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HomeMy WebLinkAboutFCS-16-177 - External Audit Plan for Fiscal 2016_Staff Report rR finance and Corporate Services Department www.kitchener.ca REPORT TO: Audit Committee DATE OF MEETING: December 12, 2016 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: December 1, 2016 REPORT NO.: FCS -16-177 SUBJECT: External Audit Planning Report for Fiscal 2016 RECOMMENDATION: That the 2016 External Audit Planning Report prepared by KPMG, attached as Appendix 1 to report FCS -16-177 dated December 1, 2016, 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 2016 year end. A second meeting 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, 2016". ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: The recommendation of this report supports the achievement of the city's strategic vision through the delivery of core service. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 1-1 FINANCIAL IMPLICATIONS: None at this time. Annual audit fees are provided for within the operating budget. COMMUNITY ENGAGEMENT: INFORM – This report and its attachment have been posted to the City’s website with the agenda in advance of the meeting. It will provide the public with information to assist them in understanding the scope of the external audit to take place in the spring of 2017. The City’s Annual Financial Statements as at December 31, 2016 and for the year then ended will be the subject of this audit. The 2016 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. ACKNOWLEDGED BY: Dan Chapman, Deputy CAO, Finance and Corporate Services 1 - 2 1 - 3 3789 4 1011131415161718 only . We take deep . trust yours – in all our dealings with you. about earning your , individually and as a team, to deliver ontents c passionate perspective that matters accountability quality and risk management exceptional service and value At the end of the day, we measure our success from the cs in the audit personal 4: Data & analytics in audit At KPMG, we are Table of Executive summaryAudit approachAudit scope of other entities and deliverablesData & analytiMaterialityValue for feesAudit cycle and timetableAppendicesAppendix 1: Audit Appendix 2: KPMG’s audit approach and methodologyAppendix 3: Required communicationsAppendixAppendix 5: Current developments ger Partner 82738884 8245 8221 --- - 747747 747 747 --- - @kpmg.ca 519 @kpmg.ca : 519: 519 The contacts at KPMG in connection with this report are:Matthew BetikLead Audit Engagement PartnerTelmbetik@kpmg.caTom MennillQuality ControlTeltmennillBrendan HallAudit Senior ManaTel: bhallCourtney ChealAudit ManagerTel: 519ccheal@kpmg.ca 1 - 4 . City . 2016 We have determined December 31, revenue. for the year ending for relevant accounting changes relevant to the 5 00,000 $4,0 Committee approved protocols. Audit Materiality Materiality has been determined based on materiality to be See page 9.Independence We are independent and have extensive quality control and conflict checking processes in place. We provide complete transparency on all services and follow Audit Current developments Please refer to Appendix ry : necessary. , and , if and the Audit Committee. These include for contaminated sites, s focused. In planning our audit we have taken into account key - Capital assets, - 6. 4 s employment benefits, audit is risk Accounting standardTangible Post-Obligatory Reserve Fund RevenueGasworks Enterprise. Executive summa Audit and business risk Ourareas of focus for financial reporting.– – – – – See page KPMG team The KPMG team will be led by Matthew Betik, Brendan Hall and Courtney Cheal. Subject matter experts will be involved Effective communication We are committed to transparent and thorough reporting of issues to the Treasurer, CAO, senior management 1 - 5 performing a Our audit approach Not applicable.As the risk is not rebuttable, our audit methodology incorporates the required procedures in professional standards to address this risk. These procedures include testing of journal entries and other adjustments,retrospective review of estimates and evaluating the business rationale of significant unusual transactions. utility profit enterprises - would be utilized to Why off - is a presumed fraud risk. The presumed fraud risk is ordinarily associated with forThe majority of revenue is calculated based on MPAC data, approved rates and user fees, and is not subject to complexity or judgement at the reporting level; and ThisHowever, the audit team has rebutted this presumption due to the following reasons:KPMG does not believe that the use of inappropriate cutperpetrate fraud.This is a presumed fraud risk. of controls Professional requirements Fraud risk from revenue recognitionFraud risk from management override approach agement override of o manipulate accounting Professional standards presume the risk of fraudulent revenue recognition and the risk of mancontrols exist in all companies.The risk of fraudulent recognition can be rebutted, but the risk of management override of control cannot, since management is typically in a unique position to perpetrate fraud because of its ability trecords and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Audit 1 - 6 system. es and SAP additions SAP Our audit approach tests on the data migration to ensure information from CIS place related to in accounts and disclosures. Communicate with management’s actuarial specialistsAssess the reasonableness of assumptions used, and Test the appropriateness of the underlying data, including employee populationsTest controls around the recording of revenues/cash receiptsIdentify and evaluate the operative effectiveness of internal controls over the identification of development charge funding projects and allocation of related expensesPerform substantive testing over amounts being recognized as revenueDiscuss capitalization policies and their application with managementTest a sample of capital additions to ensure existence and accuracyTest items recorded as repairs & maintenance or other similar accounts to ensure completeness of capital Review of significant work ordersAnalysis of supply and delivery revenue based on volumes by customer tier and approved ratesVerification of gas supply purchased and in storage Determine if there is a significant impact on the financial statements, and if so, performis properly converted to SAPReview and obtain an understanding over the new processcontrolsObtain an understanding on the application controls in the Consider if proper user system access rights have been applied. We will also use the work of the Mondelis Actuarial in our audit of the growth and therefore ject to judgement as Why perating in nature Estimates and judgements used by managementComplexity of the accounting guidanceRevenue recognized from the Development Charge Reserve Fund is subcapital projects must be relatedSignificance of the account balancesRisk of error in inappropriately recognizing costs as either capital or oHigh volume of transactions and related complexities Potential impact on future gas supply and delivery ratesDuring the year, the City converted the billing system from CIS to SAP, there is a risk that the data being transferred to the new system is not properly donemissing data or duplicate data could occur. of focus Other areas Post-employment benefitsObligatory Reserve Funds Revenue and Deferred RevenueTangible Capital AssetsGasworks operationsCIS to SAP System Conversion approach Other areas of focus include the following: Audit 1 - 7 payroll expenses - Our audit approach as of estimate of judgment udget and the prior year, adjusting for known changes in assumptions Confirmation of details with investment managersAnalytical procedures recalculating tax revenue using approved tax rates and related MPAC assessmentsTesting of internal controls over cash receipts and recordingAnalytical procedures comparing current year’s revenues on a disaggregated basis to the current year bEvaluate the design and implementation of controls over payroll and nonTesting the operating effectiveness of key internal controlsAnalytical procedures comparing current year’s expenses on a disaggregated basis to the current year budget and the prior year, adjusting for known changes in assumptionsTesting the completeness, existence, and accuracy of year end accruals, most notably those that contain are Accounts Other Significant Investments and related incomeTaxation RevenueUser Fees and Service Charge RevenueExpenses approach include the and our audit significant accounts Other of focus approach following: Audit 1 - 8 Scoping Audit AuditAuditAuditAudit Audit entities Other Trust FundsGasworks EnterpriseKitchener Public LibraryThe Centre in the Square Inc.Kitchener Downtown Improvement AreaBelmont Improvement Area entities and Other deliverables Audit scope of other entities and deliverables 1 - 9 rt. ng completeness of the journal entry Planned D&A routines risk journal entries for further testi - forward of all accounts - assisted audit techniques (CAATs) to analyze journal entries and apply certain - Utilizing KPMG application software (IDEA) to evaluate the population through a rollUtilizing computercriteria to identify potential high – – Area(s) of focus Detailed results and summary insights gained from D&A will be shared with management and presented in our Audit Findings Repo Journal entry testing ion We will be integrating Data & Analytics (D&A) procedures into our planned audit approach. Use of innovative D&A allows us to analyze greater quantities of data, dig deeper and deliver more value from our audit.We believe that D&A will improve both the quality and effectiveness of our audit by allowing us to analyze large volumes of financial informatquickly, enhancing our understanding of your business as well as enabling us to design procedures that better target risks. Data & analytics in the audit 1 - 10 mount A ,000 for 00,000 000,000 , 00 200,000 369,000,000 $3 $$4,01.1% $$6reclassification and 00,000. The ,5 $3 revenue, and total . otal t the effects of identified , in the prior year was $500,000. This benchmark is consistent with the prior Comments es. assets/accumulated surplus The corresponding amount for the 2015 audit was et judgment and is based on a combination of quantitative and qualitative professional The corresponding amount for the prior year’s audit was .of materiality, and used primarily to determine the nature, timing total budgeted revenu The corresponding percentage for the 2015 audit was 1.0% 75% xpenses. Relevant metrics include neBased on year.Determined to plan and perform the audit and to evaluatemisstatements on the audit and of any uncorrected misstatements on the financial statementsMateriality as a percentage of gross benchmarks typically are within 0.5 and 3.0%.Used extent of audit procedures.$2,625,000.Threshold used to accumulate misstatements identified during the audit.corresponding amount for the 2015 audit was $175,000. Different threshold usedto accumulated reclassification misstatements Materiality determination Metrics BenchmarkMateriality% of BenchmarkPerformance materialityAudit Misstatement Posting Threshold (AMPT) The determination of materiality requires assessments including the nature of account balances and financial statement disclosures end - assess - Professional standards require us to remateriality at the completion of our auditbased on periodresults or new information in order to confirm whether the amount determined for planning purposes remains appropriate.Our assessment of misstatements, if any, in amounts or disclosures at the completion of our audit will include the consideration of both quantitative and qualitative factors.The first step is the determination of the amounts used for planning purposes as follows. Materiality 1 - 11 and described above. . audit services standards or the interpretation thereof; professional beyond those contemplated in our planning processes; City . ees standards or requirements arising as a result of changes in e nature or size of the operations of the professional Significant changes in thChanges in Changes in the time of our work Value for f In determining the fees for our services, we have considered the nature, extent and timing of our planned audit procedures asOur fees for the 2016 audit will be in accordance with our quoted fees in the most recent proposal for external Matters that could impact our fee 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:– – – 1 - 12 7 , 201 2017 April 21 2016 7 (Gasworks) , to June 28 201 , 27 2017 Expected date(s)Last week in NovemberMarchApril 3, 2017 June to the Audit Committee end audit field work - Key deliverables and expected datesDeliverables Conduct interim audit field workConduct yearPresent audit findingsProvide audit opinion on financial statements elivered by one principal objective: Our key activities during the year are designed to achieve our To provide a robust audit, efficiently da high quality team focused on key issues. Audit cycle and timetable 1 - 13 anagement m isk r uality and q Required communications 4: Data and analytics in the audit5: Current developments Appendices Appendix 1: Audit Appendix 2: KPMG’s audit approach and methodologyAppendix 3: Appendix Appendix 1 - 14 1 - 15 1 - 16 auditors and ernal controls (as required or considered Tailor the eAudIT workflow to your circumstancesUnderstand your business and financial processesIdentify significant risksPlan the use of KPMG specialists and others including auditor’s external experts, management experts, internal auditors, service organizationscomponent auditorsDetermine audit approachEvaluate design and implementation of internal controls (as required or considered necessary)Tailor the eAudIT workflow to your circumstancesPerform tests of operating effectiveness of intnecessary)Perform substantive tests Risk Assessment––––––Testing––– and methodology ) IT 2: KPMG’s audit approach workflow to your dit Committee communications Tailor the eAudIT workflow to your circumstancesAccess global knowledge specific to your industryTeam selection and timetableTailor the eAudITcircumstancesUpdate risk assessmentPerform completion procedures and overall evaluation of results and financial statementsForm and issue audit opinion on financial statements Obtain written representation from managementRequired AuDebrief audit process Engagement Setup–––Completion––––––– Appendix Technology-enabled audit workflow (eAud 1 - 17 a ccordance the annual audit. In a ompletion of our audit, we will we will obtain from management – at the c – at the completion of our audit, we will provide at the completion of – Management representation lettercertain representations with professional standards, copies of the representation letter will be provided to the Audit CommitteeAudit findings reportreport to the Audit CommitteeAnnual independence letterprovide a letter to the Audit Committee – – – : . We planning process; and other matters Required communications 2016 fiscal year. standards, there are a number of as attached – professional standards require that during the planning the objectives of the audit, our responsibilities in – – professional nquiries udit planning report Engagement lettercarrying out our audit, as well as management’s responsibilities, are set out in the engagement letter and any subsequent amendment letters. There are no required amendments for theARequired iof our audit we obtain your views on risk of fraudmake similar inquiries to management as part of ourresponses to these will assist us in planning our overall audit strategy and audit approach accordingly Appendix 3: In accordance with communications that are required during the course of our audit. These include– – – 1 - 18 1 - 19 to the financial venue and sets out the required December 31, 2018 year end). December 31, 2018 year end). City’sCity’s . Summary and implications the public sector entity’s control has already occurred. uld be required when determining contractual rights that would be disclosed. but are not limited to: ceive lease payments. re should include descriptions about their nature and extent and the timing. The standard also indicates that the rights that will govern the level of certain type of revenue for a considerable period into the future. Additional disclosures may be required if contractual rights to assets or revenue existAssets such as accrued receivables will have to be reviewed to determine if they meet this definition. professional judgment wo the user with better information about the types of resources available to the public section entity. contractualThe transaction or event giving rise to They embody future economic benefits that involve a capacity, singly or in combination with other assets, to provide goodsThe public sector entity can control the economic resources and access to the future economic benefits. Examples of a contractual right include contractual rights to receive payments under a shared cost agreement or contractual rights toand services, to provide future cash inflows, or to reduce cash outflows This standard is a disclosure standard which defines contractual rights to future assets and redisclosures.Information about a public sector entity's contractual rights should be disclosed in notes or schedulesstatements and exercise ofFactors to consider include,(a) contractual rights to revenue that are abnormal in relation to the financial position or usual business operations; and(b) This standard is effective for fiscal periods beginning on or after April 1, 2017 (the Implications:This Standard provides a definition of assets and further expands that definition as it relates to control. Assets are defined as follows:(a) (b) (c)The standard also includes some disclosure requirements related to economic resources that are not recorded as assets to provideThis standard is effective for fiscal periods beginning on or after April 1, 2017 (the Implications: 5: Current developments Standard Assets PS 3380, Contractual RightsPS 3210, Appendix The following is a summary of the current developments that are relevant to the City of Kitchener 1 - 20 uals sactions, amounts classified by could be either an entity or an December 31, 2018 year end).December 31, 2018 year end). City’sCity’s outstanding items, any contractual financial statements and make comparisons. has been recognized. materiality of the transaction, the relevance of the information and the need for the information to any contingent liabilities. The standard also requires disclosure of related party transactions that have terial financial impact would be based on an assessment of the terms and conditions underlying the Additional disclosures may be required if contingent assets exist.Related parties will have to be identified. Additional disclosures may be required with respect to transactions Ma key management personnel or close family members may also be related parties. sure is only required when the transactions or events between related parties occur at a value different from what would been recorded if they were not related and the transactions could have a material financial impact on the financial related parties. An existing condition or situation that is unresolved at the financial statement dateAn expected future event that will resolve the uncertainty as to whether an asset exists This standard defines contingent assets.They have two basic characteristics:(a) (b )The standard also has specific disclosure requirements for contingent assets when the occurrence of the confirming event is likely.Contingent assets include grants receivable where the conditions are met but funding is conditional upon approval of an application for funding.This standard is effective for fiscal periods beginning on or after April 1, 2017 (the Implications: This standard relates to related party disclosures and defines related parties. Related parties individual. Related parties exist when one party has the ability to control or has shared control over another party. Individthat areDisclohavestatements.transaction, the financialenable the users to understand theThis standard also specifies the information required to be disclosed including the type of tranfinancial statement category, the basis of measurement, and the amounts of anyobligations andoccurred where no amountsThis standard is effective for fiscal periods beginning on or after April 1, 2017 (the Implications:with Related Party Contingent Assets , PS 3320,PS 2200Disclosures 1 - 21 e e measurement - measurement - instruments statement of re – December 31, 2019 year end). City’s end). - to identify any contracts that have embedded derivatives and recognize these . These disclosures include classes of financial instruments and qualitative and City ’s December 31, 2020 year City City use exchange amount – amount end). Earlier adoption is permitted. An entity early adopting this standard must also adopt the - use exchange amount – provider to use carrying amount; recipient choice of either carrying amount or value fair. – will have to identify these transactions and determine if they have been measured at the carrying use exchange City – after April 1, 2019 (the The This standard will require the Exchange gains and losses arising prior to settlement are recognized in a new statement of re fair value. Changes in fair value will be reported in a new financial statement required.interest rate, liquidity, and market risk. entity.derivatives. The effective date of this standard has recently been deterred and it is now effective for fiscal periods at he normal course of business financial instruments standard. effective date of this standard has been deferred and is effective for fiscal periods beginning on or after April 1, 2019 (th ency,’s December 31, 2020 year Fair value consideration No or nominal amount In tCost allocation the consolidated statement of financial position at fair value. Portfolio investments in equity instruments are required to b ignificance of financial instruments to the This standard relates to the measurement of transactions between public sector entities that comprise the government’s reportingTransactions are recorded at carrying amounts with the exception of the following:(a) (b)(c)(d) This standard is effective for fiscal periods beginning on or after April 1, 2018 (the Implications:amount ifA standard has been issued, establishing a standard on accounting for and reporting all types of financial includingbeginning on orImplications:onrecordedgains and losses.This standard sets out a number of disclosures in the financial statements designed to give the user an understanding of thesquantitative risk disclosures describing the nature and extent of risk by type. The risks to be considered include credit, currA revised standard has been issued establishing standards on accounting for and reporting transactions that are denominated in a foreign currency.The CitynewImplications:gains and losses. entity Transactions - Inter , PS 3420Financial InstrumentsRevised Standard on ForeignCurrency Translation 1 - 22 Ontario, is the Canadian member firm of KPMG International Cooperative (“KPMG International”). ,000 professionals, in 155 countries. 74 have 1 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. PMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of kpmg.ca/audit KKPMG member firms around the worldThe 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.© 2016 KPMG LLP, 1 - 23