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GOVERNMENT
Interim Audit
Report 2008/09
Dorset County
Council
Pension Fund
June 2009
AUDIT

Content
The contacts at KPMG
in connection with this
report are:
June Awty
Partner
KPMG LLP (UK)
Tel: 02073 111769
June.awty@kpmg.co.uk
Gemma Broom
Manager
KPMG LLP (UK)
Tel: 0117 9054382
Gemma.broom@kpmg.co.uk
Page
Executive summary 2
Financial statements 3
Appendices 5
A. Recommendations
B. Accounts risks
C. Review of internal audit
This report is addressed to the Council and has been prepared for the sole use of the Council. We
take no responsibility to any member of staff acting in their individual capacities, or to third parties.
The Audit Commission has issued a document entitled Statement of Responsibilities of Auditors
and Audited Bodies. This summarises where the responsibilities of auditors begin and end and
what is expected from the audited body. We draw your attention to this document.
External auditors do not act as a substitute for the audited body’s own responsibility for putting in
place proper arrangements to ensure that public business is conducted in accordance with the law
and proper standards, and that public money is safeguarded and properly accounted for, and used
economically, efficiently and effectively.
If you have any concerns or are dissatisfied with any part of KPMG’s work, in the first instance you
should contact June Awty, who is the engagement partner to the Council, telephone 02703111769,
email june.awty@kpmg.co.uk who will try to resolve your complaint. If you are dissatisfied with your
response please contact Trevor Rees on 0161 236 4000, email trevor.rees@kpmg.co.uk, who is the
national contact partner for all of KPMG’s work with the Audit Commission After this, if you are still
dissatisfied with how your complaint has been handled you can access the Audit Commission’s
complaints procedure. Put your complaint in writing to the Complaints Investigation Officer,
Westward House, Lime Kiln Close, Stoke Gifford, Bristol, BS34 8SR or by e mail to:
complaints@audit-commission.gov.uk. Their telephone number is 0844 798 3131, textphone
(minicom) 020 7630 0421
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
1

Section one
Executive summary
Scope of this report
This report summarises our planning and interim audit work for the Dorset County Council Pension Scheme (‘the
Scheme’) in relation to the 2008/09 financial statements. A significant proportion of our accounts audit is
completed before we receive your financial statements. In particular, our work to date covers the following areas:
• Audit planning and risk analysis: We have identified the key issues for the 2008/09 financial statements and
discussed your progress in addressing these.
• Control evaluation: We have reviewed your progress with the closedown and accounts production process. We
have also tested controls over the key financial systems. We rely on the work of internal audit at the Council
wherever possible, and complete an assessment of the internal audit function as part of this work.
Section 2 provides further details of the work completed and sets out our findings.
Our recommendations are included in Appendix A.
Summary of findings
• We have reviewed the Scheme’s plans for closedown and accounts preparation. The process in place should
support the timely production of materially accurate financial statements.
• We have identified four key accounting areas for the 2008/09 financial statements. These are summarised in
more detail in Appendix B. These issues are being taken seriously by the Council and progress has been made
to date in addressing each of the risks identified.
• We assessed your high level financial control framework as good overall. Our audit identified one significant
issues in relation to the organisational control environment which is detailed in Appendix A.
• We were able to rely on the relevant work undertaken by the internal audit team in respect of the Pension Fund
in the year for the key financial systems.
• There is no clear segregation of funds or documented investment responsibilities between the Council and the
Pension Fund. As a result it is unclear which organisation is liable for the Fund’s potential loss of monies
following the banking collapse in Iceland.
Acknowledgements
We would like to take this opportunity to thank officers and members for their continuing help and co-operation
throughout our audit work.
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
2

Section two
Financial statements
Introduction
Our work in respect of the audit of financial statements is split into the stages shown below:
Stage Tasks Timing
Completed
Planning
• Updating our business understanding and risk
assessment
• Assessing the organisational control environment
• Issuing our accounts audit protocol
December 2008 to
February 2009
• Reviewing the accounts production process
Control
Evaluation
• Evaluating and testing controls over key financial systems
• Review of internal audit
• Evaluating and testing controls over authority
management and control
March to
April 2009
Substantive
Testing
• Planning and performing substantive work
• Concluding on critical accounting matters
June to July 2009
-
Completion
• Completion procedures
• Forming our audit opinion
August to
September 2009
-
Key issues in respect of each of these tasks is summarised below.
Planning - Risk assessment
Our 2008/09 Audit and Inspection Plan included our initial assessment of the risks impacting on the 2008/09
financial statements. We have updated this during the course of our interim audit and include a detailed outline of
the key accounting issues and risks for the Pension Fund accounts for 2008/09 in Appendix B.
We have discussed these risks with the finance team as part of our planning and update meetings. It is noted that
these issues are being taken seriously by the Scheme and progress has been made to date in addressing each of
the risks identified as outlined in Appendix B. However, these still present significant challenges that require
careful management and focus. We will revisit these areas during our final accounts audit.
Planning - Organisational control environment
The organisational controls we assess are based on your high level system of internal control which includes how
the Fund is governed.
As noted on page 2, arrangements in respect of investment responsibilities and treasury management between
the Council and the Pension Fund would benefit from further consideration with a view to clarifying and
documenting roles and responsibilities.
Recommendations are included in Appendix A.
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
3

Section two
Financial statements (continued)
Planning - Accounts audit protocol
This important document explains our audit process with details of our audit team, audit approach and timetable. It
also summarises the working papers and other evidence we require you to provide as part of the preparation of the
financial statements. We issued this to the finance team in April 2009. We have tailored the document to reflect
our requirements in respect of the specific accounting issues identified above.
Control Evaluation - Accounts production process
We have reviewed your plans for preparing for your closedown and accounts preparation. You have incorporated a
number of measures into your closedown plan to further improve the project management of this process.
We consider that your planned processes for the preparation of your financial statements are adequate and should
support the timely production of materially accurate financial statements.
Control Evaluation - Controls over key financial systems
We work with internal audit to:
• update our understanding of key financial systems;
• confirm our understanding of these systems by completing walkthrough testing; and
• document, evaluate and test the control framework for these systems.
We have relied on the work completed by internal audit for 2008/09 over the Pension Fund’s key systems and
controls. For each of the key financial systems internal audit tested high level controls, which are strong controls
that should address the key risks. Examples are reconciliations or exception reports.
We assessed your high level financial control framework as good overall.
Internal audit gave a substantial assurance opinion in respect of the systems and internal controls operating within
the area audited and included recommendations in their reports as appropriate in respect of contributions and
refunds.
The weaknesses identified by internal audit over contributions and refunds have not resulted in additional external
audit testing as the high level controls were in place.
Control Evaluation - Review of internal audit
The Accounts and Audit Regulations 2003 require public bodies to maintain an adequate and effective system of
internal audit of their accounting records and of their system of internal control. For principal local authorities,
guidance is contained in the Code of Practice for Internal Audit in Local Government (‘the Code’). The Code
defines the way in which internal audit should be established and operated and applies equally to in-house audit
teams and those provided by external contractors.
We did not identify any significant issues with their work and are pleased to report that we have been able to place
full reliance on internal audit’s work on the key financial systems. We particularly noted improvements in terms of
the quality of system documentation and the adequacy of sample sizes used by internal audit.
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
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Appendices
Appendix A: Recommendations
We have given each recommendation a risk rating (as explained below) and agreed what action management will
need to take. We will follow up these recommendations next year.
Priority rating for recommendation
Priority one: issues that are
fundamental and material to your
system of internal control. We believe
that these issues might mean that you
do not meet a system objective or
reduce (mitigate) a risk.
Priority two: issues that have an
important effect on internal controls
but do not need immediate action. You
may still meet a system objective in full
or in part or reduce (mitigate) a risk
adequately but the weakness remains
in the system.
Priority three: issues that would, if
corrected, improve the internal control
in general but are not vital to the overall
system. These are generally issues of
best practice that we feel would
benefit you if you introduced them.
No.
Risk
Issue and recommendation
Management response
Officer and due date
Issue
The Council invested monies on
behalf of the Pension Fund in the
Icelandic banking system.
However, following the collapse of
the banking system, recoverability
of these monies is uncertain.
Impact
There is no clear segregation of
funds or documented investment
responsibilities, making it unclear
whether the Council or the Fund is
liable for the Fund’s potential loss
of monies from the banking
collapse.
Recommendation
The Pension Fund Investment
Committee should seek legal
advice in respect of this matter.
The Committee should also
formalise its arrangements with
the Council in respect of the
treasury role the Council carries out
on behalf of the Fund.
1
•
(one)
1. The current position with
regard to any liability falling on
the Pension Fund is becoming
clearer nationally. Currently we
are assuming that the Fund
will assume no liability for any
potential losses relating to
deposits in Icelandic banks,
however, this needs to be
clarified. Advice has been
sought from Counsel as to the
appropriate treatment, and a
response is expected shortly.
2. With effect from 5 October
2009, the Pension Fund will be
operating completely separate
bank accounts, and treasury
management arrangements,
thus clearly segregating the
cash balances.
Paul Kent (Pension Fund
Administrator)
30 September 2009
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
5

Appendices
Appendix B: Accounts risks
This appendix summarises the key accounting issues for the 2008/09 financial statements and the progress you
have made to date to address these.
Changes to accounting requirements
Issue Risk and implications Progress
The 2008 Statement of Recommended Practice on
Local Authority Accounting the UK (SORP) includes
a number of changes, including aligning the
disclosure of the Pension Fund accounts with the
Statement of Recommended Practice (SORP):
Financial Report of Pension Schemes (revised May
2007).
There is a risk that the financial
statements prepared by the Council
will not appropriately comply with the
updated SORP. This would result in
additional time required by both local
management and KPMG to address
any non-compliance with the SORP
and could delay the finalisation of the
financial statements.
Finance staff have familiarised
themselves with the changes
required under the SORP 2008.
The Council will make use of the
SORP disclosure checklist when
preparing the draft financial
statements to help ensure
compliance with the SORP.
Impairment of Icelandic bank investments
In October 2008 the Icelandic banking system
collapsed resulting in the recoverability of the
investments held by the Council with Icelandic
banks becoming questionable. The accounting
treatment of the balance held by the Fund therefore
needs to represent the best estimate of the likely
amount that can be recovered. LAAP Bulletins 78
and 79 provide guidance on the accounting
treatment to be adopted in the year and should be
considered by the Council. This has been
supplemented by LAAP bulletin 82, covering the
latest information from the administrators of the
banks concerned regarding the extent to which local
authority investments may be recoverable.
The Pension Fund should confirm that this is
applicable for the Pension Fund accounts.
There is a risk that the investments
held with the Icelandic banks are not
disclosed appropriately in the financial
statements in line with the guidance
provided in LAAP Bulletins 78, 79 and
82.
The Council has considered the
guidance outlined in LAAP
Bulletins 78, 79 and 82.
Discussion over the liability in
relation to the Icelandic monies
held by the Fund is ongoing
between the Council and
Investment Committee.
Other investments with uncertain recoverability
During an economic downturn the valuation of some
investments become more uncertain especially
where markets are illiquid or investments are in
markets such as property.
There is a risk some investments will
not be recoverable and therefore
consideration of the recoverability of
these will need to be addressed by
the Council in the financial
statements.
The Council is to consider the
recoverability of their investment
portfolio.
Accounting estimates and valuations
The current economic environment introduces a
number of risks for the financial statements, in
particular for estimates and valuations. This
includes the valuation of investments which are
carried at market value.
There is a risk that estimates or
valuations within the financial
statements are not appropriately
considered on a regular basis and
therefore are not representative of the
current economic environment.
A formal valuation of property
assets will be undertaken for the
2008/09 financial statements to
ensure they are reflective of the
current economic environment at
the balance sheet date. The
Council is to consider the
valuation of investments as part
of the closedown process.
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
6

Appendices
Appendix C: Review of internal audit
The following table summarises the findings of our review of the Council’s internal audit function against the
standards set out in the Code of Practice for Internal Audit in Local Government:
Standard
Scope of internal audit
Independence
Ethics for internal auditors
Audit Committee (or equivalent)
Relationships with management,
other auditors and other review
bodies
Staffing, training and
development
Audit strategy and planning
Undertaking audit work
Due professional care
Reporting
Performance, Quality and
Effectiveness
Commentary on your internal audit
The scope of internal audit’s strategic plan, presented to the Audit & Scrutiny
Committee on 22 April 2008, is adequate. It includes reviews of core financial
systems, operational reviews, ICT audit and corporate governance. The Internal Audit
Strategy is an overarching strategy, which is a high level statement of how Internal
Audit will be delivered and how it links to the Council’s objectives and priorities.
The Head of Internal Audit, Insurance and Risk Management has line manager
responsibility for both the Council’s insurance and risk management processes and
procedures. However, this is mitigated by the independent review undertaken by its
internal audit partner, Deloitte, who report the results directly to the Chief Financial
Officer. External review is also undertaken by the Council’s insurers.
In addition to the Staff Code of Conduct, the Audit Section has also issued an 'Ethical
Guidance Note' to auditors. Also, prior to the commencement of each audit
assignment, staff are required to identify any potential conflict of interest that may
exist.
Internal audit staff have been made aware of the ethics requirements in the Internal
Audit Manual. The performance of auditors in terms of integrity, objectivity,
competence and confidentiality are monitored as part of the internal audit’s appraisal
system.
The internal auditors presented their plan and progress reports against the plan to the
Council’s Audit & Scrutiny Committee throughout 2008/09.
Relationships between internal audit and management appear to be co-operative and
collaborative. Internal and external audit work together and we have been able to rely
on internal audit’s work.
Internal audit consists of trained, qualified internal auditors and the Head of Internal
Audit is CCAB qualified. The service is provided in partnership with Deloitte. A staff
training programme exists including mandatory modules for all auditors as well as
supplementary developmental training.
The Internal Audit Strategy is an overarching strategy providing a high level statement
of how Internal Audit will be delivered and how it links to the Council’s objectives and
priorities. Internal audit have a master-file of audits and the frequency of review of
each area is determined by an annual risk assessment.
The management of audit assignments is generally well controlled through the setting
of standards and deadlines for the completion of fieldwork, receipt of management
responses and finalisation of audit reports.
The internal auditors appear to exercise due professional care in undertaking their work
at the Council.
The outcome of each audit assignment, identified in the annual operational plan, is
reported to management. Internal audit complete the reporting cycle with their
quarterly reports to the Audit & Scrutiny Committee. These reports summarise the key
reviews undertaken in the year and the audit opinion reached for each review.
The quality assurance of audit reviews is achieved through a file review by the Group
Auditor and audit reports are second reviewed by the Internal Audit Manager.
Internal Audit have in place a series of performance measures , which are reviewed on
a monthly basis and reported annually to the Audit and Scrutiny Committee
© 2009 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member
firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. This document is confidential and its circulation and use are restricted.
KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
7