Reserve Bank of Australia Annual Report – 2017 Financial Statements Independent Auditor's Report

INDEPENDENT AUDITOR'S REPORT

To the Treasurer

Opinion

In my opinion, the financial statements of the Reserve Bank of Australia and its Controlled Entity (together the consolidated entity) for the year ended 30 June 2017:

1. comply with Australian Accounting Standards and the Public Governance, Performance and Accountability (Financial Reporting) Rule 2015; and
2. present fairly the financial position of the consolidated entity as at 30 June 2017 and its financial performance and cash flows for the year then ended.

The financial statements of the consolidated entity, which I have audited, comprise the following statements as at 30 June 2017 and for the year then ended:

• Statement of Assurance;
• Statement of Financial Position;
• Statement of Comprehensive Income;
• Statement of Distribution;
• Statement of Changes in Capital and Reserves;
• Cash Flow Statement; and
• Notes to and Forming Part of the Financial Statements, including Accounting Policies and other explanatory information.

Basis for Opinion

I conducted my audit in accordance with the Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing Standards. My responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of my report. I am independent of the consolidated entity in accordance with the relevant ethical requirements for financial statement audits conducted by me and my delegates. These include the relevant independence requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants to the extent that they are not in conflict with the Auditor-General Act 1997 (the Code). I have also fulfilled my other responsibilities in accordance with the Code. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion.

Key Audit Matters

Key audit matters are those matters that, in my professional judgement, were of most significance in my audit of the financial statements of the current period. These matters were addressed in the context of my audit of the financial statements as a whole, and in forming my opinion thereon, and I do not provide a separate opinion on these matters.

Key audit matter

Accuracy of the liability for the Australian banknotes

Refer to Note 1 (b) Financial instruments: Australian banknotes on issue.

Australian banknotes on issue relates directly to one of the Reserve Bank of Australia's key roles, the issuance of currency, as defined in the Reserve Bank Act 1959 and is a key audit matter due to:

• high interest to the users of the financial statements;
• the balance is significant relative to the Reserve Bank of Australia's Statement of Financial Position; and
• complexity in assessing the accuracy of the liability for Australian banknotes on issue that are placed in circulation in the economy.

The balance of Australian banknotes on issue represents the value of all bank notes on issue in Australia and the liability is measured at the face value of all Australian bank notes issued less any bank notes cancelled.

How the audit addressed the matter

To audit the Australian banknotes on issue, I performed the following audit procedures:

• Tested general IT controls and those controls relevant to the accurate recording of the issuance and return of bank notes within the system responsible for recording the balance of Australian banknotes on issue.
• Assessed the movement in Australian banknotes on issue against known comparative trends. Demand for bank notes is driven by underlying economic activity. I therefore compared movements in Australian banknotes on issue against underlying economic activity, in particular household final consumption expenditure (HFCE). HFCE is produced by the Australian Bureau of Statistics and measures household expenditure.
• I performed a comparison of current year movements against prior year patterns. I also performed a trend analysis on Australian banknotes on issue against prior periods focussing on the number of notes issued by denomination.

Key audit matter

Valuation of Australian dollar and foreign currency investments

Refer to Note 1 (b) Financial instruments, Note 15 Financial Instruments and Risk and Note 16 Fair Value.

Valuation of Australian dollar and foreign currency investments was a key audit matter due to the significant size relative to the Reserve Bank of Australia's Statement of Financial Position ($188,346m) and the complexity inherent in valuing a range of investments using different methodologies.

The portfolio of investments primarily comprises Australian dollar securities, foreign currency securities, repurchase agreements, deposits with other central banks, and foreign currency swap contracts. All investments are held at fair value except for repurchase agreements which are held at amortised cost.

How the audit addressed the matter

To audit the valuation of Australian dollar and foreign currency investments, I performed the following audit procedures:

• Tested general IT controls on the Reserve Bank of Australia's investment trading system.
• Tested controls relevant to the accurate recording of the purchase and sale of investments.
• Tested controls relevant to the ongoing monitoring of the collateralisation of repurchase agreements.
• Tested year-end valuations of Australian dollar and foreign currency securities using the following procedures to address the different valuation methodologies:
  • Agreed year-end valuations of Australian dollar and foreign currency securities to independent pricing sources.
  • Tested the year-end valuations for all foreign currency swaps using independent observable pricing inputs.
  • Tested that repurchase agreements were appropriately collateralised in line with the Reserve Bank of Australia's policy. As part of this, for a sample of securities held as collateral I agreed the valuations to independent pricing sources.
  • Obtained independent confirmation from other central banks regarding value of deposits held.

Other Information

The Accountable Authority is responsible for the other information. The other information obtained at the date of this auditor's report is the Annual Performance Statement for 2016/17 and the Capital Framework for the year ended 30 June 2017 but does not include the financial statements and my auditor's report thereon.

My opinion on the financial statements does not cover the other information and accordingly I do not express any form of assurance conclusion thereon.

In connection with my audit of the financial statements, my responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or my knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work I have performed, I conclude that there is a material misstatement of this other information, I am required to report that fact. I have nothing to report in this regard.

Accountable Authority's Responsibility for the Financial Statements

As the Accountable Authority of the Reserve Bank of Australia the Governor is responsible under the Public Governance, Performance and Accountability Act 2013 for the preparation and fair presentation of annual financial statements that comply with Australian Accounting Standards and the rules made under that Act. The Governor is also responsible for such internal control as the Governor determines is necessary to enable the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Governor is responsible for assessing the consolidated entity's ability to continue as a going concern, taking into account whether the entity's operations will cease as a result of an administrative restructure or for any other reason. The Governor is also responsible for disclosing matters related to going concern as applicable and using the going concern basis of accounting unless the assessment indicates that it is not appropriate.

Auditor's Responsibilities for the Audit of the Financial Statements

My objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes my opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian National Audit Office Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with the Australian National Audit Office Auditing Standards, I exercise professional judgement and maintain professional scepticism throughout the audit. I also:

• identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for my opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;
• obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the consolidated entity's internal control;
• evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Accountable Authority;
• conclude on the appropriateness of the Accountable Authority's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the consolidated entity's ability to continue as a going concern. If I conclude that a material uncertainty exists, I am required to draw attention in my auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify my opinion. My conclusions are based on the audit evidence obtained up to the date of my auditor's report. However, future events or conditions may cause the consolidated entity to cease to continue as a going concern;
• evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation; and
• obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the consolidated entity to express an opinion on the financial report. I am responsible for the direction, supervision and performance of the consolidated entity audit. I remain solely responsible for my audit opinion.

I communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that I identify during my audit.

From the matters communicated with those charged with governance, I determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters.

I describe these matters in my auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, I determine that a matter should not be communicated in my report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Australian National Audit Office

Grant Hehir
Auditor-General

Canberra
16 August 2017