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HomeMy WebLinkAboutAudit Agenda - 2019-12-16Pursuant to Council’s Procedural By-law, delegations are permitted to address the Committee for a maximum of 5 minutes. 1 - 1 1 - 2 1 - 3 1 - 4 9 201 , 2019 for , 2019 November 18 16 year ending December 31, The Corporation of the City of Kitchener Audit Planning Reportfor the Prepared on the Audit Committee meeting Decemberkpmg.ca/audit 1 - 5 21 828884 -- 747747 -- @kpmg.ca The contacts at KPMG in connection with this report are: Thomas MennillLead Audit Engagement PartnerTel: 519tmennillCourtney ChealAudit Senior ManagerTel: 519ccheal@kpmg.ca 134 111213141517 E AND AUDIT TRENDS MILESTONES TOMORROW & THE FUTUR AUDIT SCOPE Table of contents EXECUTIVE SUMMARYGROUP AUDIT RISKSMATERIALITYTHE AUDIT OF TODAY, KEY DELIVERABLES ANDPROPOSED FEESCURRENT DEVELOPMENTSAPPENDICES 1 - 6 . We have determined group materiality to be (excluding capital funding) nue e budgeted rev and deferred revenue which are consolidated into the Corporation City of Kitchener financial statements. We plan to other entities that are listed on page 3. f components 6 focused. In planning our audit we have taken into account key areas of focus for financial reporting. These include: - 10 4- . Group audit scope Audit materiality Audit and business risks employment benefits 00,000 Tangible capital assetsObligatory reserve fund revenue Post- Executive summary Our audit consists of perform audits on these entities.KPMG also performs audits oOur audit is riskSee pages Materiality has been determined based on$7,0See page 11 1 - 7 ave no not been prepared . and relevant audit trends City . $149,600 is and special reports for relevant accounting changes relevant to the 5 and 16 1 14. Current developments and Audit Trends Proposal Fess Independence and Quality Control Executive summary We are independent and have extensive quality control and conflict checking processes in place. Proposed fees for the annual group audit See page Please refer to pages _____________________________________________________________________________________________________________This Audit Planning Report should not be used for any other purpose or by anyone other than the Audit Committee. KPMG shall hresponsibility or liability for loss or damages or claims, if any, to or by any third party as this Audit Planning Report hasfor, and is not intended for, and should not be used by, any third party or for any other purpose. 1 - 8 Scoping AuditAudit AuditAuditAuditAuditAudit AuditAuditSpecial reportAudit Kitchener Audit Scope Profit Property Management Inc. - which KPMG performs an audit are as follows: for Entities Consolidated entities (components of the Group Audit for the City) Corporation of the City of City of Kitchener Gasworks EnterpriseKitchener Public LibraryThe Centre in the Square Inc.Kitchener Downtown Improvement AreaBelmont Improvement Area Additional Audits performed by KPMG Kitchener Housing Inc.Kitchener NonWaterloo Region Municipalities Insurance PoolHealth reconciliation report City of Kitchener Trust Funds Group Entities 1 - 9 ity or significant? Why is it The risk of fraud from revenue recognition has been rebutted off would be utilized to perpetrate fraud. profit enterprises - - risks presumed fraud risk is ordinarily associated with for The The majority of revenue is calculated based on MPAC data, approved utility rates and user fees, and is not subject to complexjudgement at the reporting level; KPMG does not believe that the use of inappropriate cut Fraud risk from revenue recognition. Professional requirementsOur audit approach — Audit This is a presumed fraud risk.However, the audit team has rebutted this presumption due to the following reasons:—— 1 - 10 specific s this risk. Why is it significant? This is a presumed fraud risk. We have not identified anyadditional risks of management override relating to this audit. risks Fraud risk from management override of controls. Professional requirementsOur audit approach Audit As the risk is not rebuttable, our audit methodology incorporates the required procedures in professional standards to addresThese procedures include testing of journal entries and other adjustments, performing a retrospective review of estimates and evaluating the business rationale of significant unusual transactions. 1 - 11 and Estimates and judgements used by managementComplexity of the accounting guidance Why are we focusing here? ——. in our audit of the accounts and disclosures. benefits Communicate with management’s actuarial specialistsAssess the reasonableness of assumptions used, Test the appropriateness of the underlying data, including employee populationsWe will also use the work of Mondelis Actuarial employment - Post Other areas of focusOur audit approach Audit risks ———— 1 - 12 Significance of the account balancesRisk of error in inappropriately recognizing costs as either capital or operating Why are we focusing here? ——. accuracy maintenance or other similar accounts to ensure completeness of capital additions and Discuss capitalization policies and their application with managementTest a sample of capital additions to ensure existence and Test items recorded as repairs Tangible Capital Assets Other areas of focusOur audit approach Audit risks ——— 1 - 13 recognized from the Development Charge Reserve Revenue Fund is subject to judgement as capital projects must be growth related in nature Why are we focusing here? — being recognized as revenue by ensuring the projects which the development charges risks Test controls around the recording of revenues/cash receipts;Perform substantive testing over amounts are allocated to are appropriate and the related expenditure has incurred; andPerform substantive testing over the collections of development charges going into the deferred revenue account Obligatory Reserve Fund Revenue and Deferred Revenue Other areas of focusOur audit approach —— Audit — 1 - 14 Why are we focusing here? Significant accountSignificant account . nalytical procedures recalculating tax revenue using approved tax rates and related MPAC assessments. and related income Confirm details with investment managersPerform a InvestmentsTaxation Revenue Other areas of focusOur audit approach Audit risks —_____________________________________________________________________________________________________________— 1 - 15 r transactions nsure transfers were authorized and all nt . E Why are we focusing here? Significant account with significant Significant account with significant transactionsSignificant accou procedures comparing current year’s expenses on a disaggregated basis to the current year budget and the eness, existence, and accuracy of yearend accruals, most notably those that contain areas of estimate o ia and any stipulations were met. nalytical procedures comparing current year’s revenues on a disaggregated basis to the current year budget and the ubstantive procedures to test the existence and accuracy of expenses analytical the complet Perform aprior year, adjusting for known changes in assumptionsPerform prior year, adjusting for known changes in assumptionsPerform sTestjudgmentReview agreements to ensure proper revenue recognition criteria was followedeligibility criterPerform test of details on significant transfers User Fees and Service Charge RevenueExpensesGovernment Transfers Other areas of focusOur audit approach ————— Audit risks _____________________________________________________________________________________________________________— 1 - 16 ,000 million,000 million % 0 5 3 7.04051,000 $ Group amount$$1.73Reclass threshold: $ Prior year Corrected audit misstatementsUncorrected audit misstatements We will report to the Audit Committee: l of materiality. the level at which we for the year. revenues Prior year materiality was $6.0 million budgeted Comments Determined to plan and perform the audit and to evaluate the effects of identified misstatements on the audit and of any uncorrected misstatements on the financial statements. Based on Prior year % of the benchmark was 1.51%Threshold used to accumulate misstatements identified during the audit. audit misstatement posting threshold was $300,000. Reclass threshold in prior year was $900,000 is used to scope the audit, identify risks of material misstatements and evaluate Materiality determination MaterialityBenchmark% of BenchmarkAudit Misstatement Posting Threshold (AMPT) Materiality think misstatements will reasonably influence users of the financial statements. It considers both quantitative and qualitative factors.To respond to aggregation risk, we design our procedures to detect misstatements at a lower leve Materiality 1 - 17 ata used Strong business acumen & advanced technology skills Enhanced focus on the risks within the business Consistent results, early issueidentification People time reporting you need in - Risk Assessment Connectivity Clara KPMG Analytics Advanced Capabilities Analysis D&A Ledger stop shop through which we plan, execute and manage the audit, providing you with - Harness the power of digital analytics for deeper insights and increased quality Broader, deeper views of your data, and richer, more informed perspectives on risks Increasing automation in routine areas obtaining a more thorough understanding of the business processes and underlying flow of d development of a tailored audit approach. to audit time access to the process at every step, including exchange of information and access to the real - Benefit KCCC is our secure audit platform and a onerealone central location.Our account analysis tool provides meaningful general ledger data insights during the planning phase of the audit that can beto assist the engagement team intransactions through utilization of Account Analysis, Visual Ledger and Journal Entry Analysis functional features. Our tool enables a more precise risk assessment anOur data extraction tools assist with risk assessment procedures and perform automated audit procedures in key cycles using dextracted directly from your ERP system. KPMG Clara Client CollaborationAccount Analysis ToolData Extraction & Analytics Tools Technology we use todayTool audit of today, tomorrow & the future As part of KPMG’s technology leadership, our audit practice has developed technologies and alliances to continuously enhance our capabilities and deliver an exceptional audit experience.Technology empowers us with the ability to perform deep analysis over your financial information, focusing our effort and interactions on the areas of greatest risk and minimizing disruption to your business. The 1 - 18 and presentation to the June Audit Committee 2019 audit report /April end - fieldwork Year March and presentation to December the Audit Committee Interim fieldwork 2019 audit end - October deliverables and milestones Planning year Key 1 - 19 ) $152,400 Actual Prior year( $149,600 Current period(budget) beyond those contemplated in our planning processes City fees procedures as described above. In determining the fees for our services, we have considered the nature, extent and timing of our planned audit Our fee analysis has been reviewed with and agreed upon by management. that could impact our fee Matters anges in the timing of our work Significant changes in the nature or size of the operations of the Changes in professional standards or requirements arising as a result of changes in professional standards or the interpretation thereofCh Our fees are estimated as follows: Audit of the financial statements The proposed fees outlined above are based on the assumptions described in the engagement letter.The critical assumptions, and factors that cause a change in our fees, include: Proposed 1 - 20 k r the . The r of 2019, PSAAB ent out an tangible capital assets. ’s December 31, 2022 yearend). City : City employment Benefits, Compensated Absences and Termination Benefits. Since the - ago, new types of pension plans have been introduced and there have been changes in the related will have to identify if they have any asset retirement obligations City employer defined benefit plans and vested sick leave benefits. Other improvements to existing guidance will also be - tion revises and replaces PS 3040, Portfolio Investments. It describes how to account for and report portfolio investments. Summary and implications Identified as the top priority in PSAB’s 2014 Project Priority Survey, the Board has approved a project to review Section PS 3250, Retirement Benefits, and Section PS 3255, Postissuance of these Sections decadesaccounting concepts.This project will involve looking at issues such as deferral of experience gains and losses, discount rates, how to account for shared risplans, multiconsidered.A new, comprehensive Handbook Section on employment benefits will replace the two existing Sections. PSAB have sinvitation to comment. In 2019 they will deliberate comments received on three invitations to comment. This standard describes how to account for and report asset retirement obligations associated with This standard is effective for fiscal periods beginning on or after April 1, 2021 (the Implications: The In recent years, governments across Canada are increasingly using various forms of public private partnership arrangements foprovision of assets and delivery of services.This project is expected to develop in two stages. The first stage will involve contemplating specific issues, including project scope, recognition and measurement of a public private partnership and disclosure requirements. Other issues will also be consideredsecond stage will involve determining how to account for public private partnerships.The objective is to develop a public sector accounting standard specific to public private partnerships. In the first quarteis expecting to release an Exposure DraftThis sec developments and audit trends Partnerships Standard PS 3250, Employee BenefitsPS 3280, Asset Retirement ObligationsPublic Private PS 3041, Portfolio investments Current The following is a summary of the current developments that are relevant to the 1 - 21 e ing e on the 31, 2020 tive risk . Earlier yearend) 3 Links Link to reportLink to reportLink to report revenue, government transfers f indicate the following is specific — measurement gains and losses. e- ’s December 31, 202 City 2 (the statement of r – both from an audit and industry perspective — series that includes the perspective of subject matter for fiscal periods beginning on or after April 1, 2019 (the City’s December is r fiscal years beginning on or after April 1, 202 fo effect cting business and what audit committees should be thinking about to prepare for Currently the Public Sector Accounting Handbook has two sections that address two major sources oand tax revenue. This new standard addresses the recognition, measurement and presentation of revenues that are common in thpublic sector other than government transfers and tax revenue. This standard will be in adoption is permitted. A standard has been issued, establishing a standard on accounting for and reporting all types of financial instruments includderivatives. The effective date of this standard yearend).Implications: This standard will require the City to identify any contracts that have embedded derivatives and recognize thesconsolidated statement of financial position at fair value. Portfolio investments in equity instruments are required to be recorded at fair value. Changes in fair value will be reported in a new financial statement This standard sets out a number of disclosures in the financial statements designed to give the user an understanding of the significance of financial instruments to the City. These disclosures include classes of financial instruments and qualitative and quantitadisclosure s describing the nature and extent of risk by type. The risks to be considered include credit, currency, interest rate, liquidity, and market risk.Overview Accelerate is a KPMG audit trends report and video leaders from across KPMG in Canada on seven key issues impacting organizations today that are disrupting the audit committee mandate.Blockchain technology is a focused disruptor of the very foundations of external and internal audit: financial recordkeeping and reporting. This Audit Point of View article offers insight on how blockchain technology is impacertain risks.Learn about KPMG's ongoing commitment to continuous audit quality improvement. We are investing in new innovative technologies and building strategic alliances with leading technology companies that will have a transformative impact on the auditing process and profession. How do we seek to make an impact on society through the work that we do? Report lockchain shift will be PS 3400, Revenue Financial InstrumentsOur discussions with you, our audit opinion and what KPMG is seeing in the marketplaceinformation that will be of particular interest to you. We would, of course, be happy to further discuss this information with you at your convenience.Thought Leadership AccelerateThe Bseismic2018 Audit Quality and Transparency 1 - 22 management Appendix 1: Audit quality and risk Appendix 2: KPMG’s audit approach and methodologyAppendix 3: Lean in Audit™Appendix 4: Required Communications Appendices 1 - 23 r Audit s are time support - st recent teness of key elements of We have policies and procedures for deciding whether to accept or continue a client relationship or to perform a specific engagement for that client. Existing audit relationshipreviewed annually and evaluated to identify instances where we should discontinue our professional association with the client.Other controls include:Before the firm issues its audit report, Engagement Quality ControlReviewer reviews the appropriapublicly listed client auditsTechnical department and specialist resources provide realto audit teams in the field clients / Personnel management engagements Acceptance & continuance of for more information including access to our mo KPMG and risk standards page performance Engagement Audit quality and objectivity management Independence, integrity, ethics Other risk monitoring Independent management quality controls Audit Quality Resources . years. four Audit quality and risk management ith integrity and objectivity and that work performed by 1: Assignment based on skills and experiencePerformance evaluationDevelopment and trainingAppropriate supervision and coaching KPMG maintains a system of quality control designed to reflect our drive and determination to deliver independent, unbiased advice and opinions, and also meet the requirements of Canadian professional standards. Quality control is fundamental to our business and is the responsibility of every partner and employee. The following diagram summarises the six key elements of ouquality control systems. Visit our Quality and Transparency Report We conduct regular reviews of engagements and partners. Review teams are independent and the work of every audit partner is reviewed at least once every We have policies and guidance to ensure engagement personnel meets applicable professional standards, regulatory requirements and the firm’s standards of quality. We do not offer services that would impair our independence.All KPMG partners and staff are required to act wcomply with applicable laws, regulations and professional standards at all times.The processes we employ to help retain and develop people include: Appendix 1 - 24 risk attributes - ndividual transactions Deep industry insights Bringing intelligence and clarity to complex issues, regulations and standards Analysis of complete populations Powerful analysis to quickly screen, sort and filter 100% of your journal entries based on high Reporting Interactive reporting of unusual patterns and trends with the ability to drill down to i 2: KPMG’s audit approach and methodology assessment This year we will expand our use of technology in our audit through our new smart audit platform, KPMG Clara. time access to information, insights - driven risk - dedicated KPMG Audit home page gives helping focus on higher risk transactions Appendix Collaboration in the audit Ayou realand alerts from your engagement team Issue identification Continuous updates on audit progress, risks and findings before issues become events Data Automated identification of transactions with unexpected or unusual account combinations –and outliers 1 - 25 and conduct walkthroughs of selected financial end transparency and understanding of process and - to - Lean trainingInteractive workshopsInsight reporting How it works Lean in Audit employs three key Lean techniques:Provide basic Lean training and equip our teams with a new Lean mindset to improve quality, value and productivity.Perform interactive workshops to processes providing endcontrol quality and effectiveness.Quick and pragmatic insight report including immediate quick win actions prioritized opportunities to realize benefit. on tools, such - us to provide actionable quality allowing – mance. 3: Lean in Audit™ mprovement areas, while management has the opportunity An innovative approach leading to enhanced value and quality oughs and flowcharts of actual financial processes. Appendix Our innovative audit approach, Lean in Audit, further improves audit value and productivity to help deliver real insight to you. Lean in Audit is process oriented, directly engaging organizational stakeholders and employing handsas walkthrBy embedding Lean techniques into our core audit delivery process, our teams are able to enhance their understanding of the business processes and control environment within your organization and productivity improvement observations.Any insights gathered through the course of the audit will be available to both engagement teams and management. For example, we may identify control gaps and potential process ito apply such insights to streamline processes, inform business decisions, improve compliance, lower costs, increase productivity, strengthen customer service and satisfaction and drive overall perfor 1 - 26 certain representations at the completion of the Management representation letterAudit findings report completion of our audit, we will provide our audit findings to the Audit Committee. We will obtain from management annual audit. In accordance with professional standards, copies of the representation letter will be provided to the Audit Committee.At the . completion of our audit. These include: : Required communications In accordance with professional standards, there are a number of communications that are required during the course of and upon Engagement letterAudit planning reportRequired inquiries The objectives of the audit, our responsibilities in carrying out our audit, as well as management’s responsibilities, are set out in the engagement letter and any subsequent amendment letters as provided by managementThis report.Professional standards require that during the planning of our audit we obtain your views on risk of fraud and other matters. We make similar inquiries of management as part of our planning process; responses to these will assist us in planning our overall audit strategy and audit approach accordingly. Appendix 4 1 - 27 f Ontario, is the Canadian International Cooperative (“KPMG International”). KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with kpmg.ca/audit KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws omember firm of KPMG KPMG member firms around the world have 174,000 professionals, in 155 countries.The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.© 2019KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 - 28 to protect the City’s assets and interests. Assurance services Consulting services 2 - 1 Assurance Services: Consulting Services: 2 - 2 2 - 3 2 - 4 2 - 5 2 - 6 2 - 7 2 - 8 No recommendation required. The following information is being provided as an update and assurance on internal audit matters, in accordance with the Audit Committee Terms of Reference. 3 - 1 Date of original audit: August 19, 2016 Completed: July 29, 2019 3 - 2 Date of original audit: September 28, 2015 (Report #1) and June 15, 2017 (Report #2) Completed: September 11, 2019 3 - 3 3 - 4 3 - 5 Completed – November 3, 2019 3 - 6 (Note that positive numbers represent write-downs and negative numbers represent write-ups.) 3 - 7 (Note that positive numbers represent write-downs and negative numbers represent write-ups.) 3 - 8 012 - 19 - CAO 4TH QUARTER AUDIT STATUS REPORT 3 - 9 y a Call P - Summary nventory I Accounting status updateCommunity Centres status updatePhysical Development Services ReviewOvertime and On progress: n Completed:I 3 - 10 Status Update ACCOUNTING 3 - 11 Accounting adjustments to controls assess Accounting division processes, controls, Sound controls and no evidence of fraudGreat team culture and collaborationRecommendations to streamline processes and minor Original Objective:To culture and the supporting organizational structure Findings / Recommendations:••• 3 - 12 - Number of recommendations 3914106 bank reconciliation automation, online e : various changes to SAP Status of Recommendations In progress: procurement solution, online access to pay stubs Not started Status CompleteIn progressNot startedNot required 3 - 13 Benefits up required. - te business continuity risk tion in staff time a urther follow f Changes to cheque audit process resulting in reduc100+ business processes documented to mitigSeparation of duties audit of SAP access •••NoCompliance topics will be periodically tested. 3 - 14 Status Update COMMUNITY CENTRES 3 - 15 services provided, inherent the Community Centres assess Original Objective:To risks, processes, organizational structure, resourcing and culture within our community centres. 3 - 16 rvisors s e p New & consolidated job titleNeighbourhood LiaisonsDecrease from 6 to 4 su licy – –– Organizational structureRentalsSpace usageNeighbourhood Affiliation Po Report 2•••• Recommendations Division mandateCommunicationsCultureService levelsTraining needsInternal collaboration Report 1•••••• 3 - 17 Report 2 10111 1 Report 1 3990 1 review of facility booking policy and Status of Recommendations In progress: neighbourhood affiliation policy Status CompleteIn progressNot started Not required 3 - 18 Benefits up required. - Survey drivers ff to more effectively support LoveMyHood urther follow a Mandate created to drive goals and objectivesOrganizational structure changes allowing stSupervisor trust now in top 5 Employee CultureImproved collaboration and communication ••••No f 3 - 19 Count Verification PHYSICAL INVENTORY 3 - 20 (done by staff): (done by Internal Audit): Objectives h physical inventory on hand counts are accurate c Count all inventory to ensure financial records matTo count a sample of inventory to verify that staff Physical Inventory •Count Verification • 3 - 21 Methodology floor counts sheet counts - - to to - - Top 20 total valuesTop 20 unit values20 random parts ––– SheetFloorVerified 20% of the total inventory value ••• 3 - 22 $8,720 up of - Findings ount verification c rds i.e. Internal audit counts did not match financial reco – 5 variances foundRepresent 8% of sampleResulted in a writeLow number and value of variances found during •••• 3 - 23 down - 2019$46K down Uncontrollable Stock$73K write - 2018$113K 2017$273K $46K Write Total Adjustments 0.5% of inventory purchased(industry benchmark 2.5%) up - Year Total write down Controllable Stock$27K write 3 - 24 2019 $12,065$32,324$40,532$93$17,853($4,276)($25,665)$72,927 2018$6,258$20,886$42,807$29,782$10,496($195)$3,377$113,413 downs (uncontrollable - Uncontrollable Stock orm Stores staff f Material GroupManholes & catch basinsRoad building materialsRoad maintenance supplies (includes salt)Seed, sod, fertilizerSign shopSteel, aluminum, plateAll other categoriesTotal writestock) Located outsideStaff use the inventory but don’t always in •• 3 - 25 Conclusion Inventory process is in controlAdjustments are negligible •• 3 - 26