Report of the Auditor-General Part III 2016 on the Accounts of Provincial and Local-level Governments and associated entities

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    Auditor-General's annual report for 2016 on the Accounts of Provincial and Local-level Governments and associated entities.

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  • Part 3
    Report of the Auditor-General
    2016

    on the Accounts of Provincial and Local-level Governments and
    associated entities
    __________________________________________________________
     Provincial Governments
     Local-level Governments
     Hospital Boards and Provincial Health Authorities
     Business Arms and Subsidiary Corporations
     Provincial Authorities
     Other Audits

    Auditor-General’s Office of Papua New Guinea

  • Page 2 of 226

  • Part 3
    Report of the Auditor-General
    2016

    on the Accounts of Provincial and Local-level Governments and
    associated entities
    __________________________________________________________
     Provincial Governments
     Local-level Governments
     Hospital Boards and Provincial Health Authorities
     Business Arms and Subsidiary Corporations
     Provincial Authorities
     Other Audits

    Auditor-General’s Office of Papua New Guinea

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  • Phone: (+675) 3012200 Fax: (+675) 325 2872 Email: agopng@ago.gov.pg Website: www.ago.gov.pg

    29 September 2017

    The Honourable Job Pomat, MP
    Speaker of the National Parliament
    Parliament House
    WAIGANI
    National Capital District

    Dear Mr. Speaker

    In accordance with the provisions of Section 214 of the Constitution of the Independent State of
    Papua New Guinea, I have the honour to present to the National Parliament Part III of my
    Report.

    The Part III 2016 Report covers the financial years ending 2016. This Report embodies the
    results of audits of each of the Accounts of Provincial Governments, Local-level Governments,
    their Business Arms and Statutory Corporations, Provincial Authorities, Trust Funds and
    Hospital Boards and Provincial Health Authorities.

    Level 6
    TISA Investment Haus
    Kumul Avenue, NCD
    P.O. Box 423, WAIGANI, NCD
    Papua New Guinea

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  • Table of Contents

    FOREWORD……………………………………………………………………………………………………………. 1
    1. ROLE OF THE AUDITOR-GENERAL AND AUDIT MANDATE …………………. 3
    1.1 Role of the Auditor-General………………………………………………………………………………. 3
    1.2 Mandate of the Auditor-General ………………………………………………………………………… 4
    2. AUDIT AND DELIVERY OF GOVERNMENT PROGRAMS ………………………… 6
    3. SCOPE OF AUDIT ………………………………………………………………………………………… 7
    3.1 Introduction …………………………………………………………………………………………………….. 7
    3.2 Appointment of an Agent Auditor ……………………………………………………………………… 7
    3.3 Dispensation of Audits ……………………………………………………………………………………… 8
    4. RESULTS OF THE AUDITS OF FINANCIAL STATEMENTS ……………………… 9
    4.1 Audit Opinion …………………………………………………………………………………………………. 9
    4.2 Financial Statements of Provincial and Local-level Governments ………………………… 10
    4.3 Financial Statements of Hospital Boards and Provincial Health Authorities …….. 15
    4.4 Financial Statements of Business Arms and Subsidiary Corporations ……………… 17
    4.5 Financial Statements of Provincial Authorities ………………………………………………. 17
    4.6 The Role of the Treasury Offices ……………………………………………………………………. 18
    4.7 Other Audits …………………………………………………………………………………………………. 17
    4.8 Audit Fees …………………………………………………………………………………………………….. 19
    5. CONTROL ENVIRONMENT………………………………………………………………………. 20
    5.1 Introduction …………………………………………………………………………………………………… 20
    5.2 Responsibilities of Management ………………………………………………………………………. 20
    5.3 Responsibility of the Auditor-General ………………………………………………………………. 21
    5.4 Details of Control Issues …………………………………………………………………………………. 21
    5.5 Conclusion ……………………………………………………………………………………………………. 26
    6.0 RESULTS OF AUDITS PER PROVINCE ……………………………………………………. 28
    6.1 AUTONOMOUS REGION OF BOUGAINVILLE …………………………………………………… 28
    6.2 CENTRAL PROVINCE …………………………………………………………………………………….. 30
    6.3 EAST NEW BRITAIN PROVINCE …………………………………………………………………….. 40
    6.4 EAST SEPIK PROVINCE………………………………………………………………………………. 57
    6.5 EASTERN HIGHLANDS PROVINCE ……………………………………………………………. 73
    6.6 ENGA PROVINCE ………………………………………………………………………………………… 80
    6.7 WESTERN PROVINCE …………………………………………………………………………………. 86
    6.8 GULF PROVINCE ………………………………………………………………………………………. 102
    6.9 HELA PROVINCE ………………………………………………………………………………………. 106

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  • 6.10 JIWAKA PROVINCE ………………………………………………………………………………….. 107
    6.11 MADANG PROVINCE ………………………………………………………………………………… 108
    6.12 MANUS PROVINCE …………………………………………………………………………………… 114
    6.13 MILNE BAY PROVINCE…………………………………………………………………………….. 116
    6.14 MOROBE PROVINCE ………………………………………………………………………………… 122
    6.15 NEW IRELAND PROVINCE ……………………………………………………………………….. 129
    6.16 ORO PROVINCE ………………………………………………………………………………………… 164
    6.17 SANDAUN PROVINCE ………………………………………………………………………………. 173
    6.18 SIMBU PROVINCE …………………………………………………………………………………….. 187
    6.19 SOUTHERN HIGHLANDS PROVINCE ……………………………………………………….. 192
    6.20 WEST NEW BRITAIN PROVINCE………………………………………………………………. 198
    6.21 WESTERN HIGHLANDS PROVINCE …………………………………………………………. 204
    7. LEGAL FRAMEWORKS …………………………………………………………………………… 211
    7.1 Organic Law on Provincial Governments and Local-level Governments …………….. 211
    7.2 Provincial Governments and Local-level Governments …………………………………….. 211
    7.3 Hospital Boards and Provincial Health Authorities …………………………………………… 212
    7.4 Business Arms and Subsidiary Corporations ……………………………………………………. 212
    7.5 Provincial Authorities …………………………………………………………………………………… 212
    7.6 Other Audits ………………………………………………………………………………………………… 213
    7.7 Dispensation of Audits ………………………………………………………………………………….. 213
    8. STATUS OF FINANCIAL STATEMENTS…………………………………………………. 215
    8.1 Provincial Government …………………………………………………………………………………. 215
    8.2 Local-level Government………………………………………………………………………………… 216
    8.3 Hospital Boards/Health Authorities ………………………………………………………………… 217
    8.4 Business Arms & Subsidiary Companies ………………………………………………………… 218
    8.5 Provincial Authorities …………………………………………………………………………………… 219
    8.6 Trusts and Funds ………………………………………………………………………………………….. 220

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  • Foreword

    FOREWORD

    My Report to the National Parliament is being presented in four parts as follows:

     Part I of my Report deals with the Public Accounts of Papua New Guinea;

     Part II of the Report deals with National Government Departments;

     Part III (this Part) of my 2016 Report deals with audits of the Provincial Governments, their Public
    Bodies and Subsidiary Corporations, Local-level Governments, Provincial Authorities, Provincial
    Health Authorities (Hospital Boards) and Trust Funds. With effect from 1996 an audit opinion on
    the financial statements of each Provincial Government and Urban Local-level Government is
    being issued in accordance with the requirements of the Organic Law on Provincial Governments
    and Local-level Governments; and

     Finally, Public Bodies and Subsidiaries, National Government-owned Companies and National
    Government’s shareholdings in Other Companies are covered in Part IV of my Report.

    Part III Report

    Readers of this Report should note that my Part III Report covers the financial years ending
    2016 and some previous years’ financial statements submitted subsequently. The Report covers
    the audit of Provincial Governments, Urban Local-level Governments, Hospitals/Provincial
    Health Authorities, Business Arms, Authorities and Trust Funds.

    The scope of audits included reviews of governance arrangements and examinations of internal
    controls in place at the time the audits were conducted. All audit findings have been reported to entity
    management for their comments.

    The Report provides a summary of significant internal control weaknesses identified, and types of
    audit opinions expressed. Major financial and accounting issues which required remedial actions to be
    taken by the agencies concerned have been summarized in this part of my Report. These issues have
    been communicated to the respective Provincial Administrators or Executive Management through
    the Management Letters.

    As required, and in addition to the Management Letters, audited financial statements together with the
    audit opinions where applicable, were also provided to the relevant Minister(s) and to the Department
    of Provincial and Local-level Government Affairs.

    Making this Report publicly available

    This Report will be made available to the public through the AGO website (www.ago.gov.pg) once it
    has been tabled in the Parliament.

    Part III 2016 Report Page 1

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  • Part III 2016 Report Page 2

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  • Role of the Auditor-General and Audit Mandate

    1. ROLE OF THE AUDITOR-GENERAL AND AUDIT MANDATE

    1.1 Role of the Auditor-General

    Section 214 of the Constitution of the Independent State of Papua New Guinea (Constitution)
    prescribes that the primary functions of the Auditor-General are to inspect, audit and report to
    the National Parliament on the Public Accounts of Papua New Guinea (PNG) and on the
    control of and on transactions with or concerning the public moneys and property of PNG.
    The Organic Law on Provincial Governments and Local-level Governments (Organic Law)
    extends these provisions to cover Provincial Governments and Local-level Governments.

    Section 113 of the Organic Law requires the Auditor-General to establish a Provincial Audit
    Service and appoint a Provincial Auditor and additional officers in each Province. At the time
    of this Report, no such Provincial Audit Services have been established in any of the
    Provinces due to budgetary limitations confronted by the PNG Auditor-General’s Office
    (AGO). These constraints greatly affect my resources and capability to service audit clients
    based in the regions. The Office however, had established Regional Audit Offices in Port
    Moresby (Southern), Kokopo (NGI), Mount Hagen and Goroka (Highlands) and Lae
    (Momase).

    My Office is currently moving to strengthen the regional offices with adequate staff and
    logistics in order to effectively perform my mandated audit functions and responsibilities at
    the sub-national level of Governments and other Government entities.

    Section 213 of the Constitution provides for the independence of the Auditor-General in the
    performance of his constitutional duties in that the Auditor-General is not subject to the
    control or direction of any person or authority. This provision connotes an atmosphere of
    complete objectivity and impartiality in the discharge of the audit responsibilities.

    Other than staff and administrative control of the AGO, neither the Constitution nor the
    Organic Law provides for any executive or directive powers by the Auditor-General over the
    organizations subject to audit. Although the evaluations and investigations conducted under
    the direction of the Auditor-General assist management in detecting control and procedural
    weaknesses, the Auditor-General has no executive responsibility in relation to the
    formulation of accounting systems and policies or the setting of standards for administrative
    and accounting purposes as this may impede the independence and objectivity requirements
    of the Auditor-General in the execution of his primary audit function.

    However, it has been the policy of this Office to enter into discussions with Provincial and
    Local-level Governments on matters relating to accounting systems, internal controls and
    administrative procedures in general, and to provide related documentation where possible. In
    providing such advice or information it is understood that the responsibility for executive
    decision making remains with the auditee organizations.

    Part III 2016 Report Page 3

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  • Role of the Auditor-General and Audit Mandate

    1.2 Mandate of the Auditor-General

    Section 7 of the Audit Act 1989 (as amended) provides for the Auditor-General to report to
    the Parliament on the results of audits undertaken. The Act specifically requires the Auditor
    General to specify
     Whether the financial statements, to which the report relates, are based on proper
    accounts and records;
     Whether the financial statements are in agreement with the accounts and records and
    whether they show fairly the financial operations for the period;
     Whether the receipt and payment and investment of moneys and the acquisition and
    disposal of assets during the year have been in accordance with the Public Finances
    (Management) Act 1995(PFMA); and
     Such other matters arising out of the financial statements, to which the report relates, as
    the Auditor-General considers should be reported.

    To meet these requirements I perform financial attest and regularity or compliance audits.
    The main objective of the attest audit is to express an opinion on the fairness of the financial
    statements, including compliance to disclosure requirements such as the format of the
    financial statements issued under Finance Instructions. Regularity audits are conducted with
    the main objective of ascertaining whether or not the expenditure had been applied for the
    purposes for which they had been authorized and that the expenditure conformed to the
    authority which governs it.

    In compliance with Part V of the Audit Act, my Office is performing both attest and regularity
    audits concurrently and is responsible for 373 audits of different entities as shown in the table
    below:
    ENTITY No Table Pages
    Provincial Governments 21 1
    Local-level Governments 322 2
    Provincial Health Authorities 21
    Business Arms 4 5
    Provincial Authorities 3 7
    Trusts and Funds 2 9
    TOTAL 373

    Provisions under the Organic Law as well as the Audit Act require that I furnish before 30
    April of the following year, audit reports on the accounts of Provincial Governments and
    Local-level Governments to the Minister for Inter-Government Relations, the Minister
    responsible for Finance matters, Provincial and Local-level Governments concerned and the
    National Economic and Fiscal Commission.

    I have endeavored to undertake audits to current status where possible within the resources
    available to me resulting in this 2016 Part 3 Report. However, there have been considerable
    difficulties in carrying out timely audits due to a number of factors including:
     Long delays and/or inaccurate presentation and disclosure of information in the
    financial statements by entities;

    Part III 2016 Report Page 4

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  • Role of the Auditor-General and Audit Mandate

     Lack of experience, competency and cooperation of some Provincial Treasury,
    accounting personnel and the provincial administrative officers in the provinces;
     Administrative difficulties where the Provincial Treasurer does not report to the
    Provincial Administrator but to the Secretary for Finance;
     Delays in responding to issues raised in our Management Letters;
     Absence of proper and adequate accounting and subsidiary records on fixed assets and
    investments in the Business Arms of Provincial Governments; and
     Significant resource constraints of my Office, especially in regard to the conduct of the
    audits of Provincial Governments and their entities.

    My Office endeavors to improve on the past performance, thus catching up on the backlog of
    audits and strives to constantly deliver quality output.

    Part III 2016 Report Page 5

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  • Audit and Delivery of Government Programs

    2. AUDIT AND DELIVERY OF GOVERNMENT PROGRAMS

    I have carried out audits of Provincial Governments and Local-level Governments, Hospital
    Boards, Business Arms, Provincial Authorities and Other audits as mandated. These
    government entities are tasked to deliver government services to the people of Papua New
    Guinea.

    Although my Report provides opinions on the financial affairs of these entities, other audit
    procedures performed by my Office give a picture of effectiveness of the delivery, by the
    public sector, of government policies and programs particularly their contribution to National
    Building through recovery, development and service delivery objectives of the Medium Term
    Development Strategies (MTDS) including:

     Welfare
     Health
     Economic Development and Growth
     Contribution to Nation Building
     Good Governance
     Rural Development
     Poverty Reduction
     Employment
     Strengthening Public Expenditure
     Management System including:
    o Fiscal Sustainability
    o Prioritisation of Resources, and
    o Cost effective implementation of programs.

    In addition, my audit findings that have been repeatedly highlighted had shown a slow
    progress in making improvements to governance structures and public accountability
    mechanisms in relation to expending Public Finances. Without strong governance procedures
    in the public sector, effective and efficient service delivery as envisaged by the National
    Government will be difficult to achieve.
    Besides the audit of financial statements, I have extended my audit programs into the audit of
    service delivery, performance audit and major public works projects to enhance my Office’s
    ability to deliver reports to Parliament on how well and effective the government programs
    are being delivered.

    Part III 2016 Report Page 6

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  • Scope of Audit

    3. SCOPE OF AUDIT

    3.1 Introduction

    In performance of the statutory audit responsibilities, the resources of this Office were
    directed primarily to the evaluation of internal controls, together with such other
    examinations as were considered necessary to examine the performance of financial
    operations with a view to assessing the reliability and integrity of financial data and to
    determine the extent of compliance with applicable laws, regulations and directives. The audit
    procedures applied were intended to reveal systemic weaknesses which would result in losses
    or errors, frauds and/or mismanagement of public funds.

    The examination on a sample basis included review of corporate governance, the work of
    internal audit, appropriations management, revenue and payments, human resource
    management processes, cash management, asset management, advance management and trust
    account management.

    All audits were planned and performed in accordance with the International Standards of
    Supreme Audit Institutions (ISSAI) as promulgated by the International Organization of
    Supreme Audit Institutions (INTOSAI) to obtain reasonable assurance whether the financial
    statements are free of material misstatement. The audit involved performing procedures to
    obtain audit evidence about the amounts and disclosures in the financial statements.

    The nature of an audit is influenced by factors such as the use of professional judgment,
    including the assessment of the risks of material misstatements of the financial statements,
    whether due to fraud or error. The audit is not required to search specifically for fraud and
    therefore, the audit cannot be relied upon to disclose all such matters. However, all audits
    were planned and executed so that I can have a reasonable expectation of detecting material
    misstatements resulting from irregularities, including fraud.

    Compliance with relevant legislation is of paramount importance in safeguarding the State’s
    assets. My audits included reviews and tests to ascertain whether key provisions of the PFMA
    and various Finance Instructions have been adhered to.

    The audit covers provincial governments, local-level governments, hospital boards
    (provincial health authorities), business arms and subsidiary corporations, provincial
    authorities, trust funds and other audits as directed by me.

    3.2 Appointment of an Agent Auditor

    The provisions of the Audit Act allow the Auditor-General to appoint a Registered Company
    Auditor as agent to assist in discharging audit responsibilities as and when considered
    necessary. Contrary to these requirements, Provincial Governments and the management of
    their business arms have been engaging private auditing firms without my knowledge to carry
    out the audits of their businesses. Section 8(5A) of the Audit Act states clearly that “A body
    which is liable to audit by the Auditor-General shall not appoint a Registered Company
    Auditor to carry out the functions and powers of the Auditor-General under the Constitution
    and this Act.”
    Part III 2016 Report Page 7

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  • Scope of Audit

    3.3 Dispensation of Audits

    As mentioned in previous reports, this Office has continued to experience considerable
    difficulties in carrying out timely audits of entities in the Provinces for a number of years.
    The factors include long delays and/or submission of incomplete financial statements due to
    high turnover of accounting staff and/or lack of suitably qualified personnel in most, if not, all
    government agencies including provincial governments, local-level governments and hospital
    boards. Of particular concern was non-preparation of financial statements by a large number
    of Local-level Governments. These problems were further aggravated by limited manpower
    and financial constraints which continued to affect my Office, making it practically
    impossible to be able to carry out audits of number of entities. In view of the above
    circumstances number of audits had to be dispensed with consistent with Audit Act that
    allows me to dispense the audits. Details of audits dispensed are presented in Section 7.7 of
    this Report.

    Part III 2016 Report Page 8

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  • Results of the Audits of Financial Statements

    4. RESULTS OF THE AUDITS OF FINANCIAL STATEMENTS

    4.1 Audit Opinion

    Financial statements audits are an independent examination of the financial accounting and
    reporting of Provincial Governments, Local-level Governments, Hospitals Boards and
    Provincial Health Authorities, Business Arms of Provincial Governments and other entities.
    The results of the examination are presented in this audit report, which expresses the auditor’s
    opinion on whether the financial statements as a whole and the information contained therein,
    fairly reflect the results of each entity’s operation and financial position. The disclosures and
    management representations made in the financial statements by the entity are assessed
    against relevant Finance Instructions and accounting standards, and legislative and other
    reporting requirements.

    It is generally accepted that a good indicator of the effectiveness of financial management
    processes is the timely finalization of the financial statements, accompanied by an unqualified
    audit opinion.

    Every year, the entities enter into thousands of transactions in millions of Kina. As such,
    errors are inevitable and may go undetected. It is therefore, important to appreciate that in
    expressing my opinion, the absolute accuracy of the financial statements may not be
    guaranteed. However, in conducting the audits of the entity’s financial statements, I seek to
    ensure that there is a reasonable assurance that the financial statements are free of material
    errors and misstatements.

    In determining the audit of the entity’s financial statements, two main factors are considered
    to determine the nature and extent of the work required. The first of these is the “materiality”
    level of the Kina amounts. This represents a threshold; if total errors fall below this threshold,
    the financial statements present information fairly; if they exceed this threshold and are not
    corrected, I refer to them as qualifications in my opinion. The second factor relates to “audit
    assurance”. This represents the level of certainty and confidence that my audit will reveal
    total errors that will be equal to or exceed the materiality threshold.

    At the conclusion of the audit, I determine whether the effect of undetected errors in the
    financial statements would mislead those who use the financial statements. If the effect is
    such that the financial statements are misleading, I include a qualification in my audit
    opinion.

    An inability to form an opinion – commonly referred to as a “Disclaimer” – is expressed when
    a scope limitation exists and sufficient appropriate audit evidence to resolve the uncertainty
    resulting from the limitation cannot be reasonably obtained; and the possible effects of the
    adjustments that might have been required, had the uncertainty been resolved, are of such a
    magnitude, or so pervasive that I am unable to express an opinion on the financial report
    taken as a whole.

    As reported in the past, only a handful of exceptional cases where Provincial Governments,
    Provincial Health Authorities and Business Arms of Provincial Governments were issued
    with audit opinions other than a disclaimer. The audit opinion reports issued to majority of

    Part III 2016 Report Page 9

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  • Results of the Audits of Financial Statements

    the entities during the current audit cycle however, were disclaimed. The reasons and the
    problems encountered are detailed in the paragraphs below.

    4.2 Financial Statements of Provincial and Local-level Governments

    I have concluded and reported that I was unable to form an opinion on virtually all Provincial
    and Local-level Government’s financial statements. Whilst in the majority of cases the
    financial statements had been prepared in the format required by the Finance Instructions
    issued under the PFMA, I concluded that material errors, uncertainties and lack of adequate
    records resulted in the overall financial position and results of operations that were not
    reliable. As a result, I continue to report that I am unable to form an opinion.

    The failure of the Provincial and District Administrators to promote measures and
    responsibilities for transparent and compliant spending of budget allocations continued to be
    a major factor that has contributed to ineffective financial management processes. However,
    whilst top management is tasked with effective management, control and accounting, the
    Parliament has the right to demand answers on accountability and governance issues.

    Other factors affecting the poor level of financial management include:
     Lack of experience and the competency of Provincial Treasury and accounting
    personnel in the provinces;
     Considerable abuse and diversion of government money for a long period of time
    without consequential disciplinary proceedings.
     Absence of regular monitoring and review by the Department of Finance on the work
    of the Provincial/District Treasury, together with timely corrective action;
     Lack of coordination and communication, for example Provincial/District Treasurers
    not advising the Administrators on matters relating to the financial status of the
    Province; and
     A reduced incentive for efficient management of funding due to the Provincial/District
    Treasury being in control of processing but the Administrator being responsible for the
    outcome.

    During this audit cycle my Office finalized and issued 15 audit reports to the Provincial
    Governments and 18 to Urban Local-level Governments. Details of these are presented in
    Section 8.1, Table 1 and Section 8.2, Table 3 respectively, Pages 216 – 218.

    There are currently 321 Local-level Governments around the country (excluding the Local-
    level Governments of the Autonomous Region of Bougainville) as shown in Table 2 of
    Section 8.2, Page 217. Of these, there are 290 Rural Local-level Governments and 31 Urban
    Local-level Governments in existence.

    As reported in my previous years reports, I was not able to carry out any audits of the Rural
    Local-level Governments accounts and records as required by the Organic Law due to
    financial and human resources constraints affecting my Office. I have satisfied myself that the
    revenue and expenditure of the Provincial Governments are largely grants, salaries and
    wages. No significant expenditures were incurred on major works and projects by the Rural
    Local-level Governments.

    Part III 2016 Report Page 10

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  • Results of the Audits of Financial Statements

    I have been able to carry out the audits of some of the major Urban Local–level Governments
    as they are located in the main headquarters of the Provinces. Audits of some Urban Local-
    level Governments were conducted for two to three years due to a backlog of audit in arrears.
    The results of controls testing are reported under Chapter 5 of this report under the respective
    Province headings.

    The financial statements of both Provincial and Urban Local-level Government comprise a
    number of Statements and Appendices. Statements ‘A’, ‘B’, ‘C’, ‘E’, ‘J’ and ‘K’ are
    maintained by the entities’ accounting system. Statements ‘D’, ‘F’, ‘G’, ‘H’ and ‘I’ are
    memorandum statements that are drawn from the accounting system, but are nevertheless
    financial statements in their own right that convey financial information to users and the
    public.

    There are certain accounts, records and registers and procedures that also relate to the
    financial statements through Appendices 1 to 6.

    4.2.1 Statement ‘A’ – Government’s Account Balances

    This is a statement of cash position for the Provincial or Local-level Government at year-end
    which should be supported by bank reconciliations. Statement ‘A’ is intended to show the
    Public Account comprising the Revenue Fund and the Trust Fund as represented by the year-
    end cashbook balances and other cash resources available to the Provincial or Local-level
    Governments.

    Common problems associated with the audit of this Statement include the following:
     Bank confirmations for the bank accounts and Interest Bearing Deposit (IBD)
    Certificates were usually not provided to confirm the closing bank and investment
    balances;
     Cash books and ledgers were often not updated before preparing the bank
    reconciliations and therefore the completed bank reconciliations were cumbersome and
    difficult to audit to ascertain the correct cash balance;
     Opening balances could not be confirmed as correct as these balances did not agree to
    the corresponding closing balances from the previous year; and
     There were adjustments made to opening or closing balances without any supporting
    documents provided.

    Under these circumstances, I was unable to express an opinion on the accuracy of Statement
    ‘A’ and consequently on the financial position of the Governments as at year-end.

    4.2.2 Statement ‘B’- Summary of Receipts and Payments

    This statement is an Operating Account and comparable to a Profit and Loss account in
    commercial practice. Statement ‘B’ is intended to show the summary of actual receipts in
    Statement ‘J’ and actual expenditure incurred in Statement ‘K’.

    Tracing figures from Statements ‘J’ and ‘K’ to this statement in almost all audits showed
    material difference relating to either expenses or revenue. Another frequent error was an
    omission of revenue and expenditure related to Staffing Grant and Teacher Salaries and

    Part III 2016 Report Page 11

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  • Results of the Audits of Financial Statements

    Allowances. This occurred as a result of these salaries and allowances being controlled and
    processed by the Department of Finance. Nevertheless, revenue and expenses arising from
    Staffing Grant and Teacher Salaries and Allowances should have been accounted for by the
    Provincial Government’s system.

    As a result of these omissions, I have qualified this statement due to the net surplus or loss
    disclosed being materially inaccurate and unreliable.

    4.2.3 Statement ‘C’- Receipts and Payments of Trust Funds

    This statement shows trust funds actual revenues and actual expenditure. The most common
    error that frequently resulted in material overstatement was the inclusion of the National
    Government Agencies’ trust accounts. These trust accounts are not related to the Provincial
    Government and should have been excluded from this statement. Consequently, the closing
    balances shown in the statement could not be relied upon. In addition, breaches of the Public
    Finance Management Act (PFMA) were likely to have occurred due to payments made from
    the trust accounts or revenue collected not being in accordance with the Trust Instruments.

    4.2.4 Statement ’D’- Sources and Application of Funds

    This is a summary cash flow statement showing sources of revenue and where these funds
    were applied. The statement also shows reconciliation of changes in bank balances to the net
    movement of the cash flow statement. In all instances this Statement could not be confirmed
    as correct and complete due to audit observations regarding materially incorrect Statements
    ‘B’, ‘J’ and ‘K’.

    4.2.5 Statement ‘E’- Financial Investments

    This statement details term deposits, treasury notes, debentures and similar instruments held
    by the Government. Provincial and Local-level Governments did not maintain investment
    registers to record details of investments. There were instances where records of revenue
    arising from either interest or disposal of these investments, were not made available for audit
    examination. Consequently, I could not verify the accuracy of this statement.

    4.2.6 Statement ‘F’- Statement of Direct Investments, Capital Contributions,
    Equity, Options and Rights

    The purpose of this statement is to show the Government’s investments and ownership in
    companies and statutory authorities that are long-term investments. All assets including
    investments acquired are charged to expenditure in the year the payment is made. However,
    investments are required to be recorded in the accounting system.

    Not maintaining investment registers or other records (i.e. share certificates) was a wide-
    spread problem. According to previous year’s financial statements or other relevant
    information obtained during the audit, the majority of Provincial Governments held
    investments in the form of shareholdings and/or made capital contributions in a number of
    companies. The non-disclosure of the Provincial Governments’ investments in this Statement
    as well as the income derived from such investments is misleading to stakeholders and users
    of the statements.

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    This issue is of a particular concern. Firstly, millions of Kina could be lost due to the lack of
    proper feasibility studies into the financial background and viability of companies in which
    the Government invests. The Provincial Government should ensure that the viability and the
    financial and statutory requirements relating to establishment of companies are properly
    reviewed and analysed prior to investing large sums of public monies in such companies.

    In addition, some of these companies are being audited through private arrangements and not
    by the Government auditors. In my reports, I have advised the Provincial Governments to
    liaise with my Office on assessing whether an audit of those financial statements should be
    undertaken by this Office. This assessment would be based on whether the Provincial
    Government is a major shareholder and has a controlling interest in the company.

    My other concern is that due to inadequate maintenance of records, these investments could
    be lost or misappropriated resulting in significant loss of public funds.

    4.2.7 Statement ‘G’- Statement of Lending

    This is a schedule of all funds lent by the Government, including on-lent loans funds. In
    absence of proper records or registers maintained by the Provincial Governments in relation
    to these matters, I was unable to confirm the accuracy of this statement.

    4.2.8 Statement ‘H’- Statement of Borrowings

    This is a schedule of all funds borrowed or loaned. Liabilities or financial obligations to
    outside organizations outstanding at the end of the financial year are not brought into account;
    however, they are required to be recorded in this statement. In the absence of proper records
    or registers maintained by the Provincial Governments in relation to these matters, I was
    unable to confirm the accuracy of this statement.

    4.2.9 Statement ‘I’- Statement of Loans Guaranteed by Government

    This statement shows the value of commitment of the Government to lenders of monies for
    loan recovery in the event of re-payment defaulted by borrowers. In the absence of proper
    records or registers maintained by the Provincial Governments in relation to these matters, I
    was unable to confirm the accuracy of this statement.

    4.2.10 Statement ‘J’- Receipts Classified under Heads of Revenue Estimates

    In accordance with the budget appropriation classification, this schedule discloses revenue
    received. The total from this statement has to reconcile with Statement ‘B’ as revenue and
    receipts. Revenue consists of all receipts being external (appropriations) or internally
    generated such as collection of fees and fines. In the majority of audits there were significant
    and unexplained discrepancies between the total of this statement and Statement ‘B’.

    The common error was an omission of the actual receipts pertaining to estimated Public
    Servants and Teaching Services Commission Salaries and Allowances, which are retained

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    and administered by the Department of Finance on behalf of the Provincial Government,
    which were (usually) not obtained and posted to the revenue ledgers.

    4.2.11 Statement ‘K’- Expenditure Classified under Heads of Appropriation

    In accordance with the budget appropriation classification, this schedule discloses
    expenditure actually paid. The total from this statement has to reconcile with Statement ‘B’.
    Expenditure consists of all charges for goods and services received and paid for before the
    end of the calendar year and refunds of revenue collected in previous years.

    A common error was an omission of the actual expenditure relating to the Teaching Services
    Commission Salaries and Allowances. Furthermore, reconciling items, such as bank charges,
    fees and other items relating to expenditure which were not adjusted in the cashbook and
    posted to the respective expenditure ledgers were also not shown in this statement.

    4.2.12 Appendix 1

    Appendix 1 reports outstanding commitments as at year end. Provincial and Local-level
    Government’s generally failed to report on the amount of committed fund.

    4.2.13 Appendix 2

    Appendix 2 reports on the outstanding debtors at year end. The majority of Governments did
    not report any debtors. In addition, there were no proper debtors’ ledger or other records such
    as invoices or debit notes maintained which could provide details of debtors at year end. In
    cases where the Government reported outstanding debtors, this balance included outstanding
    debtors from the previous years where no action appeared to have been taken to recover the
    debts.

    4.2.14 Appendix 3

    Appendix 3 shows the value of inventories at year end. In absence of various registers and
    related records, I was unable to verify the accuracy of this appendix.

    4.2.15 Appendix 4

    Appendix 4 is intended to give details of assets of the Provincial and Local-level
    Government. The majority of Provincial Governments did not report any assets, despite
    assets being purchased during the year. Those entities that reported some assets lacked
    necessary details in order for me to verify the existence, condition, location, custodianship
    and value of those assets.

    4.2.16 Appendix 5

    Losses and deficiencies of public monies and property are reported to the Inspection Branch
    of the Department of Treasury and are listed in this appendix. In absence of losses and
    deficiencies register and related records, I was unable to verify the accuracy of this appendix.

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    4.2.17 Appendix 6

    Appendix 6 reports on unacquitted advances at year end. The widespread mismanagement
    and abuse of this entitlement continues to be of concern to me. Provincial and Local-level
    Government failed to completely and accurately account for these advances. Many were
    outstanding for several years with no action taken to recover the advances. My Officers
    observed that in some Provincial Government, revenue collections were illegally loaned to
    officers. There was also no evidence of management taking action to improve on monitoring
    the management of advances.

    4.2.18 Other Issues

    Submission of Financial Statements

    It is mandatory for the Provincial Governments and the Local-level Governments to prepare
    annual financial statements and submit them to the Auditor-General for audit by 30 April in
    the year following. The Auditor-General then, after the completion of the audit, is required to
    report to the Minister for Finance, the Minister responsible for Provincial and Local-level
    Government matters, the National Economic and Fiscal Commission and the Provincial
    Governor.

    At the time of this Report there were 25 financial statements relating to 2014, 2015 and 2016
    financial years yet to be submitted by the Provincial Governments for audit as summarized in
    Table 1 of Section 8.1, Pages 207 – 208.

    Presentation of Financial Statements

    In addition to the annual financial statements, comprising Statements ‘A’ to ‘K’ and
    Appendices 1 to 6, the accounts are accompanied by the Chief Accountable Officer’s
    Statement and the Council Executive Officer’s Statement on the financial operation of the
    Provincial Government or the Local-level Government for the fiscal year ended.

    The financial statements of a number of Provincial Governments did not contain the
    Provincial Administrator’s Statement for the year ended and consequently were not presented
    in the format required by the Finance Instructions. This statement is a written representation
    by the management in which management acknowledges its’ responsibility for the fair
    presentation of the financial statements, and it also represents a means of approving the
    financial statements. Since management had not provided the necessary representations, this
    constituted a scope limitation and affected every statement presented by management.

    Another common error was a presentation error that resulted in material misstatement. In a
    number of financial statements presented by the Provincial Governments, incorrect amounts
    in Statements from ‘A’ to ‘K’ were presented.

    4.3 Financial Statements of Hospital Boards and Provincial Health Authorities

    During the last audit cycle I have issued 16 audit reports to Hospital Boards and Health
    Authorities and 33 financial statements outstanding for submission for audit including ones

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    the audit reports are under preparations, Table 4 of Section 8.3 details the status of the audit
    reports as at 30 September, 2017.

    Some Hospital Boards although financial statements were not submitted for audit, my Office
    undertook controls testing. Results of the controls testing are reported under Chapter 6 of this
    report under the respective Provincial Governments headings.

    I am pleased to report that a number of Hospital Boards and Health Authorities received
    qualified audit opinions compared to past years due to notable improvements in the areas of
    corporate governance, budgetary controls and payments of wages and salaries. Hospital
    management is significantly improving each year because of implementation of audit
    recommendations.

    Nevertheless the majority of the audit reports that I have issued in this audit cycle contained
    Disclaimer Audit Opinions as a result of significant control breakdowns, absence of financial
    records and financial statements qualifications.

    In general, all public hospitals are experiencing problems in preparing and submitting the
    financial statements for audit within the legislative requirement. Namely, Section 63 of the
    PFMA requires a public body (hospital) to submit and the Auditor-General to finalize the
    audit of prior year financial statements by 30 June each year. The same Act states that where
    a public body does not meet this deadline, the Minister may withhold half of the grants
    appropriated to that body for the following fiscal year. Although the public hospitals
    continuously fail to meet the requirement for timely reporting, the sanctions of the Act have
    never been imposed.

    Hospitals are required to prepare their financial statements in accordance with the Finance
    Instructions 2/2004 – Financial Statement Format for Non-Trading Public Bodies. The
    accounts are prepared under the cash basis of accounting with the financial statements
    consisting of: Statement of Revenue and Expenditure, Statement of Changes in Net Cash
    Asset, Schedule of Capital Assets and Liabilities and Accounting Policies.

    Common problems with the hospitals’ financial statements were:
     The records of medical supplies, accounts receivables and payables, capital
    commitments and contingent liabilities, were either non-existent or inadequate;
     Accounting records or asset registers were not maintained to record the details of the
    assets. Consequently, I was not able to verify the completeness, existence, accuracy and
    valuation of the fixed assets at year-end;
     Opening balances of cash at bank could not be confirmed as correct as these balances
    did not agree to the corresponding closing balances from the previous year;
     No advance registers were maintained. Travel advances and subsistence were
    frequently not acquitted. Therefore, this constituted a limitation of scope as I could not
    ascertain the value of the advances and also whether advances were actually utilized for
    the intended purposes;
     In several cases, there was no appointment of financial delegates to approve
    expenditure;

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     In several Hospitals the Board members were not duly appointed and sworn in, in
    accordance with Section 6 of the Public Hospital Act 1994;
     Payment of gratuities in the absence of employment contracts; and
     Overtime payments to employees without approval from the Chief Executive Officer or
    appropriate authorities.

    4.4 Financial Statements of Business Arms and Subsidiary Corporations

    All Provincial Governments had established business arms and have direct or indirect
    investments in subsidiary corporations and companies. At the time of preparing this Report
    in September 2017 there were approximately 5 known entities to be audited as detailed in
    Table 5 of Section 8.4. However, as reported in my previous reports, the full extent of the
    Provincial Governments’ investments therein, or the exact details of these business arms and
    their subsidiary corporations and companies, could not be fully established due to the lack of
    adequate information forthcoming from the Provincial Governments or the failure to maintain
    proper investment records and registers. My Office was unable to determine whether some
    entities were still in operation, defunct, or liquidated. For many years I have been
    unsuccessfully pursuing this information with the respective Provincial Governments, their
    business arms and relevant authorities.

    As reported in my previous reports, the entities have failed to submit their financial
    statements on a timely basis. Financial statements and audit fees have remained outstanding
    for many years in some cases. Consequently, audit of such financial statements could not be
    conducted despite my repeated requests.

    4.5 Financial Statements of Provincial Authorities

    Provincial Authorities are created by an Act of Parliament. The purpose of establishing these
    authorities is to develop infrastructure and to stimulate business activity in the respective
    provinces. Some of these authorities are directly involved in commercial activities as well.

    The audits of the Provincial Authorities are undertaken when the financial statements are
    received and when audit fees are remitted to my Office.

    As at the time of preparing this Report in September, 2017 the status of audits relating to the
    Provincial Authorities were as summarized in Section 8.5, Table 7 doable audits.

    4.6 Other Audits

    Trusts and Funds

    My audit responsibilities also include the audits of Special Purpose Funds and Trusts
    established by Provincial Governments. The audit of these Funds and Trusts is organized in a
    similar manner as the audit of business arms.

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    The audits of the Trust Funds (Trustee Limited) are undertaken when the financial statements
    are received and when audit fees are remitted to my Office.

    As at the time of preparing this Report in September, 2017 the status of audits relating to the
    Provincial Authorities were as summarized in Section 8.6, Table 9 doable audits.

    4.7 The Role of the Treasury Offices

    Provincial and Local–level Governments are independent legal entities with authority for
    managing their financial affairs. In recognizing these fiscal responsibilities, Sections 102 and
    103 of the Organic Law require Provincial and Local-level Governments (P&LLGs) to keep
    their accounting records proper and have sound internal control systems. The P&LLGs are
    required to manage their financial affairs in accordance with provisions of the PFMA.

    The Department responsible for financial management (i.e. the Department of Finance) has
    been tasked to establish, develop and commission Provincial/District Treasury Offices to
    provide accounting, financial management and support services to assist P&LLGs in
    providing community services. The administrative and accounting procedures have been
    specifically designed through the Finance Management Manual to provide these financial
    support services.

    A Provincial/District Treasury is an accounting organization established under Section 112 of
    the Organic Law located at the province area. The Provincial/District Treasurers’ functions
    are to ensure that all financial transactions undertaken by the P&LLGs out of public moneys
    are managed properly. These moneys are to be released strictly in accordance with law and
    contribute to the effective delivery of services to the community. Treasurers from time to time
    may also oversight functions such as banking, postal, and other services. The Secretary of
    Finance is tasked to oversee the affairs of these Treasury Offices.

    I have the responsibility to examine the financial statements and the accounts and records of
    the P&LLGs. For the last several years I have reported and concluded that material errors,
    uncertainties and lack of adequate records existed in Provincial/District Treasuries that
    resulted in the overall financial position and results of operations that were not reliable. As a
    result, I continued to report an inability to form an opinion on the P&LLG’s financial
    statements. The situation has not improved much in 2016 as well.

    The Provincial/District Treasury Offices did not adequately address their responsibilities
    through:
     Providing or ensuring experienced and competent Treasury Office personnel are
    employed;
     Providing adequate risk assessment, planning, manpower or funding to undertake
    internal audits by the Internal Audit Units within the Provincial Government; and
     A lack of coordination and communication between the Treasury Office personnel and
    P&LLGs on financial matters.

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    It is crucial that the Provincial/District Treasury Offices provide necessary support and ensure
    proper accountability and prudent financial management practices are followed when
    maintaining the accounts and records of the P&LLGs.

    The AGO recommends that the Department of Finance and the Department of Treasury have
    immediately to commence proper monitoring and support of their Offices so that P&LLG
    finances and records are properly maintained.

    4.8 Audit Fees

    The Government of PNG does not provide funding for audits of business arms of Provincial
    and Local-level Governments, authorities and trusts. In order to undertake audits on these
    entities I have to recover these costs through raising audit fees. These fees are based on the
    estimated minimal audit work required to enable me to form an opinion on their financial
    statements. Consequently, non-payment of audit fees by these entities results in audit work
    not being undertaken either by my Office or the contractor engaged by me. Based on my
    experience, a significant number of business entities take advantage of the situation and
    remain unaudited for considerable lengths of time. During that time, funds invested by the
    Provincial or Local-level Governments are depleted either due to the inability to effectively
    manage the business or due to misappropriation. As an end result, there is almost no return on
    the Government’s investments and the misappropriation is never identified and reported to
    the Parliament and the public.

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    5. CONTROL ENVIRONMENT

    5.1 Introduction

    The control environment includes the governance and management functions and sets out the
    foundation for effective control activities and monitoring. Control activities are policies and
    procedures that help ensure management directives are carried out and organizational
    objectives are achieved. Control activities, whether within computerized or manual systems,
    have various objectives and are applied at various organizational and functional levels.

    Monitoring of controls is a process to assess the quality of internal control’s performance
    over time. Monitoring is done to ensure that controls are designed appropriately and continue
    to operate effectively. Management monitoring of controls includes considering whether they
    are operating as intended and whether they are modified as appropriate for changes in
    conditions.

    This interim phase of my audit program was designed to assess the reliance that can be placed
    on control structures to produce complete, accurate and valid information for financial
    reporting purposes by the Provincial and Local-level Governments, Hospital Boards and other
    entities that come under my audit mandate.

    In performing the statutory audit responsibilities, I focused primarily on evaluation of internal
    controls, together with such other examinations considered necessary to assess the
    performance of financial operations of the entities, with a view to assessing the reliability and
    integrity of financial data and determining the extent of compliance with applicable laws,
    regulations and directives.

    The audits are not required to search specifically for fraud and therefore, cannot be entirely
    relied upon to disclose all such matters. However, the audits were planned and executed so
    that I can have a reasonable expectation of detecting material misstatements resulting from
    irregularities, including fraud.

    5.2 Responsibilities of Management

    The primary responsibility for the prevention and detection of fraud rests with those charged
    with governance. For example, the Provincial Administrator is the Chief Executive Officer
    and the Administrative Head at the Provincial Government level; the District Administrator at
    the Local-level Government and the Chief Executive Officer at the Hospital or Business Arm
    of Government. The Administrator/Chief Executive Officer is responsible for the preparation
    and presentation of the financial statements and the information contained therein in
    accordance with the Finance Instructions issued under Section 117 of the PFMA and the
    Organic Law.

    The Administrator/Chief Executive Officer is responsible for the efficient management of
    administrative services and is also responsible for keeping proper accounting records, for
    safeguarding the assets of the Provincial Government/Hospital or Business Arms of
    Government and for taking reasonable steps for the prevention and detection of fraud and
    other irregularities.

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    5.3 Responsibility of the Auditor-General

    My audits are performed in accordance with the International Standards of Supreme Audit
    Institutions (ISSAI) as promulgated by the International Organization of Supreme Audit
    Institutions (INTOSAI)and are designed to provide reasonable assurance that a financial
    report taken as a whole is free from material misstatement. Reasonable assurance is a concept
    relating to the accumulation of the audit evidence necessary for the auditor to conclude that
    there are no material misstatements in the financial report taken as a whole. Reasonable
    assurance relates to the whole audit process.

    5.4 Details of Control Issues

    A broad range of internal control issues were raised as part of the interim audit phase. In
    general, the results of the testing of controls at different entities indicated that overall, there
    continue to be significant weaknesses in the control environment. Control activities, such as
    delegations, authorizations, reconciliations, and data processing were not sufficiently robust
    to prevent, detect or correct error or fraud.

    As part of the interim audits, my reviewed processes and their related control activities in the
    following areas:
     Corporate governance;
     The work of the internal audit;
     Appropriation and budget management;
     Revenue and receivables;
     Purchases and payments;
     Human resource management processes;
     Cash management;
     Asset management; and
     Trust account management.

    5.4.1 Corporate Governance

    During the interim audits I assessed whether an agency’s control environment included
    measures that contribute positively to sound corporate governance. These measures should
    support key elements of a control environment designed to provide a sound basis for effective
    financial management.

    The results of the audits identified:
     Lack of Corporate Plans and operational plans. This was particularly evident in the audit
    of the Hospital Boards. This could lead to inability to set targets and performance
    indicators to monitor achievements and to take corrective action. It could also lead to
    inefficient and ineffective service delivery in that stakeholders and communities needs
    are not met;
     The requirement for a minimum of four meetings of a Provincial Assembly during the
    year was not met. In addition, minutes were either not taken or on occasions not certified

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    by the Chairman. These instances increase the risk that important decisions made may be
    nullified and may not hold legal basis in the event if challenged in court; and
     Audit Committees were now established in some Provincial Governments. Audit
    Committees have an important role to play in reviewing and advising on important
    components of corporate governance.

    5.4.2 Internal Audit

    Internal audit is a key source of independent and objective assurance advice on an agency’s
    internal control and risk framework. Depending on the role and mandate of an agency’s
    internal audit function, it can play an important role in assessing the adequacy of processes
    that underpin an agency’s financial statements.

    From my perspective, internal audit is an important component of the system of internal
    controls. Because of similarities in the nature and scope of activities performed by internal
    and external auditors, especially in the public sector, there are significant efficiencies to be
    achieved if external auditors are able to rely on the work of internal auditors. An effective
    internal audit program should facilitate external audit to place greater reliance on the work of
    internal audit, thereby making better use of overall audit resources.

    In that respect, it was disappointing to find that the majority of Provincial Government’s
    Internal Audit Units did not have Audit Charter and Audit Plan to set out the mandate and
    scope of audit coverage. In the majority of cases the Provincial Governments did not provide
    sufficient funds for Internal Audit Units to perform their duties during the year.

    5.4.3 Appropriation and Budget Management

    Appropriations represent the primary source of revenue for most Provincial and Local-level
    Governments and Hospital Boards and Health Authorities. One of the key audit tests was to
    ensure that the expenditures were within the appropriation limit so that expenditure for each
    agency accurately reflects anticipated final budget outcomes in the National budget system.

    The audit of the agencies revealed that controls relating to the management of appropriations
    were generally inadequate. Weaknesses noted related to:
     Incorrectly charged expenditures to Vote items for which funds were not appropriated;
     Erroneously increasing the appropriation without revised budget being approved;
     The Appropriation Acts were sometimes not signed and certified. The non-certification
    of the Appropriation Acts indicates gross negligence of duties by the Chairman and the
    Clerk of the Provincial Assembly; and
     The Provincial Governments on several occasions did not exercise compliance to
    financial instructions with regard to management and utilization of unspent funds at year
    end. Unspent funds were on occasions transferred to Trust Accounts. The unspent funds
    from the operating account are required to be paid out and receipted into the
    Government’s operating account for budget re-allocation in the following year.

    The above mentioned practices expose the Provincial Governments to the risk that the
    unspent funds may be utilized on expenditure not provided for in the Appropriation Act. In

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    addition, money could be spent in excess of the appropriation limit, which will result in
    breaches of the Appropriation Act, the PFMA and the Constitution.

    5.4.4 Revenue and Receivables

    In addition to the appropriation revenue, the Provincial Government collects internal revenue
    from other sources, i.e. motor vehicle registration and renewal, issue and renewal of driver’s
    licenses, and liquor licensing. Hospitals collect revenue through patient fees. I found that the
    relevant Registers were either non-existent or were not updated on a regular basis. As a result,
    total fees collected by either the Provincial Governments or the Hospitals could not be
    ascertained.

    In all Provincial Governments and according to the revenue ledgers, the Government has
    recorded significant shortfall in revenues in respect of the majority of internal revenue
    sources. This indicates the inability of the Provincial Governments to carry out sound and
    prudent revenue forecasting and also the lack of co-ordination and co-operation being
    exercised by the Revenue Unit and other line economic divisions of the Provincial
    Government to effectively plan and direct their efforts to ensure that all internal revenues
    estimated for the year are collected and accounted for.

    In a similar manner, General Hospitals collect income from patient fees and gifts and
    donations. Over the last several years, management of hospitals has not ensured that revenues
    were collected promptly and that the rates of fees, charges, and imposts were reviewed
    annually. In addition, there was no compliance to procedures pertaining to compiling of
    collector statements, thereby undermining the integrity of the revenue collections.

    Other common problems across all entities were:

     Daily collections were frequently not banked nor receiver statements raised and posted to
    the revenue ledger;
     Delays in banking of collections were frequent and on occasions in excess of 30 days;
     There was no segregation of duties maintained between receipting and payment
    processing; and
     There was no register of debtors maintained.

    5.4.5 Purchases and Payments

    Strong controls over purchases and payments will help ensure that the quality of goods or
    services is acceptable and that goods are actually received in good order. Controls including
    reconciliation processes, segregation of duties, appropriate delegations and access controls
    provide an effective means of ensuring that payments are valid and accurately recorded, and
    that funds are not mismanaged or subject to material fraud.

    It was noted that in most cases there was an extremely high rate of non-compliance with
    procurement and payment procedures. The instrument of appointment of Provincial Supply
    and Tenders Board, minutes of Board’s meetings and the Register of Tenders and Quotations
    were generally not made available for audit review. It was also noted that there was a

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    significant use of legal firms and consultants that was not supported by proper
    documentation.
    Other significant issues were:
     Payment vouchers were not examined for completeness and accuracy of claims prior to
    processing the payments;
     Payment vouchers were not certified to confirm the legitimacy of claims prior to
    processing the payments;
     In some cases delegates had approved expenditures in excess of their delegated financial
    limits;
     Written quotations were not obtained to ensure value for money; and
     Reimbursements were made to individuals and organizations for payments made on
    behalf of the Provincial Government using personal money.

    The significant lack of controls over procurement and payments expose the State to the risk
    of:
     Unauthorized purchases;
     Over-commitment of funds without recourse to cash flows;
     Uneconomical purchasing;
     Fraud (kickbacks/secret commissions);
     Staff use purchase orders to purchase personal items;
     Purchasing of inferior or expensive goods and services; and
     Consultancies being engaged at no benefit to the Government.

    5.4.6 Human Resource Management

    Human resource management processes encompass the day to day management and
    administration of employee entitlements and payroll functions. The salaries and wages costs
    within the Provincial and Local-level Governments and Public Hospitals represent one of the
    single largest items of expenditure in their accounts. This represents a significant area of risk
    and management should ensure that these costs are carefully controlled and monitored and
    that those responsible for payroll functions have the necessary skills and knowledge to
    effectively execute their functions.

    Given the significance of employee expenses, and the fact that by their nature some employee
    entitlement calculations can be inherently prone to human error, entities need to have
    adequate control mechanisms in place to capture and process employee data and related
    payments. In addition, key controls should include appropriate approval and review
    processes.

    I observed a number of instances where salaries files of Provincial Government members and
    staff requested for audit were not made available. Consequently, I was unable to verify any
    deficiencies in the salaries and allowances paid to Provincial Government members and staff.

    Common problem identified with Public Hospitals was that acting appointees on contract
    positions were incorrectly claiming gratuity payments. Also, recreational leave fare payments
    to officers and their families had no birth and student concession certificates attached for their

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    legal dependents for legitimacy and validity. Instances were also noted of leave tickets being
    refunded through a travel agent after withholding commission plus processing fee.

    5.4.7 Cash Management

    The cash management process covers the management of bank accounts. Each entity is
    required to ensure it has the necessary liquidity to meet its commitments as they fall due and
    to maintain proper controls over its official bank accounts. In this environment, it is essential
    that adequate management processes are in place to track fund transfers and to safeguard
    assets.

    Bank reconciliation represents an independent verification by management to ensure that
    cashbook transactions reconcile to the bank statements. Performing bank reconciliations
    periodically (monthly) ensures that receipts and payments are accurately processed, cashbook
    or bank errors are identified, and misappropriation or fraud is detected timely. Bank account
    reconciliations are a key control in assisting management to identify anomalies or errors in
    the payment and receipting processes and assist the management to discharge its
    accountability requirements. They need to be prepared within a reasonable period to ensure
    anomalies or errors have been identified and appropriate action undertaken.

    Weaknesses identified related to timely completion of bank reconciliations, including the
    clearance of reconciling items. In almost all audits of the Provincial Governments, the bank
    reconciliations were either not done or were not done in a timely manner.

    5.4.8 Assets Management

    Provincial Governments, Local-level Governments and Hospitals pay significant amounts of
    money on asset purchases, especially on computers and accessories. It is the responsibility of
    the Departmental Head to account for and safeguard the State’s assets.

    The maintenance of a reliable asset register that includes adequate information about assets
    acquired and disposed of, depreciation and asset reconciliations with periodical stock takes is
    a prerequisite to effective asset management. Regular reconciliations of the asset register with
    the entity’s financial systems will help ensure the timely and accurate recognition of asset
    items and facilitate their physical control.

    From the audits of the Provincial Government, Local-level Governments and Hospitals it was
    evident that asset registers were either non-existent or they were not maintained properly.
    This exposes the entity to the risk that assets may not be utilized effectively, may not be
    protected from physical deterioration or maintained properly. Further, periodic stock takes
    were not being conducted to determine the accuracy of assets on hand. This increases the risk
    of loss, theft or fraud.

    5.4.9 Trust Accounts Management

    Provincial Governments are responsible for maintenance of a number of trust accounts. To
    ensure proper accountability of trust money, Part 3 of the PFMA requires maintenance of
    adequate records, that collection of receipts and payments from trust accounts is in
    accordance with the Trust Instruments and for submission of periodic reports to Department
    of Finance including a requirement to submit monthly bank reconciliations.

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    Consistent with the findings from previous years, the Provincial Government could not
    provide formal Trust Instruments, and I was unable to ensure that the collection of receipts
    and the payments of trust money were valid. On a number of occasions the cashbook revealed
    an overdrawn balance.

    5.5 Conclusion

    Properly functioning internal controls are fundamental for entities in meeting their respective
    strategic, operational and financial responsibilities. The results of the current testing of
    controls continue to reveal weaknesses of such magnitude that material error could have been
    processed or misappropriation and fraud could have occurred.

    It is disappointing to report that there has been no change to the situation reported in previous
    years. Almost all the Provincial Governments, Urban Local-level Governments and Hospitals
    have been issued with Disclaimer Audit Opinions and some hospitals with qualified opinions
    signifying that there is still a long way to go in terms of improving their internal control
    issues and financial management issues. With a lot of Government interventions such as
    Government Advisors in state agencies and the establishment of Audit Committees, audit
    issues reported should have been captured and appropriate remedial action taken to address
    them. In this connection, I urge the Provincial Governments, Urban Local-level Governments
    and Hospitals to strictly follow my recommendations and implement them in subsequent
    years.

    The Disclaimer Audit Opinion means there is a lack of reliable audit evidence (non-existent
    or inadequate books and records) and/or reluctance by entity management to provide
    representation that financial accounts and records have been kept in accordance with
    acceptable financial management and accounting policies and procedures. A Disclaimer
    Audit Opinion is the worst audit report that an entity can receive.

    A commitment to strong financial management and accountability continues to be particularly
    challenging but it is also essential to drive improvement in governance within public sector
    entities and thus help ensure delivery of essential services to the citizens of this country.
    Having sound financial management and reporting in the public sector is an important
    contributor in achieving greater transparency, accountability, fiscal responsibility and, hence,
    improved governance.

    However, without robust, transparent, and accountable arrangements for financial reporting
    and financial management, it is not possible to reliably assess whether decision making by
    entities has been in the best public interest. Fundamentally, good governance arrangements
    are essential for an agency to be able to demonstrate to stakeholders that it can be trusted to
    do what it is established to do. Such arrangements assist stakeholders to have confidence that
    agencies not only have the competence and expertise required, but that they have also
    established robust administrative arrangements that enable them to do so efficiently,
    effectively and ethically. These critically important arrangements currently do not exist.

    Weakness in financial management and corrupt practices legitimize bad governance and
    diverts funding and energy away from development plans and achievement of national goals.

    Part III 2016 Report Page 26

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    Poor financial management, coupled with misuse of public money, has contributed to decline
    in service delivery to the public.

    Part III 2016 Report Page 27

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    6.0 RESULTS OF AUDITS PER PROVINCE
    6.1 AUTONOMOUS REGION OF BOUGAINVILLE
    6.1.1 Introduction

    The Autonomous Bougainville Government, Buka Urban Local-Level Government and
    Buka General Hospital are audited annually with or without the financial statements. The
    annual audits of other Local-Level Governments and the Business Arms of the
    Bougainville Government could not be audited due to manpower and financial constraints
    faced by my Office and the lack of records and logistical support from the respective
    Local-level Governments and Business Arms.

    6.1.2 Autonomous Bougainville Government

    The Autonomous Bougainville Government had not submitted its financial statements for
    the financial years ending 31 December, 2014, 2015 and 2016. Fieldwork associated with
    audit of the internal control environment for 2014 financial year had been completed. The
    audit working papers together with the draft Management Letter however, could not be
    located nor the Management Letter reviewed and issued due to the critical health
    condition of the officer responsible for the audit and consequently, the audit working
    papers and draft Management Letter were lost or misplaced in the process. I had
    considered redoing the audit along with the 2015 and 2016 accounts and records to be
    reported in my 2017 Part 3 Report to the Parliament.

    6.1.2.1 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Autonomous Bougainville
    Government had not submitted its financial statements for the years ended 31 December,
    2014, 2015 and 2016 for my inspection and audit.

    6.1.3 Buka Urban Local-level Government

    6.1.3.1 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Buka Urban Local-Level
    Government (BULLG) had not submitted its financial statements for the financial years
    ending 31 December 2012, 2013, 2014, 2015 and 2016 for my inspection and audit.
    However, field work associated with audits of the internal control environment for these
    years could not be conducted due to manpower and financial constraints faced by my
    Office.

    6.1.4. Buka General Hospital Board

    The Buka General Hospital Board submitted its financial statements for the years ended
    31 December, 2013, 2014 and 2015 in February, 2017 after the completion of the audit of
    the internal control environment and the issuance of the Management Letters for the two
    former years in July 2016. Issues identified with the control environment were reported in

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    my 2015 Part 3 Report to the Parliament. The review of the financial statements for 2013
    and 2014 and the audit of the accounts and records for 2015 however, could not be
    conducted due to financial constraints as well as the uncertainties associated with the
    2017 National General Elections.

    6.1.4.1 Status of Financial Statements

    The Buka General Hospital Board had submitted its financial statements for the years
    ended 31 December, 2013, 2014 and 2015, though late, in February 2017 for my
    inspection and audit. At the time of preparing this Report in September 2017, the
    financial statements for the year ended 31 December, 2016 however, was awaited.

    6.1.5 Business Arms

    The Autonomous Bougainville Government had a number of business arms as reported in
    my previous year reports. The status of these business arms however, remained
    unchanged as at the time of preparation of this Report in September 2017 as re-stated
    below:

    6.1.5.1 South Bougainville Engineering

    At the time of preparing this Report in September 2017, the entity had not submitted its
    annual financial statements for the twelve years ended 31 December, 2016 for my review.
    Consequently, audit of the financial statements and the accounts and records for these
    years could not be conducted and therefore, I am unable to report on the affairs, including
    financial position of the entity.

    6.1.5.2 North Solomon Marine Corporation

    At the time of preparing this Report in September 2017, the entity had not submitted its
    annual financial statements for the last twenty four years since 1993 including financial
    year ended 31 December, 2016 for my review. Consequently, audit of the financial
    statements and the accounts and records for these years could not be conducted and
    therefore, I am unable to report on the affairs, including financial position of the entity.

    6.1.5.3 Bougainville Restoration and Development Authority

    The entity had never submitted any financial statements since its inception.
    Consequently, audit of the financial statements and the accounts and records could
    not be conducted and therefore, I am unable to report on the affairs, including
    financial position of the entity.

    Part III 2016 Report Page 29

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    6.2 CENTRAL PROVINCE

    6.2.1 Introduction

    The Central Provincial Government, the Motu Koita Assembly, the Port Moresby
    General Hospital Board, and Central Province Transport Authority (CPTA) are audited
    every year, with or without financial statements. Other LLGs and the Business Arms of
    the Provincial Government could not be fully audited due to manpower and financial
    constraints faced by my Office and the lack of records and logistical support from the
    respective LLGs and Business Arms.

    6.2.2 Central Provincial Government

    The Central Provincial Government had submitted its financial statements for the years
    ended 31 December 2013, 2014 and 2015. Field work associated with audit of the
    accounts and records and the examination of the financial statements for 2013, 2014 and
    2015 financial years were completed and the Management Letters issued were not
    responded by the Central Provincial Administration. The audit reports of 2013 and 2014
    were issued and the 2015 was in progress when this report was prepared in September
    2017.

    6.2.2.1 Comments on Financial Statements – 2013 and 2014

    My reports to the Ministers concerned and other relevant bodies under the Organic Law
    and Audit Act on the Central Provincial Government’s financial statements for the years
    ended 31 December, 2013 and 2014 were issued on the 8 August 2016 and 19 April 2017
    respectively. The reports contained similar Disclaimer Audit Opinions hence, only the
    2014 report is reproduced as follows:

    Basis for Disclaimer Audit Opinion

    Financial Statements

    Presentation Errors

    Finance Instruction 4/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 prescribes the format for the preparation and presentation of
    the financial statements for Provincial Governments. The financial statements of
    Central Provincial Government for the year ended 31 December, 2014 did not fully
    comply with the above Finance Instruction.

    The required disclosures by the Governor and the Administrator on the Provincial
    Budget Performance and the financial performance were not included in the Financial
    Statements. Further, the financial statements were not duly signed and certified by the
    Provincial Administrator and the Provincial Treasurer as required to authenticate its
    presentation and disclosures. Consequently, I am unable to ascertain the completeness

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    and the accuracy of the disclosures in the financial statements of Central Provincial
    Government for the year ended 31 December, 2014.

    Opening Balances

    Because of the disclaimer of opinion issued in respect of the year ended 31 December,
    2013 and because of other limitations on the scope of my audit as noted below, I was
    not able to satisfy myself as to the completeness and accuracy of the opening bank
    balances. Since these opening balances would affect the determination of the financial
    position and the cash flows of the Central Provincial Government in the current year, I
    was unable to determine whether adjustments to the respective Cashbooks, financial
    position and the cash flows, might have been necessary for the year ended 31
    December, 2014.

    Statement A – Cash Balances

    The Fund balance of was disclosed as negative K714,592 in the financial statements.
    However, the closing balances of the bank accounts for the Operating and the Grant
    accounts including other accounts maintained totaling K14,179,386 had a significant
    discrepancy of K13,464,794. The Bank Reconciliations of the respective Bank
    accounts were not properly and correctly done during the year as reconciling items
    carried forward since 2002 in the Operating account were not cleared. Further,
    Schedule 6 had significant un-reconciled items of K9,358,373 which were not properly
    verified, traced and cleared. I was not provided sufficient and appropriate
    documentation including the required explanations for the discrepancy and the
    reconciling items. Consequently, I was unable to verify and confirm the validity and
    the correctness of the Fund balance as at 31 December, 2014.

    Assets

    In Appendix 4 to the financial statements, Assets in the custody of the Central
    Provincial Government were stated as K5,581,600. However, assets acquired
    amounting to K2,315,786 were not recorded as additions during the year. The Fixed
    Assets Register was not properly maintained and kept. As a result, I am unable to
    verify and confirm the accuracy and validity of the Assets in custody of the Central
    Provincial Government for the year ended 31 December, 2014.

    Advances

    Un-acquitted advances at year end were stated as K3,641,401 in Appendix 6 to the
    financial statements. However, Cash advances totaling K346,038 were not recorded
    during the year. I was unable to confirm and verify the validity and the correctness of
    the Advances register as it was inaccurate and not properly maintained and kept.
    Consequently, I am unable to confirm the veracity of Appendix 6 of the financial
    statements for the year ended 31 December, 2014.”

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    Report On Other Legal and Regulatory Requirements

    In addition to the scope limitation and deficiencies in the accounts and records noted
    above, I also wish to report on the breaches of the Organic Law on Provincial
    Governments and Local-level Governments, the Appropriation Act, 2013, the Public
    Finances (Management) Act, 1995 (as amended) and the Public Service (Management)
    Act, 1995 and other enabling legislations.

    Budgetary Control

    The Provincial Government passed an Appropriation Bill of K160,108,870 for the
    2014 financial year. However, I was not provided the relevant budget papers, the
    authorization and the approvals by the Provincial Executive Council (PEC) and the
    documentation for the respective budget reviews held during the year. Further, I was
    not provided an explanation or the necessary documentation for the significant
    variances culminating to noncompliance with Budgetary Protocols and legislations.

    Corporate Governance

    I was not provided the Corporate Plan (2011 – 2015) and the Meeting minutes of the
    PEC Meetings for the year ended. Consequently, I was unable to ascertain the
    governance culture and the veracity of the implementation of those resolutions if there
    were any during the year ended 31 December, 2014. Further, I observed that the
    Internal Audit Unit was under staffed, underfunded and inadequately supported with
    logistics to effectively carry out its responsibilities.

    Procurement and Payments

    There were significant control weaknesses in the Central Provincial Government’s
    maintenance of the accounting records and processes resulting among others these
    anomalies:

     39 payments totaling K6,654,253 were not verified for their validity and
    correctness as supporting documents were not made available for my
    examination;

     Three (3) payments totaling K397,806 were made without the required three (3)
    written quotations;

     Five (5) payments made to various suppliers for procurement of various goods
    and services and Law firms totaling K401,300 and K174,594 respectively did
    not have proper and adequate supporting documentation;

     A total of K11, 699, 644 was incurred for Major and Minor Capital works and
    maintenance programs during the year. However, relevant documentation and
    records including Contract, Completion reports, Certification reports, Tender
    documents and Status reports for the respective projects were not made available
    for audit examination; and

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     In Vote 143, expenditures totaling K2.5 million were incurred for a 2013 roll
    over. However, I was not provided the necessary explanations or the required
    supporting documentation for these expenditures.

    Disclaimer Opinion

    Because of the significance of the matters described above, I am not able to obtain
    sufficient appropriate audit evidence and accordingly I am unable to express an
    opinion on the financial statements of Central Provincial Government for the year
    ended 31 December, 2014.”

    Other Matters

    In accordance with the Audit Act, 1989 (as amended), I have duty to report on
    significant matters arising out of the financial statements, to which the report relates.
    The following are matters of significance:

     Central Provincial Government did not maintain proper accounts and records and
    had consequently breached Section 68(1) of the Public Finances (Management)
    Act, 1995; and

     The receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and
    Organic Law on Provincial Governments and Local-level Governments.”

    6.2.2.2 Management Response

    The management had been given an extended time to respond to my management letters
    queries, however, had not done so at the time of preparation of this Report in September
    2017.

    6.2.2.3 Status of Financial Statements

    The Central Provincial Government had not submitted its financial statements for the year
    ended 31 December, 2016. However, the audit of the internal control environment was in
    progress at the time of preparation of this Report in September 2017.

    6.2.3 Motu Koita Assembly

    The Motu Koita Assembly Act 2007 provided for the establishment of a Local-level
    Government for the Motu Koita people. The purpose of the Act was to enable the Motu
    Koita people to participate actively and meaningfully in the development of the National
    Capital District. Section 113 subsection 4 (c) of the Organic Law require the Assembly to
    submit its financial statements and its accounts and records to be audited by the Auditor-
    General of Papua New Guinea.

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    6.2.3.1 Status of Financial Statements

    The Motu Koita Assembly (MKA) had not prepared its financial statements for the years
    2007 to 2017. I reported in my 2014 Report that audit of the accounts and records and the
    related control environment could not be conducted due to lack of cooperation from the
    officers and non-availability of the necessary records. I had dispensed 2007 to 2012
    financial statements audits under Part V Section 16 (6) of the Audit Act, 1989.

    6.2.4 Port Moresby General Hospital Board

    The Port Moresby General Hospital had submitted its financial statements for the
    financial years ended 31 December 2014, 2015 and 2016. Field work associated with the
    audit of the accounts and records and review of the financial statements for 2014, 2015
    and 2016 had been completed with the Management Letters issued.

    6.2.4.1 Comments on Financial Statements – 2014 to 2016

    My reports for the years ended 31 December, 2014, 2015 and 2016 to the Ministers
    concerned and other relevant bodies under the Public Hospital Act, 1994, Public Finance
    (Management) Act, 1995 and Audit Act, 1989 were all issued in 2017. The reports for the
    three years contained Disclaimer Audit Opinions with similar issues hence; only 2016
    report is reproduced below:

    Basis for Disclaimer Audit Opinion

    Financial Statements

    Presentation Errors

    The financial statements of Port Moresby General Hospital for the year ended 31
    December, 2016 did not comply with the format as prescribed by Finance Instruction
    2/2004 issued under Section 117 of the Public Finances (Management) Act, 1995 (as
    amended). The Hospital did not disclose sufficient explanatory notes to the respective
    items and the non-disclosure of the Schedules for Capital Assets and Outstanding
    Liabilities. As a result, I was unable to express an opinion on the accuracy and
    completeness of the financial statements as the financial statements were not
    submitted as prescribed for its authentication.

    Limitations of Scope of Audit and Disclosure Errors

    I noted the following limitations of scope of audit and disclosure errors which have
    material effect on the accuracy and completeness of the account balances, the financial
    position of Port Moresby General Hospital as at 31 December, 2016 and consequently,
    the reliability of the financial statements.

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    Opening Balances

    Because of the Disclaimer of Audit Opinion issued in respect of the year ended 31
    December, 2015 and because of other limitations on the scope of my audit as noted
    below, I was not able to satisfy myself as to the completeness and accuracy of the
    opening bank balances. Since these opening balances would affect the determination of
    the financial position and the cash flows of the Port Moresby General Hospital in the
    current year. I was unable to determine whether adjustments to the respective Cashbooks,
    financial position and the cash flows, might have been necessary for the year ended 31
    December, 2016.

    Accumulated Fund Balances

    The Accumulated Fund Balance was stated as K11,416,549 in the financial statements.
    Included in the account balances was the Special Projects Account and Operations
    Account balance of K76, 884 and K11,024,370 respectively. The Trust and Special
    Projects Accounts balances of K261,542 and K53 643 respectively included in the fund
    balance did not agree to the respective account summary attached. The MYOB
    Accounting System used was not reconciled to the Excel Spread Sheets records used for
    the population of the financial statements disclosures. As such, I am unable to verify and
    confirm the correctness of the Accumulate Fund Balance for the year ended 31
    December, 2016.

    Receipts and Payments

    The Consolidated Receipts and payments of the Port Moresby General Hospital were
    stated as K54, 283,134 and K46,367,573 respectively in the financial statements. The
    appropriation for personal emoluments from the National Government was stated as K31,
    621,800. The personal emolument balances per the operating account statement stated as
    K12, 638, 868 did not agree to consolidated account summary of K12, 671, 023. With the
    lack of underlying records, periodic salary reconciliations and audit trail, I was unable to
    verify and confirm the account balance as correct for the year ended 31 December, 2016.

    Capital Assets

    Capital assets purchased during the year and the prior year was stated as K1, 786,735 and
    K8, 138,669 respectively in the Consolidated Summary of Receipts and Payments for the
    year ended 31 December, 2016. However, contrary to Note 10 to the financial statements,
    a list of assets and its values were not disclosed in the financial statements. An asset
    register maintained did not include details like date of purchase, purchase price, serial
    numbers and location for ease of reference. As a result, I was unable to confirm and
    verify the total assets valuing more than K9, 925,404 for the year ended.

    Lack of supporting documents in Payments

    Total payments were stated as K46, 367,573 in the consolidated summary of the financial
    statements for the year. However, during my review the supporting documents that could
    not be provided for audit examination was nearly 26% of the total expenditure for the

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    year. Consequently, I am unable to confirm and verify the validity and the correctness of
    the expenditures for the year ended 31 December, 2016.

    Significant Control Weaknesses

    Budgetary Control

    The total expenditure for salaries and wages was K43,373,582 which exceeded the
    appropriated amount of K31,621 800 resulted in an unauthorized over expenditure of
    K11,751,782. Further, the Administrative Consultancy Fees of K2,189,418, Golf day
    Expenses of K89,873, Constructions, Renovation and Improvement expenditure of K4,
    549,430 were not budgeted for and the authority for such expenditures could not be
    sighted. Consequently, I am unable to verify and confirm the validity of these additional
    appropriations as no explanation and documentation were provided for my oversight.

    Payroll/Rental Reimbursements

    The financial statement disclosed K1, 458,814 as monies received from a revenue head
    described as “Payroll/Rental Reimbursements” No underlying records such as sundry
    debtors listing and the related books of accounts were maintained to record the monies
    owed to the Hospital, I was unable to verify and confirm the validity and the correctness
    of the disclosure for the year ended 31 December, 2016.

    A total of K4, 086,895 paid for Short term Contract Officers was not reimbursed and
    remained outstanding as Finance Department had not reimbursed the Hospital.

    Internal Revenue

    Collection and accounting of internal revenues were inadequate as there were no
    collector’s statements, receipts books and deposit books for the internal receipts reported
    in the financial statements. The recording and banking of receipts were not prudent during
    the year.

    Sir Theo’s Foundation had donated K1, 195,276 to the Port Moresby General Hospital
    during the year ended 31 December, 2016. However, this donation was not taken into
    account and reported as such. Consequently, I was unable to confirm the disclosure in
    Receipts as complete and fair.

    Advances

    Advances were made to staff of the Hospital for travel and subsistence and as Salary
    Advances during the year. However, as there were no Advances Register and supporting
    documentation maintained and provided for my review, I was unable to verify and
    confirm the completeness and the validity of the total advances paid and recovered during
    the year.

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    No Service Agreements

    Major Service providers were paid a total of K11, 966,119 during the year. However,
    there was no service Agreements or Contracts entered into by the Hospital for the
    procurement of these services.

    Consultancy Services

    Consultancy and payments to law firms totaling K424, 911 and K746, 847 respectively
    were not proper and lacked disciplined compliant procurement practices.

    Human Resource Records

    Personal files, Employment records and the Staff Establishment Register for employees
    were not properly kept and maintained by the Port Moresby General Hospital during the
    year. Further, there were no salary reconciliations for the salaries paid during the year.

    Inappropriate Employment Contract Allowances

    Contractual allowances paid totaling K164, 500 for nine (9) contract Officers were not
    appropriately approved under the National Doctors Awards 2014 – 2016.

    Corporate Governance

    The governance culture at the Hospital was weak and lacked cohesive direction to
    achieve its corporate goals and mission. Further, the 2011 – 2020 Clinical Services
    Development Plan’s monitoring and evaluation was not conclusively feasible at the board
    level during the year ended 31 December, 2016.

    Internal Audit

    Internal Audits were not conducted by the Hospital or the National Department of Health
    (NDoH) to ensure probity and integrity of the Hospitals systems and processes to safe
    guard against loss, misuse and abuse.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and accordingly, I am unable to express an opinion
    on the financial statements of the Port Moresby General Hospital for the year ended 31
    December, 2016.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

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     Section 19(6) of the Public Hospital Act, 1994 requires minutes of the Board’s
    meetings to be recorded and kept. The Port Moresby General Hospital did not
    adequately and fully maintain minutes of Board meetings during the year ended 31
    December, 2016.

     Section 62(1) of the Public Finances (Management) Act, 1995 requires all public
    bodies to keep proper accounts and records of its transactions and affairs, and to
    develop adequate controls over their assets and liabilities. As discussed in the Basis
    for Disclaimer Audit Opinion paragraphs above, the Port Moresby General
    Hospital had not complied with this requirement.

     Port Moresby General Hospital did not maintain proper books of accounts and
    records and consequently breached Section 68(1) of the Public Finances
    (Management) Act, 1995.”

    6.2.5 Business Arms

    Section 16(2)(f) of the Audit Act 1989 provides for and extends my functions to audit the
    accounts and records of the Provincial Governments and Local Level Governments
    Business Arms and other establishments.

    I am aware of eight business arms of the Central Provincial Government namely, Central
    Province Transport Authority (CPTA); Central Provincial Investments (formerly Central
    Provincial Development Corporation); Central Provincial Travel Agent; Vitis Spices;
    Gokas Construction; Central Air Transport; Baina Agro-Forestry; and Ilimo Farm. CPTA
    had been the only one which had been consistently audited for the years up 2010. None of
    the other entities had submitted their recent financial statements for audit at the time
    preparation of this Report in September 2017.

    6.2.5A Central Province Transport Authority (CPTA)

    The Authority had submitted its financial statements for the year ended 31 December
    2011. The fieldwork associated with audit of the accounts and records and the
    examination of the financial statements had been completed and the Management Letter
    issued to the Managing Director in 2017. The audit report to the Minister and other
    authorities concerned was in progress at the time of the preparation of this Report in
    September 2017.

    6.2.5A.1 Management Response

    The Management had been given an extended time to respond to my Management Letter
    queries however, had not done so at the time of preparation of this Report in September
    2017.

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    6.2.5A.2 Status of Financial Statements

    The Authority had not submitted its financial statements for the years ended 31 December
    2012, 2013, 2014, 2015 and 2016 for my inspection and audit.

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    6.3 EAST NEW BRITAIN PROVINCE

    6.3.1 Introduction

    The East New Britain Provincial Government, Rabaul Urban Local-Level Government,
    Kokopo/Vunamami Urban Local-Level Government, Nonga General Hospital and
    Gazelle Restoration Authority are audited every year, with or without the financial
    statements. Other Rural Local-Level Governments and the Business Arms of the
    Provincial Government could not be fully audited due to manpower and financial
    constraints faced by my Office.

    6.3.2 East New Britain Provincial Government

    The East New Britain Provincial Government had submitted its financial statements for
    the financial year ending 31 December, 2015. Field work associated with examination of
    the financial statements and the audit of the accounts and records were completed with
    the Management Letter issued. Issues highlighted in the Management Letter were
    reported in my 2015 Part 3 Report to the Parliament in July, 2016. The audit opinion
    report was subsequently issued in November, 2016. Issues highlighted in the opinion
    report are as stated below.

    6.3.2.1 Comments on Financial Statements – 2015

    My Report for the year ended 31 December, 2015 to the Ministers concerned and other
    relevant bodies under the Organic Law on Provincial Governments and Local-Level
    Governments and the Audit Act was issued on 30th November, 2016. The report
    contained a Qualified Audit Opinion as reproduced below:

    “Basis for Qualified Audit Opinion

    Presentation

    Finance Instructions 4/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 prescribes the format for the preparation and presentation of the
    financial statements for Provincial Governments. The financial statements of East New
    Britain Provincial Government for the year ended 31 December, 2015 fully complied
    with the formats prescribed by Finance Instructions.

    Disclosure Errors

    I noted the following disclosure errors which could have material effect on the accuracy
    and completeness of the East New Britain Provincial Government Account balances and
    consequently, the financial position of the Provincial Government as at 31 December,
    2015:

    Cash Balances

     The East New Britain Provincial Government cash and bank balance of K14,
    548,981 included an old operating account balance of K4, 422,292. The old

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    operating account balance merely represented an un-reconciled cashbook balance at
    the time when the account was closed and was not supported by actual cash balance
    held in bank account as this account was dormant since 2009. I have reported the
    same in the previous reports to which the Provincial Government had commented
    in response to my Management Letter queries for financial year ended 31
    December, 2014 stating that the old Cash Book amount of K4,422,292 was
    rendered on write off on and was approved by the Finance Secretary on the 3rd of
    December 2014 however, The First Assistant Secretary Finance Reporting and
    Compliance Division was yet to make a decision on correct accounting treatment to
    confirm the removal of the old cash Book; and

     The balance of the Provincial Revenue Fund of K15,820,940 could not be
    confirmed as correct due to errors and material misstatements of operating deficit as
    discussed under the paragraphs on Receipts and Payments for the year ended 31
    December, 2015;

    Receipts and Payments

    The East New Britain Provincial Government reported its total revenue and expenditure
    as K39,935,063 and K47,405,168 respectively with an operating deficit of K7,470,105
    (Statement ‘B’). The accuracy of the revenue and expenditure and therefore, the
    correctness of the operating deficit as at 31 December, 2015 could not be confirmed due
    to the following issues:

     The total actual revenue of K39,935,063 included Staffing Grant totaling K272,300
    only while the IFMS 2233 report (from Department of Finance) disclosed total
    warrant authority amounts as K16,967,000 for public servants salaries and
    K42,861,000 for Teachers’ Salaries. These amounts were also not taken up in the
    respective revenue ledgers although provided for in the Annual Appropriation Act;
    and

     The receipts and expenditure relating to Provincial Special Intervention Program
    (PSIP) funds totaling K9,450,000 and K19,430,893 respectively had not been
    disclosed in this Statement as PSIP funds were budgeted for and taken up in the
    National Government Agencies Database and administered through the Provincial
    Treasury Operating Account.

    Investments

    I noted the following observations in relation to the investments held as well as the
    investment transactions of the Provincial Government during the year:

     Statement ‘E’ showed the Provincial Government held short term financial
    investments in Interest Bearing Deposit (IBD) account as K62,531 with interest at
    year end. The balance of the financial investment however, had not been disclosed
    in Statement ‘A’. Further, the Provincial Government had received and accounted
    for dividends totaling K182, 081 from its short term investments in Gazelle
    International Hotel. Though the proceeds were adequately reported in Statement ‘J’

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    the details including principle investment were not disclosed in Statements ‘E’ and
    ‘A’;
     As reported in my previous reports, the East New Britain Provincial Government
    held investments totaling K2, 689,252 represented by 100% shares in East New
    Britain Development Corporation Ltd valued at K2, 159,139 and K530, 113 in
    Barakopo Plantation Development Corporation Ltd. In the absence of audited
    financial statements of the investment companies as well the investment register
    and other related records required to be held by the Provincial Government, I was
    unable to verify the accuracy, completeness, existence and ownership of the above
    reported investments balance at year end; and

     As stated in my previous years audit reports, the Provincial Government paid K5.5
    Million to a Fishery Project Developer, New Britain Resources Development
    Company as initial part payment to acquire its fifty-one percent (51%) shareholding
    with the Company. The National Fisheries Authority was to have issued twenty
    (20) fishing licenses under the project agreement. I observed however, the fishing
    licenses and share certificates have not been obtained due to legal proceedings by
    the National Fisheries Authority against the project developer, the Provincial
    Government and the State. Further, I was not able to ascertain whether the
    Provincial Government’s investment was still viable in view of the legal issues
    surrounding the fishery project.

    Fixed Assets

    The East New Britain Provincial Government had reported its fixed assets as K69, 564,
    553 as at 31 December, 2015 with an opening balance of K46, 579,775, additions of K23,
    680,784 and disposals of K696, 006. Purchases during year under review totaling K451,
    191 however, had not been recorded in the updated fixed asset register. Consequently, I
    am unable to verify the completeness and accuracy of the value of assets owned and
    under the custody of the East New Britain Provincial Government for the year ended 31
    December 2015.

    Un-acquitted Advances

    Appendix 6 to the financial statements disclosed un-acquitted advances relating to the
    payments of travelling allowances and cash advances totaling K413, 605. The reported
    un-acquitted advances did not include the carried forward balance of K393, 571 thereby
    understating the un-acquitted balance at year end to that extent. Further, errors and
    omissions reported in our 2014 report were not taken into account and amended
    accordingly. Consequently, I am unable to rely on the completeness and accuracy of total
    un-acquitted advances disclosed in the Appendix to the financial statements;

    Trust Accounts

    The East New Britain Provincial Government had operated twelve (12) non-bank trust
    accounts with a total overdrawn closing balance of K1, 271,960 as at 31 December 2015.
    I was not provided evidence of Trust Instruments and other related documents to ascertain
    legality, validity and the appropriateness of the transactions effected through trust
    accounts during the year.

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    Significant Control Weaknesses

    The paragraphs below give a summary of significant control weaknesses identified in the
    East New Britain Provincial Government’s records and processes:

     I was unable to ascertain whether the approval for expenditure totaling K99, 500
    was within the designated financial limit of the respective financial delegate. In this
    connection, several Section 32 Officers who approved Requisitions for Expenditure
    (FF3) continued failing to disclose their designations and financial approval limits;

     In thirty-one (31) instances, payment vouchers with relevant supporting documents
    relating to expenditures incurred totaling K3,386,065 could not be easily located
    due to poor maintenance of payment vouchers. Consequently, the validity as well as
    proper authorization of the claims presented for payment could not be ascertained;

     Payments of grants/subsidies and financial assistances in lump sum from various
    expenditure votes/divisions totaling K14,779,163 to non-profit organizations,
    public authorities, churches, health centers/aid posts, schools, business arms,
    small/medium enterprises and individuals seriously lacked evidences of
    accountability reports by the recipients nor were there records to indicate that the
    Provincial Government had sought such reports;

     The Provincial Government had expended over K7.8m on tenderable capital works
    & maintenance contracts during the year. Meeting Minutes of Provincial Supply &
    Tenders Board (PSTB) convened during the year however, were not properly
    maintained hence, couple of Meeting Minutes could not be provided for my review.
    Consequently, I was unable to verify the validity and genuineness as well as proper
    approval of all other minor capital works and maintenances expenditures incurred
    during the year;

     My review of the Provincial Assembly Members Payrolls revealed the Provincial
    Assembly members were taxed on their normal salary only while all their
    allowances were paid on a fortnightly basis – tax free. The Senior Officers of the
    Provincial Administration were also paid monthly vehicle allowances of K4, 000 –
    tax free. Total payments on vehicle and mileage allowances for the year amounted
    to K1, 178,800.

    Similar issues were raised in the 2014 audit Management Letter which the
    Provincial Administration did acknowledge the fact that all allowances are taxable
    under the Income tax Act. Consequently, the ENB Provincial Administration may
    be liable for non-payment of taxes on the salaries & allowances of the Assembly
    Members and vehicle allowances for its Senior Officers; and

     I sighted no evidence to indicate that fortnightly payroll reconciliations were done
    to verify the correctness of the payroll which have resulted in unbudgeted direct
    payments in overtime allowances totaling K57,000, Retrenchment Benefits,
    Pensions and Gratuities totaling K223,000 and unidentified Alesco Payroll
    expenditure of K41,000

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    Qualified Audit Opinion

    In my opinion, except for the effects of the matters described in the Basis for Qualified
    Audit Opinion paragraphs, the financial statements of East New Britain Provincial
    Government for the year ended 31 December, 2015:

    i. Give a true fair view of the financial position and the results of its operations for the
    year then ended;

    ii. The financial statements have been presented in accordance with the Public
    Finances (Management) Act, 1995, International Public Sector According
    Standards (IPSAS) and other legislations; and

    iii. The controls exercised by the Provincial Government are sufficiently adequate to
    provide reasonable assurance that the receipt, expenditure and investment of
    moneys and acquisition and disposal of public property and incurring of liabilities
    have been in accordance with the Public Finances (Management) Act and other
    legislations.”

    6.3.2.2 Status of Financial Statements

    At the time of preparation of this Report in September, 2017, the East New Britain
    Provincial Government had submitted its financial statements for the year ended 31
    December, 2016. Field work associated with the review of the financial statements and
    the audit of the accounts and records had been completed and the results were being
    evaluated.

    6.3.3 Kokopo/Vunamami Urban Local Level Government

    The Kokopo/Vunamami Urban Local Level Government submitted its financial
    statements for the year ending 31 December, 2015. Field work associated with
    examination of the financial statements and audit of the accounts and records was
    completed with the Management Letter issued and the audit opinion report also issued to
    the Ministers concerned. The paragraphs below detail issues identified with the financial
    statements and the internal control environment.

    6.3.3.1 Comments on Financial Statements – 2015

    My report to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act was issued on 3rd of July, 2017. The report contained a Disclaimer
    Audit Opinion as reproduced below.

    Basis for Disclaimer Audit Opinion

    Presentation

    Finance Instructions 5/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 prescribes the format for the preparation and fair presentation of
    the financial statements for Local level Governments. The financial statements of

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    Kokopo/Vunamami Local level Government for the year ended 31 December, 2015 fully
    complied with the formats prescribed by Finance Instructions.

    Disclosure Errors

    I noted the following disclosure errors which could have material effect on the accuracy,
    completeness and reliability of the Kokopo/Vunamami Urban Local Level Government
    Account balances and consequently, the financial position of the Local Level Government
    as at 31 December, 2015:

    Cash Balances

    The Kokopo/Vunamami Urban Local Level Government Account balance of K322, 190
    is inaccurate in view of the reconciling items identified in the bank reconciliation
    statement for December, 2015 relating to receipts and expenditure that had not been
    adjusted in the cashbook and respective revenue and expenditure ledgers and disclosed in
    Statements ‘J’ and ‘K’ which also affected the accuracy of the bank and cashbook
    balances at year end. Further, the reported account balance as per Note 3 to the accounts
    is incorrect in view of the comments made in relation to the unreliability of the operating
    deficit of K270,430 used to calculate the account balance at year end.

    Receipts and Payments

    Total revenue and expenditure of K3, 368,967 and K3, 639,397 per Statement “B” with
    an operating deficit of K270, 430 are not in agreement with the Trial Balance total
    receipts and expenditure of K3, 371,042 and K3, 658,725 respectively.

    Debtors and receivables

    The ‘Nil’ balance of debtors and receivables reported in Appendix 2 to the financial
    statements is not in agreement with the Aged Receivables Summaries balance of
    K4,374,785 hence, is inaccurate and misleading.

    Fixed Assets

    The fixed assets at historical cost of K701, 312 disclosed in Appendix 4 to the financial
    statements is acutely inaccurate and misleading in view of the following discrepancies:

     The costs of assets disclosed are basically the brought forward balances from 2011
    and as such, did not reflect complete and accurate information on additions and/or
    disposals during the year and those of the prior years;

     The Urban Local level Government did not maintain a proper Assets Register with
    updated details of additions and/or disposals during the year. Consequently,
    additions during the year totaling K322,921 had not been recorded and properly
    accounted for;

     Appendix 3 to the financial statements did not disclose any information or values in
    relation to stocks of inventories held by the Urban Local Level Government as at 31
    December, 2015. Further, I sighted no evidence to indicate that stock takes were

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    done to confirm the completeness and existence all assets and inventories owned
    and under the custody of the Urban Local Level Government at year end.

    Advances

    Appendix 6 to the financial statements showed un-acquitted cash and travel advances as
    K109,134. The accumulative balance of K109,134 contains inherited errors from prior
    years which have not been adjusted. As such, the reported balance of un-acquitted
    advances is inaccurate and misleading.

    Other Records and Registers

    Several other documentations corroborating the financial statements, such as the registers
    of investment, inventory, debtor and borrowings, commitments & arrears, and losses &
    deficiencies were not available for my review. Consequently, I could not ascertain the
    existence, completeness and accuracy of these items in the financial statements.

    Significant Control Weaknesses

    The Management Letter relating to the audit of the accounts and records for the year
    ended 31 December 2015 was issued in June, 2017. The paragraphs below give a
    summary of significant control weaknesses identified in the Kokopo/Vunamami Urban
    Local Level Government’s internal control environment:

     The Urban Local Level Government reported its annual budget estimates for
    revenue and expenditure as K7,024,000. I was not provided evidence including the
    Appropriation Act of 2015 or a certified revised budget and other relevant quarterly
    budget review documents to suggest that the original as well as the revised budgets
    were duly sanctioned and certified prior to implementation;

     The Section 32 Officers failed to disclose their designations, financial limits and
    date of approval on the Requisitions for Expenditure (FF3) when approving
    requisitions to incur expenditure. Consequently, I was unable to verify whether the
    approval for expenditure are within their delegated financial limits;

     Payments totaling K562,091 were not signed by the Certifying Officer to confirm
    the validity, accuracy and genuineness of the claims submitted for payment;

     I observed several instances of ‘splitting of orders’ whereby payments to one
    supplier and/or payee are processed and paid by way of raising several Requisitions
    for Expenditure (FF3) and Finance Form (FF4) in order to circumvent proper
    expenditure authorization procedures such as the Section 32 Officers approving
    expenditures in excess of their designated financial limits;

     The required three (3) verbal and/ or written quotations were not obtained from
    Suppliers in most instances to determine the most economical prices for the
    required goods and services. Further, I observed the payment vouchers for purchase
    of office stationaries and other operational materials and supplies were not
    supported with goods delivery dockets to confirm the accuracy of the items ordered

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    and also to ensure that the correct quantity were delivered and actually received in
    good order by the Urban LLG;

     Advance payments for supply of fuel for the year amounted to K96,497. I sighted
    no evidence to suggest proper controls including proper vehicle log sheets were
    maintained on the usage of the Urban LLG vehicles particularly after business
    hours and on the weekends;

     The Urban Local Level Government had paid a total of K309,496 in 2015 for
    rubbish removal services which included outstanding payments dating back to
    2010. I could not confirm if the payments were legal and genuine in the absence of
    any proper ledgers and/or registers to record details of outstanding invoices;

     Grants and financial assistances to various recipients including the fifteen (15)
    Local Level Government Wards and various individuals and groups totaling
    K127,966 had not been acquitted by way of furnishing accountability reports to the
    Urban Local Level Government. Further, I sighted no evidence to indicate that the
    Urban Local Level Government had sought these reports from the recipients;

     A total of K119,333 was paid out in vehicle allowances to three Senior Officers of
    the Urban Local-level Government using internal revenue funds on vote items 125
    and 135 which are intended for transport and fuel and other operational expenses
    respectively. I noted these payments as improper and an indication of non-
    adherence to proper budgetary control practices;

     The Kokopo/Vunamami Urban LLG had inappropriately charged expenditures
    totaling K18,072 to expenditure vote items 221 and 126 where funds were not
    allocated for the purposes intended;

     Payments of reimbursement claims by the Town Manager totalling K9,024 not
    supported with any valid supporting documents and legitimate evidence of prior
    approval by the District Administrator;

     Two (2) payment vouchers in respect of payments of K15,000 and K9,100 paid to a
    Joe Paraide and Alanda Trading Limited for truck and vehicle hires were missing
    from files and as such, I could not ascertain the validity as well as proper
    authorization of the claims presented for payment; and

     I observed serious lack of proper monitoring and recovery exercises on travel and
    cash advances resulting in substantial amounts dating several years back, remained
    un-acquitted as at 31 December, 2015.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I am not able to obtain
    sufficient appropriate audit evidence and consequently, I am unable to express an opinion
    on the financial statements of Kokopo/Vunamami Urban Local-level Government for the
    year ended 31 December, 2015.

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    Other Matters

    In accordance with the Audit Act, I have duty to report on significant matters arising out
    of the financial statements to which the report relates. The following are matters of
    significance:

     The Kokopo/Vunamami Urban Local Level Government did not maintain proper
    accounts and records and has consequently breached Section 68(1) of the Public
    Finances (Management) Act 1995; and

     The receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments”.

    6.3.3.2 Management Response

    Management had not responded to matters raised in my Management Letter queries.
    Consequently, I was not advised of any improvement at the time of preparation of this
    Report in September, 2017.

    6.3.3.3 Status of Financial Statements

    At the time of preparation of this Report in September, 2017, the Kokopo/Vunamami
    Urban Local-Level Government had not submitted its financial statements for the year
    ended 31 December, 2016 for my inspection and audit.

    6.3.4 Rabaul Urban Local Level Government

    The Rabaul Urban Local-Level Government submitted its financial statements for the
    year ended 31 December, 2015. Field work associated with examination of the financial
    statements and audit of the accounts and records was completed with the Management
    Letter issued and the audit opinion report also issued to the Ministers concerned. The
    paragraphs below detail issues identified with the financial statements and internal control
    environment.

    6.3.4.1 Comments on Financial Statement – 2015

    My report to the Ministers concerned and other relevant bodies under the Organic Law
    and Audit Act on the Rabaul Urban Local-Level Government’s financial statements for
    the year ended 31 December, 2015 was issued on 20th April 2017. The report contained a
    Qualified Audit Opinion as reproduced below.

    Basis for Qualified Audit Opinion

    Presentation Errors

    Finance Instructions 5/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 prescribes the format for the preparation and presentation of the

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    financial statements for Local level Governments. The financial statements of Rabaul
    Urban Local-level Government for the year ended 31 December, 2015 had the following
    non-compliance and presentation issues:

     Except for the Mayor’s, the District Administrator’s statements on the Urban Local
    Level Government’s budget and financial performance were not included;

     The Mayor’s statement on the Urban Local-level Government’s budget
    performance incorrectly stated the 2015 approved budget appropriation as
    K1,849,400 when he had certified the approved budget ceiling of K2,280,000 for
    the fiscal year ending 31 December, 2015;

     The set of financial statements provided to audit were noted as draft hence, were
    not signed and certified by both the District Administrator and District Treasurer to
    authenticate the financial statement as legal documents presenting true and fair
    view of financial activities of the Rabaul Urban Local-level Government during the
    fiscal year ended 31 December, 2015;

     Statement ‘C’ had misleading column headings with the both opening and closing
    balance dates shown as 31 December, 2014 instead of 01 January 2015 and 31
    December, 2015; and

     The Rabaul District Treasurer did not exercise due care in the preparation and
    presentation of the financial statements. Consequently, the set of financial
    statements contained inconsistencies and errors in respect of the financial year of
    reporting. The errors were noted throughout Notes 3 & 4, 7 to 17, Statements ‘C’,
    ‘E’ to ‘I’ and Appendices 2 to 6.

    Disclosure Errors

    I noted the following disclosure errors which could have material effect on the accuracy,
    completeness and reliability of the financial statements of the Rabaul Urban Local-level
    Government Account balances and consequently, the financial position as at 31
    December, 2015:

    Cash Balances

    The Rabaul Urban Local Level Government cash and bank balance of K541,927 could
    not be confirmed as correct due to errors and material misstatement of operating deficit as
    disclosed under the paragraph on Receipts and Payments for the year ended 31 December,
    2015.

    Receipts and Payments

    Statement ‘B’ presented total revenue and expenditure as K1,205,551 and K1,350,041
    respectively with an operating deficit of K144,490. I observed there were reconcilable
    items relating to receipts and expenditure that were not adjusted in the cashbook and
    relevant revenue and expenditure ledgers and disclosed in Statements ‘J’ and ‘K’ which
    also affected the bank and cashbook balances at year end.

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    Fixed Assets

    The total cost of fixed assets of K1,899,556 disclosed in Appendix 4 to the financial
    statements is inaccurate and misleading in view of the following discrepancies:

     The Appendix showed opening balance totaling K2,362,914 however, did not
    reflect complete and accurate information on additions and/or disposals during the
    year to arrive at the reported closing value;

     Fixed Asset Register maintained as supporting schedule to Appendix 4 recorded
    fixed assets at a total cost of K2,677,914 at 31 December, 2015 hence, not in
    agreement with Appendix 4;

     Appendix 3 to the financial statements did not disclose any information or values in
    relation to stocks of inventories held by the Urban Local Level Government as at 31
    December, 2015; and

     The Fixed Asset Register maintained by the Urban Local-level Government was
    not updated on a current basis with complete and accurate information on all assets
    purchased and/or disposed of during the year.

    Advances

    The summary schedule of Appendix 6 to the financial statements stated un-acquitted
    travel and cash advances as K22,523 while the detailed scheduled reported a balance of
    K28,312 respectively resulting in a variance of K5,789 as at 31 December, 2015. Further,
    Note 17 to the financial statements disclosed a balance of K15,769 as at 31st December,
    2015 which were all not agreeing to the PGAS Advances Register outstanding total of
    K24,132 at year end. As such, the reported balances of un-acquitted advances are
    inaccurate, misleading and unreliable.

    Other Records and Registers

    Several other documentations corroborating the financial statements, such as the registers
    of investment, inventory, debtor and borrowings, commitments & arrears, and losses &
    deficiencies were not maintained hence, not available for my review. Consequently, I
    could not ascertain the existence, completeness and accuracy of these items in the
    financial statements.

    Significant Control Weaknesses

    The paragraphs below give a summary of significant control weaknesses identified in the
    Rabaul Urban Local Level Government’s internal control environment:

     The annual budget appropriation of K2,280,000 was approved by the Urban LLG
    Finance Administration/Planning/LLG and Lands Committee on 13 November,
    2014. My review of the expenditure ledgers however, revealed funds totaling
    K1,733,653 were released to the Urban Local-level Government. I was not
    provided evidence including the Appropriation Act of 2015 or a certified revised
    budget and other relevant quarterly budget review documents to suggest that the

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    original as well as the revised budgets were duly sanctioned and certified prior to
    implementation;

    ● The Rabaul Urban LLG did not adhere to financial procedures in relation to
    maintenance of quotation registers and obtaining the required three (3) verbal and/
    or written quotations from suppliers; and

     There was a lack of proper monitoring and recovery exercises relating to travel and
    cash advances resulting in substantial amounts remaining un-acquitted, from 31
    December, 2015.

    Qualified Audit Opinion

    In my opinion, except for the effects of the matters referred to in the qualification
    paragraphs above, the financial statements of Rabaul Urban Local – level Government for
    the year ended 31 December, 2015:

    a) have been prepared in accordance with the Finance Instructions issued under the
    Public Finances (Management) Act 1995; and

    b) Give a true and fair view of the financial position and the results of its operations
    for the year then ended in accordance with the Finance Instruction.

    Other Matters

    In accordance with the Audit Act, I have duty to report on significant matters arising out
    of the financial statements to which the report relates. The following are matters of
    significance:

     The Rabaul Urban Local Level Government did not maintain proper accounts and
    records and has consequently breached Section 68(1) of the Public Finances
    (Management) Act 1995; and

     The receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments”.

    6.3.4.2 Management Response

    Management had not responded to my audit Management Letter queries. Consequently, I
    was not advised of any improvements at the time of preparation of this Report in
    September, 2017.

    6.3.4.3 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Rabaul Urban Local-Level
    Government had not submitted its financial statements for the year ended 31 December,
    2016 for my inspection and audit.

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    6.3.5 Nonga General Hospital

    The Nonga General Hospital Board had submitted its financial statements for the years
    ended 31 December, 2014 and 2015. Field work associated with examination of the
    financial statements and audit of the accounts and records was completed with the
    Management Letters issued and the audit opinion reports also issued to the Ministers
    concerned. The paragraphs below detail issues identified with the financial statements and
    the internal control environment.

    6.3.5.2 Comments on Financial Statement – 2015

    My reports to the Ministers concerned and other relevant bodies under the Organic Law
    and Audit Act on the Nonga General Hospital Board’s financial statements for the years
    ended 31 December, 2014 and 2015 were issued on 1st May and 10th May, 2017
    respectively. The reports for the two years contained Disclaimer Audit Opinions with
    similar issues hence; only 2015 report is reproduced below:

    Basis for Disclaimer Audit Opinion

    Disclosure Errors

    I noted the following disclosure errors which render the financial statements of Nonga
    General Hospital for the year ended 31 December, 2015 inaccurate, misleading and
    unreliable:

     I was unable to confirm the accuracy and completeness of the Hospital Operating
    and Hospital Fees Trust Accounts closing fund balances of K22,622 and K554,680
    disclosed in the respective financial statements due to inherited errors and
    omissions of receipts and payments from prior years which were not corrected in
    the current year accounts.

     The total income of K17,613,239 disclosed in the statement of cash receipts and
    payments of the Hospital Operating Account had been materially misstated as it
    includes the Hospital’s annual appropriation of K16,750,943 and prior year carry
    over funds totaling K819,187 in note 4. The prior year carry over funds had been
    accounted for as income in the year of receipt while the annual appropriations are
    merely budget estimates that had been erroneously taken up as actual receipts;

     The total expenditure on personal emoluments of K12,800,373 disclosed in the
    Statement of Receipts and Payments of the Hospital Operating Account is grossly
    inaccurate and misleading as it includes the Hospital’s annual salaries and
    allowances budget estimates of K11,648,500 as against the actual expenditure on
    salaries and allowances of K14,944,760 as per the Hospital’s 2015
    Manpower/Payroll Audit Report. Consequently, the total expenditure on personal
    emoluments is both an understatement to the tune of K3,296,260 in view of the
    actual expenditure as well as misleading to the extent that it includes budget
    estimates that had been erroneously taken up as actual expenditure on salaries and
    allowances;

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     The Schedule of Assets accompanying the Statements of Receipts and Payments of
    the Hospital Operating Account and Hospital Fees Trust Account showed a
    combined closing assets at historical cost of K7,513,398 as at 31 December, 2015. I
    observed however, that the closing assets at cost of K984,120 disclosed in note 4 –
    Schedule of Assets and the report on assets accompanying the statement of receipts
    and payments for Hospital Fees Trust Account was the same closing balance
    disclosed in the Statement of Cash Receipts and Payments for 2014. Further, the
    combined Hospital Operating and Fees Trust Accounts closing assets at historical
    cost of K7,513,398 and the Hospital Operating Account closing assets at cost of
    K6,529,278 are also misleading as the closing assets at historical cost per note 4 –
    schedule of assets for Hospital Operating Account had K8,766,770 in 2014 and
    therefore, the opening for 2015 which, if accurate, would have resulted in a greater
    yearend assets balance and an increased combined closing assets at historical cost
    as at 31st December, 2015 given the purchases and disposals per assets report for
    2015 of K994,116 and K136,774 respectively; and

     The Assets Registers maintained by the Nonga General Hospital was incomplete
    and had not been updated to account for all assets transactions during the year.

    Significant Control Weaknesses

    My review of the accounts and records revealed significant control weaknesses including
    the following:

     The Statements of Receipts and Payments for the Hospital Operating Account and
    Fees Trust Account showed combined revenue receipt for the year ended 31
    December, 2015 as K18,263,567. However, the Hospital did not maintain proper
    revenue heads and/or codes nor operated a computerized accounting system to
    ensure that all revenue received are accurately accounted for and recorded into the
    revenue ledgers. As such, I am unable to confirm the accuracy of the actual
    revenues received;

     Nonga General Hospital had expended funds totaling K395,219 from the Hospital
    Operating Account on Wages (vote item 112) which had no funding allocation
    provided in the 2015 Annual Appropriation;

     Nonga General Hospital had paid expenditures in respect of Overtime and
    Gratuities and other employee benefits under vote item 141 from the Hospital
    Operating Account as well as through the HRM ALESCO Payroll System resulting
    in a total over-expenditure of K375,611;

     Funds totaling K400,000 were transferred from the Hospital Operating Account
    into the Hospital Fees Trust Account based on the Hospital Board approval.
    However, I was not provided evidence to suggest that the transfer of a balance of
    K100,000 from the K400,000 was sanctioned and approved by the Board;

     The Hospital continued to violate the requirements for obtaining the three (3)
    required verbal and/or written quotations from suppliers to determine the most
    economical prices for goods and services procured;

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     I observed most payments made in respect of purchases of medical supplies and
    equipment from outside of the province lacked valid supporting documents such as
    formal suppliers’ invoices, goods delivery reports and airways bills/consignment
    notes from couriers as evidences to show that the quantity of goods ordered have
    been delivered and received intact;

     Nonga General Hospital did not have a duly appointed Certifying Officer and as
    such, all payment vouchers were not certified to determine the legitimacy and
    validity of the expenditures incurred prior to processing payment of the claims;

     The Chief Executive Officer and Director Corporate Services approve expenditure
    on Requisitions for Expenditure (FF3) as Section 32 Officer and Financial Delegate
    respectively and at the same time are signatories to the bank account. Consequently,
    there had been no segregation of duties in the expenditure authorization and
    approval processes;

     Examination of sampled expenditures on various minor contract works between
    K50,000 and K500,000 revealed the payment vouchers lacked the supporting
    appropriate documents including the required three (3) verbal and/or written
    quotations from suppliers, minor contract works agreements, job completion
    certificates or work in progress reports and the Hospital Board’s approval of
    selected pre-qualified contractors;

     The Nonga General Hospital lacked proper monitoring and recovery exercises on
    travelling allowances and cash advances totaling K37,833 that had remained un-
    acquitted as at 31 December, 2015. Further, I observed payment of cash advances
    to pay-mistress from the Hospital Operating Account and Hospital Fees Trust
    Account totaling K94,171 that were not recorded as cash advances and
    consequently, had not been acquitted at year end;

     The Hospital did not maintain appropriate records of its creditors. In the absence of
    these records, I was unable to ascertain the total amount of outstanding
    commitments and liabilities as at 31 December, 2015;

     Proper accounting was not adhered to by way of journal entries using the double
    entry accounting principle to account for adjusting transactions of revenue and
    expenditure items in updating the cash book and corresponding ledger accounts in
    2015; and

     The Hospital did not maintain adequate inventory records nor had an effective
    system and procedures in place to ensure important inventories are safeguarded and
    properly accounted for.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and consequently I am unable to express an opinion

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    on the financial statements of Nonga Base Hospital for the year ended 31 December,
    2015.

    Other Matters

    In accordance with the Audit Act 1989, I have duty to report on significant matters arising
    out of the financial statements, to which the report relates. The following are matters of
    significance:

    Section 63(3) of the Public Finances (Management) Act 1995 requires the Chief
    Executive to present the financial statements in a form and design approved by the
    Minister. I am, however, unable to confirm that the Minister has approved or has
    prescribed the format of the financial statements in terms of the Public Finances
    (Management) Act 1995”.

    6.3.5.3 Management Response

    The Hospital Board had fully responded to each of my audit queries with indication that it
    had taken steps or in the process to remedy issues highlighted as deemed appropriate.

    6.3.5.4 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Nonga General Hospital
    Board had not submitted its financial statements for the year ended 31 December, 2016
    for my inspection and audit.

    6.3.6 Business Arms

    Section 16(2)(f) of the Audit Act 1989 provides for and extends my functions to audit the
    accounts and records of the Provincial Governments and Local-Level Governments
    Business Arms and other establishments.

    I am aware of business arms of the East New Britain Provincial Government namely, East
    New Britain Development Corporation Ltd (ENBDCL) and Barakopo Plantation
    Development Corporation Ltd.

    6.3.6A East New Britain Development Corporation Ltd

    The East New Britain Development Corporation Limited (ENBDC) is a business arm of
    the East New Britain Provincial Government. It operates subsidiaries in varous industries
    such as food retails, port services and construction. The main subsidiaries are as listed:

     Andersons Foodland Limited
     East New Briain Supermarkets Limited
     ENB Port Services Limited
     Dawapia Construction Limited

    There is also a related entity – New Briain Copra and Cocoa Co-operative Limited.

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    6.3.6A.1 Status of Financial Statements

    As in the past, the ENBDCL had engaged services of the private accounting firms to
    conduct audits of its accounts and records.
    At the time of preparation of this Report in September 2017, the entity had submitted its
    financial statements for the financial years ending 31 December, 2013, and 2014. The
    examination of the financial statements and the audit of the accounts and records
    however, could not be conducted due to manpower and financial constraints faced by my
    Office.

    The financial statements for the financial years ending 31 December, 2015 and
    2016 had not submitted for my inspection and audit.

    6.3.6B Barakopo Plantation Development Corporation Ltd

    As at the time of preparing this Report in September, 2017, the Barakopo Plantation
    Development Corporation Ltd had failed to submit any recent financial statements for my
    inspection and audit.

    6.3.6C Gazelle Restoration Authority

    The Gazelle Restoration Authority was established by the Gazelle Restoration Authority
    Act, 1995 following the volcanic destruction of Rabaul and the surrounding areas. The
    Authority is responsible for the cleaning up tasks, restoration of essential services in the
    affected areas and replacement of infrastructures. Program activities have been financed
    through funding arrangements with the International Bank for Reconstruction and
    Development (IBRD), European Union (EU) and partially through AusAID.

    6.3.6C.1 Status of Financial Statements

    At the time of preparation of this Report in September, 2017 the Gazelle Restoration
    Authority had not submitted its financial statements for the years ended 31 December,
    2015 and 2016 for my inspection and audit

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    6.4 EAST SEPIK PROVINCE

    6.4.1 Introduction

    The East Sepik Provincial Government (ESPG), Wewak Urban Local-level Government
    (WULLG) and Wewak General Hospital (WGH) are audited every year, with or without
    financial statements. The Maprik Urban Local-Level Government was for the first time
    audited by my Office during this audit cycle. Other LLGs and Business Arms of the
    ESPG & LLGs within the Province could not be audited due to manpower and financial
    constraints faced by my Office and the lack of records and logistical support from the
    respective Governments.

    6.4.2 East Sepik Provincial Government

    The East Sepik Provincial Government (ESPG) had submitted its financial statements for
    the financial year ending 31 December 2015 for my inspection and audit. Fieldwork
    associated with the audit of the financial statements had been completed with a
    Management Letter issued and a Disclaimer Audit Opinion issued to the Minister
    concerned and other relevant bodies. The paragraphs below details the issues identified
    with the financial statements and the control environments:

    6.4.2.1 Comments on Financial Statements – 2015

    My report to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act was issued in September, 2017. The report was a Disclaimer Opinion as
    reproduced below:

    Basis for Disclaimer Opinion

    Presentation of Financial Statements

    Finance Instruction 4/2000 issued under Section 117 of the Public Finances
    (Management) Act 1995 state the prescribed format for the preparation and presentation
    of the Financial Statements for Provincial and Local Level Governments. The Financial
    Statements of East Sepik Provincial Government for the year ended 31December, 2015
    did not contain the Governor’s Declaration on the East Sepik Provincial Government’s
    budget performance and the Provincial Government and Treasury Accounting
    Organization Chart as required. Subsequently, the financial statements were not presented
    in the format required by the Finance Instructions.

    Opening Balances

    Because of the disclaimer opinion issued in respect of the year ended 31 December, 2014
    and of other limitations on the scope of my audit as noted below, I was not able to satisfy
    myself as to the completeness and accuracy of the opening balances. Since these opening
    balances would affect the determination of the financial position and the cash flows of the
    East Sepik Provincial Government in the current year, I was unable to determine whether

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    adjustments to the respective cashbooks and the financial positions, might have been
    necessary for the year ended 31 December 2015.

    Cash balances

    I am unable to express an opinion on the accuracy of the total fund balance of
    K16,755,533 for East Sepik Provincial Government as at 31 December 2015 due to:

     Significant reconciling items identified in the bank reconciliation statements of the
    operating, grant and provincial works trust accounts that had not been adjusted in
    the respective cashbooks and hence affected the balances and the subsequent total
    fund balance at year end. I was not provided explanations and documentary
    evidence of adjustments made if any. Consequently, I was unable to confirm the
    completeness and accuracy of the year-end cash at bank balances disclosed in the
    Statement ‘A’;

     Unpresented cheques dating back to 2010 in the ESPG grant account and the
    Provincial Works Trust Account were not written back to their respective cash
    books hence, these cash books were unreliable;

     The 2015 opening cash book balances for the Provincial Works and the Stormwater
    Trust Accounts did not agree to their 2014 audited closing balances. Consequently,
    I was unable to confirm the accuracy of the closing balances for these trust
    accounts;

     In the absence of the bank reconciliations for the Storm Water Drainage Project
    accounts and the Marienberg trust account I was unable to confirm the accuracy
    and completeness of their total cash book balances of K5,832,439 as at year then
    ended.

    Receipts and Payments

    I am unable to verify the completeness and accuracy of the receipts of K54,011,598
    payments of K54,750,404 and the subsequent deficit of K738,805 in Statement ‘B’ and
    the related Statements ‘J’ and ‘K’ due to:

     The TMS 55 report on Staffing and Teacher’s salaries grants component not
    recorded in the books of accounts and reported subsequently. Consequently, the
    Statements ‘B’, ‘J’ and ‘K’ did not appropriately show the financial performance of
    the provincial government during the year under review; and

     Reconciling items of revenue totaling K1,001,874 and expenditure totaling
    K899,147 were not posted to the revenue ledgers and the cash book and hence, not
    reported in statements ‘B’, ‘J’ and ‘K’. I was not provided explanations and
    documentary evidence of adjustments made if any. Consequently, I was unable to
    confirm the completeness and accuracy of the receipts and payments;

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    Investments

    The East Sepik Provincial Government had a business arm such as Sepik Coffee and
    shares held with South Sea Tuna. Records pertaining to these investments were not made
    available for my examination and as such I was unable to confirm the nil balances
    disclosed in statements ‘E’ and ‘F’.

    Assets

    Good asset management was not practiced and in the absence of a complete assets
    register, annual stock-takes and proper assets policy, I was unable to confirm the
    existence, custody, condition and value of assets owned by the East Sepik Provincial
    Government as at 31 December, 2015. Furthermore, assets totaling K635,288 purchased
    during the year could not be confirmed in absence of the asset register.

    Advances

    Appendix 6 revealed total un-acquitted advances of K14,692,806 as at 31st December
    2015. In the absence of proper records such as advance register, acquittal files, reminder
    notices and evidence of recovery actions taken against defaulters, I was unable to confirm
    the accuracy and completeness of the total un-acquitted advances as at year end.

    The Management had since responded to my audit observations relating to the disclosures
    in the financial statements and had assured me of its commitment to make improvements
    in areas concerned in future.

    Significant Control Weaknesses

    There was significant control weaknesses identified in the Provincial Government’s
    records and processes, as follows:

    a) Budget estimates for all the trust accounts were not prepared and submitted to the
    Minister for Treasury for approval as required under the trust instrument in
    accordance to the Public Finance Management, Act;

    b) The Provincial Government did not maintain a proper customer data base with an
    effective billing system in the revenue section for the collection of revenue from the
    major internal revenue sources such as Goods and Services Tax (GST), Liquor
    Licensing Fees and Motor Traffic Registration Fees resulting in under collection of
    internal revenue totalling K3,074,620. Further, evidence of check and balances
    were non-existent and segregation of duties being the key element of control was
    lacking. Staff were performing overlapping tasks in cash collection, receipting,
    recording and banking;

    c) I was unable to establish if the East Sepik Provincial Supply and Tenders Board
    (PSTB) was functioning effectively in ensuring that proper procurement procedures
    were adhered to in incurring major procurements of goods and services in the
    province due to PSTB meeting minutes, prequalification listing of contractors,
    Technical and Evaluation Committee (TEC) evaluation and analytical reports,

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    tenders and quotations registers and tender documents were not made available for
    my examination. Consequently, I was unable to establish if requirements for
    procurement of goods and services were adhered to.

    d) Appointment Instruments of all Financial Delegates and Authorized Requisitioning
    Officers (ARO) and their specimen signatures were not maintained and produced
    for my examination when requested. Consequently, I was not able to verify the
    names and signatures on the requisitions raised and processed for payment; and

    e) My examination of Paid Accounts on sample basis revealed unsatisfactory matters
    where economical purchasing practices were not seriously observed to maximize
    acquisition of goods and services with limited resources:

     Three (3) quotations were not obtained in almost all payment vouchers sighted.
    This practice departure from the requirements proper procurement procedures as
    per the Financial Manual and payments totaling K2,531,136 were charged to
    incorrect expenditure votes;

     Financial Assistance totalling K1,185,486 and grants/subsidies totalling
    K3,495,026 were paid to individuals and other organisations. In the absence of
    proper policies and guidelines for accountability over these payments, I was unable
    to ensure the validity of these payments;

     Expenditures totaling K837,075 were paid to Bank South Pacific (BSP) for airfares
    for officers. There was no evidence of actual airfares being issued. In the absence
    of proper controls, there was high possibility of officers en-cashing the cheques;

     Expenditures totaling K643,896 were paid to Travel and Logistics Agent, a travel
    agent based in Wewak, for travel expenses including airfares and accommodation
    for officers of the Provincial Government. These payments were seen to be non-
    compliance to requirements of proper procurement procedures and the requirement
    for acquittal stipulated in the Public Finances (Management) Act;

     Payments totaling K2,803,690 were made to private car companies for hire of
    vehicles. In the absence of proper procurement procedures, these vehicle hire
    companies appeared to be handpicked thus resulting in the excessive and
    unjustifiable hire costs;

     A total amount of K2,048,649 was paid to various fuel suppliers during the year. In
    the absence of an effective control mechanism to monitor the supply and usage of
    fuel for the vehicle fleets, I was unable to ensure if the fuel account was used with
    due care for wastage and extravagant;

     Payments totaling K1,632,633 for minor capital works and maintenance were paid
    to various contractors. Tender documents, Progress inspection reports, selection
    criteria and completion certificates were not sighted to confirm that projects were
    properly awarded and satisfactorily completed. In the absence of duly signed
    contracts, I was unable to ensure the validity of these payments; and

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     Tender documents and formal contracts managed and paid through the Provincial
    Works Trust Account were not provided for my review. These included projects
    for the Back filling of the sports stadium playing field-by Wanem Ya Ltd, Police
    Housing Project at Yawasoro by BC Civi Works, a consultancy services provided
    by Arhitechural Aalliance and construction of 40 police houses by Dieter Serice
    Engineering. Reports pertaining to inspection and completion of these projects
    were not provided for my review. Consequently, I was unable to ensure if these
    projects were executed with due care for waste and extravagant.

    Disclaimer Audit Opinion

    In my opinion, because of the significance of the matters described above, I was not able
    to obtain sufficient appropriate audit evidence and accordingly I am unable to express an
    opinion on the financial statements of East Sepik Provincial Government for the year
    ended 31 December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

     the East Sepik Provincial Government did not maintain proper accounts and records
    and has consequently breached Section 68(1) of the Public Finances
    (Management)Act, 1995;

     the receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments; and

     The East Sepik Provincial Government has not prepared and submitted its financial
    statements for the year ended 31 December, 2015 to the Minister and the Auditor-
    General within the required timeframe in contravention to Sections 114 and 119 of
    the Organic Law on Provincial and Local Level Governments.”

    6.4.2.2 Management Response

    The above observations on the internal control weaknesses had been communicated by
    way of Management Letters to the Provincial Administrator and Management together
    with implications and recommendations for improvements. The Management had since
    responded to my audit observations and recommendation for improvement relating to the
    internal control issues and had assured me of its commitment to making improvements in
    areas concerned in future.

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    6.4.2.3 Status of Financial Statements

    The East Sepik Provincial Government had not submitted its financial statements for the
    year ended 31 December, 2016 for my inspection and audit. However, the interim audit
    on the control environment had been completed in the absence of the financial statements
    and the results were being evaluated at the time of preparing this Report in September
    2017.

    6.4.3 Wewak Urban Local-level Government

    The Wewak Urban Local-level Government (ULLG) submitted its financial statements
    for the years ended 31 December 2012, 2013, 2014 and 2015. Field work associated with
    the examination of these financial statements and audit of the accounts and records had
    been completed with all the Management Letters and Audit Opinion Reports issued. The
    paragraphs below detail issues identified with the financial statements and the internal
    control environment.

    6.4.3.1 Comments on Financial Statements – 2015

    My reports to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act on the Wewak Urban Local Level Government’s financial statements
    for the years ended 31 December 2012, 2013, 2014 and 2015 were issued in July 2017.
    The reports contained similar Disclaimer Audit Opinions hence, only the 2015 report is
    reproduced as follows:

    Basis for Disclaimer Opinion

    Presentation of Financial Statements

    Finance Instructions 5/2000 issued under Section 117 of the Public Finances
    (Management) Act 1995 state the prescribed format for the preparation and presentation
    of the financial statements for Local Level Governments. The financial statements of
    Wewak Urban Local Level Government for the year ended 31 December, 2015:

     did not contain the statement on the budget performance of the Wewak Urban local
    Level Government by the Town Mayor;

     did not contain the Statement of the District Administrator’s Declaration of the
    Financial Statements in accepting responsibility on the disclosure of data and
    information provided on the financial affairs of Wewak Local-Level Government;
    and

     The statements were not signed by the senior management as required.

    These statements are written representations by the management in which management
    acknowledges its responsibility for the fair presentation of the financial statements and it
    also represents a means of approving the financial statements. Since the management has
    not provided the necessary representations this constitutes a scope of limitation and
    affects every statement of the financial statements. Subsequently, the financial statements

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    were not presented in the format required by the Finance Instructions.

    Incorrect amounts presented in thousands

    The financial statements of Wewak ULLG for the year ended 31 December, 2015 are
    misleading as a result of error in the presentation of the statements. Namely, amounts in
    Statements ‘A’ to ‘I’, Appendices 1 and 2 and Notes 3 to 14 and 16 to 17 of the notes to
    and forming part of the financial statements were incorrectly presented in amounts of
    ‘thousands’(‘000) instead of the original amounts.

    Prior Year Balances

    The prior year comparative balances disclosed in financial statements for the year ended
    31 December, 2015 were incorrect and inconsistent to the balances per the 2014 audited
    financial statements. I have carried out appropriate audit procedures regarding the
    opening balances of the current period and the comparative balances. However, I was not
    able to obtain sufficient audit evidence to ensure completeness and accuracy of the
    opening fund balances and the prior year comparative balances as reported

    Opening Balances

    Because of the disclaimer of opinions issued in respect of the years ended 31 December,
    2014 and prior years and of other limitations on the scope of my audit as noted below, I
    was not able to satisfy myself as to the completeness and accuracy of the opening
    balances. Since these opening balances would affect the determination of the financial
    position and the cash flows of the Wewak Urban Local-Level Government in the current
    year, I was unable to determine whether adjustments to the respective cashbooks and the
    financial positions, might have been necessary for the year ended 31 December 2015.

    Cash balances

    I am unable to express an opinion on the accuracy of the cash at bank and trust account
    balances respectively and consequently, on the financial position of Wewak Urban Local
    Level Government accumulated fund balance of K28,302 as at 31 December, 2015 due
    to:

    a) the accumulated total fund balance of K28,303 in Statement ‘A’ is not adequately
    represented by the cash balance of K5,306 resulting in a variance of K22,996. The
    representation of the bank balances does not reflect the fund balance rendering the
    statement as incorrect, incomplete and unreliable;

    b) the LLG Fund balance of (K640,085) in statement ‘A’ does not reflect the details
    shown in note 3 totaling (K611,782.62) resulting in a variance of K28,303. Further,
    the cash balances in both Statement ‘A’ and note 6 do not reflect the reconciled
    cashbook balance of K459,358;

    c) The details of the Trust Fund of K668,388 are not shown in note 4 and note 4 are
    not reflective of Statement ‘C’. Also, the opening balances for the funds in note 4

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    are different from the prior year ending balances;

    d) The Bank Reconciliations of the Wewak Urban Local-Level Government‘s bank
    account were not properly and correctly done during the year as significant
    reconciling items carried forward since 2004 were not cleared. These items had not
    been adjusted in the cashbook thus affected the balance at year end. In addition,
    independent confirmation of bank balances was not provided by the bank; and

    e) Wewak Urban LLG had opened and operated a separate bank account (Account
    number: 1002 843 025) to cater for the Town Market Fees collection. This account
    was opened without the prior approval from the Secretary for Finance. Further, the
    receipts and payments out of this account and the subsequent bank balance were not
    captured and reported in Statements ‘A’, ‘B’, ‘J’ and ‘K’. The records maintained
    for this account were not provided for my verification.

    I was not provided sufficient and appropriate documentation including the required
    explanations for the errors and discrepancies noted above. Consequently, I was unable to
    verify and confirm the validity, completeness and the accuracy of the total accumulated
    balance as at 31 December, 2015;

    Receipts and Payments

    I am unable to verify the accuracy of the receipts of K1,129,096 and payments of
    K1,769,181 and subsequently the accuracy of the deficit of K640,085 for the year ended
    31 December, 2015 due to:

    a) Reconciling items of revenue totaling K178,963 and expenditure totaling K9,347
    were not posted to the respective revenue and expenditure ledgers and the cash
    book and hence, not reported in statements ‘B’, ‘J’ and ‘K’. I was not provided
    explanations and documentary evidence of adjustments made if any. Consequently,
    I was unable to confirm the completeness and accuracy of the receipts and
    payments; and

    b) Takings from the market were not banked and accounted for in the books of the
    urban local-level government and the rentals from properties inside the market
    rented out were also not receipted and accounted and hence not reported in
    statements ‘B’ and ‘J’ of the financial statements. I was not provided sufficient and
    appropriate documentation including the required explanations for the
    discrepancies. Consequently, I was unable to confirm the completeness and
    accuracy of the total receipts for the year ended 31 December 2015.

    Debtors

    Appendix 2 reported nil debtors as at the year ended 31 December, 2015. Debtor ledgers
    maintained for uncollected debts in respect of all revenue heads were not adequately
    updated during the year and long outstanding debts were not followed up and action taken
    for recovery of debts resulting in significant shortfall in revenue collection. I was not
    provided with satisfactory explanation and supporting documentation of the inadequate

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    maintenance of the debtors ledgers. Consequently, I was unable to ascertain the validity
    and accuracy of the nil balance for debtors.

    Assets

    The appendix 4 of the financial statements showed Assets as Nil for the year ended 31
    December 2014. An Assets Register was not maintained and stock takes of assets and
    inventories were not carried out during the year. In the absence of a complete Assets
    Register and annual stock takes, I was unable to confirm the value, completeness and
    existence of assets owned by and in the custody of Wewak Urban Local-level
    Government as at 31 December, 2014.

    Advances

    Appendix 6 of the financial statements reported un-acquitted advances as nil as at the year
    ended 31 December, 2015. The Wewak Urban Local-Level Government did not maintain
    a comprehensive advances register and I was not provided a proper and accurate
    reconciliation of the outstanding advances for the year then ended. Consequently, I am
    able to ascertain the accuracy of the total advances paid during the year and establish the
    total amount of un-acquitted advances at year end.

    Significant Control Weaknesses

    There were significant control weaknesses identified in the Provincial Government’s
    records and processes, as follows:

     The Wewak Urban Local-Level Government did not maintain a proper customer
    database with names, addresses, details of locations with an effective billing system
    in the revenue section resulting in collections of revenues from internal revenue
    heads especially the land rates, sanitation & garbage and the Trading licenses were
    done on an ad hoc basis and billing of client/debtors were not done on a timely
    basis resulting in significant arrears outstanding. Further, I could not establish the
    total debts outstanding as at year end due to poor record maintenance;

     Segregation of duties in the collection, receipting and banking of cash daily and
    preparation of collector statements was lacking. The cashier performed all
    responsibilities including being the custodian of unbanked cash and safe cabinet
    which posed a high risk of abuse and misuse of cash collection;

     The Wewak Urban Local-Level Government appointed a market management to
    manage the operations of the market including collection and banking of market
    and other fees on its behalf. In the absence of a memorandum of understanding or
    an agreement in place between the market management and the Wewak Urban
    Local-Level Government and cashbooks and related records. I was unable to
    establish the legitimacy of the arrangement and confirm if all moneys collected
    were banked intact and brought to account in the books of Wewak Urban Local-
    Level Government;

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     A number of businesses was conducted within the Market premises without paying
    any rentals to Wewak Urban since they started operating. Hence a loss of revenue
    to the Wewak Urban Local-Level Government;

     A contract to justify the payment of security services fees in 2014 and 2015 and the
    rent free space in the market premises was not made available for my examination.
    Hence, I was not able to establish the validity of the rentals paid and the free use of
    the space within the market premises;

     Collections banked totaling K86,368 could not be traced to the collectors
    statements and the bank statements and also could not establish to which bank
    account these takings were deposited. Further, official receipts were noted to be not
    issued by the cash office for the market collections;

     There is no systematic procedure in place for procurement of goods and services.
    Quotations were not obtained from three (3) suppliers as required and no quotation
    register sighted to verify the existence of quotations obtained for purchases of
    goods and services;

     The specimen signatures of the duly appointed Financial Delegates and
    Requisitioning Officers were not maintained properly. Also the signatures for
    Financial Delegates could not be verified;

     Inspection reports and completion certificates/ reports were not found in the files
    for contract works. As a result, I was not able to ensure if value for money were
    derived from these expenditures;

     Proper and efficient filing system was lacking as personnel files were not in their
    current state and lacked up to date records and important information necessary for
    calculation of wages and entitlements; and

     Wages were under taxed while Councilor’s Allowances were paid without
    deducting tax. Tax declaration forms were not lodged with the Internal Revenue
    Commission (IRC) to enable correct deduction of tax from the wages and
    allowances.

    Disclaimer of Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and accordingly I am unable to express an opinion
    on the financial statements of the Wewak Urban Local-Level Government for the year
    ended 31 December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended), I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

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     the Wewak Urban Local Level Government does not maintain proper accounts and
    records and has consequently breached Section 68(1) of the Public Finances
    (Management)Act, 1995;

     the receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments.

     Wewak Urban Local-Level Government had opened and operated a separate bank
    account (Account number: 1002 843 025) to cater for the Town Market Fees
    collection. This account was opened without the approval of the Secretary for
    Finance and has consequently breached section 11(2) of the Public Finances
    (Management) Act, 1995;

     the Wewak Urban Local Level Government did not have a five (5) year corporate
    plan and has consequently breached the Public Service General Order No. 8.11;
    and

     The Wewak Urban Local Level Government has not prepared and submitted its
    financial statements to the Minister and the Auditor-General prior to the year
    ending 31 December 2015, resulting in breach of section 114 and 119 of the
    Organic Law on Provincial and Local Level Governments.”

    6.4.3.2 Management Response

    The above observations on the internal control weaknesses had been communicated by
    way of Management Letters to the District Administrator and Management together with
    implications and recommendations for improvements. I have however, not received the
    responses to the Management Letters as at the time of preparing this Report in September
    2017.

    6.4.3.3 Status of Financial Statements

    The Wewak ULLG had not submitted its financial statements for the financial year ended
    31 December 2016 for my inspection and audit at the time of writing this Report in
    September 2017.

    6.4.4 Maprik Urban Local-level Government

    The Maprik Urban Local-level Government (ULLG) submitted its financial statements
    for the years ended 31 December 2013, 2014 and 2015. Field work associated with the
    examination of these financial statements and audit of the accounts and records had been
    completed with all the Management Letters and Audit Opinion Reports issued. The
    paragraphs below detail issues identified with the financial statements and the internal
    control environment.

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    6.4.3.1 Comments on Financial Statements – 2015

    My reports to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act on the Maprik Urban Local Level Government’s financial statements
    for the years ended 31 December 2013, 2014 and 2015 were issued in July 2017. The
    reports contained similar Disclaimer Audit Opinions hence, only the 2015 report is
    reproduced as follows:

    Basis for Disclaimer Opinion

    Presentation of Financial Statements

    Finance Instructions 5/2000 issued under Section 117 of the Public Finances
    (Management) Act 1995 state the prescribed format for the preparation and presentation
    of the financial statements for Local Level Governments. The financial statements of
    Maprik Urban Local Level Government for the year ended 31 December, 2015:

     Did not contain the statement on the budget performance of the Maprik Urban local
    Level Government by the Town Mayor;

     District Administrator’s Declaration of the Financial Statements in accepting
    responsibility on the disclosure of data and information provided on the financial
    affairs of Maprik Local-Level Government was unsigned; and

     The statements were not signed by the senior management as required.

    Subsequently, the financial statements were not presented in the format required by the
    Finance Instructions. These statements are written representations by the management in
    which management acknowledges its responsibility for the fair presentation of the
    financial statements and it also represents a means of approving the financial statements.
    Since the management has not provided the necessary representations this constitutes a
    scope of limitation and affects every statement of the financial statements.

    Incorrect amounts presented in thousands

    The financial statements of Maprik ULLG for the year ended 31 December, 2015 are
    misleading as a result of error in the presentation of the statements. Namely, amounts in
    Statements ‘A’ to ‘I’, Appendices 1 and 2 and Notes 3-17 of the notes to and forming
    part of the financial statements were incorrectly presented in amounts of
    ‘thousands’(‘000) instead of the original amounts.

    Opening Balances

    Because of the limitation of scope from disclaimed audit opinion in the prior year and of
    other limitations on the scope of my audit as noted below, I was not able to satisfy myself
    as to the completeness and accuracy of the opening balances. Since these opening
    balances would affect the determination of the financial position and the cash flows of the
    Maprik Urban Local-Level Government in the current year, I was unable to determine

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    whether adjustments to the respective cashbooks and the financial positions, might have
    been necessary for the year ended 31 December 2015.

    Cash balances

    I am unable to express an opinion on the accuracy of the cash at bank and consequently,
    on the financial position of Maprik Urban Local Level Government accumulated fund
    balance of K47,210 as at 31 December, 2015 due to:

     Complete and enabling records such as Cashbooks, bank reconciliation statements
    and bank statements were not made available for my examination; this constituted a
    limitation of scope. Consequently, I was not able to verify the accuracy and
    completeness of the cash balances and the subsequent Fund balance of K47,210 as
    at the year end. In addition, the operating deficit for the current year was materially
    misstated as discussed under the paragraph of Receipts and Payments.

     The comparative Surplus/(Deficit) for the year as per Statement ‘B’ for the 2014
    financial year reported in note 3 of the financial statements was different from the
    comparative balance presented in Statement ‘B’ and the prior year’s financial
    statements. I was not provided explanations and documentary evidence of
    adjustments made if any. Consequently, I was unable to confirm the accuracy and
    consistency in the disclosure of the prior year comparative balances in the financial
    statements

    Receipts and Payments

    Statement ‘B’ disclosed the summary of Receipts and Payments with an operating deficit
    of K138,840. I am unable to verify the accuracy and completeness of the receipts and
    payments and subsequently the accuracy of Statement ‘B’ and the related Statements ‘J’
    and ‘K’ and Statement ‘D’ due to the mandated records such as the trial balance,
    summary reports of revenue and expenditure and their respective ledgers were not made
    available for my examination. This constituted a limitation of scope. In addition, the 2014
    comparative balances reported in Statements ‘B’ and ‘D’ were noted incorrect and
    inconsistent to the balances reported in the 2014 financial statements.

    Assets

    The appendix 4 of the financial statements showed Assets as Nil for the year ended 31
    December 2015. An Assets Register was not maintained and stock takes of assets and
    inventories were not carried out during the year. In the absence of a complete Assets
    Register and annual stock takes, I was unable to confirm the value, completeness and
    existence of assets owned by and in the custody of Maprik Urban Local-level
    Government as at 31 December, 2015.

    Advances

    Appendix 6 of the financial statements reported un-acquitted advances of K35,580 as at
    the year ended 31 December, 2015 whilst the note forming the statement (note 17)

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    reported outstanding advances of K49,390 as at year ended 31st December 2015 resulted
    with a variance of K13,810. The Maprik Urban Local-Level Government did not maintain
    a comprehensive advances register and I was not provided an explanation on the variance
    between the appendix 6 and note 17. Consequently, I am able to ascertain the accuracy of
    the total advances paid during the year and establish the total amount of un-acquitted
    advances at year end.

    Significant Control Weaknesses

    There was significant control weaknesses identified in the Maprik Urban Local Level
    Government’s records and processes, as follows:

     The collector’s statements, bank deposit butts and bank statements for the year
    were not made available for audit examination. Consequently, I was not able to
    comment on the completeness and accuracy of the collections, banking, and
    reporting of the revenue receipts. In addition, due to absence of the above records, I
    was not able to apply audit procedures to determine on the extent of existence of
    debtors if any;

     Proper and relevant accounting records pertaining to procurement and payment of
    goods and services were not available for audit examination. Hence, there was
    limitation of scope on the application of audit procedures to gain reasonable
    assurance on the financial transactions as to whether compliance to statutory
    regulations and the financial records were maintained fairly;

     There was no evidence to confirm that three (3) quotations is obtained for all
    payment nor was a quotations register maintained during the year in compliance to
    the proper procurement procedures stipulated under the Financial Management
    Manual;

     Appointment Instruments for Section 32 Officers and Financial Delegates and their
    specimen signatures were not maintained. Hence I was not able to ensure if
    requisitions for payments were approved by duly approved section 32 officers and
    the financial delegate within their financial limit;

     There was no evidence of employee records being maintained such as employee
    personal files and approved staff ceiling, and pay listing. As a result, I was not able
    to ensure the total number of staff employed and their respective salary grade;

     There was lack of relevant records such as the payroll printout, tax declarations and
    the approved pay listing. As such I was not able to ensure that wages totaling K
    K86,350 was process and paid accordingly; and

     Non-compliance with Advances Management was observed as Cash and travel
    advances were not acquitted within seven (7) days of return from duty travel, new
    advances were given to Officers while their previous advances were still un-
    acquitted, and follow-up actions were not taken to have the advances acquitted
    promptly.

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    Disclaimer of Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and accordingly I am unable to express an opinion
    on the financial statements of the Maprik Urban Local Level Government for the year
    ended 31 December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended), I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

     The Maprik Urban Local Level Government does not maintain proper accounts and
    records and has consequently breached Section 68(1) of the Public Finances
    (Management)Act, 1995;

     The receipts and payments and the acquisition and disposal of assets during the
    period covered by the financial statements have not been in accordance with the
    Public Finances (Management) Act, 1995 and Organic Law on Provincial
    Governments and Local-level Governments.

     the Maprik Urban Local Level Government did not have a five (5) year corporate
    plan and has consequently breached the Public Service General Order No. 8.11;
    and

     The Maprik Urban Local Level Government has not prepared and submitted its
    financial statements to the Minister and the Auditor-General prior to the year
    ending 31 December 2015, resulting in breach of section 114 and 119 of the
    Organic Law on Provincial and Local Level Governments.”

    6.4.3.2.1 Management Response

    The above observations on the internal control weaknesses had been communicated by
    way of Management Letters to the District Administrator and Management together with
    implications and recommendations for improvements. I have however, not received the
    responses to the Management Letters as at the time of preparing this Report in September
    2017.

    6.4.4 Wewak General Hospital

    6.4.4.1 Status of Financial Statements

    The Wewak General Hospital had submitted its financial statements for the year ended 31
    December 2015. Fieldwork associated with the audit of the accounts and records had been
    completed and the results are being evaluated at the time of preparing this Report in
    September 2017.

    The financial statements for Wewak General Hospital for the year ended 31 December
    2016 had not been submitted for my inspection and audit at the time of writing this
    Report in September 2017.

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    6.4.5 Business Arms

    Section 16 (2) (f) of the Audit Act, 1989 provides for and extends my functions to audit
    the accounts and records of the Provincial Government and Local-Level Government
    Business Arms and other establishments.

    I am aware that East Sepik Provincial Government had a number of business arms
    including Sepik Coffee and shares held with South Sea Tuna. Records pertaining to these
    investments were not made available for my examination and as such I was unable to
    comment on the operations and financial results of these entities.

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    6.5 EASTERN HIGHLANDS PROVINCE

    6.5.1 Introduction

    Eastern Highlands Provincial Government, Goroka Urban Local-level Government,
    Eastern Highlands Provincial Health Authority and Provincial Government Business
    Arms are audited every year, with or without financial statements. Other Local-level
    Governments and the Business Arms of the Governments could not be audited due to
    manpower and financial constraints faced by my Office and the lack of records and
    support from the respective entities in the Eastern Highlands Provincial Governments
    domain.

    6.5.2 Eastern Highlands Provincial Government

    The Eastern Highlands Provincial Government submitted its Financial Statements for the
    year ending 31 December, 2015 and the audit of the accounts and records was completed
    and in March, 2017. The final Management Letter and the audit opinion report for 2015
    was issued to the Ministers concerned and other relevant bodies in April, 2017. The audit
    report issued was a Disclaimer Audit Opinion. Issues identified with the financial
    statements and the control environments are reproduced in the paragraphs below.

    6.5.2.1 Financial Statements – 201 5

    My Report to the Ministers concerned and other relevant bodies under the Organic Law
    on Provincial Governments and Local Level Governments and the Audit Act, 1989 (as
    amended) was issued in April, 2017. The report was a Disclaimer of Opinion as
    reproduced below:

    Basis for Disclaimer Opinion

    Report on the Financial Statements

    Disclosure Errors

    The financial statements of Eastern Highlands Provincial Government for the year ended
    31 December, 2015 comply with the format prescribed by Finance Instruction 4/2000.
    However, I am unable to express an opinion on the accuracy and completeness of the
    financial statements as the financial statements were not authenticated as prescribed.

    Opening Balances

    Because of the disclaimer of opinion issued in respect of the year ended 31 December,
    2014 and because of other limitations on the scope of my audit as noted below, I was not
    able to satisfy myself as to the completeness and accuracy of the opening bank balances.
    Since these opening balances would affect the determination of the financial position and
    the cash flows of the Eastern Highlands Provincial Government in the current year, I was
    unable to determine whether adjustments to the respective Cashbooks, financial position
    and the cash flows, might have been necessary for the year ended 31 December, 2015.

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    Statement A – Cash Balances

    I am unable to express an opinion on the accuracy of the negative Fund balance of
    K61,846,997 of the Eastern Highlands Provincial Government for the year ended 31
    December, 2015 due to the following reasons:

    a) The Fund Balance of negative K61,846,997 is represented by bank and investment
    balance of K20,834,579 resulting in a negative difference of K82,681,576 as at 31
    December, 2015. However, the Provincial Administration did not provide the
    necessary documentation, the required explanation or the reconciliation for the
    significant discrepancy.

    b) The Provincial Revenue Fund was disclosed as negative K62,069,233. However, it
    was stated in Note 3 to the accounts as K20,612,344 resulting in a difference of
    K41,456,889. Further, in Note 3 the beginning balance of K8,494,789 is incorrect
    as it does not correspond to the 2014 comparative figure of K8,382,494 stated in
    Statement A.

    c) The Trust Fund balance disclosed as K222,236 is a dormant book value carried
    over from previous years. I was not provided reconciliation, explanations and
    documentary evidence for the balance. Consequently, I was unable to verify the
    Trust Fund balance of K222,236 for the year ended 31 December, 2015.

    d) Included in the Bank balance of K20,834,579 is a negative balance of K398,355.
    As stated in Note 6.3 this amount is disclosed as “Other Accounts”. However, I am
    unable to verify and confirm the validity and the accuracy of the account balance as
    it had been used as a carry forward reconciling item without proper and adequate
    supporting documentation from prior years including the year ended 31 December,
    2015.

    e) Further, the Fund balance in Statement “A” is represented by the un-reconciled
    cash balances of Revenue and Trust Accounts. My examination of the bank
    reconciliation of the Grant and the Provincial Government Operating accounts
    revealed significant outstanding reconciling balances inherited from prior years and
    continue to recur as reconciling items for the year ended 31 December, 2015.

    I was not able to verify the validity and the correctness of the disclosures in the Statement
    “A” as I was not provided the necessary documentation, the required explanation or the
    reconciliation for the significant discrepancies. Consequently, I am unable to satisfy
    myself even for results or consequences of the inaccuracies and errors cumulating in the
    overall Fund balance.

    Receipts and Payments

    Statement “B” disclosed the Summary of the Receipts and Payments with an operating
    deficit of K12,117,555. I am unable to verify the accuracy of the receipts and payments
    and subsequently the accuracy of the Statement “B” and the related Statements “J” and
    “K” as there were significant un-reconciled items identified in the bank reconciliation
    statements of the Eastern Highlands Provincial Government Operating and Grant

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    Accounts relating to receipts and expenditure that were not adjusted in the cashbooks and
    the revenue and expenditure ledgers and disclosed in Statements “J” and “K” with
    consequential effects on Statements “B” and the cash balances reported in Statement “A”.

    Assets

    The Appendix 4 of the financial statements stated Assets as Nil for the year ended 31
    December, 2015. However, I was provided a Register of Fixed Assets for the prior year’s
    up to 2010. This register was not updated in the respective years after 2010 and did not
    include additions during the year 2015, totaling K1,194,761. The list provided did not
    include necessary details including, date of purchases, costs, useful life, locations and
    obsolesce of the Assets under the Administration’s care and possession. In the absence of
    an updated and complete Assets Register, I was unable to confirm the value,
    completeness and the validity of the Assets in the custody of the Eastern Highlands
    Provincial Government and the disclosure made in Appendix 4 for the year ended 31
    December, 2015.

    Advances

    Appendix 6 of the Financial Statements disclose K1,655,240 as outstanding advances for
    the year ended 31 December, 2015. However, in Note 17 outstanding advances brought
    forward from 2014 were stated as K1, 572,689. I was not provided a proper and accurate
    reconciliation of the outstanding advances and the un-acquitted advances for the year end.
    As a result, I am unable to ascertain the correctness, validity and the recovery of the
    outstanding public monies for the year ended 31 December, 2015.

    Report on other Legal and Regulatory Requirements

    In addition to the scope limitation and deficiencies in the accounts and records noted
    above, I also wish to report on the breaches of the Organic Law on Provincial
    Governments and Local-level Governments, and the Appropriation Act, 2014 the Public
    Finances (Management) Act, 1995 (as amended) and the Public Service (Management)
    Act, 1995 and other enabling legislations.

    Budgetary Control

    The Provincial Government passed the Original Amended Appropriation Act, No. 1 of
    2015 authorizing a total of K307,680,600 on 29 January, 2015 to be expended for the
    year, 2015. The Original budget revealed no top up and withdrawals. However, there was
    a shortfall of revenue and an under expenditure of K245,611,367 and K257,728,922
    respectively. I was not provided an explanation or the necessary documentation for the
    significant variances culminating to noncompliance with Budgetary Protocols and
    legislations.

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    Procurement and Payment

    There were significant control weaknesses in the Eastern Highlands Provincial
    Government’s maintenance of the accounting records and processes resulting among
    others these anomalies:

    • Grants totaling K3,262,120 were paid to various recipients during the year. Except
    for the Local Level Governments, the Provincial Government’s Policy Guideline
    for Grants and Financial Assistance to Organizations, Groups and Individuals and
    the Accountability Reports from the grant recipients were not provided for my
    review and audit,

    • 17 payment vouchers totaling K577,616 were not provided for audit verification
    and 12 payments totaling K287,228 were made without obtaining the required three
    (3) written quotations. As a result, I was unable to validate the veracity and the
    propriety of these payments.

    • Consultancy and legal payments total K691,571 were made during the year, 2015.
    However, I was not provided any form of documentation or explanations for the
    engagement of those lawyers and consultants. As a result, I am unable to verify the
    veracity of the payments made respectively during the year ended 31 December,
    2015.

    • I continue to highlight the probity of the payments made for the purpose of a
    “Goroka Market Development”. A total of K17 million was paid in 2013 and 2014
    and these payments may have by passed the PSTB procurement procedures and
    guidelines.

    Further, I was not provided necessary explanations or documentation regarding these
    payments and the status of the market development since I initially enquired in 2013.
    Consequently, I am unable to confirm and verify the validity and the correctness of these
    payments totaling K17 million.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and accordingly, I am unable to express an opinion
    on the financial statements of the Eastern Highlands Provincial Government for the year
    ended 31 December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

    • the Eastern Highlands Provincial Government does not maintain proper accounts
    and records in terms of its receipts, payments, investment of moneys, the

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    acquisition and disposal of assets and had consequently breached Section 68(1) of
    the Public Finances (Management) Act, 1995;

    • the receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments, and

    • Eastern Highlands Provincial Government has not prepared and submitted its
    financial statements to the Minister and the Auditor-General prior to 30 June for the
    year ending 31 December, 2015, resulting in breach of Section 114 and 119 of the
    Organic Law on Provincial and Local Level Governments.”

    6.5.2.2 Management Response

    Management had not responded to the matters raised in my Management Letters.
    Consequently, I was not advised of any improvement at the time of preparing this Report.

    6.5.2.3 Status of Financial Statements

    The financial statements for the year ended 31 December, 2016 had not been submitted
    for my inspection and audit at the time of preparing this Report in August, 2017.

    6.5.3 Goroka Urban Local-level Government

    6.5.3.1 Status of Financial Statements

    The Goroka Urban Local-level Government (GULLG) had not submitted its Financial
    Statements for 2014, 2015 and 2016 at the time of writing this Report in August, 2017 for
    my inspection and audit. The field work associated with the interim audit of the control
    environment for 2015 and 2016 were not completed and the results of the audit will be
    reported in my 2017 Part 3 Report.

    6.5.4 Eastern Highlands Provincial Health Authority

    6.5.4.1 Status of Financial Statements

    Financial Statements for the years ended 31 December, 2014 and 2015 were submitted for
    my inspection and audit. At the time of preparing this report, the results of the respective
    audits were being evaluated. The delay was due to management problems within the
    Eastern Highlands Provincial Health Authority.

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    6.5.5 Business Arms

    The four business arms of the Eastern Highlands Provincial Government, namely;
    Akogere Estate Limited, Nokondi Investments Limited, Al’s Auto Repairs and Eastern
    Highlands Property Developers Limited were established by the Provincial Government
    to engage in different business activities and generate income and with the realized
    returns to be paid back into the provincial government.

    6.5.5A Akogere Estate Limited

    According to the 2015 accounts of Eastern Highlands Provincial Government, the
    Government has invested initial capital of K1, 130, 567 in this company back in 1998.
    The Akogere Estate Limited is an unlisted Company registered under the Papua New
    Guinea Companies Act, 1997.

    6.5.5A.1 The Activities of the Company

    The principle activity of the Company during the year was property investment.

    6.5.5A.2 Status of Financial Statements

    At the time of preparing this Report, the Akogere Estate Limited had not submitted its
    financial statements for the years ended 31 December, 2010 to 2016 for my inspection
    and audit.

    6.5.5B Nokondi Investments Limited

    According to the 2015 financial statements of Eastern Highlands Provincial Government,
    the Government has invested initial capital of K501,148 in this company back in 1998.
    The Nokondi Limited is an unlisted Company registered under the Papua New Guinea
    Companies Act 1997, operating in property investment business.

    6.5.5B.1 The Activities of the Company

    The main activity of the Company was among others to invest in property investments in
    Goroka, Eastern Highlands, PNG and elsewhere with realized returns that will benefit the
    people of Eastern Highlands.

    6.5.5B.2 Status of Financial Statements

    At the time of preparing this Report, the Nokondi Investments Limited had not submitted
    its financial statements for the years ended 31 December, 2010 to 2016 for my inspection
    and audit.

    Part III 2016 Report Page 78

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    6.5.5C Al’s Auto Repairs Limited

    According to the 2015 financial statements of Eastern Highlands Provincial Government,
    the Government has invested initial capital of K94,581 in this company back in 1998. The
    Al’s Auto Repairs Limited is an unlisted Company registered under the Papua New
    Guinea Companies Act 1997, operating in property investment business.

    6.5.5C.1 Status of Financial Statements

    At the time of preparing this Report, the Al’s Auto Repairs Limited had not submitted its
    financial statements for the years ended 31 December, 2010 to 2016 for my inspection
    and audit.

    6.5.5D Eastern Highlands Property Developers Limited

    6.5.5D.1 Status of Financial Statements

    At the time of preparing this Report, the Eastern Highlands Property Developer Limited
    had not submitted its financial statements for the years ended 31 December, 2010 to 2016
    for my inspection and audit.

    Part III 2016 Report Page 79

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    6.6 ENGA PROVINCE

    6.6.1 Introduction

    The Enga Provincial Government, Wabag Urban Local-level Government, Wabag
    General Hospital, Enga Children’s Fund and Pogera District Development Authority are
    audited every year, with or without financial statements. Other LLGs and the Business
    Arms of the Provincial Government could not be fully audited due to manpower and
    financial constraints faced by my Office and the lack of records and logistical support
    from the respective Governments.

    6.6.2 Enga Provincial Government

    The Enga Provincial Government submitted its financial statements for the year ended 31
    December 2015 and the fieldwork associated with the audit of accounts and records were
    completed with the Management Letters issued and a Disclaimer Audit Opinion was
    issued to the Ministers concern. The issues identified with the financial statements and
    the control environments are reproduced as follows:

    6.6.2.1 Comments on Financial Statements – 2015

    My report to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act was issued in September 2017. The report was a Disclaimer of Opinion
    as reproduced below:

    “Basis for Disclaimer Opinion

    Cash Balances

    I am unable to express an opinion on the accuracy of the Cash balances totaling K19,
    145,587 and consequently, on the financial position of Enga Provincial Government as at
    31 December, 2015 due to the following issues:

     The opening Cash Balances brought forward from previous years contained
    significant errors and omissions. Since these opening balances would affect the
    determination of the financial position and the cash flows of the Enga Provincial
    Government in the current year, I was unable to determine whether adjustments to
    the respective cashbooks and the financial positions, might have been necessary for
    the year ended 31 December 2015;

     The underlying records such as cashbook, ledgers and the bank statements
    pertaining to the operations of Other Account reported with a balance of K500,662
    were not provided for my examination;

     Reconciling items of revenue and expenditure identified through the monthly bank
    reconciliation for the provincial operating and grants accounts are not promptly
    cleared resulting to the accumulation of long outstanding items reported in the
    monthly bank reconciliation statements.
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    Receipts and Payments

    The Enga Provincial Government reported its total revenue and expenditure as K107,
    593,994 and K118, 033,099 respectively with an operating deficit of K10, 439,104. I am
    unable to verify the accuracy of the receipts and payments in statements ‘B’, ‘J’ and ‘K’
    due to;

     The revenue and expenditure component of the Staffing and Teaching Services
    grants of K24,153,000 reported in Statements ‘J’ and ‘K’ respectively differ from
    the amount of K89,238,000 reported in the revenue and expenditure ledgers. I was
    not provided with the documents and necessary explanations for the discrepancies
    consequently, I was not able to verify the accuracy of the total Staffing and
    Teaching Services Grants reported; and

     Substantial reconciling items pertaining to revenue and expenditure were not
    adjusted in the cash books, respective ledgers and the subsequent Statements ‘B’,
    ‘J’ and ‘K’.

    Investments

    Financial Statements ‘E’ and ‘F’ did not disclose any investments held by the Provincial
    Government as at 31 December, 2015. However, the Enga Provincial Government had
    majority share holdings with Wapenamanda Coffee Factory (51%), Enga Pyrethrum
    Company (100%), Kandep wheat factory (100%), Enga Children’s Trust Fund Limited
    (100%) and Miok Air (100%). Records relating to investments of the Provincial
    Government were not provided for my examination and as such I was unable to confirm
    and verify the total value of investments of the Provincial Government as at 31
    December, 2015.

    Assets

    Appendix 4 did not show a complete report on the assets of the Provincial Government at
    31 December 2015. Documents sighted during audit confirm that the Provincial
    Government over the last five years since 2012 had been working on an action plan to
    consolidate a standard fixed assets and inventory register as well as design policies and
    procedures for proper management of these assets.

    Losses and Deficiencies

    Appendix 5 reported losses and deficiencies of K366, 665 as at year ended 31 December,
    2015. However, note 16 of the notes to and forming part of the financial statements
    showed a balance of K64, 521 resulting in a variance of K302,144. I was not provided
    with necessary documentations and explanations of the discrepancy. Consequently, I was
    unable to confirm the accuracy of the balances reported as at year end.

    Part III 2016 Report Page 81

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    Advances

    Appendix 6 disclosed un-acquitted advances of K25, 662,890 as at 31 December, 2015.
    There was weakness in the internal controls over the management of advances, arising
    from inadequacy on the maintenance of the advance register which were not updated on a
    regular bases, incompleteness in recording of details in reference to advances paid, failure
    to adhere to acquittal procedures and imposing of penalties on advance defaulters.
    Consequently, I was not able to ensure the accuracy and completeness of the total un-
    acquitted advances as at year end.

    Significant Control Weaknesses

    There was control weaknesses identified in the Provincial Government’s accounting
    records and processes as follows:

     Segregation of duties was not implemented in regard to the collection and banking
    of public moneys. I noted that only one (1) Cashier was performing overlapping
    tasks without any supervision. The independent duties performed concurrently
    include collection and receipting, compiling collector statements, recording and
    banking;

     The required accounting records such as FF3 Register, Claims Register, Quotation
    Register, Consolidated Assets & Inventories Register and Investment Register were
    not maintained.

     There was lack of adequate controls over 2015 expenditure appropriation which
    resulted to large amount of expenses on motor vehicle purchases and private hires
    and increasing associated costs on fuel and maintenance, excessive expenditure on
    cash advances without proper acquittals, unnecessary expenditure on financial
    assistances to other government agencies who receive full funding from the
    National Government, and lump-sum payments lacking supporting documents.

     Control over advance management was inadequate where officers being paid
    advances while previous advances remained un-acquitted and cash advances being
    solely handled by the paying officer posing high risk for abuse and misuse of these
    funds; and

     Employee personal files were not properly maintained and personal details not
    updated on a timely basis. Salary history cards were either missing or not updated
    and fortnightly payroll reconciliations were not done due to lack of payroll records.
    In addition leave register was not maintained including personal documents such as
    birth and marriage certificates to prove genuineness of legal dependents claimed
    for recreational leave entitlements.

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    Disclaimer Audit Opinion

    Because of the significance of the matters described under the basis of a disclaimer
    opinion above, I was not able to obtain sufficient appropriate audit evidence and
    consequently I am unable to express an opinion on the financial statements of the Enga
    Provincial Government for the year ended 31 December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

     The Enga Provincial Government did not maintain proper records and accounts and
    has consequently breached Section 68(1) of the Public Finances (Management)Act,
    1995; and

     The receipts and payments and investments of moneys and the acquisition and
    disposal of assets during the period covered by the Financial Statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local Level Governments.”

    6.6.2.3 Management Response

    Management had not responded to the matters raised in my Audit Management Letter for
    2015. Consequently, I am unable to determine if there were any improvements at the time
    of preparing this Report in September, 2017.

    6.6.2.4 Status of Financial Statements

    At the time of preparing this Report, the financial statements for Enga Provincial
    Government for the year ended 31 December 2016 has been submitted and field audits
    were scheduled to commence shortly when funding becomes available.

    6.6.3 Wabag Urban Local-level Government

    6.6.3.1 Status of Financial Statements

    At the time of preparing this Report, the Wabag Urban Local-Level Government had
    submitted its financial statements for the years ended 31 December 2013, 2014, and 2015
    for my inspection and audit. The fieldwork associated with the examination of the
    financial statements and the audit of the accounts and records for the three (3) years could
    not be conducted due to financial constraints faced by my Office.

    The financial statement for the year ended 31 December, 2016 was not submitted for my
    inspection and audit.

    Part III 2016 Report Page 83

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    6.6.4 Wabag General Hospital

    6.6.4.1 Status of Financial Statements

    At the time of preparing this Report, the Wabag General Hospital had submitted its
    financial statements for the year ended 31 December, 2015 for my inspection and audit
    and field audits will commence shortly when funding become available.

    atement for the year ended 31 December, 2016 was not submitted for my inspection and
    audit.

    6.6.5 Business Arms

    Section 16(2)(f) of the Audit Act 1989 provides for and extends my functions to audit the
    accounts and records of the Provincial Governments and Local-level Governments
    Business Arms and other establishments. The Enga Provincial Government has a number
    of business arms as reported below.

    6.6.5A Enga Children’s Trust Fund

    The Enga Children’s Fund Trustee Limited was established by a Deed of Trust in 1997
    between ‘The Enga Provincial Government’ and ‘Pogera Mine Equity Holdings Pty Ltd’.

    6.6.5A.1 The Functions of the Fund Trustee

    The principle activities of the company were to manage the trust funds in accordance
    with the Trust Deed executed between the company and the Enga Provincial Government
    for the funds received from MRDC Ltd under the Deed of Redemption of Option. The
    main function of the Trustee was, among other things to invest in real estate in Port
    Moresby, PNG and elsewhere with realized returns that will benefit the people of Enga.

    6.6.5A.2 Financial Statements

    The Enga Children’s Fund Trustee had submitted its financial statements for the year
    ended 31 December 2015 for my inspection and audit. The fieldwork associated with the
    inspection of the accounts and records and the examination of the financial statements
    had been completed and Management Letters issued.

    My report to the Ministers and other relevant bodies under the Company’s Act and the
    Audit Act were issued on 29th March 2017. The report did not contain any qualification.

    6.6.5A.3 Status of Financial Statements

    The Enga Children Fund has submitted its financial statements for the year ended 31
    December 2016 for my inspection and audit. Fieldwork associated with the audit of
    accounts and records and the examination of the financial statements was in progress at
    the time of preparing this Report in September 2017.
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    6.6.5B Enga Rural Investments (Holdings) Ltd and its Subsidiaries

    The Enga Provincial Government incorporated Enga Rural Investments (Holdings) Ltd
    (ERIHL) and its Subsidiaries (Wapenamanda Coffee Factory, Enga Pyrethrum Company
    and Kandep Wheat Factory) purposely to invest and develop major agricultural
    development projects aimed at economically empowering the lives of simple people in
    the province. The three (3) subsidiary companies are cash crop companies managed by
    ERIHL.

    6.6.5B.1 Status of Financial Statements

    At the time of preparing this Report, the financial statements for these companies for the
    years since their establishments have not been submitted for my inspection and audit.

    6.6.6A Pogera District Development Authority

    The Pogera LLG Special Purpose Authority (PLLGSPA) was established by
    proclamation under the Local Level Government Administration Act 1997. The
    PLLGSPA is the successor to the Pogera Development Authority established by the
    Pogera Development Authority Act 1989 of the Enga Provincial Government.

    6.6.6A.1 The Functions of the Authority

    The functions of the Authority generally are to provide special mining and government
    services including municipal services and other essentials in the Pogera mine area.

    6.6.6A.2 Status of Financial Statement

    The Pogera Development Authority had not submitted its financial statements for the
    years ended 31 December 2012, 2013, 2014, 2015 and 2016 for my inspection and audit
    despite numerous reminders from my Office.

    Part III 2016 Report Page 85

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    6.7 FLY RIVER (WESTERN) PROVINCE

    6.7.1 Introduction

    The Fly River Provincial Government, Daru and Kiunga Urban Local-level Governments
    and Daru General Hospital are audited annually with or without the financial statements.
    The annual audits of other Local-level Governments and the Business Arms of the
    Provincial Government could not be audited due to manpower and financial constraints
    faced by my Office and the lack of records and logistical support from the respective
    Local-level Governments and Business Arms.

    6.7.2 Fly River Provincial Government

    The Fly River Provincial Government had not submitted its financial statements for the
    years ended 31 December, 2014, 2015 and 2016 for my inspection and audit. However,
    the field work associated with audit of the internal control environment for the two
    former years had been completed and the Management Letters were issued.

    6.7.2.1 Control Environment – 2015

    The Management Letters relating to the audit of the accounts and records for the years
    ended 31 December, 2014 and 2015 were issued in February, 2017. The Management
    Letters contained similar issues hence, only significant control weaknesses in the 2015
    Management Letter are reproduced as follows:

    Budgetary Control

    Examination of the Budgetary Controls exercised by the Fly River Provincial
    Government during the financial year 2015 revealed the following issues:

     Journal entry No; 64/2015 was passed to indicate a transfer of K3,000,000 PSIP
    Funds from the Provincial Treasury Operating Account to the Provincial
    Government Operating Account and expended. This transfer was in breach of the
    Appropriation Act 2015 where all PSIP funds are to be captured under National
    Government Grants:

    Documentary evidence was not provided nor sighted to indicate a formal approval
    by the Secretary-Department of Finance nor the Provincial Budgetary Committee
    as well as the Provincial Executive Committee or the Provincial Assembly for
    transfer of PSIP funds. The similar observations had been reported in the previous
    years;

     Total warrant authorities as at 17th August 2015 was stated as K4,097,500
    comprised of current authority of K591,500 and previous authority of K3,506,000.
    The total warrant authorities received from Department of Finance for national
    grants and the cash fund certificate issued by the Provincial Government could not
    be confirmed. An amount of K3,506,000 could not be verified against the warrants
    issued as not all warrants were provided as a result of a poor filing system; and

     Evidence of budget quarterly reviews had not been provided for audit examination.
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    Cash Book & Bank Balance

    The Fly River Provincial Government maintained two bank accounts namely, the Fly
    River Provincial Government Operating Account and Fly River Provincial Grant Account
    with two separate cash books to conduct its financial transactions for Internal Revenues
    and Grant Revenues respectively. Audit of the bank accounts together with related
    records revealed the following matters:

    Fly River Provincial Government Operation Account: 1000943315

    The year-end bank reconciliations showed favorable closing bank and cash book balances
    of K1,743,153 and K2,379,252 respectively. The review of the bank reconciliation
    statements, bank statements and the PGAS cash book however, revealed the following
    concerns:

     The bank reconciliation for the month ending December 2015 had shown that the
    closing bank and cash book balance of K1,743,153 and K2,379,252 respectively,
    remained un-reconciled; and

     Significant reconcilable items that were sighted in supporting schedules of the bank
    reconciliations had continued to significantly distort the actual cash book and fund
    balances. These items had not been identified and corrected in accordance with
    Financial Instruction 5/2006 issued dated 30th November 2006.

    Fly River Provincial Government Grant Account: 1001680784

    The year-end bank reconciliations had shown favorable closing bank and cash book
    balances of K7, 154,260 and K1, 357,862 respectively. The review of the bank
    reconciliation statements, bank statements and PGAS cash book however, revealed the
    following concerns:

     The bank reconciliation had shown that the year-end closing bank and cash book
    balance of K7, 154,260 and K1,357,862 respectively remained un-reconciled; and

     Significant reconcilable items that were sighted in supporting schedules of 6, 8 &
    11 of the bank reconciliation statement for December 2015 had been outstanding
    for years dating back to 2011 which could have significantly distorted the actual
    cash book and fund balances. These items had not been identified and corrected in
    accordance with Financial Instruction 5/2006 issued dated 30th November 2006.

    Revenue Management

    The audit review of the collection and banking procedures revealed the following
    weaknesses:

     Significant under collection of revenues in the areas of Mining Royalties,
    Dividends (MROT2) and 10% Equity. Total estimated for the year was
    K22,446,700 while actual collected was K5, 538,141 resulting in a variance of
    K16,908,558. The under-collection implies unrealistic budget estimates which
    could adversely impact expenditure plans;
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     Cash receipting/collection and banking procedures revealed no major irregularities.
    However, the appointment of cash officer, who is the spouse of the Provincial
    Treasurer may amount to a conflict of interest and a breach of the Public Service
    Management Act; and

     The Provincial Liquor Office had been poorly equipped with of financial resources
    and man-power to effectively perform their roles and responsibilities of monitoring
    and surveillance of existing liquor outlets. However, despite the handicap, the
    office managed to generate well over K200, 000 annually. There was a very poor
    filing system which proved access to the records difficult and time consuming.

    Payment of Accounts & Procurement Management

    Tests of sample payments for accuracy and completeness of payments and procurement
    processes revealed the following control weaknesses:

     Payment vouchers not adequately maintained resulting in audit un-able to locate or
    have the documents provided in account of twenty seven sampled payments
    totaling K537,526 except for the cheque usage report;

     A verbal quotation register was not maintained at the time of the audit
    to state the reason, for only one quotation or no quotations for goods and services
    purchased.

     Nine payments totaling K192,995 that were not committed, certified and lacked
    three valid quote attachments prior to processing of the payment; and

     Record of financial delegates, specimen signatures and authorized requisition
    officers were not updated annually.

    Provincial Supply & Tenders Board

    The review of the Fly River Provincial Government Procurement Procedures revealed the
    following weaknesses:

     The Instruments establishing the appointment of Provincial Supply and Tender
    Board (PSTB) Board members, Signed Meeting Minutes, Register for tenders
    invited and certificate of inexpedience issued were not available nor provided for
    audit review; and

     The tender box was unsuitable for the purpose, not placed in a secured location, not
    secured by dual lock operation and no separate custody of keys. Also, small project
    tenders or urgent tenders are not received sealed.

    Capital Works & Maintenance

    The review of the records and details of the sampled forty-four (44) payments totaling
    K5,334,149 during the year under review revealed the following weaknesses:

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     Finance Form 3 (FF3) for all payments tested, were not signed by the commitment
    clerk and authorized PSTB approval attached prior to payments;

     Reports, records or information on monitoring and reporting of project
    management by the Technical Services Division were not available nor provided
    for audit review at the time of the audit in June, 2016;

     Payment vouchers relating to payments totaling K532,611 were missing; and

     Eleven payments totaling K2,005,874 to construction companies who had no
    evidence of valid Certificate of Registration (COR) and Certificate of Compliance
    (COC) from Investment Promotion Authority (IPA) and Internal Revenue
    Commission (IRC) respectively.

    Grants & Subsidies

    Audit review of the Grants and Subsidy expenditure ledgers (National and Provincial
    accounts) revealed that the Fly River Provincial Government had expended over
    K2,517,317 during the year as grants and subsidies to various organizations including the
    Districts. Audit noted however those policy guidelines for proper and effective
    management of grants and lump-sum payments disbursed to various agencies for state
    funded projects were lacking. Consequently, acquittals and disbursement
    reports/statements from respective recipients were not provided to the Provincial
    Administration and no follow up actions taken for accountability purposes.

    Assets Management

    A review of the existing systems and procedures relating to the assets management
    revealed the following weaknesses:

     The Fly River Provincial Government did not maintain a proper Assets Register
    during the year under review and prior years. Further, no Central Asset Register
    maintained to record details of purchases and/or disposal of assets during the year
    and prior years. Divisional Managers were also responsible for maintaining
    individual Asset Registers for the Divisions. Interviews and enquiries conducted
    with management revealed that no such assets registers had been maintained over
    the years. Consequently, purchases during the year totaling well over K335,124
    could not be verified as correctly recorded in the Assets Register. The Provincial
    Government spends millions of kina purchasing assets every year and the absence
    of proper records indicates that, there is high risk of the assets being abused and
    misused;

     No periodic stock take and Board of Surveys of assets had been conducted during
    the year under review and prior years to ensure all assets of the Provincial
    Government are in existence and in usable conditions; and

     The title documents for the properties were not provided for audit review although
    requested. Consequently, audit was unable to verify the total number of properties
    under the custody of Fly River Provincial Administration.

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    Advances Management

    The Fly River Provincial Government had in place advance registers for both travelling
    and cash advances except for the following weaknesses:

     Payments for travel and cash advances (as per the ledgers from the Provincial
    Grant Account – K856,120 and Provincial Operating Account – K1,383,502) during
    the year totaling K2,239,622 had remained un-acquitted at the time when this audit
    was done in May/June, 2016. Audit sighted no evidence to indicate that there had
    been any acquittal or recovery efforts taken; and

     Payment of excessive cash advances ranging from K20,000 to K85,500 amounting
    to K736,720 were noted which had not been acquitted as stated above. This
    indicated the lack of stringent cash management practices exercised by the
    management.

    Salaries, Wages & Allowances

    Review of the sampled personnel files, payrolls and other related records revealed the
    following issues:

     An updated Establishment Register (2015) was not provided to audit to obtain the
    names of the employees for the year 2015. Audit was informed however, that all
    position holders currently under the new structure remained un-attached as the
    recruitment and appointment process was still pending;

     Fortnightly payroll reconciliation was not done for the twenty-six (26) fortnights
    for the year under review;

     Income Tax payable on casual employees’ wages was not deducted and remitted to
    Internal Revenue Commission (IRC) which was in breach of IRC Tax Regulations;

     Personal files on contract officers were generally not adequately maintained or
    were missing and hence, were not available for audit review;

     A total of 226 casual staff were on the PGAS Payroll and paid from Fly River
    Provincial Operating Account amounting to K4,067,323 through Kundu Pay with
    the Bank South Pacific Bank (BSP). As noted in the previous years, audit could not
    confirm validity and legitimacy of their employment in the absence of a complete
    and reliable Casual Employees Listing, and that only 78 of the total casuals had
    their files maintained in some form. As a result it is likely that there are ghost
    names on the PGAS Payroll; and

     Provincial Treasury casual staff was noted to have been paid from the 700 Series
    PGAS Payroll rather than from the Provincial Treasury Operating Account.
    Records or correspondences in relation to this salary payment arrangement for
    number of payees were not sighted.

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    Trust Accounts

    The Fly River Provincial Government operated a total of five Trust Accounts without
    bank accounts. The respective Trust Ledgers were operated through the PGAS system as
    Clearing Accounts through the Provincial Government Operating and Grant bank
    Account respectively with related system cash book.

    Two of the five Trust Accounts namely, the FRPG Trust Clearing Account & FRPG
    Operating Clearing account had opening and closing balances with transactions during
    the year while the other three namely, North Fly District, Cashbook 500 and Cashbook
    501 had same opening and closing balances which remained dormant during the year as
    these were closed in 2002.

    Corporate Governance

     The Provincial Assembly and PEC meeting minutes were not provided despite the
    request. Consequently, unable to confirm whether the Provincial Government had
    convened the required minimum number of sittings during the year nor could
    ascertain decisions and resolutions passed, if any;

     The Corporate Plan provides strategies, causes of actions to be taken, monitoring
    and evaluation processes required to measure outcomes with appropriate associated
    plans developed to amplify or articulate the action plan for clear understanding and
    implementation;

     The Fly River Provincial Government had in place a Five-Year Corporate Plan
    (2011 – 2015) and a Five – Year Development Plan (2013-2017). The Corporate
    Plan had eight (8) Key Result Areas (KRAs) namely, Internal Management,
    Coordination and Direction (KRA 1); Mobilization of Support Services in Decision
    Making Processes (KRA 2); Finance, Budget Management and Implementation
    (KRA 3); Effective Human Resources Management and Training (KRA 4);
    Physical Assets Management (KRA 5); Performance Management & Technical
    Information Management System (KRA 6 ); Local Level Government Support
    (KRA 7); and Cross Cutting Issues (Gender, HIV/Aids, Disaster and Emergency
    (KRA 8). Audit noted that most of these KRAs had not been implemented as
    highlighted below:

    KRA 1: No monitoring and evaluation team established to ensure the KRA were
    achieved;

    KRA 3: No realistic internal revenue estimate as well as lack of proper recoding and
    updating of the internal and national revenue heads in the system; no proper
    supporting or source documents of the revenue received;

    KRA5: No assets register for the FRPG or the records of assets;

     The Internal Audit Unit is handicapped by limitation of required resources
    including sufficient manpower and appropriate logistical and budget support.

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     The Internal Audit Unit had no Annual Audit Work Plans for the year under review
    nor did it undertake any internal audits during the year hence, no audit reports
    could be provided; and

     The Fly River Provincial Government is yet to establish an Audit Committee as
    required by Section 9 of the Public Finance Management Act, 1995 (as amended).

    Journal Entries

     Twenty-four Journal Entries totaling K502,588 were however, could not be
    verified as they were not properly filed or held in file; and

     A Journal Entry relating to a canceled cheque valued at K500,000 had no evidence
    of the cheque. The Accountant advised that the actual canceled cheque was
    withheld by the Bank for unknown reason was pending.

    6.7.2.2 Management Response

    The audit observations on the internal control weaknesses for the years 2014 and 2015
    had been communicated by way of a Management Letters to the Provincial Administrator
    and management together with recommendations for improvements. I have however, not
    received the responses to the Management Letters as at the time of preparing this Report
    in August 2017.

    6.7.2.3 Status of Financial Statements

    At the time of preparation of this Report in August, 2017, the Fly River Provincial
    Government had not submitted its financial statements for the financial year ended 31
    December, 2016 for my inspection and audit.

    6.7.3 Daru Urban Local-level Government

    The Daru Urban Local-level Government had submitted its financial statements for the
    years ended 31 December 2014 and 2015 for my inspection and audit. Field work
    associated with examination of the financial statements and audit of the accounts and
    records was completed with both the Management Letters and Audit Opinion Reports
    issued. The paragraphs below detail issues identified with the financial statements and the
    internal control environment.

    6.7.3.1 Comments on Financial Statements – 2015

    My reports to the Ministers concerned and other relevant bodies under the Organic Law
    and Audit Act on the Daru Urban Local-Level Government’s financial statements for the
    years ended 31 December, 2014 and 2015 were issued on 21st and 28th June, 2017
    respectively. The Reports contained similar Disclaimer Audit Opinions hence, only the
    2015 report is reproduced as follows:

    Part III 2016 Report Page 92

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    Basis for Disclaimer Audit Opinion

    Disclosure Errors

    Cash Balances

    The Daru Urban Local Level Government Fund Balance of K814,354 is inaccurate due to
    omission of the 2014 Carried Forward Fund Balance of K122,475 and Net Operating
    Surplus for the year of K489,122 which were not included in the calculation of the total
    revenue fund balance in Note 3 to the accounts. Also my comments on significant
    discrepancies noted on the monthly bank reconciliation and inherited errors on the prior
    years carried forward fund balance not corrected in the current year’s books of account
    which are of material value which would have impacted the accuracy and completeness
    of the cash balances reported in the financial statements.

    Receipts and Payments

    Statement ‘B’ presented total revenue and expenditure as K910,370 and K421,158
    respectively with an operating surplus of K489,212. The operating surplus was unreliable
    due to understatement of the total expenditure by K295,515 as confirmed by the ledger
    accounts and that necessary and complete records were not maintained to confirm if all
    internal revenues had been accounted for.

    Other Disclosures

    Accuracy of Nil balance disclosures of other statements relating to, trust accounts,
    investments, lending and borrowings, as well as appendices relating to commitments &
    arrears, debtors & receivables, assets & inventories, losses & deficiencies and cash
    advances could not be confirmed as accurate and reliable in the absence of related records
    and registers.

    Significant Control Weaknesses

    There was significant control weaknesses identified in the Daru Urban Local Level
    Government’s records and processes as follows:

     The Daru Urban Local Level Government annual budget estimates for the year was
    K3,106,170, an increase of K422,370 from the previous year’s budget of
    K2,683,800. I was not provided with sufficient information and records to indicate
    that quarterly budget reviews and revisions were done and that the budget was
    implemented according to the approved appropriations. I also noted numerous
    instances of payments charged to inappropriate expenditure vote items defeating
    the purpose of budgetary control practices;

     No proper revenue registers were maintained to keep track of all revenue
    collections. As a result market fees collected were often used without proper
    accounting documentation;

     I could not verify the genuineness and legality of payment totaling K93,497 in the
    absence of payment vouchers. I also noted significant lapses in the procurement
    procedures which included payments totaling K34,747 processed and paid without
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    being certified by the Certifying Officer and casual laborers payments totaling
    K26,500 could not be confirm as received due to unavailability of Finance Form10;

     As previously mentioned in my 2013 and 2014 Audit Reports, Daru Urban Local
    Level Government had not maintained a comprehensive fixed asset register nor
    conducted any physical stock-take of its assets. Consequently, I am unable to
    establish the total value of assets owned and in the custody of the ULLG as at 31
    December, 2015;

     The Urban Local Level Government had advances totalling K28,870 remained un-
    acquitted as at time of the audit in October, 2016 ;

     Journalized entries valuing K1,419, 895 were never documented nor filed after
    being systematically recorded on the PGAS;

     During my audit of the 2013 accounts in September 2014 I was advised that the
    Planning Division of the Provincial Administration had undertaken the task of
    compiling a Corporate Plan or a Five (5) year Development Plan for LLGs in South
    Fly District. However, at the time of the completion of the 2015 audit in October
    2016, no such documents had been provided for my review; and

     The Fly River Provincial Government is responsible for the internal audit of the
    Daru ULLG. However, no internal audits were done on the accounts of the Urban
    LLG.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and consequently, I am unable to express an opinion
    on the Financial Statements of Daru Urban Local-level Government for the year ended 31
    December, 2015.

    Other Matters

    In accordance with the Audit Act, I have a duty to report on significant matters arising
    out of the Financial Statements, to which the report relates. The following are matters of
    significance:

     Daru Urban Local Level Government did not maintain proper accounts and records
    and has consequently breached Section 68(1) of the Public Finances (Management)
    Act 1995; and

     The receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the Financial Statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local Level Governments”.

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    6.7.3.2 Status of Financial Statements

    The Daru Urban Local-level Government had not submitted its financial statements for
    the financial year ended 31 December 2016 for my inspection and audit at the time of
    preparation of this report in August, 2017. The field work associated with audit of the
    internal control environment however, could not be conducted due to financial and
    manpower constraints faced by my Office.

    6.7.4 Kiunga Urban Local-level Government

    6.7.4.1 Status of Financial Statements

    The Kiunga Urban Local-level Government had not submitted its financial statements for
    the financial years ended 31 December 2014, 2015 and 2016 for my inspection and audit
    at the time of preparation of this report in August, 2017. The field work associated with
    audit of the internal control environment for the three years however, could not be
    conducted due to financial and manpower constraints faced by my Office.

    6.7.5 Daru General Hospital Board

    The Daru General Hospital Board had submitted its financial statements for the years
    ended 31 December, 2014, 2015 and 2016 for my review and audit. Field work
    associated with examination of the financial statements and audit of the accounts and
    records was completed with both the Management Letters and Audit Opinion Reports
    issued. The report for the financial year 2014 was disclaimed whilst 2015 and 2016
    reports were qualified due to various improvements in disclosures in the financial
    statements as well as other internal control procedures. The paragraphs below detail
    issues identified with the financial statements and the internal control environment for the
    respective years.

    6.7.5.1 Comments on Financial Statements – 2014

    My report for the year ended 31 December, 2014 to the Minister concerned and other
    relevant bodies under the Audit Act and the Organic Law was issued on 1st of May, 2017.
    The report contained a Disclaimer Audit Opinion as reproduced below:

    “Basis for Disclaimer Audit Opinion

    Disclosure Errors

    I noted the following disclosure errors have material effect on the accuracy and
    completeness of the account balances, the financial position and consequently, the
    reliability of the financial statements of Daru General Hospital as at 31 December, 2014:

     The accuracy and completeness of the reported value of fixed assets as per the
    Schedule of Assets totaling K1,258,848 could not be confirmed to the register as
    proper and adequate records for all assets were not maintained nor available for
    audit inspection.

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     The accuracy of the Accumulated Fund balance of K4, 796,948 comprised of the
    Operating Account of K312, 531 and Fees Trust Account of K4,484,417 could
    not be confirmed in the absence of related bank reconciliations.

    Significant Control Weaknesses

    The paragraphs below give a summary of significant control weaknesses identified in the
    Daru General Hospital internal control environment:

    Revenue

    Except for instances of minor delays in banking of patient fees, controls relating to
    revenue management were noted to be sound and effective as evidenced by correct
    receipting of National Government Grants through CFCs and direct bank transfers from
    the National Department of Health and posting of the same in the cash books.

    Budgetary Control

     Proper accounting for government grants and hospital fees and the formulation of
    annual budget estimates of revenues and expenditures were lacking. Management
    failed in its responsibility to formulate estimates of revenues and expenditures of
    the Hospital for the year under review as required by the Public Finance
    (Management) Act, 1995;

     Annual budget submission with the Appropriations and the quarterly budget
    reviews for 2014, if any, were not provided for my review at the time of the audit;
    and

     The Salary & Allowances were budgeted at K5,639,300 and paid through the
    Department of Finance against the actual expenditure of K744,754. I was not
    provided nor sighted copy of the payroll reconciliations confirming actual
    expenditure on salaries and allowances for the year.

    Paid Accounts

     Ten instances of payments for routine maintenance totalling K729,966 lacked
    supporting documents including maintenance request forms and delivery dockets
    and proper receipts to confirm that all materials bought had been received intact;

     Payments incurred under “other operating expenditure” totalling K150,489 were
    not approved by a Section 32 Officer. Further, segregation of duties in respect of
    payments amounting to K528,070 was not exercised;

     The Hospital had reported its expenditure on trainings as K42,886. The accuracy
    and appropriateness of these expenditures however, could not be ascertained in the
    absence of any documented and duly approved appropriate Training Plans;

     I noted a very poor and ineffective filing system at the Hospital during the year
    resulting in over 50% of the sampled paid vouchers either missing or not filed at
    the time of the audit; and

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     Payments of recreation leave fares totalling K118,750 were not supported with
    birth certificates and/or concessions for legal dependents and students under 18
    years.

    Salaries & Wages

     Variations in salaries & wages for some permanent employees could not be verified
    in the absence of valid documents including permanent and temporary variations
    forms and advices, performance appraisals reports, over time forms etc.,… for
    confirmation;

     Employee records including salary history cards, recreational and other leave
    records, HDA, compassionate leave and sick leave records were not properly
    maintained and updated;

     Fortnightly payroll reconciliations were not done to verify the accuracy of the
    payrolls;

     Payment vouchers and Kundu Pay reports on casual wages totalling K76,613 were
    not available for audit review; and

     Overtime payments totalling K86,357 were made without prior approval by the
    Divisional Heads.

    Asset Management

    The Daru General Hospital owned extensive portfolios of fixed assets including land and
    residential buildings, vehicles and various biomedical and static equipment, furniture,
    office equipment and white goods. The Hospital did maintain an asset register however,
    lacked proper and timely update of asset details including models/serial numbers,
    additions and disposals, and physical locations of assets. Further, I sighted no evidence to
    indicate that periodic stock takes of the assets were conducted to ensure existence and
    condition of assets.

    Advance Management

    Noted general breakdown in management of travel and cash advances during the year
    resulting in an un-acquitted balance of K233,518 at year end.

    Cash & Bank Balances

    The Hospital Board had ceased the fees trust account and operated only one (operating)
    account for both the fees and the operational account transactions with a single cash book
    since 2007 following the Ministerial Directive due to maladministration and abuses of the
    account in the prior years and reopened only in August, 2014 as reported in the past.
    However, proper reconciliations of cash book and bank account for the year under review
    were not done to reflect accurate account balances at year end.

    Part III 2016 Report Page 97

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    Corporate Governance

     As reported in the past, the Daru General Hospital did not have a Corporate Plan at
    the time of the audit in October 2016 with related long term objectives, set
    priorities and targets as well as associated plans incorporating patient care through
    financial, asset management, human resource, information technology, risk
    management and divisional operating plans,

     The Hospital had no formal Board in place in 2014 due to the expiry of the terms of
    its members. I was advised that as a result, no formal meetings were convened
    during the year. The absence of a formal appointment of Hospital Board had been
    reported since 2009 audit however, nothing seems to have been done since. I am of
    the view therefore, that in the absence of any formal Board in place, and therefore,
    its Meetings, any major financial decisions that may have been undertaken during
    the year could be deemed inappropriate and illegal. Further, the expenditure
    records had however, revealed that stipends and allowances totalling K45,159 were
    paid to certain individuals. Validity of these payments could not be confirmed in
    the absence of any formal meeting minutes or other evidence to indicate attendance
    of members; and

     The National Department of Health is responsible for the internal audit of the
    Hospital. However, I did not sight nor was provided evidence to suggest that such
    audit was conducted during the year 2014 to ensure that the control mechanisms
    instituted were operational and effective.

    The Management had responded in detail and noted fully my audit queries advising that
    certain remedial actions have been taken or are being taken to improve on the issues
    highlighted and will continue to put in place measures for further improvements.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I am not able to obtain
    sufficient appropriate audit evidence and accordingly I am unable to express an opinion
    on the financial statements of Daru General Hospital for the year ended 31 December,
    2014.

    Other Matters

    In accordance with the Audit Act, I have duty to report on significant matters arising out
    of the financial statements, to which the report relates. The following are matters of
    significance:

     Section 62 (1) of the Public Finance (Management) Act, 1995 requires all public
    bodies to keep proper accounts and records of their transactions and affairs, and to
    develop adequate controls over their assets and liabilities. As discussed in the Basis
    for Disclaimer Opinion paragraphs above, the Daru General Hospital had not
    complied with this requirement during the 2014 financial year.

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     The financial statements for Daru General Hospital was not prepared and submitted
    to the Minister and the Auditor General prior to 30 June for the year ending 31
    December preceding, resulting in breaches of Section 63(2) and (4) of the Public
    Finance (Management) Act, 1995. The signed financial statements for the year
    ended 31 December, 2014 were submitted for my review in October, 2015.”

    6.7.5.2 Comments on Financial Statements – 2016

    My reports for the years ended 31 December, 2015 and 2016 to the Ministers concerned
    and other relevant bodies under the Audit Act and the Organic Law were issued on 26th
    June and 14th July, 2017 respectively. The reports contained similar Qualified Audit
    Opinions hence, only the 2016 report is reproduced as follows:

    Basis for Qualified Audit Opinion

    Presentation

    Finance Instruction 2/2004 issued under Section 117 of the Public Finances
    (Management) Act 1995 states the prescribed format for the preparation and presentation
    of the financial statements for Public Bodies. The 2016 financial statements for Daru
    General Hospital had fully complied with the Finance Instruction.

    Disclosure Errors

    I noted the following disclosure errors which could have material effect on the accuracy
    and completeness of the account balances, the financial position and consequently, the
    reliability of the financial statements of Daru General Hospital as at 31 December, 2016:

     The source records relating to adjustments of K109,815 and K2,439,466 used in the
    calculation of the Operating and Trust accounts year-end cash balances of
    K812,032 and K3,271,962 respectively were not provided for my verification and
    confirmation.

    I also noted that the bank reconciliation statement compiled for the Operating
    account for the month of December, 2016 revealed significant amounts of revenue
    and expenditure items totalling K2,153,802 and K2,193,108 respectively that
    remained uncleared at year end. The outstanding reconciling items are of material
    value that will affect the accuracy and completeness of the cash balances reported
    in the financial statements;

     The accuracy and completeness of the reported value of fixed assets as per the
    Schedule of Assets in Note 4 of the Financial Statement totaling K1,224,334 could
    not be confirmed to the register as proper and adequate records for all assets were
    not maintained nor available for audit inspection; and

     Transactions of the hospital accounts are maintained through manual spread sheet
    and as such are prone to high risk of data manipulation and inaccurate disclosures.

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    Significant Control Weaknesses

    The paragraphs below give a summary of significant control weaknesses identified in the
    Daru General Hospital internal control environment:

    Budgetary Control

     Proper accounting for government grants and hospital fees collections was lacking.
    Management failed in its responsibility to formulate estimates of revenues and
    expenditures of the Hospital Fees Trust Account for the year under review;

     Appropriation of K6,799,000 comprised of salary & allowances were budgeted and
    paid through Department of Finance, however no reconciliation or payroll audits
    were done to confirm actual revenue and expenditure component of salary and
    allowances for the year; and

     Quarterly budget reviews and revision relating to appropriations for both the
    operating and trust accounts were not made available for my review at the time of
    audit.

    Paid Accounts

     Nine instances of payments for routine maintenance totalling K66,828 lacked
    supporting documents including maintenance request forms and delivery dockets
    and proper receipts to confirm that all materials bought had been received intact;

     Recreation leave fares payments totaling K151,837 lacked appropriate supporting
    documents such as birth certificates and/or concessions for dependents under 18
    years to validate the number and age of dependents claimed; and

     Audit noted that payments totalling K571, 614 made for supplies and consumables
    were made without obtaining three quotations.

    Advance Management

    Noted general breakdown in the management of travel and cash advances during the year
    resulting in an un-acquitted balance of K396,233 at year end.

    Assets Management

    The assets register was not properly maintained and as such failed to provide detailed
    information such as model/serial number, condition and locations of assets. The Hospital
    owned extensive portfolios of fixed assets including land and residential buildings,
    vehicles and various biomedical and static equipment; furniture, office equipment and
    white goods. However, there were no evidences to indicate that Hospital had conducted
    periodic stock take of its assets to ensure existence of its fixed assets, are in usable
    condition, and to provide management with reliable information so that decisions
    regarding replacements and disposals can be made and catered for in the annual budgets.

    Part III 2016 Report Page 100

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    Cash Book & Bank Accounts

     The Hospital Board had ceased operation of the fees trust account since 2007
    following the Ministerial Directive due to then maladministration and abuses of the
    account and operated only one (operating) account for both the fees and the
    operational account transactions with a single cash book up to August 2014 when
    the fees trust account was reopened. However, I did not sight a copy of the trust
    instrument at the time of the audit; and

     Bank Reconciliations were done on a monthly basis for both operating and trust
    accounts. However, the same were not reviewed, checked and singed by the
    responsible person(s).

    The Management had responded in detail and noted fully my audit queries advising that
    certain remedial actions have been taken or are being taken to improve on the issues
    highlighted and will continue to put in place measures for further improvements.

    Qualified Audit Opinion

    In my opinion, except for the effects of the matters referred to in the qualification
    paragraphs above, the financial statements of Daru General Hospital (DGH) for the year
    ended 31 December, 2016:

     give a true and fair view of the financial operations during the year and its financial
    position for the year then ended; and

     the financial statements have been prepared and presented generally in accordance
    with Finance Instruction 2/2004 issued under Section 117 of the Public Finances
    (Management) Act 1995.”

    6.7.6 Business Arms

    Section 16 (2) (f) of the Audit Act1989 provides for and extends my functions to audit the
    accounts and records of the Provincial Government and Local-Level Government
    Business Arms and other establishments.

    I am not nor made aware of the existence of any business arms of the Fly River
    Provincial Government at the time of preparing this Report in August, 2017.
    Consequently, I am unable to comment on the operations and financial results of the
    business arms of the Provincial Government, if any.

    Part III 2016 Report Page 101

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    6.8 GULF PROVINCE

    6.8.1 Introduction

    The Gulf Provincial Government, Kerema Urban Local-level Government and Kerema
    General Hospital are audited every year, with or without financial statements. Other
    Local-level Governments (LLGs) and the Business Arms of the Provincial Government
    were not audited due to manpower and financial constraints faced by my Office and the
    lack of records and logistical support from the respective Governments and Business
    Arms.

    6.8.2 Gulf Provincial Government

    The financial statements for the year ended 31 December, 2015 were submitted for my
    inspection in June 2017. However, I was unable to conduct the field audit due to the
    constraints mentioned above. I will report the results of this audit in my 2017 Part 3
    Report.

    6.8.2.1 Status of Financial Statements

    At the time of preparing this Report in September, 2017, the Gulf Provincial Government
    had not submitted its financial statements for the year ended 31 December, 2016 for my
    inspection and audit.

    6.8.3 Kerema Urban Local-level Government

    6.8.3.1 Status of Financial Statements

    As reported in my 2015 Part 3 Report, the Kerema Urban Local-level Government had
    not submitted its financial statements for the years ended 31 December, 2012, 2013, 2014
    and 2015 for my inspection and audit. However, in June 2017, draft financial statements
    were submitted to my Office after enquired by the Gulf Provincial Governments Audit
    Committee in May, 2017 to furnish the respective financial statements for their inspection
    and audit. I will commence the respective audits soon after these statements are endorsed
    by management.

    6.8.4 Kerema General Hospital

    The Kerema General Hospital had submitted its financial statements for the years ended
    31 December, 2012 and 2013 for my inspection and audit. Field work associated with the
    audit of accounts and records and examination of the 2012 and 2013 financial statements
    had been completed and Disclaimer Audit Opinions were issued to the Ministers concern.
    The issues identified with the financial statements and the control environments are
    reeproduced as follows:

    6.8.4.1 Comments on the Financial Statements 2012 – 2013

    My reports on the Kerema General Hospital for the years ended 31 December, 2012 and
    2013 to the Ministers concerned and other relevant bodies under the Audit Act were

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    issued in September and March, 2017 respectively. The reports contained Disclaimer
    Opinions hence; only 2013 is reproduced below:

    “Basis for Disclaimer Opinion

    Limitation of Scope

    Opening Balances

    Because of the disclaimer of opinion issued in respect of the year ended 31 December,
    2012 and because of other limitations on the scope of my audit as noted below, I was not
    able to satisfy myself as to the completeness and accuracy of the opening bank balance of
    K9,497,538. Since these opening balances would affect the determination of the financial
    position and the cash flows of the Kerema General Hospital in the current year, I was
    unable to determine whether adjustments to the respective Cashbooks, financial position
    and the cash flows, might have been necessary for the year ended 31 December, 2013.

    Cash at Bank

    The Operating Bank Account was stated as K256,659 in the financial statements for the
    year ended 31 December, 2013. However, this disclosure was not properly reconciled
    with the underlying documents and records as a variance of K32,601 remained
    reconciled. Consequently, I was unable to verify and confirm the account balance for the
    year ended 31 December, 2013.

    Fixed Assets

    In Note 4.2 to the financial statements, Fixed Assets acquired during the year total
    K383,344. However, in the absence of a proper and accurate Fixed Assets Register, the
    details of these assets, the location and condition and the total Assets kept under the
    custody and control of the Kerema General Hospital Board was not verified and
    confirmed. As a result, I am unable to ascertain the correctness and the validity of the
    status and the disclosure made at year end.

    Government Grant

    The National Government Grants were disclosed as K7,407,400 in the financial
    statements for the year ended 31 December, 2013. However, I was unable to verify and
    confirm the account balances as supporting documents including copies of Warrant
    authorities were not provided for my examination.

    Receipts

    Hospital Service Fees were disclosed as K32,456 under Trust Account in the Funds
    consolidated statement. However, the relevant records and registers for the collection of
    the respective hospital fees were not adequately maintained and kept by the Hospital. I
    observed that the Cash Office and the Accounts Section kept separate un-reconciled
    records resulting in an un-reconciled variance of K8,702. Further, there were un-
    reconciled deposits in the Bank Statements totaling K4,554 and K23, 456 from Direct
    Deposits and Rental Fees respectively.

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    Consequently, I am unable to verify and confirm whether the receipts under Trust
    Account, Hospital Fees Account are valid and accurate for the year ended 31 December,
    2013.

    Report On Other Legal and Regulatory Requirements

    In addition to the scope limitation and deficiencies in the accounts and records noted
    above, I also wish to report on the breaches of the Constitution of the Independent State
    of Papua New Guinea, Organic Law on Provincial Governments and Local-level
    Governments, and the Appropriation Act, 2014 the Public Finances (Management) Act,
    1995 (as amended) and the Public Service (Management) Act, 1995 and other enabling
    legislations.

    Financial Statement Presentation Errors

    Finance Instruction 4/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 prescribes the format for the preparation and presentation of the
    financial statements for General Hospital. The financial statements of Kerema General
    Hospital for the year ended 31 December, 2013 did not comply with the above Finance
    Instruction.

    The Financial statements were unsigned by those charged with governance and further,
    the Kerema General Hospital financial statements submitted for audit did not contain the
    updated schedule of Capital Assets and Liabilities, and Statement of Accumulated Funds
    for the year ended 31 December, 2013.

    Budgetary Control

    Budget management records including budget book, warrant authorities and cash fund
    certificates and other related books of accounts and records were not provided for my
    examination. Consequently, I was not able to satisfy myself whether there were sufficient
    controls on the Budget and the reporting guidelines.

    Procurement and Payment

    There were significant control weaknesses in the Kerema General Hospital’s maintenance
    of the accounting records and processes resulting among others these anomalies:

     Debtors and Creditors Ledgers were not properly recorded and kept during the year
    ended 31 December, 2013.

     There were no formal appointments for officers performing the roles and
    responsibilities of a Requisition and a Section 32 officer rendering duties performed
    in these capacities invalid.

     Procurements and payments made totaling K352,018 were made without following
    procedures laid in the Public Finance (Management) Act, 1995.

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     Two (2) payments totaling K88,330 were made out of the Kerema General Hospital
    Fees Trust Account did not have supporting documentation.

     Advances totaling K108,434 were paid during the year ended 31 December, 2013.
    However, Advance management records including Advance register, Acquittals
    files and other related documents and records were not provided for my
    examination.

    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I am not able to obtain
    sufficient appropriate audit evidence and accordingly I am unable to express an opinion
    on the financial statements of Kerema General Hospital for the year ended 31 December,
    2013.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended), I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

    Kerema General Hospital did not maintain proper books of accounts and records to
    support the financial statements and the disclosures contained therein. Further, the
    Hospital Board through the hospital management need to improve future financial
    reporting and its respective accountability statements as required under the Public
    Finance (Management) Act, 1995.”

    6.8.4.1 Status of Financial Statements

    The Kerema General Hospital had not submitted its financial statements for the years
    ended 31 December, 2014, 2015 and 2016 for my inspection and audit at the time of
    preparation of this Report in September, 2017. However, a report on the audit of the
    internal control environment for 2014 is under preparation and will be reported in my
    2017 Part 3 Report.

    6.8.5 Business Arms

    Section 16 (2) (f) of the Audit Act, 1989 (as amended), provides for and extends my
    functions to audit the accounts and records of the Provincial Government and Local-level
    Government Business Arms and other establishments.

    I am aware of the following Business Arms and/or the Trust Funds of the Gulf Provincial
    Government namely, Gulf Economic Development Ltd; Paia Inlet Infrastructure
    Development Co Ltd (86% shareholding); Gulf Investment Trust Fund and its two
    Subsidiaries – Gulf Papua Fisheries Ltd and Southern Star Ltd; Vailala Timber Block 1
    Trust Fund; and Vailala Timber Block 2 Trust Fund. At the time of preparing this Report
    in September, 2017, none of these entities had submitted their respective financial
    statements for my inspection and audit. Consequently, I am unable to comment on the
    operations and financial results of these entities.

    Part III 2016 Report Page 105

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    6.9 HELA PROVINCE

    6.9.1 Introduction

    The Hela Province was created through an Act of Parliament on 14 July, 2009. The Hela
    Provincial Government, Tari Urban Local-level Government and the Hela Provincial
    Health Authority will be audited every year, with or without financial statements.
    However, the province had not established a functioning Urban Local-level Government
    during the year ended 31 December, 2015. The Hela Provincial Health Authority was
    established in 2014 by the NEC after the Tari District was declared a Provincial Hospital
    in October, 2014.

    6.9.2 Hela Provincial Government

    The Hela Provincial Government’s Audit Opinions of the financial statements for the
    years ended ending 31 December, 2013 and 2014 were reported in my 2015 Part 3
    Report.

    6.9.2.1 Status of Financial Statements

    At the time of preparing this Report in September, 2017 the Hela Provincial Government
    had not submitted its Annual Financial Statements for the years ended 31 December,
    2015 and 2016 for my inspection and audit.

    6.9.3 Tari Urban Local-level Government

    6.9.3.1 Status of Financial Statements

    At the time of preparing this report in September, 2017, the Tari Urban Local-Level
    Government had not submitted its financial statements for the years ended 31 December
    2013, 2014, 2015 and 2016. These audits will be done as soon as the respective financial
    statements are submitted to my Office.

    6.9.4 Hela Provincial Health Authority

    6.9.4.1 Status of Financial Statements

    At the time of preparing this report in September, 2017, the Hela Provincial Health
    Authority for its first year of operation had submitted its 2016 financial statement for my
    inspection and audit. The fieldwork associated with the examination of the accounts and
    records have been completed and the results are being evaluated. That being the case, my
    report on the Authority will be in my 2017 Report.

    Part III 2016 Report Page 106

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    6.10 JIWAKA PROVINCE

    6.10.1 Introduction

    The Jiwaka Province was created through an Act of Parliament on 14 July, 2009.
    However, it gained its provincial status on 17 May, 2012. The Jiwaka Provincial
    Government will be audited every year, with or without financial statements. At the time
    of audit in September, 2017, the Jiwaka Province had not properly established an Urban
    Local-level Government and a Provincial Health Authority.

    6.10.2 Jiwaka Provincial Government

    The Jiwaka Provincial Government’s audit opinion for the year ended 31 December,
    2013 was reported in my 2015 Part 3 Report. I also included the results of my review on
    its Control Environment for the years ended 31 December, 2014 and 2015.

    6.10.2.1 Status of Financial Statements

    At the time of preparation of this Report in August, 2017, the Jiwaka Provincial
    Government had not submitted its Annual Financial Statements for the years ended 31
    December, 2014, 2015 and 2016 for my inspection and audit.

    I have written to the Administrator in June, 2017 concerning his statutory obligations to
    produce the respective financial statements and he has not responded to date.

    6.10.3 Jiwaka Urban Local-level Government

    6.10.3.1 Status of Financial Statements

    The Jiwaka Province had not established a functioning Urban Local-level Government.
    When a Jiwaka Urban Local-level Government is established, it is required to prepare
    annual financial statements for my inspection and audit.

    6.10.4 Jiwaka General Hospital Board

    6.10.4.1 Status of Financial Statements

    The Jiwaka Province had not established a Provincial Hospital Board. When the
    Provincial Hospital Board is properly established and financially operational, it is
    required to prepare annual financial statements for my inspection and audit.

    Part III 2016 Report Page 107

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    6.11 MADANG PROVINCE

    6.11.1 Introduction

    The Madang Provincial Government, Madang Urban Local-level Government and
    Modilon General Hospital Board are audited every year, with or without financial
    statements. Other Local-level Governments (LLGs) and the Business Arms of the
    Provincial Government could not be audited due to financial constraints faced by my
    Office and the lack of records and logistical support from the respective Governments
    and Business Arms.

    6.11.2 Madang Provincial Government

    Madang Provincial Government had submitted its financial statements for the year ended
    31 December 2015. Fieldwork associated with the audit of the financial statements and
    the accounts and records had been completed with the Management Letter and audit
    report issued.

    6.11.2.1 Comments on Financial Statements – 2015

    My report to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act on the financial statements of the Madang Provincial Government for
    the year ended 31 December 2015 was issued in 2017. The report contained Disclaimer
    Audit Opinion and is reproduced as follows:

    “Basis for Disclaimer Opinion

    Cash balances

    I am unable to express an opinion on the accuracy of the cash at bank balances and
    consequently, on the financial position of the Madang Provincial Government as at 31
    December 2015 due to the following reasons:

     There was limitation of scope arising from disclaimed audit opinion in the prior
    year. Remedial adjustments taken to correct the account balances had not been
    provided for my examination. In addition, the operating surplus for the current year
    was materially misstated as discussed under the paragraph of Receipts and
    Payments. Consequently, I was unable to verify and confirm the accuracy of the
    accumulated fund balance of K20,998,040;

     The Trust Fund Balance of K105,212 included the Sub National Strategy Trust
    Fund balance of K9,856 which is a dormant book value carried over from previous
    years. In the absence of accounting books and records pertaining to this trust
    account I was unable to confirm its existence and the subsequent Trust Fund
    Balance as at year then ended; and

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     Significant reconciling items identified in the bank reconciliation statement had not
    been adjusted in the cashbook and this affected the cash balances at year end.
    Further, stale cheques totaling K336,132 have not been identified, cancelled and
    written off with prior approval from authorities and I was not provided
    explanations and documentary evidence of any adjustments made. Consequently, I
    was unable to confirm the completeness and accuracy of the year-end cash at bank
    balances.

    I was not provided the necessary documentation, the required explanation or the
    reconciliation for the significant discrepancies. Consequently, I am not able to verify the
    validity and the correctness of the accumulated fund balance as at year ended 31
    December, 2015.

    Receipts and Payments

    I am unable to verify the accuracy of the receipts and payments and subsequently the
    accuracy of the net surplus/deficit of K1,149,917 as at 31 December, 2015 due to:

     Staffing Grants and Teachers’ Salaries of K71,095,000 which is retained and spent
    from Public Accounts of Department of Finance was reported in this financial
    statement. However, this expenditure was not captured and recorded in the
    provincial government’s books of accounts and I was not provided the required
    explanation and evidence of adjustment made if any. Consequently, I am not able
    to verify the accuracy and completeness of this disclosure in the financial
    statements.

     Substantial reconciling items pertaining to revenue of K546,870 and expenditure of
    K482,764 identified in the bank reconciliation statements were not adjusted in the
    respective cashbooks and posted to the appropriate ledgers and the subsequent
    revenues and expenditures in Statements ‘B’, ‘J’ and ‘K’.

    Investments

    The Province has an investment in the Madang Development Corporation of K500,000 as
    at 31 December 2015. In absence of investment register, share certificates and related
    records I was unable to confirm the existence, accuracy and completeness of the
    investments as at year end.

    Debtors

    Appendix 2 reported Debtor and Receivables as nil as at 31 December 2015. The Madang
    Provincial Government did not maintain debtors’ ledgers for uncollected debts in respect
    of all revenue heads during the year. Further, an amount of K76,955 was reported in the
    2014 financial statements however, this figure was not reflected in the comparative
    balances for the 2015 financial statements and the reconciliation for the clearing off of
    this balance in 2015 was not made available for my examination. I was not provided with
    explanations and reconciliations for discrepancies highlighted. Consequently, I was

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    unable to verify the accuracy and completeness of the nil balance reported as at the year
    ended.

    Inventories

    Appendix 3 reported Inventories of K11,664,888 as at 31 December 2015. The details of
    the inventories in note 14 are not reflective of appendix 3 as note 14 reflected the 2014
    balances with the 2013 comparatives. As a result, the balances reflected in note 14 are
    incorrect and misleading.

    Further, this appendix showed only additions of inventories to the opening balances and
    not the inventories disposed and/or consumed during the year. I noted that inventories
    such as consumables and fuel purchased during the year have been consumed however
    not reconciled and adequately reported in the appendix. The respective registers
    maintained at respective cost centers as stated in note 14 were not adequately updated to
    reflect the movement of inventories during 2015.
    I was not provided with explanations and reconciliations for discrepancies highlighted.
    Consequently, I was unable to verify the accuracy and completeness of the inventory
    balance reported as at the year ended.

    Assets

    Appendix 4 of the financial statements showed Assets as K20,106,658 as at the year
    ended 31 December 2015. A centralized Assets Register was not maintained to
    consolidate all registers maintained at cost centers and stock takes of assets and
    inventories were not carried out during the year. In the absence of a centralized Assets
    Register and annual stock takes, I was unable to confirm the value, existence and
    completeness of assets owned by and in the custody of Madang Provincial Government
    as at 31 December, 2015.

    Advances

    The appendix 6 reported un-acquitted advances of K1,607,046 as at the year ended 31
    December,2015. I was not provided a proper and accurate reconciliation of the
    outstanding advances for the year then ended. Consequently, I am able to ascertain the
    accuracy of the total advances paid during the year and establish the total amount of un-
    acquitted advances at year end.

    Significant Control Weaknesses

    There were significant control weaknesses identified in the Provincial Government’s
    records and processes, as follows:

     The Provincial Government did not maintain a proper customer data base with an
    effective billing system in the revenue section for the collection of revenue from
    the major internal revenue sources such as Goods and Services Tax (GST), Liquor
    Licensing Fees and Motor Traffic Registration Fees. Evidence of check and
    balances were non-existent. Segregation of duties being the key element of control

    Part III 2016 Report Page 110

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    was not being exercised. Staff were performing overlapping tasks in cash
    collection, receipting, recording and paying;

     The process applied in disposing of assets could not be established for fairness and
    equity. There was conflict of interest involved by PSTB members who successfully
    bid for motor vehicles. There was no independent declaration enclosed with the
    PSTB decisions made to the successful bidders. Also, some of those disposable
    vehicles were underpaid which shows that most of these bidders did not have the
    capacity to pay the full disposal amount and have denied potential bidders who
    would generate substantial amount of revenue to the provincial government.

     Non-maintenance of accounting records such as FF3 register, claims register,
    verbal & written quotation registers, centralized assets and advances registers;

     Significant volume of expenditure transactions charged to inappropriate vote items
    and also there were numerous instances of unbudgeted commitment paid from the
    2015 appropriation;

     instances of claims not thoroughly examined and certified and a lake of proper and
    appropriate supporting documentations in payment of claims;

     With the exception of Grants paid to the LLGs, there was no accountability report
    provided for funds paid to public authorities neither were there any evidence
    sighted to suggest that a systematic monitoring process existed and functioning
    effectively to ensuring that funds paid in this manner were appropriately used for
    purposes intended.

     There was no proper and standard guideline governing funds being allocated or
    paid for financial assistance.

     Excessive expenses were incurred on vehicle hire as there was no control over the
    hiring of vehicles and the genuiness and economical purpose of hire could not be
    determined due to lack of supporting documentations or if paid were for services
    already rendered and as such there were no deliberation on the purpose of hire,
    number of days hired, rate charge and approval obtained from the appropriate
    authority.

     Personal monies reimbursements by individuals lack proper receipts or relevant
    documents in support of claims made. A number of faulty claims docking a total of
    K435,600 for various types of payments which do not have the necessary
    documentations and approvals and the valid evidences for reimbursements.

     A significant expenditure of K7, 394, 968 was incurred on the Capital works and
    maintenance programs during the year. I noted that the Provincial Government’s
    Provincial Supply & Tenders Board and its Works Division did not ensure proper
    tendering processes in engaging contractors for major projects. In addition, the
    PSTB Technical and Evaluation Committee evaluation and analytical reports were
    not sighted to ascertain proper evaluation and recommendations made to the Board.
    Also pre-qualification list of local contractor was lacking.
    Part III 2016 Report Page 111

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    Disclaimer Audit Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and accordingly I am unable to express an opinion
    on the financial statements of Madang Provincial Government for the year ended 31
    December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have a duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

     the Madang Provincial Government did not maintain proper accounts and records
    and consequently in breached Section 68(1) of the Public Finances
    (Management)Act, 1995;

     the receipts and payments and investments of moneys and the acquisition and
    disposal of assets during the period covered have not been in accordance with the
    Public Finances (Management) Act, 1995 and Organic Law on Provincial
    Governments and Local-Level Governments; and

     The Madang Provincial Government has not prepared and submitted its financial
    statements for the year ended 31 December 2015 to the Minister and the Auditor-
    General within the required timeframe in contravention of Sections 114 and 119 of
    the Organic Law on Provincial and Local Level Governments.”

    6.11.2.3 Management Response

    The above observations had been communicated by way of a Management Letter to the
    management together with implications and recommendations for improvements. I had
    however, not received the responses to the Management Letter as at the time of
    preparing this Report in September 2017.

    6.11.2.4 Status of Financial Statements

    At the time of preparing this Report, Madang Provincial Government had submitted its
    financial statements for the year ended 31 December 2016 for my inspection and audit
    and field audit will commence shortly when funding becomes available.

    6.11.3 Madang Urban Local-Level Government

    6.11.3.1 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Madang Urban Local-Level
    Government had not submitted its financial statements for the years ended 31 December
    2011 to 2016 (6 years) for my inspection and audit.

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    The audit of the 2011 and 2012 financial statements had been dispensed due to delays in
    the submission of the financial statements.

    6.11.4 Modilon General Hospital Board

    6.11.4.1 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Modlion General Hospital
    Board had submitted its financial statements for the years ended 31 December 2012,
    2013, 2014 and 2015 for my inspection and audit. The field audit will commence shortly
    when funding becomes available.

    The financial statement for the year ended 31 December, 2016 has not been submitted
    for my inspection and audit.

    6.11.5 Business Arms

    Section 16 (2) (f) of the Audit Act 1989 provides for and extends my functions to audit
    the accounts and records of the Provincial Government and Local-Level Government
    Business Arms and other establishments.

    I am aware that Madang Provincial Government had a number of business arms including
    Madang Development Corporation. Records pertaining to these investments were not
    made available for my examination and as such I was unable to comment on the
    operations and financial results of these entities.

    Part III 2016 Report Page 113

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    6.12 MANUS PROVINCE

    6.12.1 Introduction

    The Manus Provincial Government, Lorengau Urban Local-level Government and
    Lorengau General Hospital are audited annually with or without the financial statements.
    The annual audits of the Rural Local-level Governments and the Business Arms of the
    Provincial Government could not be audited due to manpower and financial constraints
    faced by my Office and the lack of records and logistical support from the respective
    Local-level Governments and Business Arms.

    6.12.2 Manus Provincial Government

    6.12.2.1 Status of Financial Statements

    At the time of preparation of this Report in September, 2017, the AGO was advised that
    the financial statements for the year ended 31 December, 2015 were in the process of
    being finalized while the draft financial statements for the year ended 31 December, 2016
    were submitted for my inspection and audit. The field work associated with audit of the
    internal control environment for 2015 and the examination of the financial statements and
    the audit of the accounts and records for 2016 however, could not be conducted due to
    financial constraints faced by my Office as well as the uncertainties associated with the
    2017 National General Elections.

    6.12.3 Lorengau Urban Local-level Government

    6.12.3.1 Status of Financial Statements

    At the time of preparation of this Report in September, 2017, the Lorengau Urban Local-
    Level Government (LULLG) had submitted its financial statements for the year ended 31
    December, 2015 while the financial statements for 2016 were being prepared. Field work
    associated with the examination of the financial statements and audit of the accounts and
    records for 2015 and the audit of control environment for 2016 however, could not be
    conducted due to manpower and financial constraints faced by my Office as well as the
    uncertainties associated with the 2017 National General Elections.

    6.12.4 Lorengau Hospital Board

    6.12.4.1 Status of Financial Statements

    The Lorengau Hospital Board had not submitted its annual financial statements for the
    years ended 31 December, 2013, 2014, 2015 and 2016 at the time of preparation of this
    Report in September, 2017 for my inspection and audit.

    6.12.5 Business Arms

    Section 16(2) (f) of the Audit Act 1989 provides for and extends my functions to audit the
    accounts and records of the Provincial Government and Local-level Government

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    Business Arms and other establishments. The Manus Provincial Government has
    investments in number of business arms as reported below.

    6.12.5.1 Manus Fishing Corporation Ltd

    The Corporation was established by the Manus Fishing Corporation Act 2003 with the
    objective and functions as stipulated under the relevant Sections of the Act. As reported
    in my previous reports, the Corporation is 100% owned by the Provincial Government.
    The Corporation was said to have a fleet of two vessels, however, without any return to
    the Provincial Government. Documents such as share certificate or certificate of
    incorporation were not available for my review. At the time of preparation of this Report
    in September, 2017 the company had not submitted any recent financial statements for
    my review and audit.

    6.12.5.2 Manus Shipping Authority

    The Authority was established by the Manus Provincial Shipping Authority Act 1994. As
    reported in my previous reports, the Authority was reported to have operated a fleet of
    three vessels. Out of these, only one vessel is said to be in operation since 2003. Profits
    from the operation are shared between the Provincial Government and the operator net of
    running costs. At the time of preparation of this Report in September, 2017 the Authority
    had not submitted any recent financial statements for my review and audit.

    6.12.5.3 Kei Beseu Kampani Ltd

    As reported in my previous reports, the Manus Provincial Government holds 522 shares
    as a single majority shareholder at 34% while the various landowner groups share the
    balance of the shares in the entity. At the time of preparation of this Report in September,
    2017 the company had not submitted its financial statements for the five (5) years ended
    31 December, 2016 for my review and audit.

    6.12.5.4 Lorengau Hotel Ltd

    As reported in my previous reports, the Lorengau Hotel Ltd was incorporated in October
    1974 with the Manus Provincial Government share having a share of 50% to 80% and the
    remaining balance shared between the Kei Beseu Kampani Ltd and the Local-level
    Governments. At the time of preparation of this Report in September, 2017 the company
    had not submitted its financial statements for the five (5) years ended 31 December, 2016
    for my review and audit.

    Part III 2016 Report Page 115

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    6.13 MILNE BAY PROVINCE

    6.13.1 Introduction

    The Milne Bay Provincial Government, Alotau Urban Local-level Government and
    Milne Bay Provincial Health Authority are audited every year with or without financial
    statements. Other LLGs and the Business Arms of the Provincial Government could not
    be fully audited due to manpower and financial constraints faced by my Office and the
    lack of records and logistical support from the respective LLGs and Business Arms.

    6.13.2 Milne Bay Provincial Government

    The Milne Bay Provincial Government had submitted its financial statements for the
    financial years ended 31 December, 2014 and 2015. The fieldwork associated with audit
    of the financial statements and the accounts and records for 2014 and 2015 had been
    completed with the respective management letters and audit opinions issued accordingly.
    The issues identified with the financial statements and the control environments are
    summarized in the paragraphs below.

    6.13.2.1 Comments on Financial Statements – 2014 and 2015

    My reports to the Ministers concerned and other relevant bodies under the Organic Law
    and Audit Act on the Milne Bay Provincial Government’s financial statements for the
    years ended 31 December, 2014 and 2015 were issued on the February and March 2017
    respectively. The reports contained similar Disclaimer Audit Opinions hence, only the
    2015 report is reproduced as follows:

    Basis for Disclaimer Opinion

    Presentation Errors

    Finance Instructions 5/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 state the prescribed format for the preparation and presentation
    of the financial statements for Provincial Government.

    The financial statements of Milne Bay Provincial Government for the year ended 31
    December, 2015 fully complied with the formats prescribed by Finance Instruction
    5/2000. I am however, unable to express an opinion on the accuracy and completeness of
    the financial statements due to the following issues as stated under the paragraphs below
    that render the financial statements inaccurate and misleading:

    The declaration of the Financial Statements being true was not signed off accordingly by
    the Provincial Administrator and the Provincial Treasurer.

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    Cash Balances

    Statement ‘A’ showed the Fund Balance of K13,009,174 represented by closing cash
    balances of the Provincial Government Operating Account of K5,502,763 and Provincial
    Government Grant Account of K7,506,411 as at 31 December, 2015. I however, noted
    the following errors and inconsistencies which render the statement inaccurate and
    unreliable:

    The Opening Revenue Fund Balance of K1,657,897 overdrawn used in Note 3
    computations contains errors brought forward from previous years.

    Under 6.1 of the notes to and forming part of the financial statements revealed bank
    balances of K5,502,763 (Westpac) and K7,506,411 (BSP). However, inconsistencies
    were noted in reporting of these balances in my review of the Bank Reconciliation
    Statements for the two accounts for the month ending 31December, 2015.

    Investments

    This statement is intended to show all short term investments by the Provincial
    Government during the year. This statement showed no short term investments although
    MBPG had an IBD investment of K3,000,000 which should have been reported in this
    statement. Furthermore, the interest revenue earned of K32,818 was not shown in this
    statement, although were taken up in the revenue ledgers under statement ‘J’.

    Assets

    Appendix 4 to the financial statements reported total value of assets as at 31 December
    2015 to be K22,643,661. My review of the of the controls surrounding asset management
    revealed the following matters of concern; land and building were recorded without their
    values, no evidence to indicate that a periodic stock take was undertaken and details of
    assets disposed of were not reflected on the asset register.

    Significant Control Weaknesses

    There were significant control weaknesses with the Milne Bay Provincial Government’s
    records and internal control processes as stated below:

     Payment vouchers, contracts, completion reports, certification reports, tender
    documents and status reports for minor and major capital works totaling
    K3,469,883 were not made available for audit, hence could not be verified.

     The Provincial Government had expended a total of K10,292,107 on grants and
    subsidies during the year. I have however, not sighted evidence to indicate proper
    controls were in place to ensure funds paid were properly accounted for by the
    recipients.

     In one instance, a collector statement for an amount of K210,030 could not be
    substantiated with relevant copies of official receipts and deposit slips.

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     Travelling Allowances and General Advances totaling K 99,340 and K78,712
    respectively for the year under review remained un-acquitted as at 31 December
    2015 require a thorough investigation for prompt clearance and recovery where
    necessary.

    Disclaimer Opinion

    Because of the significance of the matters described above, I was not able to obtain
    sufficient appropriate audit evidence and consequently I am unable to express an opinion
    on the financial statements of Milne Bay Provincial Government for the year ended 31
    December, 2015.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended), I have a duty to report on
    significant matters arising out of the financial statements, to which the report relates. The
    following are matters of significance:

     Milne Bay Provincial Government did not maintain proper accounts and records
    and has consequently breached Section 68(1) of the Public Finances
    (Management)Act, 1995; and

     the receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements were not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments.”

    6.13.2.2 Management Response

    The observations on the audit of the financial statements and the accounts and records for
    the year ended 31 December, 2015 had been communicated by way of a Management
    Letter to the Provincial Administrator together with recommendations for improvements.
    However, the responses to the Management Letter had not been received at the time of
    preparation of this Report.

    6.2.2.3 Status of Financial Statements

    The Milne Bay Provincial Government had submitted its financial statements for the year
    ended 31 December, 2016. However, due to the AGO’s funding issues the audit has been
    delayed up to the time of preparation of this Report in September 2017.

    6.13.3 Alotau Urban Local-level Government

    The audit of the financial statements for the year ended 31 December, 2014 was
    completed with Management Letter issued to the Ministers and agencies concerned. The
    Issues raised are reported hereafter.

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    6.13.3.1 Comments on the Financial Statements – 2014

    My report on the Alotau Urban Local Level Government 2014 to the Ministers concerned
    and other relevant agencies under the Audit Act, 1989 (as amended) was issued in July,
    2017. The report contained Qualified Audit Opinion and it is reproduced below:

    Basis for Qualified Audit Opinion

    Financial Statements

    The Funds

    Statement A disclosed total funds available as K283,015 for the year ended 31 December,
    2014. However, the bank balances were not properly reconciled to the General Ledger
    due to an incorrect accounting procedure where the Cash at bank of K1,017,998 was
    reconciled to itself, instead to the cashbook. As the account balance disclosed for the year
    was understated and incorrect, I am unable to confirm the true and fairness of the
    disclosure for the year ended 31 December, 2014.

    Debtors – Appendix 2

    The debtors for the year ended 31 December, 2014 were reported as NIL in Appendix 2 to
    the financial statements. However, the debtors of the prior year totaling K1,447,359 were
    not disclosed. Consequently, I was unable to confirm the validity and the correctness of
    the account balances for the year ended.

    Assets – Appendix 4

    Assets were stated as K1,711,552 in the Appendix 4 to the financial statements. However,
    Assets purchased during the year totaling K287,685 were not disclosed in the Appendix
    accordingly. As a result, I was unable to satisfactorily confirm the validity and the
    correctness of the disclosures made in the Appendix 4 to the financial statements for the
    year ended 31 December, 2014.

    Advances – Appendix 6

    In Appendix 6 to the financial statements of un-acquitted advances remain outstanding at
    year end as (K27,925). However, 80% (K22,215) of these advances were for prior years
    and were not vigorously pursued and recouped by the Alotau Urban Local level
    Government. As there were outstanding advances even for the year ended 31 December,
    2014, the Local Level Government breached the requirements of the Public Finance
    (Management) Act, 1995 in terms of advance management.

    Significant Control Weaknesses

    There was significant control weaknesses identified in Alotau Urban Local-level
    Government’s records and processes, as follows:

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     The Alotau Urban Local Level Government revised budget for its revenue and
    expenditures were estimated at K2,297,000 and K2,297,000 respectively.
    However, the actual receipts and payments were under collected by K630,008 and
    overspent by K274,101 respectively during the year. I was not provided the
    necessary documentation or explanations for the budget deviations which resulted
    in unauthorized appropriations. As a result, I am unable to satisfy myself on the
    validity and the authenticity of the deviations that occurred during the year ended
    31 December, 2014.

     The bank reconciliations of the Local Level Government were not checked and
    verified as correct by senior accountable officers during the year. In the bank
    reconciliations, un-presented cheques for May, July, September, October and
    November 2013 totaling K3,969 with cheques were not written back to the cash
    book as soon as the cheques became stale. Further, reconciling items including
    errors or omissions in the bank reconciliations for the year end totaling K736,112
    were not satisfactory rectified with the bank during the year ended 31 December,
    2014.

     Proper and disciplined procurement procedures and practices were not adopted by
    the Local Level Government during the year. Payments for Fuel and for
    Assistances and Pledges totalling K66,616 and K24,623 respectively were
    improper. Further, payments totaling K95,720 for town cleaning and related
    activities were not supported with the casual listing, hourly rates and subsequent
    endorsement of receipts.

     The governance procedures at the Alotau Urban Local Level Government were
    weak and lacked cohesive direction to achieve corporate goals. Further, it did not
    have a Corporate Plan and it was not possible to assess the activities earmarked.

     Internal Audits were not conducted on the Alotau Urban Local Level Government
    by the Milne bay Provincial Government internal auditors to ensure probity and
    integrity of the local level government’s systems and processes to safe guard
    against loss and misuse.

    Qualified Audit Opinion

    In my opinion, except for the effects of the matters described in the Basis for
    Qualified Audit Opinion paragraphs, the financial statements of the Alotau
    Urban Local-level Government for the year ended 31 December, 2014,

    (a) give a true and fair view of the financial position and the results of its
    operations for the year then ended; and

    (b) with exception of instances of non-compliance described under Significant Control
    Weaknesses, the financial statements have been prepared in accordance with the
    Public Finances (Management) Act, 1995 and generally accepted accounting
    practice.”

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    6.13.3.2 Management Response

    The observations on the audit of the financial statements and the accounts and records for
    the year ended 31 December, 2014 had been communicated by way of a Management
    Letter together with recommendations for improvements. However, the responses to the
    Management Letter had not been received at the time of preparation of this Report.

    6.13.3.3 Status of Financial Statements

    At the time of preparing this Report in September 2017, the Alotau Urban Local Level
    Government had not submitted its financial statements for the years ended 31 December,
    2015 and 2016 for my inspection and audit.

    6.13.4 Milne Bay Provincial Health Authority

    The Milne Bay Provincial Health Authority (PHA) had submitted its financial statements
    for the year ended 31 December, 2015. The fieldwork associated with the audit of the
    financial statements and accounts and records had been completed. The Management
    Letter was issued and the audit report results were being evaluated at the time of
    preparation of this Report in September 2017.

    6.13.4.1 Management Response

    The observations on the audit of the financial statements and the accounts and records for
    the year ended 31 December, 2015 had been communicated by way of a Management
    Letter to the Chief Executive Officer of Milne Bay Provincial Health Authority together
    with recommendations for improvements. However, the responses to the Management
    Letter had not been received at the time of preparation of this Report.

    6.13.4.2 Status of Financial Statements

    The Milne Bay Provincial Health Authority had not submitted its financial statements for
    the year ended 31 December, 2016 at the time of preparation of this Report in September
    2017.

    6.13.5 Business Arms

    Relevant Section 16(2) (f) of the Audit Act provides for and extends my functions to audit
    the accounts and records of the Provincial and the Local Level Government Business
    Arms and other establishments.

    I am aware of two business arms of the Milne Bay Provincial Government namely, Milne
    Bay Properties Ltd and Miba Microfinance Ltd. At the time of preparing this Report in
    September, 2017, the business arms had not submitted any financial statements for my
    inspection and audit. Consequently, I am unable to comment on the operations and
    financial results of the entities.

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    6.14 MOROBE PROVINCE

    6.14.1 Introduction

    The Morobe Provincial Government (MPG), Lae Urban Local-level Government
    (LULLG) and Angau Memorial General Hospital (AMGH) are audited every year, with
    or without financial statements. Other Local-Level Governments and the Business Arms
    of the Provincial Government could not be fully audited due to financial constraints faced
    by my Office and the lack of records and logistical support from the respective entities.

    6.14.2 Morobe Provincial Government

    The Morobe Provincial Government had submitted its financial statements for the
    financial year ending 31 December 2015 for my inspection and audit. Field work
    associated with examination of the financial statements and audit of the accounts and
    records was completed with both the Management Letters and Audit Opinion Reports
    issued. The issues identified with internal control environment for 2015 were reported in
    the 2015 Part 3 Report and hence only the issues identified with the financial statements
    are detailed in paragraphs below:

    6.14.2.1 Comments on Financial Statements – 2015

    My report to the Ministers concerned and other relevant bodies under the Organic Law
    and the Audit Act was issued in July 2017. The report was a Disclaimer of Opinion as
    reproduced below:

    Basis for Disclaimer Audit Opinion

    Incorrect amounts presented in thousands

    The financial statements of Morobe Provincial Government for the year ended 31
    December, 2015 are misleading as a result of error in the presentation of the statements.
    Namely, amounts in Statements ‘A’ and ‘C’ to ‘I’, Appendices 1 and 2 and Notes 3 to 4
    and 6 to 17 of the notes to and forming part of the financial statements were incorrectly
    presented in amounts of ‘thousands’(‘000) instead of the original amounts.

    Opening Balances

    Because of the disclaimer opinion issued in respect of the year ended 31 December, 2014
    and of other limitations on the scope of my audit as noted below, I was not able to satisfy
    myself as to the completeness and accuracy of the opening balances. Since these opening
    balances would affect the determination of the financial position and the cash flows of the
    Morobe Provincial Government in the current year, I was unable to determine whether
    adjustments to the respective cashbooks and the financial positions, might have been
    necessary for the year ended 31 December 2015.

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    Cash balances

    I am unable to express an opinion on the accuracy of the total fund balance of K8,
    142,023 for Morobe Provincial Government as at 31 December 2015 due to:

     Significant reconciling items identified in the bank reconciliation statements of the
    operating, grant and provincial works trust accounts that had not been adjusted in
    the respective cashbooks and hence affected the balances and the subsequent total
    fund balance at year end. I was not provided explanations and documentary
    evidence of adjustments made if any. Consequently, I was unable to confirm the
    completeness and accuracy of the year-end cash at bank balances disclosed in the
    Statement ‘A’; and

     Trust Accounts with bank accounts which had their accounts and records operated
    through the Provincial Government Accounting Systems (PGAS) were disclosed in
    statement ‘C’ whilst those operated outside the PGAS were not. The two (2) trust
    accounts namely, Morobe Provincial Sports Council and Morobe Provincial
    Disaster and Emergency Trust with bank accounts received additional funding in
    total of K963, 226 in 2015 from the Provincial Government however, were not
    reported. I was not provided sufficient documentation and necessary explanation
    for the non-disclosure. Consequently, I was unable to ascertain whether all trust
    accounts operated by the Provincial Government have been properly accounted for
    and disclosed in the financial statements.

    Receipts and Payments

    Significant reconciling items relating to revenue and expenditure appearing in the
    December bank reconciliation were not adjusted to the cashbooks and respective ledgers
    and as a result were not incorporated in the financial statements. Consequently, I am
    unable to verify the completeness and accuracy of the receipts of K287,308,140 and
    payments of K282,334,200 and subsequently, the operating surplus of K 4,973,247 in
    Statements ‘B’, ‘J’ and ‘K’.

    Investments

    The Morobe Provincial Government did not report any Investments in statements ‘E’ and
    ‘F’ of the financial statements. However, the Provincial Government has Business Arms,
    namely Kumgie Holdings and Morobe Sustainable Investment. As reported in 2014,
    K1,000,000 was paid to Kumgie Holdings in 2013 being for establishment of MPG
    Umbrella Company and a K900,000 was paid to Morobe Sustainable Investment. These
    investment Companies were not disclosed in statement ‘F’. Further, there were no
    investment related documents such as Share Certificates, Trust Deeds, Investment
    Registers, Company Certificates and profiles maintained to record details of investments
    held by the Provincial Government. Consequently, I am unable to ascertain the value of
    investments held by the Provincial Government.

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    Outstanding Commitments and Arrears

    The outstanding commitments and arrears reported in appendix 1 with its details shown
    in note 12 were inconsistent and varied. I noted that these balances were the same
    reported in the 2014 financial statements. I was not provided an explanation for these
    discprancies and in the absence of commitment registers and related records I was unable
    to verify the completeness and accuracy of the outstanding commitments and arrears
    reported as at the year ended 31 December, 2015.

    Debtors

    The appendix 2 showed nil debtors and receivables as at 31 December 2015. However,
    note 13 forming part of the financial statement for 2015 showed a closing debtors balance
    of K97,160 being balance brought forward from 2014. I was not provided an explanation
    for this discrepancy and in the absence of debtor’s ledgers I was unable to confirm the
    completeness and accuracy of the debtors and receivables as at the year ended 31
    December, 2015.

    Assets

    Appendix 4 showed nil summary of assets whilst note 15 of the notes to and forming part
    of the financial statements showed a total of K6,440,147 which was a carry forward
    figure from the 2014 resulting in significant variances and inconsistencies. Further, good
    asset management was not practiced and in the absence of a complete assets register and
    annual stock-takes, I am unable to confirm the existence, completeness, condition and
    value of all assets owned by the Morobe Provincial Government as at 31 December, 2015
    which included motor vehicles as there was also lack of control over the Provincial
    Government Fleet of Vehicles.

    Advances

    Appendix 6 showed total un-acquitted advances of K3,403,109 as at 31st December 2015
    whilst note 17 of the notes to and forming part of the accounts showed a total amount of
    K4,794,642 resulting in significant variances. Both disclosures were mere carry forward
    balances from prior years without any movement during the year. Further, in the absence
    of proper records such as advance register, acquittal files, reminder notices and evidence
    of recovery actions taken against defaulters, I was unable to confirm the accuracy and
    completeness of the total un-acquitted advances as at year end.

    Significant Control Weaknesses

    There was significant control weaknesses identified in the Provincial Government’s
    records and processes as follows:

     The Provincial Government did not maintain a proper customer data base with an
    effective billing system in the revenue section for the collection of revenue from
    the major internal revenue sources such as Goods and Services Tax (GST),
    Bookmakers Tax, Liquor Licensing Fees and Motor Traffic Registration Fees etc.
    resulting in under collection of internal revenue totalling K8,104,131. Further,

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    evidence of check and balances were non-existent and segregation of duties being
    the key element of control was lacking. Staff were performing overlapping tasks in
    cash collection, receipting, recording and banking;

     The financial power of a Section 32 officer were improperly delegated to the Chief
    of Staff for the Governor’s Office through the consultancy company that was
    engaged to provide consultancy services to the Governor and hence was in breach
    of Section 32. The consultancy company was paid at K20,000 per month;

     Three quotations were not obtained in most instances prior to the purchase of goods
    and services nor was there a quotations register maintained;

     An advance payment of K40,000 was made to Prime Travel Services for travel
    expenses including airfares, vehicle hire and accommodation for officers of the
    Provincial Government. These payments were seen to be non-compliance to
    requirements of proper procurement procedures and the requirement for acquittal
    stipulated in the Public Finances (Management) Act;

     Project Files for the construction and maintenance of roads, bridges, buildings,
    installation of water supply, and fencing of residence were not made available for
    my verification although requested. Consequently, I was unable not verify if
    selected projects undertaken during the year totalling K3,826,578 were completed;

     Public Finances (Management) Manual pertaining to maintenance of proper Assets
    Register during the year was not complied with by the Morobe Provincial
    Government. A Central Asset Register was not maintained to record details of
    purchases and disposal of assets during the year and prior years. So as a proper
    policy and guidelines on the management and control of state assets was not in
    place; and

     Proper control and strict compliance was lacking in Advances Management
    procedures as stipulated under the Financial Instruction Manual. Advances register
    was not maintained and up-dated yearly while acquittal processes lacked miserably
    while management allow holder of outstanding advance to acquire second and third
    advances.

    Disclaimer of Audit Opinion

    In my opinion, because of the significance of the matters described above, I was not able
    to obtain sufficient appropriate audit evidence and accordingly I am unable to express an
    opinion on the financial statements of the Morobe Provincial Government for the year
    ended 31 December, 2015.

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    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have duty to report on significant
    matters arising out of the financial statements, to which the report relates. The following
    are matters of significance:

     the Morobe Provincial Government did not maintain proper accounts and records
    and has consequently breached Section 68(1) of the Public Finances
    (Management)Act, 1995;

     the receipts and payments and investment of moneys and the acquisition and
    disposal of assets during the period covered by the financial statements have not
    been in accordance with the Public Finances (Management) Act, 1995 and Organic
    Law on Provincial Governments and Local-level Governments; and

     The Morobe Provincial Government has not prepared and submitted its financial
    statements for the year ended 31 December, 2015 to the Minister and the Auditor-
    General within the required timeframe in contravention to Sections 114 and 119 of
    the Organic Law on Provincial and Local Level Governments.”

    6.14.2.3 Management Response

    Management had not responded to the matters raised in my Audit Management Letter for
    2015. Consequently, I am unable to determine if there were any improvements at the time
    of preparing this Report in September, 2017.

    6.14.2.4 Status of Financial Statements

    The Morobe Provincial Government had not submitted its Financial Statement for the
    financial year ended 31 December, 2016 for my inspection and audit. However, the field
    work associated with audit of the internal control environment was completed and the
    results are being evaluated at the time of preparing this Report in September, 2017.

    6.14.3 Lae Urban Local-level Government

    The Lae Urban Local-level Government did not submit its financial statements for the
    years ended 31 December 2012, 2013, and 2014. Consequently, I was unable to comment
    on the financial status and the management of the funds for Lae ULLG. Interim audits on
    the internal control environments for these years were conducted with Management
    Letters issued respectively. The internal control issues for 2012 and 2013 were reported
    in the 2014 Part 3 Report and the 2014 audit findings were reported in the 2015 Part 3
    Report.

    6.14.3.1 Status of Financial Statements

    Status of the three years financial statements were unavailable, however problems
    associated with operating system and back logs of outstanding entries in both years

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    accounts may not allow for an early preparation and presentation of the financial
    statements. The financial statements are still not prepared.

    At the time of preparing this Report in September, 2017, the financial statements of Lae
    ULLG for the years ended 31 December 2012, 2013, 2014, 2015and 2016 had not been
    submitted for my inspection and audit.

    6.14.4 Angau Memorial General Hospital

    The Angau Memorial General Hospital had submitted its financial statements for the
    years ended 31 December 2015. Fieldwork associated with audit of the accounts and
    records and the examination of the financial statements were completed with the
    Management Letter issued and audit opinion report was issued to the Minister concerned.
    The paragraph below details the issues identified with the financial statements and the
    control environment.

    6.14.4.1 Financial Statements – 2015

    My report to the Minister concerned and other relevant bodies under the Public Hospitals
    Act and the Audit Act on the financial statements of the Angau Memorial General
    Hospital for the year ended 31 December 2015 was issued in April 2017. The report was
    an unqualified as reproduced as follows:

    Audit Opinion

    In my opinion the financial statements of Angau Memorial General Hospital for the year
    ended 31 December, 2015:

    a) give a true and fair view of the financial position and the results of its operations
    for the year then ended in accordance with the Finance Instructions; and

    b) With the exception of instances of non-compliance described under Other Matters,
    the financial statements have been prepared in accordance with the Finance
    Instructions issued under the Public Finances (Management) Act, 1995.

    Other Matters

    In accordance with the Audit Act, 1989 (as amended) I have a duty to report on
    significant matters arising out of the financial statements, to which the report relates. The
    following are matters of significance:

    a) Angau Memorial General Hospital did not maintain proper accounts and records as
    detailed below and has consequently breached Section 68(1) of the Public Finances
    (Management)Act, 1995;

     the Chief Executive Officer is required under Part 32, Division 1 of the Public
    Financial Management Manual to maintain proper Assets Registers under the
    classifications of Land and Buildings; Furniture and Fitting; Office Equipment;
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    Motor Vehicles; Marine Vessels; Plant and Machinery and Tools and
    Equipment and to submit a comprehensive report on details of assets on hand
    with details extracted from Stock Cards at the end of each quarter, within 30
    days of the subsequent month. This requirement has not been complied with by
    the Angau Memorial General Hospital;

     Part 20, Paragraph 5 and 14 of the Financial Management Manual stipulates
    the procedures and guidelines for the effective management of Advances by
    State entities. The hospital management has not complied with this
    requirement; and

    b) Angau Memorial General Hospital has not prepared and submitted its financial
    statements to the Minister and the Auditor-General prior to 30 June for the year
    ending 31 December 2015, resulting in breaches of Section 63(2) and Section 63(4)
    of the Public Finances (Management) Act 1995.”

    6.14.4.2 Management Response

    Hospital Management has responded to my Audit Management Letter queries and
    corrections, improvements, and adjustments noted from the management responses has
    been rectified with the management prior to issuing the audit report.

    6.14.4.3 Status of Financial Statement

    The Angau Memorial General Hospital had submitted its financial statements for the year
    ended 31 December 2016 for my inspection and audit. Fieldwork associated with audit of
    the accounts and records and the examination of the financial statements were completed
    and the results are being evaluated at the time of preparing this Report in September
    2017.

    6.14.5 Business Arms

    Section 16(2) (f) of the Audit Act 1989 provides for and extends my functions to audit the
    accounts and records of the Provincial Government and Local-Level Government
    Business Arms and other establishments.

    I am aware of two business arms of the Morobe Provincial Government namely,
    Kumghie Holdings Limited and Morobe Sustainable Investment. At the time of preparing
    this Report in September 2017, the business arms have not submitted any financial
    statements for my inspection and audit. Consequently, I was unable to comment on the
    operations and financial results of these entities.

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    6.15 NEW IRELAND PROVINCE
    6.15.1 Introduction

    The New Ireland Provincial Government, Kavieng General Hospital and Kavieng Urban
    Local-Level Government are audited every year, with or without financial statements.
    Other Rural Local-Level Governments and Business Arms of the Provincial Government
    could not be fully audited due to manpower and financial constraints faced by my Office
    and the lack of records and logistical support from the respective entities.

    6.15.2 New Ireland Provincial Government

    Field work associated with the audit of the control environment for the year ended 31
    December, 2015 was completed and Management Letter issued. Issues identified in the
    Management Letter were reported in my 2015 Part 3 Report in 2016. The New Ireland
    Provincial Government had subsequently submitted its financial statements for my
    review and audit. Field work associated with the examination of financial statements and
    audit of related accounts and records was completed with both the Management Letter
    and the Audit Opinion Report issued. Field work associated with the audit of the control
    environment for the year ended 31 December, 2016 was also completed in the absence of
    the financial statements with the Management Letter issued.

    6.15.2.1 Comments on Financial Statements – 2015

    My Report for the year ended 31 December, 2015 to the Minister concerned and other
    relevant bodies under the Organic Law on Provincial Governments and Local-Level
    Governments and the Audit Act was issued in June, 2017. The report contained a
    Disclaimer Audit Opinion as reproduced below:

    Basis for Disclaimer Opinion

    Presentation Errors

    Finance Instruction 4/2000 issued under Section 117 of the Public Finances
    (Management) Act, 1995 prescribes the format for the preparation and presentation of the
    financial statements for Provincial Governments. The financial statements of New Ireland
    Provincial Government for the year ended 31 December, 2015 had the following non-
    compliance and presentation issues:

     The Provincial Governor and Acting Provincial Administrator did not present
    statements specifically outlining the Provincial Governments budget and financial
    performance for the year ended 31 December, 2015;

     The set of financial statements provided for my review contained an incomplete
    Table of Contents and Statements ‘A’, ‘H’ to ‘K’ and Appendices 1 to 6 had no
    page numbers inserted;

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     The financial statements are misleading as the amounts in Statements ‘C’ and ‘D’
    as well as the closing balances reflected in the respective Notes 3, 4, 6 and 17 to
    the Statement ‘A’ were incorrectly presented in amounts of ‘thousands’ of Kina
    (K’000) instead of the original amounts. Further, Statement ‘C’ had the opening
    balance date incorrectly stated as 01st of January, 2014 instead of 01st of January,
    2015.

    Disclosure Errors

    I noted the following disclosure errors which could have material effect on the accuracy
    and completeness of the New Ireland Provincial Government account balances, the
    financial position and consequently, the reliability of the financial statements as at 31
    December, 2015:

    Cash Balances

     The closing Provincial Account Balance of K1,937,894 included an old operating
    account closing balance of K765,007 which was not supported by evidence of any
    actual cash held in bank account as this Account was inactive dating back to prior
    years and that the amount merely represents the closing cashbook balance at the
    closure of the Operating Account;

     The balance of the Provincial Revenue Fund of K19,956,395 could not be
    confirmed as correct due to errors and material misstatements of the operating
    deficit as discussed under the paragraphs on Receipts and Payments; and

     There were material reconciling items identified in the bank reconciliation
    statements of both the New Ireland Provincial Government Operating and Grant
    Accounts relating to receipts and expenditure that were not adjusted in the
    cashbooks and respective revenue and expenditure ledgers and disclosed in
    Statements ‘J’ and ‘K’ which also affected the bank and cashbook balances at year
    end.

    Receipts and Payments

    The New Ireland Provincial Government reported its total revenue and expenditure as
    K34,582,250 and K51,715,831 respectively with an operating deficit of K17,133,581. I
    am unable to confirm the accuracy of the revenue and expenditure and therefore, the
    correctness of the operating deficit as at 31 December, 2015 due to the following reasons:

     The total actual revenue and expenditure of K34,582,250 and K51,715,831
    disclosed in Statement ‘B’ were materially misstated as they did not agree with the
    trial balance total of K34,531,436 and K51,665,017 respectively. As a result, the
    operating deficit of K17,133,581 is also materially misstated, inaccurate and
    unreliable;

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     The Public Servants’ and Teachers’ Salaries actual expenditures per TMS report of
    K50,814 had not been disclosed in Statement ‘K’ nor taken up in the expenditure
    ledgers as these were provided for in the Annual Appropriation Act; and

     Material reconciling items relating to receipts and payments identified in the
    Provincial Government Operating and Grants Accounts’ bank reconciliation
    statements not adjusted in the cashbooks, the revenue and expenditure ledgers and
    disclosed in Statements ‘J’ and ‘K’ had affected accuracy of statement ‘B’ and the
    cash balances reported in statement ‘A’.

    Investments

    The Provincial Government had not disclosed any information or balances relating to
    long term investments in the financial statements. However, as stated in my previous year
    audit report, the New Ireland Provincial Government held two (2) shares at the cost of K2
    in its business arm, namely New Ireland Development Corporation as well as 3,000
    shares at the cost of K3,000 in Lottery Management Services which is understood to be
    defunct. In the absence of adequate confirmation including the investment register and
    related share certificates, I am unable to confirm the accuracy, existence, ownership and
    value of investments owned by the Provincial Government as at 31 December, 2015.

    Assets

    The New Ireland Provincial Government did not disclose details of fixed assets
    purchased and owned at the closure of the year under review in Appendix 4 to the
    financial statements. The closing value of fixed assets was also not disclosed in Note 15
    to Statement ‘A’. The Fixed Assets Register as well as the Motor Vehicle Fleet Register
    were not maintained on a current basis and lacked complete and accurate information on
    all fixed assets purchased and/or disposed during the year. Consequently, I am unable to
    confirm the completeness, accuracy and existence of the fixed assets owned and under
    the custody of the New Ireland Provincial Government.

    Trust Accounts

    The New Ireland Provincial Government administered independently the NIPG Royalty
    Associated Benefits Trust Account that was operated through a separate bank account. I
    was not provided evidence of Trust Instruments and other related documents to ascertain
    legality and validity of the transactions through this trust account.

    Significant Control Weaknesses

    The paragraphs below give a summary of significant control weaknesses identified in the
    New Ireland Provincial Government’s internal control environment:

     Prudent cash management practices continued to be seriously flawed at the
    Provincial Treasury Office. The duties performed by the Receiver of Public
    Moneys involving revenue collection, banking and compiling of receiver/collector
    statements were not checked and certified by a competent authority including
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    independent and surprise cash counts to ensure all revenues are brought to account
    and banked intact. Consequently, material amounts of under-banking of revenue
    collections totaling K22,633 were noted dated back to 2011. Further, amounts
    recorded in the cash book as collected and stated in the bank reconciliation
    statements totalling K296,334 dated back to 2010 had not been deposited into the
    Provincial Government Operating Account;

     In thirty-one (31) instances, payments totalling K10,667,020 were not signed by
    the duly appointed Certifying Officer to determine the legitimacy of the
    ex