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HomeMy WebLinkAboutFCS-13-187 - 2013 External Audit PlanStaff Report Finance and Corporate Services Department REPORT TO: Audit Committee DATE OF MEETING: December 9, 2013 wvmkitrhener ra SUBMITTED BY: Dan Chapman, Deputy CAO, Finance and Corporate Services and City Treasurer (519) 741 -2200 ext 7347 PREPARED BY: Sheri Brisbane, Supervisor of Financial Reporting (519) 741 -2200 ext 7349 WARD(S) INVOLVED: All DATE OF REPORT: November 21, 2013 REPORT NO.: FCS -13 -187 SUBJECT: 2013 External Audit Planning Report RECOMMENDATION: That the 2013 External Audit Planning Report prepared by KPMG, attached as Appendix 1 to report FCS -13 -187 dated December 9, 2013, 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, changes in the accounting /regulatory environment 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 2013 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, 2013 ". 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: None 1- 1 COMMUNITY ENGAGEMENT: This report and its attachment will provide the public with information to assist them in understanding the scope of the external audit to take place in the spring of 2014. The City's Annual Financial Statements as at December 31, 2013 and for the year then ended will be the subject of this audit. The 2013 audited financial statements, once completed and approved, will be posted on the City website and notice will be provided to all residents through Your Kitchener (a City publication delivered in the Kitchener Citizen) in accordance with Section 295 (1) of the Municipal Act, 2001. ATTACHMENT: 2013 External Audit Planning Report prepared by KPMG ACKNOWLEDGED BY: Dan Chapman, DCAO Finance and Corporate Services 1 -2 cutting thnnmh cornplexfty Emoll City of Kitchener Audit PlIaininfing Ilellport For 0--ie year ending December 31, 2013 KIP MG LLIP, Chairteired Accountants, V licensed Pubhc Accountants 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. Issues of focus during the current year In addition to staying on top of PSAB and complex regulatory requirements, and in light of the challenges of ongoing economic uncertainty and volatility, we urge you to stay focused on the top priority for audit committees: financial reporting and internal control risk. Also, consider whether the financial statements and disclosures are telling the whole story, and whether disclosures can be improved to better address inhabitant and ratepayer expectations. We would be pleased to discuss current issues affecting the role of the audit committee with you at your convenience. Audit quality Audit quality is receiving an increased level of scrutiny around the world. Audit quality is at the core of everything we do at KPMG, and we believe that it is not just about providing the right audit opinion, but also the steps we take to provide that audit opinion. One component of our efforts in this area is the development and implementation of the KPMG Audit Quality Framework to help ensure that every partner and professional concentrates on the fundamental skills and behaviours required to deliver an appropriate and independent audit opinion. We invite you to review "KPMG's Audit Quality Framework ", summarized in the appendices of this report. We believe this audit plan embodies our commitment to audit quality. Reaching out to audit committees KPMG's Audit Committee Institute (ACI) provides information, resources, and knowledge- sharing opportunities to help audit committees and directors strengthen the integrity of their financial reporting process and the quality of their corporate governance practices. The ACT's Audit Committee Roundtables are held across the country twice yearly. You are cordially invited to attend. For information on ACT's audit committee resources and roundtable registration, please visit www.kpmg.ca /auditcommittee. 1 -4 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, CPA, CA Tom Mennill, FCPA, FCA Partner Partner Auditplan ............................................................................................................... ............................... 1 Whathas changed from last year .................................................................... ............................... 1 Accountingstandards ...................................................................................... ............................... 1 Auditingstandards ........................................................................................... ............................... 1 Annual inquiries related to risks of fraud: ...................................................................................... 1 Scopeof the audit ............................................................................................. ............................... 2 Ourresponsibilities ........................................................................................... ..............................2 Materiality........................................................................................................ ............................... 3 Financial reporting risks ................................................................................... ............................... 4 OtherAreas of Audit Focus .............................................................................. ............................... 6 Timingof the audit ............................................................................................ ............................... 7 Appendices............................................................................................................. ............................... 8 1 -6 Jv i I ifs 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. • • • We have set out below a summary of changes that have been taken into consideration in planning the audit for the current period: ccouin'tihing s°taindards Govert7inem Trat skars • 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 Revetwe • 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. • There are new accounting standards that will affect future years. • Refer to the appendices for further discussion on these future accounting standards. ud'iii°tihing s°taindards No significant auditing standard changes. Annual inquiries related to risks of fraud: Professional standards require that we ask you questions in connection with your oversight of management's process for identifying and responding to the risks of fraud: What are your views about fraud risks in the entity? This Audit Planning Report should not be used for any other purpose or by anyone other than the audit committee. KPMG shall have no responsibility or liability for loss or damages or claims, if any, to or by any third party as this Audit Planning Report 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 I1 1 -7 How do you provide effective oversight of programs and controls to prevent, detect and deter fraud, including oversight over internal controls management has established to mitigate fraud risks? Are you aware of, or have you identified any instances of, actual, suspected or alleged fraud, including misconduct or unethical behaviour related to financial reporting or misappropriation of assets? If so, have the instances been appropriately addressed and how have they been addressed? 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. In planning our audit, we have considered the level of audit work required to support our opinion, including each of the following matters: '' " "eIllour °miiillliiillliiitiiie • Our responsibilities in carrying out our audit, as well as management's responsibilities, are set out in the engagement letter included in the appendices to this report. • We will also prepare separate audit reports for the following entities: • Trust Funds • Gasworks Enterprise • Kitchener Public Library • The Centre in the Square Inc. • Kitchener Downtown Improvement Area Board of Management • Belmont Improvement Area Audit planning report to the audit committee Page 12 1 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. The determination of materiality requires judgment and is based on a combination of quantitative and qualitative assessments, including the nature of account balances and financial statement disclosures. We determine performance materiality (from materiality) in order to assess risks of material misstatement and to determine the nature, timing and extent of audit procedures. We determine an audit misstatement posting threshold (from materiality) in order to accumulate misstatements identified during the audit. 0 For the current period, the following amounts have 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: request of management and of the audit committee that all uncorrected misstatements be corrected. communicate the effect that uncorrected misstatements, individually or in aggregate, may have on our audit opinion. Audit planning report to the audit committee Page 13 1 -9 ' ° "giinainciiia rqaortfing riiisll s 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 financial reporting risks identified during our audit planning are listed below: Risk of fraud Summary of response to the presumed risk of management override of controls Professional standards require certain procedures to be performed to address the presumed risk of management override of controls. We plan on performing these required procedures. • identify and evaluate the operative effectiveness of internal controls over manual journal entries • perform substantive procedures on journal entries related to financial reporting • perform a retrospective analysis of accounting estimates Audit planning report to the audit committee P a g e 14 1 -10 Risk of material misstatement prior to consideration of internal controls Risk of error: 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 management'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 P a g e 15 1 -11 Other Areas of Audit Focus For other significant accounts and disclosures, the following summarizes our planned audit approach: Significant account /disclosure Planned approach Investments and related income Substantive test of details. Substantive analytical procedures recalculating tax revenue using approved tax rates and assessment. Taxation revenue Consideration of significant tax write -offs and /or refunds as a result of property assessment adjustments 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. Supply and Delivery Revenue - Substantive analytical procedures recalculating supply and Gasworks delivery revenue based on volume used by tier, and the related price. Inventory — Gasworks Substantive analytical procedures agreeing the Gasworks recorded volume of inventory to the confirmed inventory balance reported by Union Gas 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. Audit planning report to the audit committee P a g e 1 1 -12 Timing i We have discussed the key audit deliverables with management and the expected dates indicated below have been agreed upon: Key d�liver��les,:and expectec�dat�;,,,,,,,, Deliverables Expected date(s) Conduct interim audit field work November March 31, 2014 — Conduct year -end audit field work April 25, 2014 Present the Audit Findings Report to the Audit Committee June 30, 2014 Provide audit opinions on financial statements TBD Audit planning report to the audit committee P a g e 17 1 -13 RJIAATOMEATSMO • • •- •r Audit planning report to the audit committee P a g e 18 1 -14 Audit quality, and the respective roles of the auditor and audit committee, is fundamental to the integrity of financial reporting in our capital markets. This is why audit quality is at the core of everything we do at KPMG. And we believe that it is not just about reaching the right opinion, but how we reach that opinion. To help ensure that every partner and employee concentrates on the fundamental skills and behaviours required to deliver an appropriate and independent opinion, we have developed our global Audit Quality Framework. The framework comprises seven key drivers of audit quality. °III'lllie seoein Ilkey drivers of al ud'iii°t ql uallliii°t y Commitment to continuous t` improvement Performance of Active and efficient audits Association with the right entitles Clear standards and robust audit tools Commitment to Recruitment,. development and l tea, 0�11 technical excellence and quality service I\, delivery assignment of appropriately qualified personnel,„,`"^ Audit quality is part of our culture and our Assures you that: Audit planning report to the audit committee P a g e 19 1 -15 1111 II�IIIIII�IIIIIII III I1111�111111 IIII111111 IIII�IIII IIIIIIIII�IIIIIII III III�III�IIIIIIIIII II�IIIII�IIIIIIIIII IIII III III Tone at the top Audit quality is part of our culture and our Assures you that: values and therefore non - negotiable . Our culture supports Allows the right behaviours to permeate our promise to you of across our entire organization and each of our excellent service and a engagements high quality audit — consistently Association with Ethics above all . You're receiving an the right entities Eliminates any potential independence and independent, p conflict -of- interest issues transparent, audit opinion Clear standards A solid rule book . You're receiving an and robust audit Rigorous internal policies and guidance that efficient and high g tools help ensure our work meets applicable quality audit that will professional standards, regulatory help you maintain investor confidence in requirements, and KPMG's standards of your financial quality statements. Recruitment, People who add value Provides you with: development and t assignment Helps us attract and retain the best people and • An engagement team appropriately reinforces the importance of developing their handpicked for your qualified talents business needs – a Audit planning report to the audit committee P a g e 19 1 -15 "077" personnel th relevant pecific skill sets professional and industry experience Commitment to The right tools for the right job • An audit engagement technical Promotes technical excellence and quality team whose excellence and quality service service delivery through training and qualifications evolve as delivery accreditation, developing business your business grows es and changes g understanding and industry knowledge, investment in technical support, development • An audit opinion that of specialist networks, and effective continues to meet your consultation processes needs as a participant in the capital markets Performance of We understand that how an audit is Assists you with: effective and conducted is as important as the final efficient audits result. • Assessing the effectiveness and A code of conduct, audit delivery tools, and efficiency of the audit internal policies and procedures that help ensure the work performed by engagement . Performing your governance role with personnel meets applicable professional confidence. standards, regulatory requirements, and our standards of quality Commitment to Comprehensive and effective monitoring continuous We regularly solicit feedback from the audit improvement committees of the entities we audit. Our robust internal quality review program ensures the work of each partner is reviewed every three years. Additionally, our procedures and a sample of our audits of listed entities are reviewed by the Canadian Public Accountability Board (CPAB), the independent regulator of the accountancy profession in Canada. The Public Company Accounting Oversight Board (PCAOB) in the US also conducts an annual inspection of a sample of our audits of SEC registrants. Finally, a sample of other audits and reviews is undertaken annually by the various provincial institutes in Canada. We consider the recommendations that come from these reviews and implement actions to strengthen our policies and procedures, as appropriate. Audit planning report to the audit committee P a g e 110 1 -16 The regulatory latidscape is chatigitig Uncertain economic forecasts and a changing regulatory environment define today's world; reliable financial information and high - quality audits have never been more essential. We believe that high quality audits contribute directly to market confidence and we share your objectives of credible and transparent financial reporting. Our Audit Quality Framework is particularly relevant to Audit Committees, and we see our role in being transparent to you as a key mechanism to support you in the execution of your responsibilities. Our cots ift°iiiet.rt. t. quality The independence, judgment and professional skepticism of your auditors add value to your financial statements, and we believe it is important to be transparent about the processes we follow to develop a KPMG audit report. We want you to have absolute confidence in us and in the quality of your audit. Our own professional standards dictate technical requirements for reaching and communicating an audit opinion. And we live and abide by these requirements. We invest heavily in our quality, and the Audit Quality Framework helps ensure these investments are the right ones —that they help us continuously drive and maximize our quality improvements. But we feel it is also important that we communicate to you how we view and implement audit quality. The seven key drivers outlined here, combined with the commitment of each individual in KPMG, are meant to do just that. KPMG member firms across the world use this audit quality framework to describe, focus on and enhance audit quality for the benefit of the entities we audit and in support of the efficacy of our capital markets. It is our hope that sharing our vision of what audit quality means is a significant step in building confidence in the value of our audits. Audit quality is fun 'aui °nen °talll to the way we wouiHlll< Audit planning report to the audit committee P a g e I 11 1 -17 III -i r current developiry „i e in "t s Pftr tr fyf histrut °iotrf. 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. Foreigii Sumo r y Tratislat,ioti • 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. Liability for Soi °ioSf f °fytr atid Mit,igat,ioti of S' trf° i °ihr f° S Sites PS 3260 — Liability for Contaminated 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 112 1 -18 in g a g e iiry i iin t I ett e r Audit planning report to the audit committee P a g e 113 1-19 LKY P62 Mr NQ KPMG LLP Chartered Accountants 115 King Street South 2nd Floor Waterloo ON N2J 5A3 PRIVATE & CONFIDENTIAL Mr. Dan Chapman Deputy Chief Administrative Officer The Corporation of the City of Kitchener 200 King Street West Kitchener, ON N2G 4G7 November 22, 2013 Dear Sir, Telephone (519) 747 -8800 Fax (519) 747 -8830 Internet www.kpmg.ca The purpose of this letter is to outline the terms of our audit engagement commencing for the period ending December 31, 2013 for the following entities: • The Corporation of the City of Kitchener • Kitchener Gasworks Enterprise • The Corporation of the City of Kitchener Trust Funds • The Centre in the Square Inc. • Kitchener Public Library • Belmont Improvement Area Board of Management + Kitchener Downtown Improvement Area Board of Management This letter supersedes our previous letter to the Entity. The terms of the. engagement outlined in this letter will continue in effect from period to period, unless amended or terminated in writing. The attached Terms and Conditions form an integral part of the terms of this engagement and are incorporated herein by reference (collectively the "Engagement Letter "). IINANCIAL REPORTING FRAMEWORK FOR THE FINANCIAL STATEMENTS The financial statements will be prepared and presented in accordance with Canadian public sector accounting standards (hereinafter referred to as the "Financial reporting framework "). The financial statements will include an adequate description of the financial reporting framework. MANAGEMENT'S RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS Management acknowledges and understands that they are responsible for: (a) the preparation and fair presentation of the financial statements in accordance with the financial repotting framework referred to above (b) ensuring that all transactions have been recorded and are reflected in the financial statements (c) such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Management also acknowledges and understands that they are responsible for the design, implementation and maintenance of internal control to prevent and detect fraud . KPMG Li_P is a Canadian limited Imbility partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG international Cooperative ( "KPMG International" j, a Swiss entity. KPMG Canada provides services to KPMG LLP? 1 -20 (d) providing its with access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters (e) providing us with additional information that we may request from management for the purpose of the audit (f) providing US with unrestricted access to persons within the Entity from whom we determine it necessary to obtain audit evidence (g) providing us with written representations required to be obtained Under professional standards and written representations that we determine are necessary. Management also acknowledges and Understands that professional standards require that we disclaim an audit opinion when management does not provide certain written representations required An audit does not relieve management or those charged with governance of their responsibilities. AUDITORS' RESPONSIBILITIES REGARDING THE AUDIT OF THE FINANCIAL STATEMENTS 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 • to report on the financial statements We will conduct the audit of the Entity's financial statements in accordance with Canadian generally accepted auditing standards (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 misstatements 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 the board of directors. The form (oral or in writing) and the timing will depend on the importance of the matter and the requirements under professional standards. AUDITORS' DELIVERABLES The expected Form and content of our audit report is provided in Appendix — Expected Form of Report. However, there may be circumstances in which a report may differ from its expected form and content. 1 -21 ®�'_I INCOME TAX COMPLIANCE AND ADVISORY SERVICES Tax compliance and advisory services are outside the scope of this letter. These services will be subject to the terms and conditions of a separate engagement letter.] FEES Fees for Professional Services to this letter will be charged in accordance with our fee proposal letter for audit services dated July 22, 2009. We are available to provide a wide range of services beyond those outlined above. Additional services are subject to separate terms and arrangements. We are proud to provide you with the services outlined above and we appreciate your confidence in our work. We shall be pleased to discuss this letter with you at any time. If the arrangements and terms are acceptable, please Sign the duplicate of this letter in the space provided and return it to us. Yours very truly, Thomas E. Menmll, FCPA, FCA Partner, responsible for the engagement and its performance, and for the report that is issued on behalf of KPMG LLP, and who, where required, has the appropriate authority from a professional, legal or regulatory body 519-747-8211 cc: Audit Committee * * * * * * * * * *4: The terms of the engagement set out are as agreed: Name and Title Date (dd /mm /yy) AJ J,�lrr► 1­22 MNEER IP Appendix — Expected Form of Report INDEPENDENT AUDITORS' REPORT To the Mayor and Members of Council. Inhabitants and Ratepayers of The Corporation of the City of Kitchener We have audited the accompanying consolidated financial statements of the Corporation of the City of Kitchener, which comprise the consolidated statement of financial position as at December 31, 2013, the consolidated statements of operations, change in net financial assets and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Nfanagenient's Responsibility for the consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. tl udifors ' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit, We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement, An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the consolidated 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 4 1 -23 IM P Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Corporation of the City of Kitchener as at December 31, 2013, and its consolidated results of operations and its consolidated cash flows for the year then ended in accordance with Canadian public sector accounting standards. Chartered Accountants, Licensed Public Accountants DATE Waterloo, Canada 1 -24 .,t, ° � � P TERMS AND CONDITIONS FOR ASSURANCE ENGAGEMENTS The Terms and Conditions are an integral part of the accompanying engagement letter from KPMG that identifies the engagement to which they relate (and collectively form the "Engagement Letter "). The Engagement Letter supersedes all written or oral representations on this matter. 1. SEVERABILITY. If any of the provisions of this Engagement Letter are determined to be invalid or unenforceable, the remaining provisions shall remain in effect and be binding on the parties to the fullest extent permitted by law. 2. GOVERNING LAW. This Engagement Letter shall be subject to and governed by the laws of the province where KPMG's principal office performing this engagement is located (without regard to such province's rules on conflicts of law) and all disputes arising hereunder or related thereto shall be subject to the exclusive jurisdiction of the courts of such province of Canada. 3. LLP STATUS. KPMG LLP is a registered limited liability Partnership ( "LLP ") established under the laws of the Province of Ontario and, where applicable, has been registered extra - provincially under provincial legislation. KPMG is a partnership, but its partners have a degree of limited liability. A partner is not personally liable for any debts, obligations or liabilities of the LLP that arise from a negligent act or omission by another partner or by any other person under, that other partner's direct supervision or control. The legislation relating to limited liability partnerships does not, however, reduce or limit the liability of the firm. The firm's insurance exceeds the mandatory professional indemnity insurance requirements established by the relevant professional bodies. Subject to the other provisions hereof, all partners of the LLP remain personally liable for their own actions and/or actions of those they directly supervise or control. 4. DOCUMENTS AND INFORMATION. Management's cooperation in providing us with documents and related information and agreed -upon assistance on a timely basis is an important factor in being able to issue our report. KPMG shall be entitled to share all information provided by the Entity with all other member firms of KPMG International Cooperative ( "KPMG International ") performing services hereunder. All work papers, flies and other internal materials created or produced by KPMG during the engagement and all copyright and intellectual property rights in our work papers are the property of KPMG. 5. USE OF MEMBER FIRMS AND THIRD PARTY SERVICE PROVIDERS. Personal and/or confidential information (e.g. entries into KPMG's time and billing system and into KPMG's conflicts database) collected by KPMG during the course of this engagement may be used, processed and stored outside of Canada by KPMG, KPMG International member firms performing services hereunder or third party service providers. KPMG represents to the Entity that each KPMG International member firm and third party service provider providing services hereunder has agreed or shall agree to conditions of confidentiality with respect to the Entity's information. Further, KPMG is responsible to the Entity for causing third party service providers to comply with such conditions of confidentiality, and KPMG shall be responsible to the Entity for their failure to comply and failure of each KPMG International member firm providing services hereunder to comply with its obligations of confidentiality owed to KPMG. Any services performed by third party service providers shall be performed in accordance with the terms of this Engagement Letter, but KPMG shall remain responsible to the Entity for the performance of such services and services performed by each KPMG International member firm providing services hereunder. Such personal and/or confidential information may be subject to disclosure in accordance with the laws applicable in the jurisdiction in which the information is processed or stored, which laws may not provide the same level of protection for such information as will Canadian laws. 6. PERSONAL INFORMATION CONSENTS AND NOTICES. Any collection, use or disclosure of personal information is subject to KPMG's Privacy Policy available at www.kpmq.ca. KPMG may be required to collect, use and disclose personal information about individuals during the course of this engagement. The Entity represents and warrants that: (t) it will obtain any consents reasonably required to allow KPMG to collect, use and disclose personal TERMS AND CONDITIONS FOR ASSURANCE ENGAGEMENTS AUGUST 2013 information in the course of the engagement, and (it) it has provided notice of the potential processing of such personal information outside of Canada (as described in paragraph 5 above). KPMG's Privacy Officer noted in KPMG's Privacy Policy is able to answer any individual's questions about the collection of personal information required for KPMG to deliver services hereunder, The Entity consents to KPMG sending to the Entity, its officers, directors and employees, as applicable, electronic messages (including emails) relating to KPMG products and services and other matters of interest to the Entity. The Entity, its officers, directors or employees may withdraw such consent by contacting KPMG's National Office located at Bay Adelaide Centre, 333 Bay Street, Suite 4600, Toronto, Ontario M5H 2S5, Attentioif: Urnsubscribe; or infoOkpmq.ca. OFFERS OF EMPLOYMENT. In order to allow issues of independence to be addressed, management agrees that prior to extending an offer of employment to any KPMG partner, employee or contractor, the matter is communicated to the engagement partner or associate partner. 8. OFFERING DOCUMENTS. If the Entity wishes to include or incorporate by reference the financial statements and our report thereon in an offering document, we will consider consenting to the use of our report and the terms thereof at that time. Nothing in this Engagement Letter shall be construed as consent and KPMG expressly does not consent to the use of our audit report(s) in offering documents, If the Entity wishes to obtain KPMG's written consent to the use of our audit report(s) in an offering document, or wishes us to provide a comfort or advice letter, we will be required to perform procedures as required by professional standards; any agreement to perform such procedures will be documented in a separate engagement letter.. Management agrees to provide us with adequate notice of the preparation of such documents. 9. FEE AND OTHER ARRANGEMENTS. KPMG's estimated fee is based on the quality of the Entity's accounting records, the agreed -upon level of preparation and assistance from the Entity's personnel, and adherence to the agreed -upon timetable. KPMG's estimated fee also assumes that the Entity's financial statements are in accordance with the applicable financial reporting framework and that there are no significant new or changed accounting policies or issues, or financial reporting, internal control over financial reporting or other reporting issues, KPMG will inform the Entity on a timely basis if these factors are not in place. Additional time may be incurred for such matters as significant issues, significant unusual and/or complex transactions, informing management about new professional standards, and any related accounting advice. Where these matters arise and require research, consultation and work beyond that included in the estimated fee, the Entity and KPMG agree to revise the estimated fee. No significant additional work will proceed without management's concurrence, and, if applicable, without the concurrence of those charged with governance. Upon completion of these services KPMG will review with the Entity any fees and expenses incurred in excess of KPMG's estimate, following which KPMG will render the final billing. Routine administrative expenses such as long distance telephone calls, photocopies, fax charges, printing of statements and reports, postage and delivery and secretarial and report department assistance will be charged on the basis of a percentage of KPMG's professional costs. Other disbursements for items such as travel, accommodation and meals will be charged based on KPMG's actual disbursements. KPMG's invoices are due and payable upon receipt, Amounts overdue are subject to interest. In order to avoid the possible implication that unpaid fees might be viewed as creating a threat to KPMG's independence, it is important that KPMG's bills be paid promptly when rendered. If a situation arises in which it may appear that KPMG's independence is threatened because of significant unpaid bills, KPMG may be prohibited from signing the report and, if applicable, any consent. Fees for any other services will be billed separately from the services described in this engagement letter and may be subject to written terms and conditions supplemental to those in this letter. Canadian Public Accountability Board (CPAB) participation fees, when applicable, are charged to the Entity based on the annual fees levied by CPAB. 1 -25 °�1M TERMS AND CONDITIONS FOR ASSURANCE ENGAGEMENTS To the extent that KPMG partners and employees are on the Entity's premises, the Entity will take all reasonable precautions for the safety of KPMG partners and employees at the Entity's premises. 10. LEGAL PROCESSES. The Entity on its own behalf hereby acknowledges and agrees to cause its subsidiaries and affiliates to hereby acknowledge that KPMG may from time to time receive requests or orders from the Canadian Public Accountability Board or from professional, securities or other regulatory, judicial or governmental authorities (both in Canada and abroad) to provide them with information and copies of documents in KPMG's files including working papers and other work - product relating to the affairs of the Entity, its subsidiaries and affiliates. Except where prohibited by law, if a request or order is directly related to an inspection or investigation of KPMG's audit of the Entity, KPMG will advise the Entity of the request or order. The Entity hereby acknowledges that KPMG will provide these documents and information without further reference to, or authority from, the Entity, its subsidiaries and affiliates. When such an authority requests access to KPMG's working papers and other work - product relating to the Entity's affairs, KPMG will, on a reasonable efforts basis, refuse access to any document over which the Entity has expressly informed KPMG at the time of delivery that the Entity asserts privilege, except where disclosure of documents is required by Jew. The Entity must mark any document over which it asserts privilege as "privileged ". If and only if the authority requires such access to privileged documents pursuant to the laws of a jurisdiction in which express consent is required for such disclosure, then the Entity hereby provides its consent, Where privileged Entity documents are disclosed, KPMG Is directed to advise the authority that the Entity is permitting disclosure only to the extent required by law and for the limited purpose of the authority's exercise of statutory authority. KPMG is directed to advise the authority that the Entity does not intend to waive privilege for any other purpose and that the Entity expects its documents to be held by the authority as privileged and confidential material (held securely, limited distribution, etc.). For greater certainty, the Entity and KPMG hereby agree that this acknowledgement (and, if required, consent) does not negate or constitute a waiver of privilege for any purpose and the Entity expressly relies upon the privilege protections afforded under statute and otherwise under law. The Entity agrees to reimburse KPMG, upon request, at standard billing rates for KPMG's professional time and expenses, including reasonable legal fees, incurred in dealing with the matters described above. 11, KPMG INTERNATIONAL MEMBER FIRMS. The Entity agrees that any claims that may arise out of this engagement will be brought solely against KPMG, the contracting party, and not against any other KPMG International Cooperative ( "KPMG International ") member firms participating in this engagement or such third party service providers referred to in Section 5 above. 12. CONNECTING TO THE ENTITY'S IT NETWORK. KPMG personnel are authorized to connect their computers to the Entity's IT Network, subject to any restrictions communicated to KPMG from time to time. Connection to the Entity's IT Network or the Internet via the Network, while at the Entity's premises, will be for the express purpose of conducting normal business activities, primarily relating to facilitating the completion of work referred to in this letter. 13. DELIVERABLES OR COMMUNICATIONS. KPMG may issue other deliverables or communications as part of the services described in this Engagement Letter. Such deliverables or communications may not to be included in, summarized in, quoted from or otherwise used or referred to, in whole or in part, in any documents or public oral statement. KPMG expressly does not consent to the use of any communication, report, statement or opinion prepared by us on the interim financial statements and such communication, report, statement or opinion may not be included in, summarized in, quoted from or otherwise used in any document or public oral statement. 14. ALTERNATIVE DISPUTE RESOLUTION. The parties hereby agree that they will first attempt to settle any dispute arising out of or relating to this Engagement Letter or the services provided hereunder through good faith negotiations in the spirit of mutual cooperation between representatives of each of the parties with authority TERMS AND CONDITIONS FOR ASSURANCE ENGAGEMENTS AUGUST 2013 to resolve the dispute. In the event that the parties are unable to settle or resolve their dispute through negotiation within 30 days of the dispute first arising or such longer period as the parties may mutually agree upon, such dispute shall, as promptly as is reasonably practicable, be subject to mediation pursuant to the National Mediation Rules of the ADR Institute of Canada, Inc. All disputes remaining unsettled for more than 60 days following the parties first meeting with a mediator or such longer period as the parties may mutually agree upon shall, as promptly as is reasonably practicable, be subject to arbitration pursuant to the National Arbitration Rules of the ADR Institute of Canada, Inc. (the "Arbitration Rules "). Such arbitration shall be final, conclusive and binding upon the parties, and the parties shall have no right of appeal or judicial review of the decision. The parties hereby waive any such right of appeal which may otherwise be provided for in any provincial arbitration statute made applicable under the Arbitration Rules. The place of mediation and arbitration shall be the city in Canada in which the principal KPMG office that performed the engagement is located. The language of the mediation and arbitration shall be English. 1 -26 KPMG LLP, the audit, tax and advisory firm (kpmg.ca), a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative ( "KPMG International "). KPMG International's member firms have 140,000 professionals, including more than 7,900 partners, in 146 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. © 2012 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( "KPMG International "), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG Internation 27