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Home My WebLink AboutFCS-11-194 - 2011 External Audit Planning Report & KPMG report.S~r~ff Re~ c~r~ ~' I~~rt,~~nT~,~ Finance and Corporate Services ~eparfinent REPORT TO: DATE OF MEETING: SUBMITTED BY: PREPARED BY: WARD(S) INVOLVED: DATE OF REPORT: REPORT NO.: SUBJECT: RECOMMENDATION: Audit Committee November 14, 2011 November 9, 2011 FCS-11-194 2011 EXTERNAL AUDIT PLANNING REPORT www.kitchenerca That the 2011 External Audit Planning Report prepared by KPMG, attached as Appendix 1 to report FCS-11-194 dated November 9, 2011, be approved. BACKGROUND: Item 3 (e) in the Audit Committee Terms of Reference states that one of the responsibilities of the audit committee is to "approve external audit plans". It is important to have open communication between the external auditor and the Audit Committee to ensure that both groups are kept up to date on changes in the organization and their related risks. In KPMG's proposal to serve as the External Auditor, they committed to meeting with the Audit Committee twice annually. This is the first of those meetings for the 2011 year end and a second will be held once their audit is complete to present results and offer an opportunity for questions. REPORT: KPMG will present their Audit Planning Report. Please see attached document titled "City of Kitchener Audit Planning Report for the year ending December 31, 2011 ". ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: Work falls within the Efficient and Effective Government plan foundation area of the Strategic Plan. It helps support the financial goal of long term financial stability and fiscal accountability to our taxpayers. FINANCIAL IMPLICATIONS: N/A Report FCS-11-194 1 1- 1 S~r~ff Re~ c~r~ ~' I~~rt,~~nT~,~ Finance and Corporate Services ~eparfinent w~t+w.kitthenerca COMMUNITY ENGAGEMENT: N/A ACKNOWLEDGED BY: Dan Chapman, DCAO, Finance and Corporate Services Report FCS-11-194 2 1- 2 1- 3 Dear Audit Committee members, Audit planning is the cornerstone of an effective, efficient and high quality audit. In developing our audit plan, we have worked with management to obtain a common understanding of the issues and related financial reporting risks facing the City of Kitchener and have designed our audit to focus on those areas of risk. As members of the Audit Committee, you have a significant role to play in the oversight of our audit and we welcome any and all observations you may have regarding the decisions reflected in this audit plan. At KPMG, we are committed to audit quality and outstanding client service. Audit quality is integral to our business and is engrained in our training, our processes and our systems and controls. We believe this audit plan embodies our commitment to audit quality. We would like to take this opportunity to remind you that KPMG's Audit Committee Institute is committed to providing information, resources and knowledge-sharing opportunities to help audit committees and their boards of directors strengthen the integrity of their financial reporting process and the quality of their corporate governance practices. For more information, and to register to receive updates, publications and invitations to Audit Committee Institute events, please visit www.kpmg.ca/auditcommittee. We sincerely hope this Audit Planning Report is of assistance to you, and we look forward to discussing it in detail and answering any questions you may have at the upcoming audit committee meeting. Yours sincerely, Matthew Betik, CA Tom Mennill, 1 Partner Partner For KPMG's audit committee resources, please visit kgmq.ca/auditcommittee Contents Audit plan .............................................................................................................................................. 1 What has changed from last year ................................................................................................... 1 Accounting standards ..................................................................................................................... 1 Auditing standards .......................................................................................................................... 1 Annual inquiries related to risks of fraud :...................................................................................... 1 Scope of the audit ............................................................................................................................ 1 Our responsibilities ......................................................................................................................... 2 Significant financial reporting risks ................................................................................................. 3 Other Areas of Audit Focus ............................................................................................................. 5 Timing of the audit ........................................................................................................................... 5 Appendices ............................................................................................................................................ 6 Current developments ......................................................................................................................... 7 Government Transfers .................................................................................................................... 7 Tax Revenue ................................................................................................................................... 7 Financial Instruments ...................................................................................................................... 7 Foreign Currency Translation .......................................................................................................... 7 Liability for Remediation and Mitigation of Contaminated Sites .................................................... 7 Auditor Responsibilities ....................................................................................................................... 8 1- 5 -- ''. i f, ~$~ , , ~~~~ _ - Audit plan We have prepared this audit plan to inform you of the planned scope and timing of the audit for the purpose' of carrying out and discharging your responsibilities and exercising oversight over our audit of the consolidated financial statements. What has changed from last year We have set out below a summary of changes that have been taken into consideration in planning the audit for the current period: • No current year accounting standard changes. • There are new accounting standards that will affect your fiscal year ending December 31, 2013. • Refer to the appendices for further discussion on these future accounting standards. At~~ ~7;~ ti °,. _~~ • No significant auditing standard changes this year. Annual inquiries related to risks of fraud: Canadian Auditing Standards require that we ask you the following questions in connection with your oversight of management's process for identifying and responding to the risks of fraud: • How do you provide effective oversight of management's process for identifying and responding to fraud risks, including programs and controls to prevent, detect and deter fraud? • Are you aware of any instances of actual, suspected or alleged fraud, including m isconduct or unethical behaviour related to financial reporting or misappropriation of assets? If so, how have the allegations been addressed? Scope of the audit The purpose of an audit is to enhance the degree of confidence of the users of the financial statements through the expression of an opinion on whether the financial statements fairly present, in all material respects, the financial position, results of operations, changes in accumulated surplus changes in net financial assets, and cash flows of the Corporation of the City of Kitchener in accordance with Canadian Public Sector Accounting Standards. KPMG shall have no responsibility or liability for loss or damages or claims, if any, to or by any third party as this document has not been prepared for, and is not intended for, and should not be used by, any third party or for any other purpose. Audit planning report to the audit committee Page ~ 1 1- 6 In planning our audit, we have considered the level of audit work required to support our opinion, including each of the following matters: lea o ... ~ ~ . • Our responsibilities in carrying out our audit, as well as management's responsibilities, are set out in the appendices to this report. • We will also prepare separate audit reports for the following entities: o Trust Funds o Gasworks Enterprise o Kitchener Public Library o The Centre in the Square Inc. o Kitchener Downtown Improvement Area Board of Management o Belmont Improvement Area • We determine materiality in order 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. • For the current period, materiality of $3.3M has been determined. • We will reassess materiality at period-end to confirm whether it remains appropriate for evaluating the effects of uncorrected misstatements on the financial statements. • We will communicate uncorrected misstatements to you, other than those that are clearly trivial. • Should uncorrected misstatements remain, in accordance with professional standards, we will: o request that all uncorrected misstatements be corrected. o communicate the effect that uncorrected misstatements, individually or in aggregate, may have on our audit opinion. Audit planning report to the Audit Committee Page ~ 2 1- 7 Significant financial reporting risk' As part of our audit planning, we identify significant financial reporting risks that, by their nature, require special audit consideration. By focusing on these risks, we are able to target our procedures and deliver a high quality audit that is both efficient and effective. The significant financial reporting risks identified during our audit planning are listed below: Tangible Capital Assets Risk of material misstatement Given the large volume of capital activity and the key decision points regarding the identification of capital vs. operating work orders, there exists risks of misstatement due to inappropriate capitalization of maintenance activities or vice versa. This can impact both the net book value of tangible capital assets, depreciation expense in the current and future periods and operations and maintenance expense. Summary of planned audit approach Audit approach • identify and evaluate the operative effectiveness of internal controls over capitalization of costs • review and evaluate the process for allocating overhead to constructed assets • calculations of depreciation expense There is a risk of misstatement due to the estimates and judgements used by management and the complexity of the accounting guidance. Summary of planned audit approach Audit approach • communicate with management's actuarial specialists • assess the reasonableness of assumptions used • test the appropriateness of the underlying data, including employee populations Use of ~r~anagement's expert We will communicate with and use the work of Morneau Shepell in our audit of the accounts and disclosures. Audit planning report to the Audit Committee Page ~ 3 1- V Risk of material misstatement There is a risk of misstatement due to the nature of government grants (being capital or operating) and whether or not the City has met the requirements of the grants for recognition as revenue in the current period. For developer contributions, there is risk of recording the revenue in the incorrect period as these revenues are recognized as the related expenditures are incurred and not when cash is received. This can impact current period's revenues as well as deferred revenue and/or receivables. Audit approach • confirm significant government grants with granting agencies • review relevant contribution agreements • assess the revenue recognition policies and application of those policies • review transactions in the develooment contributions reserve funds Audit planning report to the Audit Committee Page ~ 4 1- 9 Other Areas of Audit Focus For other significant accounts and disclosures, the following summaries our planned audit approach: Significant account/disclosure Planned approach Investments and related income Substantive test of details. Substantive analytical procedures recalculating tax revenue Taxation revenue using approved tax rates and assessment. Substantive analytical procedures comparing current year's User Charge Revenue revenues on a disaggregated basis to the current year budget and prior year, adjusting for known changes in assumptions. Expenses -current Evaluate the design and implementation of controls over payroll and non-payroll expenditures. Test the operating effectiveness of the controls. Substantive analytical procedures comparing current year's expenses on a disaggregated basis to the current year budget and prior year, adjusting for known changes in assumptions. Substantive approach refers to the application of substantive analytical procedures or test of details procedures. Substantive analytical procedures consist of the evaluation of financial information through a study of plausible relationships among both financial and non-financial data. They also encompass the investigation of identified fluctuations and relationships that are seemingly inconsistent with other relevant information or deviate significantly from predicted amounts. Test of details are the application of one or more of the following techniques to individual items or transactions: inspection of records or documents; inspection of tangible assets; observations; confirmations; recalculation; re-performance. Timing of the audit We have discussed the key audit deliverables with management and the expected dates indicated below have been agreed upon: Key deliverables and expected dates Deliverables Conduct interim audit field work Present the Audit Planning Report to the Audit Committee Conduct year-end audit field work Present the Audit Findings Report to the Audit Committee Audit planning report to the Audit Committee Expected date(s) Week of November 7. 2011 November 14, 2011 Starting the week of April 9, 2012 June 25, 2012 Page ~5 1- 10 '.~ Appendices Current developments Auditor Responsibilities Audit planning report to the Audit Committee Page ~ 6 1- 11 Current developments G~,~,i='~.~' • Sets outs recognition principles for government transfers. • May allow deferral of transfers received if certain conditions exist that create a liability. • This standard is effective for fiscal years beginning on or after April 1, 2012. The standard may be applied retroactively or prospectively. Tax Revenue • PS 3510 -Tax Revenue was approved by PSAB in November 2009. • This standard sets out revenue recognition principles for tax revenue. • Provides principles for recognition of taxes collected on behalf of others. • This standard is effective for fiscal years beginning on or after April 1, 2012. Fin=~~~~_ • Sets out principles to be used in establishing an accounting standard with respect to financial instruments and derivative instruments. • Fair value measurement proposed for derivatives and portfolio investments that are equity instruments quoted in an active market. Fair value can be applied to non-equity instruments through an accounting policy choice. • This standard is effective for fiscal years beginning on or after April 1, 2015. Fir . • PSAB has approved amendments to Section PS 2600 to be consistent with the new standard for Financial Instruments. • This standard requires all monetary items and those non-monetary items included in the fair value category to be translated using the exchange rate on the financial statement date. Hedge accounting and the scope exclusion for foreign exchange reserves in PS 2600 have been removed. • The amended standard is effective for fiscal years beginning on or after April 1, 2015 and must be adopted when the new Financial Instruments standard is adopted. Lit~~ ~' ,,^r ~~ • PS 3260 -Liability for Contarninated Sites was approved by PSAB in March 2010. • A liability for remediation of contaminated sites should be recognized when an environmental standard exists, the contamination exceeds the environmental standard, the government is directly responsible or accepts responsibility, it is expected future economic benefits will be given up and a reasonable estimate of the amount can be made. • This standard is effective for fiscal years beginning on or after April 1, 2014. Audit planning report to the Audit Committee Page ~ 7 1- 12 Auditor Responsibilities Our function as auditors of the Entity is: • to express an opinion on whether the Entity's financial statements, prepared by management with the oversight of those charged with governance, are, in all material respects, in accordance with the financial reporting framework referred to above and We will conduct the audit of the Entity's financial statements in accordance with Canadian generally accepted auditing standards and relevant ethical requirements, including those pertaining to independence (hereinafter referred to as applicable "professional standards"). We will plan and perform the audit to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Accordingly, we will, among other things: • identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the Entity and its environment, including the Entity's internal control. In making those risk assessments, we consider internal control relevant to the Entity's preparation of the financial statements 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 Entity's internal control. • obtain sufficient appropriate audit evidence about whether material m isstatements exist, through designing and implementing appropriate responses to the assessed risks. • form an opinion on the Entity's financial statements based on conclusions drawn from the audit evidence obtained. • communicate matters required by professional standards, to the extent that such matters come to our attention, to the appropriate level of management, those charged with governance and/or Council. 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