A THEATRE has generated "significant" costs since a council took over its running, an auditor has found.

A report by the District Auditor into Durham City Council highlighted the costs of running the year-old Gala Theatre.

The council originally appointed The Entertainment Team to run the £14m venue, but assumed control after the firm went into liquidation with £700,000 debts.

Earlier this month, Colin Shearsmith, the council's chief executive, said that while a contingency fund would be used to support the theatre in the short-term, council taxpayers would ultimately have to fund it.

The auditor's letter states: "The Millennium project - of which the Gala is a key part - remains a key financial issue, with unbudgeted capital costs of £1m, which have been funded from capital receipts in 2001/2002."

The auditor adds that there are "significant additional revenue costs running the Gala Theatre".

"The council is planning to significantly reduce revenue balances as a result of using reserves to support revenue budgets in 2002/2003, mainly to support the Gala Theatre," his letter states.

"It will need to closely monitor the impact of this spending on its ongoing financial health."

The district auditor also finds that the council lacks a formal approach to carrying out and monitoring the results of best value reviews, and says that this should be remedied.

A council spokeswoman said: "We do appreciate the comments of the audit letter.

"Like all theatres in the country, the Gala will need a subsidy in the future, but it's a magnificent asset."

A full copy of the annual audit letter is available for inspection at the chief executive's offices at 4, Saddler Street, Durham.