AGN 05 NHS Audit Planning

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Auditor Guidance Note 5 (AGN 05)

NHS Audit Planning

Version issued on: 5 March 2021

About Auditor Guidance Notes

Auditor Guidance Notes (AGNs) are prepared and published by the National Audit Office

(NAO) on behalf of the Comptroller and Auditor General (C&AG) who has power to issue

guidance to auditors under Schedule 6 paragraph 9 of the Local Audit and Accountability Act

2014 (the Act).

AGNs set out guidance to which local auditors must have regard under Section 20(6) of the

Act. The guidance in AGNs supports auditors in meeting their requirements under the Act

and the Code of Audit Practice published by the NAO on behalf of the C&AG.

The NAO also issues Weekly Auditor Communications (WACs) to local auditors to bring to

their attention relevant information to support them in carrying out audit work. The firms

that are local auditors under the Act may use WACs to update their own internal

communications and reference tools.

AGNs are numbered sequentially and published on the NAO’s website. Any new or revised

AGNs are brought to the attention of local auditors through the WACs.

The NAO prepares Auditor Guidance Notes (AGNs) solely to provide guidance to local auditors in interpreting the Code

of Audit Practice made under the Local Audit and Accountability Act 2014. The contents of AGNs cannot be reproduced,

copied or re-published by parties other than local auditors without permission from the NAO.

The AGNs are designed to assist local auditors in forming their own understanding of the requirements of the Code.

Auditors are required to have regard to AGNs, which means that they must take into account the guidance issued by the

NAO, and, if they decide not to follow it, they must give clear (in the sense of objective, proper, and legitimate) reasons

within audit documentation as to why they have not followed the guidance. AGNs are in no way intended as a substitute

for the exercise of the independent professional skill and judgement of a local auditor in deciding how to apply the

NAO’s guidance or when providing explanations as to why guidance has not been followed.

Local auditors should not assume that AGNs are comprehensive or that they will provide a definitive answer in every

case.

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AGN 05 is relevant to all local auditors of health bodies covered by the Local Audit and

Accountability Act 2014 and the Code of Audit Practice including auditors of NHS

foundation trusts. Guidance on auditors’ work on value for money arrangements and on

reporting is published in AGN 03 and AGN 07 respectively.

Introduction and context The guidance within this document is prepared to assist auditors in meeting their

responsibilities as the statutory auditor of local health bodies, under the Code of Audit

Practice (the Code). This AGN sets out guidance for auditors to support planning work on

audits of financial statements of local health bodies.

As part of their planning process, audit teams identify changes to accounting requirements

drawing on any relevant technical briefings prepared by their firms. This guidance is not

intended to replace auditors’ own procedures.

Local auditors are also component auditors. The NAO group audit teams issue group

instructions which local auditors need to follow. The group instructions set out

requirements for local auditors to assist the NAO group audit teams in meeting their

responsibilities supporting the C&AG as the statutory auditor of the bodies of which local

health bodies are components.

The continuing financial pressures within the NHS provider and commissioning sectors have

been widely publicised, including in our 2020 report NHS financial management and

sustainability. This report is the NAO’s eighth report on the financial sustainability of the

NHS. The report concludes that the NHS is treating more patients but has not yet achieved

the fundamental transformation in services and finance regime needed to meet rising

demand. The short-term fixes that the Department of Health & Social Care (DHSC), NHS

England and NHS Improvement (NHSE&I) put in place to manage resources in a constrained

financial environment are not sustainable. The extra money brought in to stabilise the

finances of NHS bodies has continued to drive volatility and variability among trusts, while

patient waiting times continue to deteriorate and the number of people waiting for

treatment continues to increase.

During March 2020, the UK government began its response to the coronavirus pandemic

(COVID-19). Government intervention to COVID-19 will have occurred through a variety of

mechanisms within DHSC and NHSE&I and other Arms’ Length Bodies working together to

generate the response required. There may be some areas where the budgeting, accounting

and guidance is still being determined. COVID-19 has and is continuing to significantly

impact on markets, client operations, business plans, government policy and interventions.

Many COVID-19 support schemes were set up at pace with a view to getting immediate

support to the people, entities and areas of the economy where it was most needed. This

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means the rigour with which controls were implemented and processes set up or followed

may not reach previous standards, there is a risk that fraud and error rates may be higher in

grant and other scheme claims than have been seen previously.

The NAO’s programme of work to support Parliament in its scrutiny of the UK government’s

response to COVID-19 includes government preparedness for the pandemic, the spending

on the direct health response and the wider emergency response. Further information and

reports can be found on the NAO’s website here.

The C&AG included a Report on Accounts on the 2019-20 DHSC accounts (page 123). This

highlighted a number of issues across the DHSC group which pre-date COVID-19, some of

which particularly relate to the provider sector. In addition, the response to the COVID-19

pandemic will have a significant impact on 2020-21 accounts with a new funding regime

implemented, the supply of centrally-procured items such as personal, protective

equipment and ventilators, the establishment of Nightingale hospitals, and the

implementation of the vaccine rollout.

When considering the planning issues highlighted in this AGN, auditors should be mindful

that audits under the Code of Audit Practice are integrated. Auditors should therefore

consider the extent to which any issues highlighting risks to the opinion on the financial

statements, or which suggest that non-standard reporting may be necessary and, any work

required to inform their commentary on arrangements to secure value for money under

AGN 03.

Auditors should also consider whether it is appropriate to draw particular attention to any

issues arising from their work under AGN 03 or AGN 05 by exercising their additional public

reporting powers, such as making statutory recommendations or issuing public interest

reports. Further guidance on relevant considerations when exercising additional powers

can be found in AGN 04.

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Contents

This AGN is structured as follows:

Section 1: Accounting Manuals and Financial Reporting .................................................... 5

Accounts Directions................................................................................................................ 5

Group Accounting Manual 2020-21 ....................................................................................... 6

Future Accounting Standards ................................................................................................. 7

Annual Report ........................................................................................................................ 9

NHS Foundation Trust Annual Reporting Manual 2020-21 ................................................. 10

Agreement of Balances ........................................................................................................ 11

Summarisation Schedules / Consolidation Template .......................................................... 12

Section 2: Other Matters 2020-21 ................................................................................... 15

Revised Funding Regime in Response to COVID-19 ............................................................. 15

Procurement Policy Note (PPN 02/20)................................................................................. 20

Inventories and Equipment .................................................................................................. 22

Use of Management’s Expert – Valuations of Property, Plant and Equipment .................. 24

Subsidiaries........................................................................................................................... 29

Co-commissioning ................................................................................................................ 31

Other Support and Raising Technical Issues or Queries on this AGN ................................ 33

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Section 1: Accounting Manuals and Financial Reporting

Accounts Directions What are the issues?

The Department of Health and Social Care (DHSC) is required to issue accounts

directions to NHS trusts. The accounts directions are included in Chapter 2, Annex 4 of

the 2020-21 Group Accounting Manual (GAM).

NHS England is required to issue directions to clinical commissioning groups (CCGs) in

respect of their annual report and accounts. The accounts directions will be published

on NHS England's SharePoint site. Each of the audit firms has access to this site.

Additionally, the NAO will highlight relevant guidance published on SharePoint via

weekly communications.

NHS Improvement issues the directions to foundation trusts, which will be issued with

the Annual Reporting Manual for foundation trusts (FT ARM).

Why is this important?

The accounts directions set out instructions, in accordance with legislation, that health

service bodies must comply with. The directions cover:

• the method and principles for the preparation of accounts including

compliance with HM Treasury's Financial Reporting Manual (FReM) and the

GAM;

• submission of the draft accounts; and

• submission of the audited accounts.

What should auditors do?

Auditors should be aware of the accounts directions for the audited body, to support

their audit planning work under ISA (UK) 300 (Revised June 2016) Planning an Audit of

Financial Statements, and ISA (UK) 250 (Revised November 2019) Section A –

Consideration of Laws and Regulations in an Audit of Financial Statements.

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Group Accounting Manual 2020-21 What are the issues?

DHSC issued the 2020-21 Group Accounting Manual (GAM) on 30 April 2020, following

a consultation exercise. The GAM provides a single mandatory accounting document

for the whole of the departmental group. The main areas of change and the responses

received in response to DHSC’s consultation on the GAM are set out here.

The GAM includes guidance on the completion of annual reports for NHS trusts and

CCGs. The Annual Reporting Manual for foundation trusts provides guidance for the

completion of foundation trusts’ annual reports only.

Additional appendices are included within the GAM where there are additional sector

specific reporting requirements. Additional appendices provide supplementary

guidance for CCGs, NHS trusts and foundation trusts in the relevant chapters of the

GAM.

The GAM will be supplemented as necessary by additional guidance over the course of

the year. Updates will be posted to the DHSC GAM area of ‘gov.uk’. All content issued

in this way should be treated as having the same status as the manual.

Guidance relevant to CCG accounts completion in the NHS England Group ‘Integrated

Single Financial Environment’ (ISFE) will be issued on the NHS England SharePoint.

Each of the audit firms has access to this site. Additionally, the NAO will highlight

relevant guidance published on SharePoint via weekly communications.

A detailed accounts submission process, showing deadlines and procedures for

handling statutory accounts and summarisation schedules is available on DHSC’s

website.

Why is this important?

NHS trusts, foundation trusts and CCGs are required to produce their annual accounts

in line with the GAM issued by DHSC and in accordance with the submissions

timetable. NHS trusts and NHS foundation trusts (NHS providers) have been given the

option to apply for an extension to the timetable for the submission of draft and

audited accounts where, for example, there is:

• a significant change to the operations of the trust and associated workload

for accounts preparation, for example hosting a Nightingale facility; or

• a material merger/acquisition transaction in the final three months of the

financial year.

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Trusts were encouraged by NHSE&I to discuss with their auditors in determining

the appropriate year end timetable for them.

The delivery of the NHS timetable is also dependent on additional guidance and

information being provided by DHSC that is yet to be issued. Therefore, the

preparation and audit of NHS provider and CCG accounts is contingent on the

adequacy and timely provision of guidance and information.

What should auditors do?

Auditors should familiarise themselves with the content of, and changes to, the

2020-21 GAM to support their audit planning work under ISA (UK) 300 (Revised June

2016) Planning an Audit of Financial Statements, and ISA (UK) 315 (Revised June 2016)

Identifying and Assessing the Risks of Material Misstatement Through Understanding

of the Entity and Its Environment.

Auditors should note the submission dates within the DHSC timetable for audited NHS

trust, foundation trust and CCG accounts and consider the impact on their resource

planning for the audit of the financial statements. Auditors should liaise with their

NHS provider clients early to understand any of those wishing to apply for an

extension to the timetable and the implications on resourcing.

Auditors of CCGs, NHS trusts and foundation trusts do not make submissions but are

required to ensure that all relevant documents and signed statements are provided to

bodies in reasonable time to enable them to meet submission deadlines.

Although the NAO will bring auditors’ attention to other relevant guidance and the

submissions timetable when it is received, auditors may also wish to establish

arrangements to obtain copies locally.

Future Accounting Standards What is the issue?

IFRS 16 Leases will replace IAS 17 Leases. Implementation has now been deferred and

will be effective from 1 April 2022 for entities that follow HM Treasury’s FReM and the

GAM. The transitional reporting requirements for IFRS 16 have been adopted such

that the preceding year is not restated.

The new standard eliminates the distinction between operating and finance leases for

lessees and brings in a single approach under which all but low-value or short term

(less than 12 months) leases are recognised. The distinction between operating and

finance leases for lessors is maintained.

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Successful implementation of the new standard will depend on organisations collating

and reviewing relevant information about their new and existing leases. This will

require a significant exercise to collect and analyse relevant information and

organisations will need to have an effective project plan and timetable to prepare for

implementation on a timely basis.

Organisations will need to take steps including having arrangements for capturing

information on leases and contracts.

Why is this important?

The standard is likely to lead to significant changes to lessees with all major leases

coming onto the Statement of Financial Position as well as additional disclosures. This

includes a disclosure objective which gives a basis for users of financial statements to

assess the effect that leases have on the financial position, financial performance and

cash flows of the lessee and lessor. There are additional disclosures for the right-of-

use asset, depreciation charges and interest expense on the lease liabilities and

disclosures on the exemptions for recognition (i.e. low value and short-term leases).

NHS bodies will need to consider the implications for their own financial reporting and

supporting arrangements as they prepare for the standard to be adopted.

Paragraph 30 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

states:

‘When an entity has not applied a new IFRS that has been issued but is not yet

effective, the entity shall disclose:

(a) this fact; and

(b) known or reasonably estimable information relevant to assessing the possible

impact that application of the new IFRS will have on the entity's financial

statements in the period of initial application.’

What should auditors do?

Auditors should discuss with their bodies the implications of the introduction of IFRS

16 for their financial reporting and consider the requirement for early planning and

reviewing of balances and disclosures and any required adjustments.

Auditors will need to consider the accuracy and completeness of the disclosures

required under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.

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Annual Report What is the issue?

NHS bodies are required to publish a single document containing the annual report

and accounts.

Guidance for the preparation of the annual report for CCGs and NHS trusts is included

in Chapter 3 of the DHSC GAM. Guidance for foundation trusts is included in the 2020-

21 FT ARM.

Why is this important?

Certain elements of the annual report are subject to audit as set out in paragraph 3.27

of the GAM and corresponding paragraphs of the FT ARM. These comprise:

• single total figure of remuneration for each director;

• CETV disclosures for each director;

• payments to past directors, if relevant;

• payments for loss of office, if relevant;

• ‘fair pay’ (pay multiples) disclosures;

• exit packages, if relevant; and

• analysis of staff numbers and costs.

Auditors are also required to review the information within the annual report for

consistency with other information in the financial statements. Paragraph 3.16 of the

DHSC GAM requires that auditors are required to read the information in the annual

report and refer to this in their audit report. NHS bodies should submit the draft

annual report to auditors to allow them sufficient time to undertake their review.

Paragraph 3.5 of the DHSC GAM requires that NHS bodies include the audit report

within the Accountability Report.

Paragraph 3.80 of the GAM sets out a number of disclosures that are required to be

included in the Parliamentary Accountability Report. NHS providers and CCGs are not

required to produce a Parliamentary Accountability Report, but have the option to

include these disclosures in the Annual Report. Where the NHS body elects not to do

this, it must include the disclosures on remote contingent liabilities, losses and special

payments, gifts, and fees and charges as notes within its financial statements.

In light of pressures caused by the public sector response to COVID-19, some annual

report requirements were changed for 2019-20. These revisions were made in April

2020, mirroring changes made to the FReM by HM Treasury. In December 2020 HM

Treasury confirmed that these relaxations will continue to be available in 2020-21

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annual reports. By order of FAQ 4: 2020 to 2021 year end reduced reporting

requirements in the GAM, minor revisions have been made to chapter 3 and chapter 3

annex 1, to reflect the optional nature of the disclosures below:

• the performance analysis;

• sickness absence data; and

• staff turnover disclosure.

What should auditors do?

Auditors should familiarise themselves with the guidance for the annual report in the

DHSC GAM.

Auditors should engage in early discussions with their NHS bodies to ensure the body

includes and publishes the required information in accordance with relevant guidance.

NHS Foundation Trust Annual Reporting Manual 2020-21 What is the issue?

NHS Improvement1 issued the FT ARM 2020-21 on 9 February 2021. The FT ARM

provides guidance to foundation trusts on the completion of the annual report.

Foundation trusts are required to complete their accounts in accordance with the

GAM.

As per paragraph 34 above, the following relaxations to NHS foundation trust annual

reports will continue to be available in 2020-21:

• the annual report is no longer required to include a performance analysis

section within the performance report. This is optional;

• the annual report is no longer required to include a quality report. This is

optional;

• the staff sickness disclosure in the staff report can be replaced with a link to

where the information will be available online; and

• the model annual governance statement is updated to reflect the change to

preparation of quality reports.

1 From 1 April 2016, NHS Improvement is the operational name for an organisation that brings together several NHS organisations including Monitor and the NHS Trust Development Authority. However, both organisations continue to exist as legal entities. NHS Improvement now carries out the statutory functions of both organisations and NHS Improvement continues to refer to Monitor when issuing accounts directions to foundation trusts. From 1 April 2019, NHS England and NHS Improvement have been working together as a new single organisation (NHSE&I), aligning the way they work to support system working although both remain separate legal entities.

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The FT ARM also notes electronic signatures in documents will continue to be

accepted for signed documents relating to the annual report and accounts which are

required to be submitted to NHS Improvement.

Why is this important?

The FT ARM outlines the process foundation trusts should follow when producing and

submitting their annual report.

What should auditors do?

Auditors should familiarise themselves with the content of, and any changes to, the

2020-21 FT ARM to support their audit planning work under ISA (UK) 300 (Revised

June 2016) Planning an Audit of Financial Statements, and ISA (UK) 250 (Revised

November 2019) Section A – Consideration of Laws and Regulations in an Audit of

Financial Statements.

Agreement of Balances What is the issue?

DHSC is required to consolidate the accounts of all organisations falling within the

accounting boundary. The agreement of balances process aims to identify all income

and expenditure transactions, and payable and receivable balances that arise from the

provision of goods and services between component bodies in order to eliminate

these transactions and balances on consolidation.

NHS Improvement and NHS England also eliminate transactions and balances between

their component bodies in preparing their sector-specific consolidated accounts.

DHSC and NHSE&I published its 2020-21 Agreement of Balances guidance in

December 2020 which is designed to provide practical guidance to all NHS bodies

within the resource accounting boundary.

Why is this important?

The exercise completed at the year-end (month 12) contributes directly to the year-

end production of the NHS provider sector, NHS England and DHSC consolidated final

accounts.

There are a number of arrangements between bodies that can cause complications for

this process, including lead commissioning arrangements and the treatment of

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disputed balances. Joint working arrangements, including those arising from

Sustainability and Transformation Partnership (STP) arrangements and integrated care

systems (ICS) may also give rise to different accounting treatments between

participating bodies.

Auditors may also complete work on agreement of balances as part of their work on

the financial statements audit and as part of the work under the NAO group

instructions.

What should auditors do?

Auditors should work with health bodies to help ensure that bodies engage with the

process and understand its purpose. Auditors should discuss at an early stage the level

of evidence required to substantiate balances.

The increasing use of pooled budgets and lead commissioning arrangements, including

with local government bodies, can provide additional complexity to the agreement of

balances process. Auditors should be aware of the guidance on pooled budgets and

joint arrangements, including the Better Care Fund, within Chapter 4 Annex 8 of the

GAM – Accounting for Pooled Budgets and Joint Arrangements and discuss the

accounting treatment of such arrangements to ensure they are satisfied with the

accounting treatment for the body in which they are auditing.

Summarisation Schedules / Consolidation Template What is the issue?

In addition to the statutory annual report and accounts produced by each entity, NHS

bodies need to communicate the same data, with further analysis to permit

consolidation, to NHS England or NHS Improvement in a standard format that can be

automatically processed.

The Code of Audit Practice requires auditors to report on the consistency of the

schedules or returns with the audited body’s financial statements for the relevant

reporting period. This should be done using the final audited accounts and final

schedules, making sure that all audit adjustments are appropriately reflected, and

where relevant, disclosure notes are consistent. Auditors should note that this is a

requirement for all local NHS bodies and is in addition and separate to any work

required of component auditors by the NAO group audit teams.

Auditors are also required to submit the final summarisation schedules to the NAO

group audit teams as required by the group audit instructions.

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NHS England group accounts (NHS Commissioning Board) consolidates the accounts of

both CCGs and NHS England as a parent of the group. These are required to be

consolidated into the DHSC Group Accounts. The C&AG is responsible for examining,

certifying and reporting on the NHS Commissioning Board’s accounts under the Health

and Social Care Act 2012.

The Consolidated NHS Provider Accounts (CPA) consolidates the accounts of both

foundation trusts and NHS trusts which together make up the NHS provider sector.

The CPA is required to be consolidated into the DHSC Group Accounts.

In accordance with directions issued by the Secretary of State for Health and Social

Care dated 29 June 2018, under the National Health Service Act 2006, NHS

Improvement prepares the CPA on a basis consistent with the individual NHS

providers’ accounts. These are consolidated in accordance with International

Financial Reporting Standards, as amended for NHS providers by the FReM, the FT

ARM and the GAM.

The Secretary of State’s directions require NHS Improvement to prepare consolidated

NHS provider accounts so as to:

• give a true and fair view of the state of affairs of NHS trusts and foundation

trusts collectively as at the end of the financial year and the comprehensive

income and expenditure, changes in taxpayers’ equity and cash flows for the

financial year then ended; and

• disclose any material expenditure or income that has not been applied for

the purposes intended by Parliament or material transactions that have not

conformed to the authorities that govern them.

The C&AG is responsible for examining, certifying and reporting on the CPA pursuant

to powers under section 16 of the Budget Responsibility and National Audit Act 2011

(“the 2011 Act”).

Why is this important?

The consolidation templates and summarisation schedules form the basis of the group

consolidation process. Differences are time-consuming to resolve and delay

consolidation at the group level. It is important that differences between the accounts

and consolidation schedules are highlighted to the audited body on a timely basis.

What should auditors do?

The Code of Audit Practice requires auditors to report on the consistency of the

schedules or returns with the audited body’s financial statements for the relevant

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reporting period. This should be done using the final audited accounts and final

schedules, making sure that all audit adjustments are appropriately reflected, and

where relevant, disclosure notes are consistent.

It is important that auditors ensure that the summarisation schedules submitted to

the NAO group audit teams are the final version and consistent with those submitted

to the national bodies.

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Section 2: Other Matters 2020-21

Revised Funding Regime in Response to COVID-19

Funding, cash and capital regime 2020-21

What are the issues?

The original NHS Planning Guidance 2020-21 - January was suspended as the NHS

prepared for its response to COVID-19. A new financial regime for the NHS was

implemented. This was announced through a series of letters and guidance

documents, broadly splitting 2020-21 into two halves.

2020-21 financial regime – first half of the year 1 April to 30 September 2020 (H1)

The initial NHS response was set out in a letter dated 17 March 2020 from Sir Simon

Stevens, NHS Chief Executive, and Amanda Pritchard, NHS Chief Operating Officer, to

NHS providers, NHS commissioners, GP practices and local authority chief executives

and directors of adult social care. The letter set out actions for every part of the NHS

to put in place to redirect staff and resources. Section 6 of this letter highlights that all

NHS trusts and NHS foundation trusts were moved to block contract payments ‘on

account’ for an initial period of 1 April to 31 July 2020 (subsequently extended to 30

September 2020), with the suspension of the usual Payment by Results national tariff

payment process.

The letter’s Annex: Coronavirus Cost Reimbursement set out the following:

• The suspension of the operational planning process for 2020-21.

• The suspension of the Financial Recovery Fund during the period of 1 April to

31 July 2020.

• NHS providers should claim for additional costs where the block payments do

not equal actual costs to reflect genuine and reasonable additional marginal

costs due to COVID-19.

• Commissioner allocations for 2020-21 have already been notified as part of

operational planning and will not be changed. However, individual

commissioner financial positions and affordability will be kept under review.

NHSE&I will calculate central support top-up payments for CCGs to cover the

difference between allocations set out above and expected costs.

A subsequent letter dated 29 April 2020 from Sir Simon Stevens and Amanda Pritchard

to the NHS set out the approach to the second phase of the NHS response to COVID-

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19. A corresponding guidance document Changes to COVID-19 finance reporting and

approval processes as we move into the second phase of the NHS response was issued

by NHSE&I which outlines changes to the processes for reporting revenue expenditure

and claiming reimbursement for capital expenditure related to COVID-19. The

guidance is applicable to NHS trusts, NHS foundation trusts, CCGs, and NHS England

direct commissioning:

• For capital expenditure this replaces guidance issued on 27 March 2020 with

effect from 19 May 2020.

• For revenue expenditure the principles within this guidance take effect from

1 May 2020, and for reporting purposes from Month 2.

On 31 July 2020, NHS England published the Third phase of NHS response to COVID-19

which continued the above arrangements for months 5 and 6 (August and September)

and set out new arrangements applicable to the second half of the year.

2020-21 financial regime – second half of the year 1 October 2020 to 31 March 2021 (H2)

On 31 July 2020, NHS England published a series of documents in relation to the Third

phase of NHS response to COVID-19. The letter sets out priorities for the rest of 2020-

21 and outlines financial arrangements heading into autumn as agreed with

government. An important feature of the “H2” arrangements is the move to “system

envelopes” with funding allocations covering most NHS activity made at the system

level for the period from 1 October 2020 to 31 March 2021, including resources to

meet the additional costs of COVID-19 response and recovery.

There will be no further general retrospective payments for COVID-19 costs incurred

from 1 October 2020. All future COVID-19 costs are funded through the fixed COVID-

19 funding allocation except certain exclusions including:

• Personal protective equipment

• Nightingale set up costs

• Nightingale hospital ongoing running costs

• Hospital discharge programmes

• Vaccinations programme

• The majority of testing services (some exclusions apply, for example, funding

for COVID-19 polymerase chain reaction (PCR) testing is based on the tests

processed, tested and reported by the laboratory. Any increase in PCR testing

activity as result of frontline asymptomatic staff testing is also included

within this framework. Any other additional costs such as additional

swabbing costs are outside of the cost per test reimbursement and form part

of the Trust’s COVID 19 system funding envelope).

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In exceptional circumstances, the principles set out in paragraph 67 above may be

subject to change where measures may be triggered at local, regional or national

levels by the NHSE&I National Incident Response Board depending on the

circumstance.

Systems are expected to have set out plans to deliver their Phase 3 recovery and

activity requirements and achieve financial balance within this envelope. Systems are

expected to breakeven but individual organisations can deliver surplus or deficit

positions by mutual agreement within the system. Nevertheless, NHS trusts are still

required to meet statutory break-even duty and CCGs are required to meet their

resource limits.

The components of the system funding envelopes include:

• CCG allocations which have been adjusted to enable CCGs to breakeven

taking into account current blocks.

• Growth funding has been allocated to the system to support underlying

growth in the cost base since the reference period baseline and over the

remainder of the year.

• System top-up funding to support delivery of a system breakeven position

which will be issued by a lead CCG.

• COVID-19 allocation funding to cover COVID-19 related costs for the

remainder of the year.

• Block income from outside the system, including other CCGs, Specialised

Commissioning and Other Direct Commissioning.

Transfer of system level funding (system top-up, growth funding and COVID-19

funding) between the lead CCG and other CCGs must be transacted via the central

“IAT” allocation transfer method rather than by invoice unless there is a direct supply

of services/benefits between the CCGs.

Other funding that sits outside the system envelope includes temporary COVID-19

services where relevant organisations will be funded by government on an actual cost

basis. These costs include, for example, Nightingale hospitals, hospital discharge

programmes, and COVID-19 testing services. This is set out in further detailed

guidance: Contracts and Payment Guidance issued in September 2020.

Cash and capital regime for 2020-21

NHSE&I introduced a new cash and capital regime for 2020-21 as set out in the

following series of guidance and letters:

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• Guidance on NHS system capital envelopes for 2020-21: This provides an

overview of the new approach to capital funding in the NHS from 2020-21

and includes information regarding:

o Overview of NHS operational capital funding

o System-level allocations where every Sustainability Transformation

Partnership (STP)/ Integrated Care System (ICS) will receive a 2020-21

capital spending envelope derived from the system-level allocation.

While NHS providers remain legally responsible for maintaining their

estates and for setting and delivering their organisational level capital

investment plans, every ICS/STP will have to account for ensuring

overall capital spending across their system remains within these

budgets.

o Reporting and monitoring arrangements during and after COVID-19.

o Capital proceeds in respect of disposals and surplus land and how these

will be available to the STP/ICS.

• Reforms to the NHS Cash and Capital Regimes for 2020-21 Financial Year: This

letter to all chief executives of NHS providers outlines the new cash and

capital regimes that will be effective as of 1 April 2020 including:

o New Public Dividend Capital (PDC) issued to repay over £13 billion of

the NHS’ historic debt.

o A move away from interest-bearing loans for future interim capital and

revenue support, which instead will be provided as PDC.

o Providing a capital spending envelope for the year to every local area,

within which each STP/ICS will be expected to work together to manage

their spending.

• Reforms to the NHS Cash Regime effective from 1 April 2020: This provides

further detail on the cash regime including:

o Interim revenue and capital debt arrangements where interim revenue

loans, including working capital facilities and interim capital debt at 31

March 2020 are to be extinguished during 2020-21. Providers will be

issued PDC to effect the repayment of outstanding balances at 31

March 2020. This excludes capital normal course of business (NCB)

loans. Please note that DHSC has published a regional breakdown of

NHS debt that will be written off from 1 April 2020 on its gov.uk website

and available here.

o Future revenue and capital support arrangements during and after

COVID-19.

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Why is this important?

The NHS finance regime is complex with different funding mechanisms being applied

across different parts of the 2020-21 financial year. The COVID-19 funding schemes

were set up at pace with a view to getting immediate support to NHS bodies and

patients. There is a risk that the rigour with which controls were implemented and

new processes set up or followed may not reach previous standards. For example,

CCGs may have different mechanisms for holding providers to account in the absence

of signed contracts. This may increase the risk of management override of control, or

fraud and error in funding and scheme claims.

The funding mechanism for the reimbursement of COVID-19 expenditure may give rise

to a potential risk of manipulation of the financial position in order to secure

funding. For example, an incentive to code expenditure in the first half of the year to

obtain reimbursable COVID-19 expenditure, although for the second half of the year,

incentives may depend on whether NHS providers are receiving COVID-19 costs as a

fixed sum from their lead CCG or whether they’re being asked to show what’s been

spent.

Individual NHS bodies within a system are still required to maintain the integrity of

their financial accounts. The NHS provider licence includes a duty regarding integrated

care, and that “the licensee shall not do anything that could reasonably be regarded as

detrimental to enabling integrated care.” The licence applies directly to NHS

foundation trusts, and NHSE&I’s oversight of NHS trusts is designed to apply this with

equivalence. However, it is important that where an NHS provider or CCG takes a

decision that is balancing its objectives as an organisation with how ‘integrated care’

(i.e. system working) serves the interests of patients, that it can support the true

substance of its transactions and its accounting with evidence.

There are likely to be new significant transactions streams due to COVID-19 in NHS

bodies. Therefore, management will need to consider the financial reporting

implications for their annual report and accounts preparation.

What should auditors do?

Auditors should be aware of the risks associated with new transaction streams and the

various funding regimes applicable to the different parts of the financial year 2020-21

to support their audit planning work under ISA (UK) 240 (Revised January 2020) The

Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, ISA

(UK) 300 (Revised June 2016) Planning an Audit of Financial Statements, and ISA (UK)

315 (Revised June 2016) Identifying and Assessing the Risks of Material Misstatement

Through Understanding of the Entity and Its Environment.

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This includes understanding the policy decisions impacting the financial statements;

such as new expenditure, investment or grant schemes, commitments, obligations or

losses and special payments. Enquiries on finance processes should explore how

finance processes have changed, particularly focusing on areas where the operation of

a control being relied on for assurance purposes has changed.

Auditors will need to be aware of the risks associated with particular accounting

treatments, for example, any directions regarding whether transactions should be on

a revenue or capital basis, or which are not supported by evidence. The specific

capital funding for COVID-19 related projects may create incentives for NHS providers

to treat expenditure relating to a project as capital when the specific elements of

projects do not meet the criteria for capitalisation, or to recognise capital expenditure

during 2020-21 in order to report positions in line with expectations for this funding.

Whilst this AGN sets out the overall funding flow from DHSC, auditors will need to

consider NHS providers’ assessment of revenue recognition under IFRS 15 Revenue

from contracts with customers and CCGs’ assessment of liabilities. These should reflect

local arrangements in place and the substance of the transaction.

Auditors will also need to be aware that, as the NHS continues to respond to the

pandemic, funding regimes may be subject to revision during the year. Some elements

of the funding regime are yet to be finalised (e.g. the Elective Incentive Scheme which

is intended to reward systems for achieving the activity recovery goals set out in the

Third phase of NHS response to COVID-19). Block payment arrangements will continue

for the first quarter of 2021-22 but quarters 2-4 will be under a new finance regime.

The NHS planning round for 2021-22 has been suspended until Q2 of 2021-22 and the

new finance regime is still being determined.

Procurement Policy Note (PPN 02/20) What are the issues?

In March 2020 the Cabinet Office issued Procurement Policy Note (PPN 02/20) setting

out information and guidance for public bodies on payment of their suppliers to

ensure service continuity during and after the current COVID-19 outbreak. The actions

suggested in the paper include making payments in advance of need, suspending

payment by results requirements and paying for services as normal despite disrupted

or suspended service delivery. Such actions would normally be prohibited under

Managing Public Money without explicit HM Treasury consent, as being novel,

contentious and repercussive.

In summary, PPN 02/20, when read alongside the supporting letter from Sir Tom

Scholar (Accounting Officer, HM Treasury) to accounting officers, provides HM

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Treasury consent for certain payments in advance of need to suppliers, subject to

certain conditions. HM Treasury are clear in their letter that this consent does not

alleviate Accounting Officers from their usual duties to ensure that spending is regular,

proper and value for money. They expect contracting authorities to conduct

appropriate and proportionate due diligence to ensure such payments are necessary

for continuity of supply of critical service.

The NAO considers that such payments, so long as they comply with these conditions

and other aspects of the relevant framework of authorities, are regular.

NHSE&I published further guidance, Guidance to NHS Organisations on PPN note,

which set out how NHS organisations should interpret the Cabinet Office’s PPN 02/20

in connection with payment of ‘at risk’ suppliers to NHS organisations and how those

aspects should be locally implemented. This guidance does not substitute PPN 02/20

for NHS organisations. The Procurement Policy Note 02/20 is no longer extant,

expiring on 30 June 2020.

Why is this important?

This guidance does not replace any primary or secondary care guidance issued in

relation to 2020-21 contracting and should be read in conjunction with Revised

arrangements for NHS contracting and payment during the COVID-19 pandemic.

The Procurement Policy Note 02/20 is no longer extant, expiring on 30 June 2020, but

would have been valid for 25% of the financial year. Therefore, spend in this window

should be considered against this.

What should auditors do?

Auditors should be aware of the risks associated with changes in procurement

processes as covered by the guidance to support their audit planning work under ISA

(UK) 240 (Revised January 2020) The Auditor's Responsibilities Relating to Fraud in an

Audit of Financial Statements, ISA (UK) 300 (Revised June 2016) Planning an Audit of

Financial Statements, and ISA (UK) 315 (Revised June 2016) Identifying and Assessing

the Risks of Material Misstatement Through Understanding of the Entity and Its

Environment.

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Inventories and Equipment What are the issues?

In response to the COVID-19 pandemic, significant volumes of goods and services have

been procured by DHSC and NHSE. These include Nightingale hospitals, Test and

Trace, support for increased hospital admissions due to COVID-19 and the vaccination

programme.

Goods and supplies have been and will continue to be issued to individual

organisations including NHS providers, primary care organisations and commissioners.

In 2019-20 auditors issued a number of modified opinions in relation to NHS

providers’ material stock balances where restrictions on movement prevented either

the NHS provider from performing a stocktake and/or the auditor being able to attend

in order to obtain the necessary assurance. NHS providers that were affected by this

will therefore likely receive modified opinions in relation to their 2020-21 opening

stock balances where auditors have not subsequently been able to obtain sufficient

assurance.

Personal protective equipment

Personal protective equipment continues to be purchased centrally by DHSC and

transferred to NHS providers free of charge during 2020-21 (sometimes referred to as

‘push stock’). These items should be recognised by the recipient at a suitable ‘deemed

cost’. DHSC has committed to providing information regarding the quantity and cost of

items provided to each NHS provider during 2020-21 for them to account for these

items within their year-end financial statements. This is included in further detailed

guidance issued by NHSE&I on 12th February 2021: Guidance on accounting for

2020/21 items.

Ventilators and medical equipment

DHSC has established a national pandemic equipment pool (termed the ‘national loan

stock’) of ventilators and other medical equipment. This equipment is made available

to trusts free of charge. The National Ventilator Allocation Panel (NVAP) will contact

NHS providers to confirm which assets they wish to retain, however this exercise will

take place in 2021-22. Items are only taken back to the national equipment pool with

trusts’ agreement. Items held by trusts on 31 March 2021 should therefore be

recorded in trusts’ accounts. Where items are held by trusts at year end, these are in

substance donations to trusts. Further information is included in detailed guidance

issued by NHSE&I: Guidance on accounting for 2020/21 items. This accounting

treatment will be confirmed in the Q4 update to the DHSC 2020-21 GAM.

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Why is this important?

The accounting transactions required in individual NHS providers’ accounts is reliant

on the provision of information and guidance from DHSC which is still being

developed.

The personal protective equipment stock could change an individual NHS providers’

year-end inventory balance from being immaterial to material.

The accounting treatment for other programmes such as Nightingale hospitals and the

vaccine programme on individual NHS entity accounts is yet to be finalised. Guidance

is still being developed by DHSC and NHSE&I but their initial thinking is included within

Guidance on accounting for 2020/21 items. Given the scale of these programmes, they

are likely to lead to significant new transaction streams in some NHS providers and

CCGs.

Auditors are reminded that NHSE&I’s Guidance on accounting for 2020/21 items is

intended to help NHS organisations understand the treatment of items that are new

for 2020-21 but it does not constitute an accounts direction. Any specific guidance on

accounting practices to be followed is contained in the DHSC GAM. As set out in

paragraphs 80 and 81 above, auditors will need to pay particular attention to any

unusual accounting treatments and/or those not supported by evidence.

Government and local restrictions on movement are likely to remain in place close to

year-end 2020-21 which could affect the ability to attend year-end stock-takes or

physically verify the existence of equipment (where required).

What should auditors do?

Auditors should be aware of the risks associated with new transaction streams to

support their audit planning work under ISA (UK) 240 (Revised January 2020) The

Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, ISA

(UK) 300 (Revised June 2016) Planning an Audit of Financial Statements, and ISA (UK)

315 (Revised June 2016) Identifying and Assessing the Risks of Material Misstatement

Through Understanding of the Entity and Its Environment.

Auditors should be aware that, as the NHS continues to respond to the pandemic,

guidance regarding the provision of information from DHSC and NHSE&I on how local

NHS bodies should account for centrally procured programmes is still being

developed. The NAO will communicate such information and guidance to auditors via

supporting information and weekly auditor communications.

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ISA 501 (Revised June 2016) Audit Evidence requires auditors to attend stocktakes to

confirm assertions around material inventory balances. Government and local

restrictions may not make this possible for 2020-21 stocktakes.

The FRC issued guidance to auditors in response to COVID-19 in March 2020 that

stated –“the FRC is concerned that the current situation should not undermine the

delivery of high-quality audits. Audits should continue to comply fully with required

standards.” The FRC issued further guidance in April 2020 that stated “the need for a

modified opinion may arise because certain audit procedures cannot be performed (for

example physical inventory testing because of travel restrictions), and no other

procedures can be undertaken to produce the required volume or quality of reliable

audit evidence”.

Furthermore, the Institute of Chartered Accountants in England and Wales (ICAEW)

issued guidance which states that “each individual engagement will need to be

assessed on a case by case basis to determine what more, if anything, may be

appropriate and to consider whether alternative procedures have fulfilled the

requirements of ISA 501 and in particular whether sufficient appropriate evidence has

been obtained. If, despite using alternative procedures, the requirements of ISA 501

are not met, you will need to modify the audit opinion under ISA 705”.

Auditors should engage at the earliest opportunity with NHS bodies that are likely to

hold material inventory or equipment. Due to access arrangements changing over the

course of the year, attending a stocktake close to year-end or the physical verification

of items of equipment may not be possible. In considering whether alternative

procedures are appropriate to obtain the necessary assurance to meet ISA 500

(January 2020) Audit Evidence for equipment and for inventory ISA 501 (Revised June

2016) Audit Evidence – Specific Considerations for Selected Items, auditors will need to

understand the body’s own controls and how it has gained the assurance it requires to

support the balances and disclosures within its annual report and accounts, for

example, what controls the body has in place to provide confirmation of stock

quantities and equipment, the condition of stock and equipment, and movements in

these items.

Use of Management’s Expert – Valuations of Property, Plant and Equipment What are the issues?

NHS providers hold a significant quantity of property, plant and equipment. Chapter 4,

Annex 4 of the GAM states that:

‘Assets which are held for their service potential (i.e. operational assets used to

deliver either front line services or back office functions) must be measured at

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their current value in existing use. For “in use” non-specialised property assets

current value in existing use should be interpreted as market value for existing

use. In the Royal Institution of Chartered Surveyors; (RICS) “Red Book” (RICS

Appraisal and Valuation Standards), this is defined as Existing Use Value (EUV).’

‘For specialised properties (i.e. those for which no active market exists),

depreciated replacement cost is considered to be a satisfactory approximation

of current value in existing use. Within that methodology, the MEA [modern

equivalent asset] concept is applied: the “replacement cost” is based on the

cost of a modern replacement asset that has the same productive capacity as

the property being valued.’

‘There is no pre-determined frequency with which assets must be re-valued.

Instead the Standard requires that asset values should be kept up to date and

that the frequency of revaluation will need to reflect the volatility of asset

values. Where assets are subject to significant volatility, then annual

revaluations may be required. Conversely, where changes in asset values are

insignificant then a revaluation may be necessary only every 3 or 5 years.’

Many of the property assets held by NHS providers are of a specialised nature and a

valuer is usually engaged as management’s expert to carry out a valuation of these

assets. The DHSC GAM goes on to say in paragraph 4.250:

‘It is for valuers, using the RICS Red Book, and following discussions with the

entity, to determine the most appropriate methodology for obtaining either a

current value in existing use or a fair value’.

In support of the RICS Red Book, RICS issue the UK National Supplement. This ‘reflects

valuation standards and other authoritative requirements that are specific to the UK

jurisdiction, and provides additional valuation applications guidance accordingly’. This

therefore has the effect of being guidance rather than being a standard. An updated

version of the UK National Supplement was issued in November 2018, effective from

14 January 2019.

In November 2018 RICS also issued UKGN 2 – Depreciated replacement cost method

of valuation for financial reporting, also effective from January 2019. This provides

further guidance on how to apply the UK National Supplement and ‘highlights the

reporting requirements outlined in RICS Valuation – Global Standards 2017 – UK

national supplement (RB UK) that are particularly relevant when the DRC method has

been used’.

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In summary, the RICS Red Book constitutes the standard which valuers should adhere

to. The updated UK National Supplement and UKGN 2 constitute application guidance

which UK valuers should take account of when preparing DRC valuations.

Paragraph 4.252 of the GAM also sets out the treatment of VAT in the valuation

methodology:

‘Where DRC is used as the valuation methodology, entities must use the

“instant build” approach. Generally the valuation should be gross of VAT,

however circumstances may arise where the asset would be more appropriately

valued net of VAT. For instance, entities may recover VAT on payments for

certain contracted-out services, including the provision of a fully managed and

serviced building under a PFI. When revaluing assets arising from a PFI project,

entities may take the view that this should be based on a value excluding

recoverable VAT, reflecting the cost at which the service potential would be

replaced by the PFI operator. Valuation is ultimately a matter for local

valuation experts. However, PFI assets must only be revalued exclusive of

recoverable VAT where there is clear evidence that this is appropriate, which

must be to the satisfaction of local auditors. Where an asset was not previously

acquired through a route that permits VAT to be recoverable, and there is no

clear indication that VAT would be recoverable on any replacement, the asset

must be valued inclusive of VAT.’

The auditor may also engage an auditor’s expert to evaluate and challenge the work of

management’s expert.

RICS has issued a Valuation Practice Alert – COVID-19 to its members outlining some

of the potential impacts from the effects of the COVID-19 pandemic on their work. It

acknowledges that the crisis will impact the work carried out by members in a variety

of ways including difficulties in inspecting property due to “firm’s own internal

procedures, government-imposed restrictions or the occupant’s unwillingness to grant

access”. The alert states:

“Any restrictions of information and/or the ability to inspect must be made

clear, agreed with the client and clearly stated in the report. All affected terms

of engagement must be amended to confirm this. These requirements also

apply to any valuation assumptions that are made as a consequence of

restricted access and/or valuation information. If the regulated member

considers that it is not possible to provide a valuation on a restricted basis, the

instruction should be declined.”

A supplement to the practice alert has also been published by RICS dated 6th

November 2020 which sets out inspection methods including regulations and

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protocols. It provides that “inspections and investigations may take various forms

including, but not limited to:

• full internal inspection of all but inaccessible parts and without testing of

services

• internal inspection with some level of restriction on access

• a site perimeter or ‘drive-by’ inspection

• an inspection otherwise external to the site or property

• a ‘desktop’ opinion formed using, for example, digital mapping, records, plans

and other data”.

RICS established the RICS Material Valuation Uncertainty Leaders Forum (UK), which

was set up to consider the unique events relating to the global COVID-19 pandemic

and its impact on valuation assignments, with a focus on financial reporting and

measures for the accurate and consistent reporting of material uncertainty. The

webpage includes a ‘forum outputs’ section. The forum recommends that material

valuation uncertainty declarations may not be required for all properties, except those

in retail and leisure sectors, subject to valuer discretion for individual cases.

Why is this important?

The valuation of land and buildings included in the NHS provider’s financial statements

is complex and often includes a number of assumptions and judgements. The

valuations are also likely to have a high degree of materiality.

In the case of the unique events relating to the global COVID-19 pandemic and its

impact on valuation assignments, while the recommendation to include a material

uncertainty clause in the valuation reports has now been lifted for all properties,

except those in retail and leisure sectors, there could be some continued volatility in

the property markets that may affect 31 March 2021 valuations.

NHS bodies need to demonstrate whether or not a valuation is necessary (as not all

NHS bodies have a full valuation each year) and be able to support their assessment in

the years between formal valuations.

Due to government and local restrictions, physical property inspections may not be

possible and therefore alternative assurance procedures are likely to be required by

both the valuer and the auditor to confirm details and assumptions applied. This may

be particularly challenging where there is a change in valuer or auditor and no prior

knowledge of the property and previous assumptions applied.

Management are responsible for the accounting estimates they use when preparing

any set of accounts. For property valuations, while management may employ an

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expert in the form of a professional valuer (following the RICS guidance), management

retain responsibility for the estimates within their accounts. Management are

responsible for assessing the reasonableness of what they are provided with by their

expert and challenging appropriately. They are also responsible for applying

accounting policies in respect of property assets in accordance with IAS 16 Property,

Plant and Equipment and the DHSC GAM.

What should auditors do?

Auditors should consider the requirements of ISA (UK) 500 (Revised January 2020)

Audit Evidence, which states that ‘if information to be used as audit evidence has been

prepared using the work of a management’s expert, the auditor shall, to the extent

necessary, having regard to the significance of that expert’s work for the auditor’s

purposes:

a) Evaluate the competence, capabilities and objectivity of that expert;

b) Obtain an understanding of the work of that expert; and

c) Evaluate the appropriateness of that expert’s work as audit evidence for the

relevant assertion.’

Where the auditor engages an auditor’s expert, the auditor should consider the

requirements set out in ISA (UK) 620 (Revised November 2019) Using the Work of an

Auditor’s Expert.

Auditors should ensure that the consideration of the work of management’s expert

and any auditor’s expert engaged is adequately documented, including evidence

obtained of work undertaken to challenge and evaluate key assumptions.

The Royal Institute of Chartered Surveyors (RICS) Valuation – Professional Standards

(Red Book) highlights the increased level of reliance placed by valuers on their clients

in respect of depreciated replacement cost (DRC) valuations: ‘with specialised assets

the valuer may have to place greater reliance on information provided by the client, or

its other advisers, than would be the case with more conventional assets’. Auditors

should have regard to this point when seeking such assurances under ISA (UK) 500

(Revised January 2020) Audit Evidence, e.g. by requesting details of any assumptions

made by the valuer based on discussions with the audited body.

Auditors should also consider historic accounting judgements which may have a

significant impact on the current year financial statements and whether the

judgements remain appropriate.

Auditors should consider the following factors which may affect assumptions in

property valuations and in certain cases, trigger impairments or accelerated

depreciation:

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• Changes to accommodation plans (e.g. disposal, exercising a lease break,

change in property use, modern equivalent asset assumptions in respect of

service potential)

• Significant new capital expenditure

• Changes to market conditions due to the impact of COVID-19

• Changes to the income generated from subletting properties or other

activities (e.g. pharmacies, cafes, gift shops, newsagents)

• The valuer’s ability and intention to inspect properties that are subject to

professional valuation in 2020-21

Auditors should take account of the updated RICS alert when discussing with audited

bodies the communications they have had with their external property valuation

experts, and when assessing any impacts of the RICS alert for the planned level of

assurance and auditor reporting.

Auditors should consider the requirements of ISA (UK) 540 Auditing Accounting

Estimates and Related Disclosures when assessing management’s accounting

estimates in relation to property valuations.

Subsidiaries What are the issues?

A number of NHS providers have established subsidiaries that, whilst they have similar

characteristics, can have unique and complex arrangements in their own right. Some

structures involve sale and leaseback models, for example, an NHS trust providing

assets on a finance lease to the company which the company then leases back to the

trust. The property company may provide a range of services to the trust, for example,

the maintenance of a trust’s non-PFI estate and associated services such as portering;

security; laundry; waste; reception; grounds maintenance and repairs; and some back-

office functions such as finance and accountancy.

Why is this important?

The associated transactions within the NHS provider’s financial statements can be

complex and often include a number of assumptions and judgements, particularly in

relation to which entity’s accounts assets are recognised; whether subsequent

managed service agreements contain an embedded lease; and the treatment of VAT

and whether or not this is recoverable which can impact the valuation of assets which

are also likely to have a high degree of materiality.

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The considerations regarding the treatment of VAT where depreciated replacement

cost is used as the valuation methodology and revaluing the assets arises from a PFI

project are set out in paragraph 4.252 of the GAM (and quoted in paragraph 111

above in this AGN).

NHS Improvement issued an addendum in November 2018 to NHS Improvement’s

Transactions guidance – Transactions guidance for trusts forming or changing a

subsidiary. This framework clarifies the required approval process before trusts can

implement plans for subsidiaries; it does not affect their legal ability to develop such

plans.

What should auditors do?

Auditors should be aware of the risks associated with complex subsidiaries to support

their audit planning work under ISA (UK) 300 (Revised June 2016) Planning an Audit of

Financial Statements, and ISA (UK) 315 (Revised June 2016) Identifying and Assessing

the Risks of Material Misstatement Through Understanding of the Entity and Its

Environment.

Auditors should consider the requirements of ISA (UK) 500 (Revised January 2020)

Audit Evidence as set out above in paragraph 121.

Where the auditor engages an auditor’s expert, the auditor should consider the

requirements set out in ISA (UK) 620 (Revised November 2019) Using the Work of an

Auditor’s Expert.

Auditors should ensure that the consideration of the work of management’s expert

and any auditor’s expert engaged is adequately documented, including evidence

obtained of work undertaken to challenge and evaluate key assumptions. This will

include the consideration of the economic reality of the arrangements under SIC-27

Evaluating the Substance of Transactions Involving the Legal Form of a Lease and IFRIC

4 Determining Whether an Arrangement Contains a Lease (superseded by IFRS 16

Leases effective from 1 April 2022) when determining whether there is a lease in

substance.

Auditors should also consider historic accounting judgements which may have a

significant impact on the current year financial statements and whether the

judgements remain appropriate.

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Co-commissioning What are the issues?

Primary care co-commissioning is one of a series of changes set out in the NHS Five

Year Forward View. It allows CCGs to take on greater responsibility for general

practice commissioning. Its introduction was intended to support the development of

integrated out-of-hospital services, based around the needs of local people.

In 2014-15, NHS England invited CCGs to participate through one of three models:

• greater involvement – an invitation to CCGs to work more closely with their

local NHS England teams in decisions about primary care services;

• joint commissioning – enables one or more CCGs to jointly commission

general practice services with NHS England through a joint committee; or

• delegated commissioning – an opportunity for CCGs to take on full

responsibility for the commissioning of general practice services.

Guidance for CCGs on the operation of co-commissioning was published in November

2014 in Next steps towards primary care co-commissioning.

As of 1 April 2020, 132 CCGs have delegated commissioning arrangements for primary

medical services. In addition, one CCG has a joint commissioning arrangement with

NHS England and two are operating under the greater involvement model. A list of

CCGs with delegated commissioning can be found on NHS England’s website here.

From 2016-17 onwards CCGs have received direct funding for the commissioning of

general practice services, and have primary responsibility for obtaining assurance for

these transactions. Auditors should be aware that NHS England has contracted Capita

to deliver primary care support services at all NHS sites and that there are regional

differences in the method of operation and controls, with some elements being

undertaken by NHS England local regional teams.

In 2019-20 NHS England commissioned an ISAE 3402 report for Capita-provided

primary care support services which identified one control failure.

Why is this important?

Primary care expenditure is significant and is likely to be material for those CCGs with

full delegation.

In 2019-20 the ISAE 3402 report for Capita-provided primary care support services

identified one of the control objectives not being met. The service auditor issued a

qualified opinion.

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What should auditors do?

Auditors should engage in discussions with CCGs to establish what co-commissioning

agreements have been entered into. The nature of the arrangements may present a

number of audit risks which auditors will need to consider as part of their planning

process.

Auditors should note that the systems which support these costs are complex and

should consider early discussions with the CCG to understand the processes in place.

Auditors will need to consider the findings of the ISAE 3402 reports to support their

audit planning work under ISA (UK) 300 (Revised June 2016) Planning an Audit of

Financial Statements, and ISA (UK) 315 (Revised June 2016) Identifying and Assessing

the Risks of Material Misstatement Through Understanding of the Entity and Its

Environment. Copies of these reports will be made available on the LACG extranet.

Where auditors wish to undertake substantive procedures, evidence requests should

be submitted to CCGs. NHS England will facilitate the process of obtaining the

evidence from PCSE where applicable. Auditors should note that, due to the number

of CCGs undertaking fully-delegated co commissioning, NHS England has asked that

sample requests are provided as early as possible and that all fields on the standard

request form are completed.

AGN 05 NHS Audit Planning

Issued on 5 March 2021

33 | Page OFFICIAL

Other Support and Raising Technical Issues or Queries on this AGN

Auditors in firms should raise queries within the firm, in the first instance, so that the

relevant technical support service can consider whether to refer queries to the NAO’s

Local Audit Code and Guidance (LACG) team by e-mailing LACG.queries@nao.org.uk.

Information supporting auditors is available on the LACG extranet. This includes

details of third-party reports and information. Copies of referenced third party

information and service auditor reports will also be available on the LACG extranet

following issue. Updates will be communicated through the Weekly Auditor

Communication (WAC). If there is a need for further statutory guidance during the

year, the NAO may issue an addendum to this AGN.

The NAO also engages with the firms through its Local Auditors’ Advisory Group

(LAAG) and supporting technical networks to consider any emerging regime-wide

technical issues on a timely basis. Auditors should follow their in-house arrangements

for bringing significant emerging issues to the attention of their supplier’s

representative on LAAG or the relevant technical network.