Auditor Guidance Note 5 (AGN 05) NHS Audit Planning

 
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AGN 05
                                                                                                 NHS Audit Planning
                                                                                            Issued on 5 March 2021

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
                                                                          NHS Audit Planning
                                                                     Issued on 5 March 2021

 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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AGN 05
                                                                          NHS Audit Planning
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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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                                                                                                           NHS Audit Planning
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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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