court Services Victoria (2), the Public Transport Development Authority (1), Goulburn-Murray Rural Water Corporation (1), Grampians Wimmera Mallee Water Corporation (1), the Metropolitan Fire and Emergency Services Board (1) and DTF (1).

Figure 3E
Information and Communication

Source: VAGO.

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The AFR shows the financial performance and position of the State and the GGS.

Separately reporting on the GGS allows the government to demonstrate its results against its published budget. The 2016–17 State Budget sets out the government's sustainability objectives for the GGS, which are supported by three key financial measures.

In this part, we review the State against these three key financial measures and other relevant ones. We also discuss key transactions during the year that influenced the results, and review the GGS against the 2016–17 State Budget.

4.1 Financial measures and outcomes

Figure 4A details the three key financial measures, and the government's assessment of the GGS outcome for 2016–17.

Figure 4A
Financial measures, targets and outcomes of GGS for 2016–17

(a) This indicator relates to the net result from transactions.

(b) Net debt measures the sum of deposits held, advances received, government securities, loans and other borrowings, less the sum of cash and deposits, advances paid and investments, loans and placements.

Source: DTF.

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As required by section 16A of the Audit Act 1994, we gave a draft copy of this report to the Treasurer of Victoria and asked for his submissions or comments. As required by section 16(3) of the Audit Act 1994, we gave relevant extracts of this report to named agencies and asked for their submissions or comments. We have considered their views when reaching our audit conclusions. We also provided a copy of the report to the Department of Premier and Cabinet.

Responsibility for the accuracy, fairness and balance of those comments rests solely with the Treasurer of Victoria or agency head.

Responses were received as follows:

• Treasurer of Victoria
• Eastern Health
• Country Fire Authority

RESPONSE provided by the Treasurer of Victoria

RESPONSE provided by the Treasurer of Victoria—continued

RESPONSE provided by the Chief Executive, Eastern Health

RESPONSE provided by the Chief Executive Officer, Country Fire Authority

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Figures B1 to B17 provide information on the audit opinions issued for the 276 entities consolidated into the AFR.

Entities are listed in the following order:

General government sector

• Department of Economic Development, Jobs, Transport and Resources
• Department of Education and Training
• Department of Environment, Land, Water and Planning
• Department of Health and Human Services
• Department of Justice and Regulation
• Department of Premier and Cabinet
• Department of Treasury and Finance
• Courts
• Parliament of Victoria
• Victorian Auditor-General's Office

Public non-financial corporations

• Department of Economic Development, Jobs, Transport and Resources
• Department of Environment, Land, Water and Planning
• Department of Health and Human Services
• Department of Justice and Regulation
• Department of Premier and Cabinet
• Department of Treasury and Finance

Public financial corporations

• Department of Treasury and Finance

General government sector

Figure B1
Department of Economic Development, Jobs, Transport and Resources

Source: VAGO.

Figure B2
Department of Education and Training

Source: VAGO.

Figure B3
Department of Environment, Land, Water and Planning

(a) Outstanding at the time of publishing this report.

Source: VAGO.

Figure B4 Department of Health and Human Services

Source: VAGO.

Figure B5
Department of Justice and Regulation

Source: VAGO.

Figure B6
Department of Premier and Cabinet

(a) Outstanding at the time of publishing this report.

Source: VAGO.

Figure B7
Department of Treasury and Finance

Source: VAGO.

Figure B8
Courts

Source: VAGO.

Figure B9
Parliament of Victoria

Source: VAGO.

Figure B10
Victorian Auditor-General's Office

Source: VAGO.

Public non-financial corporations

Figure B11
Department of Economic Development, Jobs, Transport and Resources

(a) Development Victoria was formed on 1 April 2017 and received an exemption to prepare 15-month accounts in 2017–18.

(b) Formerly Port of Melbourne Corporation.

Source: VAGO.

Figure B12
Department of Environment, Land, Water and Planning

Source: VAGO.

Figure B13
Department of Health and Human Services

Source: VAGO.

Figure B14
Department of Justice and Regulation

Source: VAGO.

Figure B15
Department of Premier and Cabinet

Source: VAGO.

Figure B16
Department of Treasury and Finance

(a) The Minister for Finance has extended the reporting period for this entity.

Source: VAGO.

Public financial corporations

Figure B17
Department of Treasury and Finance

Source: VAGO.

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Figure D1
Risk definitions applied to issues reported in audit management letters

Source: VAGO.

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Accountability

Responsibility of public entities to achieve their objectives in the reliability of financial reporting, the effectiveness and efficiency of operations, compliance with applicable laws, and reporting to interested parties.

Adverse opinion

An audit opinion expressed if the auditor has sufficient appropriate audit evidence and concludes that misstatements, individually and in aggregate, are both material and pervasive in the financial report.

Amortisation

The systematic allocation of the depreciable amount of an intangible asset over its expected useful life.

Asset

An item or resource controlled by an entity that will be used to generate economic benefits.

Asset valuation

The fair value of a non-current asset on a specified date.

Audit Act 1994

Victorian legislation establishing the Auditor-General's operating powers and responsibilities and detailing the nature and scope of audits that the Auditor‑General may carry out.

Audit committee

Helps a governing board to fulfil its governance and oversight responsibilities and strengthen the accountability of senior management.

Audit opinion

A written expression, within a specified framework, indicating the auditor's overall conclusion about a financial (or performance) report based on audit evidence.

Calendar year

A period of a year beginning with January 1 and ending with December 31.

Capital expenditure

Money an entity spends on:

• new physical assets, including property, infrastructure, plant and equipment
• renewing existing physical assets to extend their service potential or life.

Capital grant/capital purpose income

Government funding for an agency to acquire or build capital assets such as land, buildings or equipment.

Carrying value

The original cost of an asset, less the accumulated amount of any depreciation or amortisation, less the accumulated amount of any asset impairment.

Clear audit opinion

A positive written expression provided when the financial report has been prepared and presents fairly the transactions and balances for the reporting period in keeping with the requirements of the relevant legislation and Australian Accounting Standards. Also referred to as an unqualified audit opinion.

Control environment

Processes within an entity's governance and management structure that provide reasonable assurance about the achievement of an entity's objectives in terms of the reliability of financial reporting, the effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

Corporations Act 2001

Commonwealth legislation governing corporations, including their financial reporting framework.

Current asset

An asset that will be sold or realised within 12 months of the end of the financial year being reported on, such as term deposits maturing in three months or stock items available for sale.

Current liability

A liability that will be settled within 12 months of the end of the financial year being reported on, such as payment of a creditor for services provided to the entity.

Debt

Money owed by one party to another party.

Deficit

When total expenditure is more than total revenue.

Depreciated replacement cost

Current replacement cost less accumulated depreciation to reflect the economic benefits of the assets that have been consumed.

Depreciation

Systematic allocation of the value of an asset over its expected useful life, recorded as an expense.

Disclaimer of opinion

Conclusion expressed if the auditor is unable to obtain sufficient appropriate audit evidence on which to base an audit opinion, and concludes that the possible effects on the financial (or performance) report of undetected misstatements, if any, could be both material and pervasive.

Eliminations

Removing the effect of transactions between entities when preparing consolidated financial statements.

Emphasis of matter

A paragraph included in the audit opinion of a financial report that refers to a matter appropriately presented or disclosed that, in the auditor's judgement, is of such importance that it is fundamental to users' understanding of the financial report.

Entity

A corporate or unincorporated body that has a public function to exercise on behalf of the State or is wholly owned by the State, including departments, statutory authorities, statutory corporations and government business enterprises.

Equity or net assets

Residual interest in the assets of an entity after its liabilities have been deducted.

Expense

The outflow of assets or the depletion of assets an entity controls during the financial year, including expenditure and the depreciation of physical assets. An expense can also be the incurrence of liabilities during the financial year, such as increases to a provision.

Fair value

The price that would be received if an asset was sold or the price paid to transfer a liability in the course of an orderly transaction between market participants at the measurement date.

Financial Management Act 1994

Victorian legislation governing the financial management of public sector entities, as determined by the Minister of Finance, including their financial reporting framework.

Financial report

A document reporting the financial outcome and position of an entity for a financial year, which contains financial statements including a comprehensive income statement, a balance sheet, a cash flow statement, a comprehensive statement of equity, and notes.

Financial Reporting Directions

Issued by the Minister of Finance for entities reporting under the Financial Management Act 1994, with the aim of:

• achieving consistency and improved disclosure in financial reporting for Victorian public entities by eliminating or reducing divergence in accounting practices
• prescribing the accounting treatment and disclosure of financial transactions in circumstances where there are choices in accounting treatment, or where existing accounting pronouncements have no guidance or requirements.

Financial sustainability

An entity's ability to manage financial resources so it can meet its current and future spending commitments, while maintaining assets in the condition required to provide services.

Financial year

A period of 12 months for which a financial report is prepared, which may be a different period to the calendar year.

Fiscal targets

Targets set by the government to meet short- and medium-term economic objectives.

General government sector

All government departments, offices and other bodies that provide services free of charge or at prices significantly below their cost of production, less eliminations. General government services include those that are mainly non‑market-based, those that are largely for collective consumption by the community, and those that involve the transfer or redistribution of income. These services are financed mainly through taxes, other compulsory levies and user charges.

Going concern

An entity that is expected to be able to pay its debts when they fall due, and continue in operation without any intention or necessity to liquidate or otherwise wind up its operations.

Governance

The control arrangements used to govern and monitor an entity's activities to achieve its strategic and operational goals.

Impairment (loss)

The amount by which the value of an entity's asset exceeds its recoverable value.

Income

The inflow of assets or decrease of liabilities during the financial year, including receipt of cash and the reduction of a provision.

Income approach

A valuation technique that converts future amounts, such as cash flows or income and expenses, to a single current (discounted) amount. The fair value of those future amounts is measured as an indication of current market expectations.

Intangible asset

An identifiable non-financial asset, controlled by an entity, that cannot be physically seen, such as software licences or a patent.

Internal audit

A function of an entity's governance framework that examines and reports to management on the effectiveness of the entity's risk management, internal controls and governance processes.

Internal control

A method of directing, monitoring and measuring an entity's resources and processes to prevent and detect error and fraud.

Investment

Public or private sector expenditure for the development and/or use of infrastructure assets, intended to result in medium- to long-term service and/or financial benefits.

Issues

Weaknesses or other concerns in the governance structure of an entity identified during a financial audit, which are reported to them in a management letter.

Legislative time frame

The 12-week mandatory completion date for audited financial statements—that is, entities are required to provide financial statements to the Auditor-General within eight weeks of the balance date. The Auditor-General then has four weeks to complete the audit.

Liability

A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of assets from the entity.

Machinery-of-government changes

Changes made to the administrative structure of government.

Management letter

A letter the auditor writes to the governing body, the audit committee and the management of an entity outlining issues identified during the financial audit.

Material agencies

Those entities that are collectively deemed to have a significant effect on the transactions and balances reported in the State's annual financial report.

Material error or adjustment

An error that may result in the omission or misstatement of information, which could influence the economic decision of users taken on the basis of the financial statements.

Materiality

Information is material if its omission, misstatement or non-disclosure has the potential to affect the economic decisions of users of the financial report, or the discharge of accountability by management or those charged with governance. The size, value and nature of the information and the circumstances of its omission or misstatement help in deciding how material it is.

Modified opinion

The auditor's expressed qualified opinion, adverse opinion or disclaimer of opinion.

Net result

The value that an entity has earned or lost over the stated period—usually a financial year—calculated by subtracting an entity's total expenses from its total revenue for that period.

Non-current asset

An asset that will be sold or realised later than 12 months after the end of the financial year being reported on, such as investments with a maturity date of two years or physical assets the entity holds for long-term use.

Non-current liability

A liability that will be settled later than 12 months after the end of the financial year being reported on, such as repayments on a five-year loan that are not due in the next 12 months.

Non-reciprocal transfers

Transfers in which an entity receives assets without directly giving equal value in exchange to the other party to the transfer.

Other comprehensive income

Revenues, expenses, gains and losses under Australian Accounting Standards that are excluded from net income on the income statement and are instead listed after net income.

Physical asset

A non-financial asset that is a tangible item an entity controls, and that will be used by the entity for more than 12 months to generate profit or provide services, such as building, equipment or land.

Present value

A current estimate of the present discounted value of the future net cash flows in the normal course of business.

Public financial corporation sector

Public sector corporations, including the government's central borrowing authorities, that provide financial services.

Public non-financial corporation sector

Public entities, including some that aim to cover most of their expenses from revenue, that provide market non-financial goods and services.

Qualified audit opinion

An opinion issued when the auditor concludes that an unqualified opinion cannot be expressed because of:

• disagreement with those charged with governance or
• conflict between applicable financial reporting frameworks or
• limitation of scope.

A qualified opinion is considered to be unqualified except for the effects of the matter that relates to the qualification.

Regulatory period

A statutory defined period that reflects all of the financial/operational activities that took place during that time.

Relevant measures and indicators

Measures and indicators an entity uses if they have a logical and consistent relationship to its objectives and are linked to the outcomes to be achieved.

Revaluation

The restatement of a value of non-current assets at a particular point in time.

Revenue

Inflows of funds or other assets or savings in outflows of service potential, or future economic benefits in the form of increases in assets or reductions in liabilities of an entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period.

Risk

The chance of a negative or positive impact on the objectives, outputs or outcomes of an entity.

Risk register

A tool an entity uses to help identify, monitor and mitigate risks. The register may appear in the form of a plot graph or a table.

Self-funding entities

Entities that generate most of their revenue from their operations, rather than from government funding.

Specific purpose funds/specific purpose grants

Grant funding provided by the Commonwealth to the state government for a particular area or service.

Strategic plan

A document an entity provides to its staff and board to communicate its organisational goals, the actions needed to achieve those goals and other critical elements developed during the planning exercise.

Unmodified opinion

The audit opinion that the auditor expresses when concluding that the financial (or performance) report is prepared, in all material respects, in keeping with the applicable reporting framework.

Whole-of-life cost

The cost to buy or construct an asset, plus the cost of maintaining the asset over its life.

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