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HomeMy WebLinkAboutAudit Agenda - 2017-12-11 Audit Committee Agenda Monday, December 11, 2017 Office of the City Clerk 3:30 p.m. - 5:00 p.m. Kitchener City Hall nd 200 King St.W. - 2 Floor Council Chamber Kitchener ON N2G 4G7 Page 1 Chair – Mayor B. Vrbanovic Delegations Pursuant to Council’s Procedural By-law, delegations are permitted to address the Committee for a maximum of 5 minutes. Item 1 - Matt Betik, KPMG Discussion Items 1. FCS-17-197 - External Audit Plan for Fiscal 2017 (15 min) 2. FCS-17-013 - 2018 Internal Audit and Service Review Work Plan (25 min) Status Reports th 3. FCS-17-011 - 4 Quarter Audit Status Report (20 min) Dianna Saunderson Committee Administrator REPORT TO: Audit Committee DATE OF MEETING: December 11, 2017 SUBMITTED BY: Sheri Brisbane, Supervisor Financial Reporting, 519-741-2200 ext7349 PREPARED BY: Sheri Brisbane, Supervisor Financial Reporting, 519-741-2200 ext7349 WARD(S) INVOLVED: All DATE OF REPORT: December 1, 2017 REPORT NO.: FCS-17-197 SUBJECT:External Audit Planning Report for Fiscal 2017 ___________________________________________________________________________ RECOMMENDATION: That the 2017 External Audit Planning Report prepared by KPMG, attached as Appendix 1 to report FCS-17-197 dated October 30, 2017, 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, 2017”. 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 2018. The City’s Annual Financial Statements as at December 31, 2017 and for the year then ended will be the subject of this audit. The 2017 audited financial statements, once completed and approved, will be posted on the City website and notice will be provided to all residents through the Kitchener Post in accordance with Section 295 (1) of the Municipal Act, 2001. ACKNOWLEDGED BY:Dan Chapman, CAO and City Treasurer 1 - 2 Committee 2017 11, Audit December Quarter Fourth 1 - 3 Work Review 2017 Report Service Fiscal and for Status Agenda Plan Audit Audit Audit Internal Quarter External2018Plans4th ••• 1 - 4 PLAN 2017 AUDIT FISCAL 197 17 FCS EXTERNALFOR 1 - 5 , 2017 year ending December 31 The Corporation Of the City of Kitchener Audit Planning Report For the Licensed Public AccountantsOctober 30, 2017 for the Council Meeting on December 11, 2017kpmg.ca/audit 1 - 6 34569 10 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 er entities and deliverables exceptional service and value At the end of the day, we measure our success from the personal At KPMG, we are Table of Executive summaryMaterialityAudit scope of othAudit approachAudit cycle and timetableAppendices ger Partner 824582738884 8221 --- Manager - 747747747 747 --- - Senior 519 @kpmg.ca : 519: 519 The contacts at KPMG in connection with this report are:Matthew BetikLead Audit Engagement PartnerTelmbetik@kpmg.caTom MennillQuality ControlTeltmennill@kpmg.caBrendan HallAudit Senior ManaTel: bhallCourtney ChealAuditTel: 519ccheal@kpmg.ca 1 - 7 . 7. City 201 We have December 31, revenue. changes relevant to the for the year ending on budgeted r relevant accounting $6,000,000 5 fo dix approved protocols. Appen 4 Audit Materiality Materiality has been determined based determined materiality to beSee page 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 Committee Current developments Please refer to ry : , and , if necessary. and the Audit Committee. These include for contaminated sites, s focused. In planning our audit we have taken into account key . - for financial reporting. 6 - 8 employment benefits, focus Accounting standardTangible Capital assets,Post-Obligatory Reserve Fund RevenueGasworks Enterprise. Executive summa Audit and business risk Our audit is riskareas of – – – – – See pages 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 - 8 mount A 300,000 $4.5 million$1 million for reclassification e completion of our audit will $387 million$6 million1.55% $ es at th . The corresponding end results or new information in order to confirm whether the - $3,000,000 1.1% the effects of identified misstatements on ation misstatements. Comments reclassific $200,000 for the year. This benchmark is consistent with the prior year. perform the audit and to evaluate include net assets/accumulated surplus, total revenue, and total expenses. materiality at the completion of our audit based on period s . of materiality, and used primarily to determine the nature, timing and extent of audit budgeted revenues for the prior year’s audit was $4,000,000 asses 75% - Relevant metricsBased on Determined to plan and the audit and of any uncorrected misstatements on the financial statementsamountThe corresponding percentage for the prior year’s audit was Used procedures. The corresponding amount for the prior year’s audit was Threshold used to accumulate misstatements identified during the audit. The corresponding amount for the previous year’s audit wasDifferent threshold used to accumulated Materiality determination Metrics BenchmarkMateriality% of BenchmarkPerformance materialityAudit Misstatement Posting Threshold (AMPT) Materiality The determination of materiality requires professional judgment and is based on a combination of quantitative and qualitative assessments including the nature of account balances and financial statement disclosuresThe first step is the determination of the amounts used for planning purposes as follows: Professional standards require us to reamount determined for planning purposes remains appropriate. Our assessment of misstatements, if any, in amounts or disclosurinclude the consideration of both quantitative and qualitative factors. 1 - 9 is sufficient Scoping AuditAuditAuditAuditAuditAudit Wilmot Hydro Inc. Kitchener Power Corporation is recorded as an investment - of other entities and deliverables scope other entities which are consolidated into the Corporation of the City of Kitchener’s financial statements and which we perform work over are as follows: Other Entities Trust FundsGasworks EnterpriseKitchener Public LibraryThe Centre in the Square Inc.Kitchener Downtown Improvement AreaBelmont Improvement Area Audit Professional standards require that we obtain an understanding of the Company’s organizational structure, including its components and their environments thatto identify those components that are financially significant or that contain specific risks that must be addressed during our audit.The We also perform a separate audit for Kitchener Power Corporation, which includes Kitchenerin the City’s consolidated financial statements. 1 - 10 t is typically in a unique position to gemen Our audit approach of significant unusual transactions. 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, performing a retrospective review of estimates and evaluating the business rationale profit - . would be utilized off Why - majority of revenue is The presumed fraud risk is ordinarily associated with forenterprisesThe calculated based on MPAC data, approved utility rates and user fees, and is not subject to complexity or judgement at the reporting level; and This is a presumed fraud risk.However, the audit team has rebutted this presumption due to the following reasons:– – KPMG does not believe that the use of inappropriate cutto perpetrate fraud.This is a presumed fraud risk.We have not identified any specific additional risks of management override relating to this audit ds presume the risk of fraudulent revenue recognition and the risk of management override of controls exist in all companies. approach Professional requirements Fraud risk from revenue recognitionFraud risk from management override of controls Audit Professional standarThe risk of fraudulent revenue recognition can be rebutted, but the risk of management override of control cannot, since manaperpetrate fraud because of its ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. 1 - 11 by ensuring the accounts and venue revenues/cash receipts Our audit approach incurred. been We will also use the work of the Mondelis Actuarial in our audit of the disclosures.Test controls around the recording ofIdentify 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 reprojects which the development charges are allocated to are appropriate and the related expenditure hasPerform substantive testing over the collections of development charges going into the deferred revenue account Discuss 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 additionsReview 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 Communicate with management’s actuarial specialistsAssess the reasonableness of assumptions used, and Test the appropriateness of the underlying data, including employee populations –– – – – – – – –– – – –– Why High volume of transactions and related complexities Potential impact on future gas supply and delivery rates Estimates and judgements used by managementComplexity of the accounting guidanceRevenue recognized from the Development Charge Reserve Fund is subject to judgement as capital projects must be growth related in natureSignificance of the account balancesRisk of error in inappropriately recognizing costs as either capital or operating – – ––––– approach focus employment ible Capital Other areas of Post-benefitsObligatory Reserve Funds Revenue and Deferred RevenueTangAssetsGasworks operations Audit Other areas of focus include the following: 1 - 12 prior payroll expenses - Our audit approach : Testing of internal controls over cash receipts and recordingAnalytical procedures comparing current year’s revenues on a disaggregated basis to the current year budget and the year, adjusting for known changes in assumptionsEvaluate 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 yearend accruals, most notably those that contain areas of estimate of judgment Confirmation of details with investment managersAnalytical procedures recalculating tax revenue using approved tax rates and related MPAC assessments –– –– – – – – approach Accounts Other Significant Investments and related incomeTaxation RevenueUser Fees and Service Charge RevenueExpenses Audit Other significant accounts of focus and our audit approach include the following 1 - 13 Expected date(s) June 11, 2018 December 18, 2017March 26, 2018 to April 20, 2018June 2018 Deliverables end audit field work - is in line with prior year To provide a robust audit, efficiently delivered by a high quality team focused on key issues. key activities during the year are designed to achieve our one principal objective: timeline Conduct interim audit field workConduct yearPresent audit findings to the Audit CommitteeProvide audit opinion on financial statements Audit cycle and timetable Our •Our 1 - 14 anagement m isk r TM uality and q Required communicationsLean in Audit :: Current developments 45 Appendices Appendix 1: Audit Appendix 2: KPMG’s audit approach and methodologyAppendix 3: Appendix Appendix 1 - 15 identify iate supervision and coaching. Assignment based on skills and experience;Performance evaluation;Development and training; and Appropr All KPMG partners and staff are required to act with integrity and objectivity and comply with applicable laws, regulations and professional standards at all times.We do not offer services that would impair our independence.The processes we employ to help retain and develop people include:We have policies and procedures for deciding whether to accept or continue a client relationship or to perform a specific engagement for that client.Existing audit relationships are reviewed annually and evaluated to instances where we should discontinue our professional association with the client. ––––– on process. - . The following diagram summarises the six key elements clients / Personnel management engagements Acceptance & continuance of Audit quality: Our hands management Quality control is fundamental to our business and is the responsibility of every partner and employee.of our quality control systems isk r standards and risk performance Engagement and objectivity Independence, integrity, ethics Audit quality management and access to our audit quality report, including Other risk monitoring Independent management quality controls professional standards. page for more information Review time support 1: Audit quality - years. he field. four include: Audit Quality Resources Before the firm issues its audit report, Engagement Quality Control Reviewer reviews the appropriateness of key elements of publicly listed client audits.Technical department and specialistresources provide realto audit teams in t our Other controlsWe conduct regular reviews of engagements and partners.teams are independent and the work of every audit partner is reviewed at least once every We have policies and guidance to ensure that work performed by engagement personnel meets applicable professional standards, regulatory requirements and the firm’s standards of quality. Appendix KPMG maintains a system of quality control designed to reflect our drive and determination to deliver independent, unbiased advice and opinions, and also meet the requirements of CanadianVisit ––– 1 - 16 workflow to your 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 organizations auditors and component auditorsDetermine audit approachEvaluate design and implementation of internal controls (as required or considered necessary)Tailor the eAudIT circumstancesPerform tests of operating effectiveness of internal controls (as required or considered necessary)Perform substantive tests Risk Assessment––––––Testing––– and methodology ) IT 2: KPMG’s audit approach Tailor the eAudIT workflow to your circumstancesAccess global knowledge specific to your industryTeam selection and timetableTailor the eAudIT workflow to your circumstancesUpdate risk assessmentPerform completion procedures and overall evaluation of results and financial statementsForm and issue audit opinion on financial statements Obtain written representation from managementRequired Audit Committee communicationsDebrief audit process Engagement Setup–––Completion––––––– Appendix Technology-enabled audit workflow (eAud 1 - 17 a l provide management we wil the annual audit. In accordance we will obtain from – at the completion of our audit, 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 Committee – provided . We as and other matters fraud Required communications tandards, there are a number of s as attached professional standards require that during the planning the objectives of the audit, our responsibilities in – – – . professional nquiries Engagement lettercarrying out our audit, as well as management’s responsibilities, are set out in the engagement letter and any subsequent amendment lettersby managementAudit planning report Required iof our audit we obtain your views on risk of make similar inquiries to management as part of our planning process; responses 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 - ng end to end transparency and ey Lean techniques: Insight reporting Lean training Perform interactive workshops to conduct walkthroughs of selected financial processes providiunderstanding of process and control quality and effectiveness. Quick and pragmatic insight report including your team’s immediate quick win actions and prioritized opportunities to realize benefit. Provide basic Lean training and equip our teams with a new Lean mindset to improve quality, value and productivity. 3. 1. 2. Interactive workshops How it works Lean in Audit employs three k on nity - TM - ses. is process allowing us to provide actionable quality – 4: Lean in Audit y improvement observations. Appendix An innovative approach leading to enhanced value and quality Our new innovative audit approach, Lean in Audit, further improves audit value and productivity to help deliver real insight to you. Lean in Auditoriented, directly engaging organizational stakeholders and employing handstools, such as walkthroughs and flowcharts of actual financial procesBy embedding Lean techniques into our core audit delivery process, our teams are able to enhance their understanding of the business processes and control environment within your organization and productivitAny insights gathered through the course of the audit will be available to both engagement teams and yourselves. For example, we may identify control gaps and potential process improvement areas, while companies have the opportuto apply such insights to streamline processes, inform business decisions, improve compliance, lower costs, increase productivity, strengthen customer service and satisfaction and drive overall performance. 1 - 19 uals assets to end). sets out the required be either an entity or an December 31, 2018 yearend). City’s ments under a shared cost agreement or . Summary and implications Corporation of the City of Kitchener Additional disclosures may be required if contractual rights to assets or revenue exist Assets such as accrued receivables will have to be reviewed to determine if they meet this definition. The transaction or event giving rise to the public sector entity’s control has already occurred. The 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 paycontractual rights to receive lease payments. and services, to provide future cash inflows, or to reduce cash outflows ) They embody future economic benefits that involve a capacity, singly or in combination with other assets, to provide goods This standard is a disclosure standard which defines contractual rights to future assets and revenue and disclosures.Information about a public sector entity's contractual rights should be disclosed in notes or schedules to the financial statements and should include descriptions about their nature and extent and the timing. The standard also indicates that the exercise of professional judgment would be required when determining contractual rights that would be disclosed. (b) contractual rights that will govern the level of certain type of revenue for a considerable period into the future.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) The standard also includes some disclosure requirements related to economic resources that are not recorded asprovide the user with better information about the types of resources available to the public section entity. This standard is effective for fiscal periods beginning on or after April 1, 2017 (the City’s December 31, 2018 yearImplications:This standard relates to related party disclosures and defines related parties. Related parties couldindividual. Related parties exist when one party has the ability to control or has shared control over another party. Individthat are key management personnel or close family members may also be related parties. Factors to consider include, but are not limited to:(a) contractual rights to revenue that are abnormal in relation to the financial position or usual business operations; and(c) 5: Current developments Standard Assets PS 3380, Contractual RightsPS 3210, PS 2200, Related PartyDisclosures Appendix The following is a summary of the current developments that are relevant to the 1 - 20 by to ods measurement - statement of re – December 31, 2018 yearend). City’s end). after April 1, 2018 (the City’s December 31, 2019 yearend). to identify any contracts that have embedded derivatives and recognize these . These disclosures include classes of financial instruments and qualitative and City City use exchange amount – financial statements and make comparisons. use exchange amount – provider to use carrying amount; recipient choice of either carrying amount or value fair. business – will have to identify these transactions and determine if they have been measured at the carrying use exchange amount l financial impact would be based on an assessment of the terms and conditions underlying the City – Related parties will have to be identified. Additional disclosures may be required with respect to transactions The This standard will require the is effective for fiscal periods beginning on or is only required when the transactions or events between related parties occur at a value different from what would g on or after April 1, 2019 (the City’s December 31, 2020 year Fair value consideration No or nominal amount ) In the normal course of ) Cost allocation Disclosure have been recorded if they were not related and the transactions could have a material financial impact on the financial statements. Materiatransaction, the financial materiality of the transaction, the relevance of the information and the need for the information enable the users to understand theThis standard also specifies the information required to be disclosed including the type of transactions, amounts classified financial statement category, the basis of measurement, and the amounts of any outstanding items, any contractual obligations and any contingent liabilities. The standard also requires disclosure of related party transactions that have occurred where no amounts has been recognized.This standard is effective for fiscal periods beginning on or after April 1, 2017 (the Implications:with related parties. This standard relates to the measurement of transactions between public sector entities that comprise the government’s reporting entity.Transactions are recorded at carrying amounts with the exception of the following:(a(b)(c)(dThis standardImplications:amount if required.A standard has been issued, establishing a standard on accounting for and reporting all types of financial instruments including derivatives. The effective date of this standard has recently been deterred and it is now effective for fiscal peribeginninImplications:on the consolidated statement of financial position at fair value. Portfolio investments in equity instruments are required to be recorded at fair value. Changes in fair value will be reported in a new financial statement gains and losses. This standard sets out a number of disclosures in the financial statements designed to give the user an understanding of the significance of financial instruments to the quantitative risk disclosures describing the nature and extent of risk by type. The risks to be considered include credit, currency, interest rate, liquidity, and market risk. entity Transactions - PS 3420, InterFinancial Instruments 1 - 21 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. KPMG LLP, 7 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.© 201 1 - 22 REPORT TO: Audit Committee DATE OF MEETING: December 11, 2017 SUBMITTED BY: Corina Tasker, Internal Auditor, 519-741-2200 ext. 7361 PREPARED BY: Corina Tasker, Internal Auditor, 519-741-2200 ext. 7361 WARD(S) INVOLVED: ALL DATE OF REPORT: December 1, 2017 REPORT NO.: FCS-17-013 SUBJECT: 2018 Internal Audit and Service Review Work Plan ___________________________________________________________________________ RECOMMENDATION: That the 2018 Internal Audit work plan be approved as outlined in report FCS-17- 013 dated December 1, 2017. BACKGROUND: Under the Audit Committee terms of reference it is the Audit Committee’s responsibility to provide recommendations for areas of focus and types of audits as well as approve the annual internal audit work plan. The integrated service review work plan encompasses not only the work of Internal Audit but also that of other staff across the corporation with responsibility for service review work. By planning service review work corporately it ensures that there is no duplication of effort and that work is integrated across departments where required. This comprehensive approach also ensures that all service areas will be reviewed at some point over approximately a six year period. This report shows the 2018 integrated service review work plan as well as the Internal Audit work plan. Only the Internal Audit work plan requires Audit Committee approval. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 2 - 1 REPORT: Service Review Goal The Effective and Efficient City Services priority within the City’s Strategic Plan (2015 - 2018) places a priority on improving the design and delivery of city services, responsible stewardship of public funds and accountability, among other things. The overarching goal of service reviews is to protect the City’s assets and interests, which supports these priorities. This includes, but is not limited to, protecting the long term health of the organization, its financial and physical assets, its reputation, its ability to perform critical services and the safety and well-being of employees and citizens. The way that staff achieves this goal is through three main categories of review work: 1. Ensuring operations are efficient and effective as possible Are we doing the right things? Are we doing things in the right way? Are we making the best use of our limited resources? Are we meeting customer or citizen needs? 2. Ensuring controls are adequate to protect assets from loss Have risks been adequately identified and mitigated? Are there structures and processes in place to prevent or detect loss, theft, fraud? 3. Monitoring compliance with policy, procedures and legislation Has staff been adequately trained on what is expected of them? Are staff following the rules to ensure work is accurate, reliable, timely, efficient, effective, safe, and legal? Are staff putting the corporation at risk in any way through their actions or inactions? This review work is carried out by internal audit, along with staff in the City’s various departments, to review both internal and customer facing services using a variety of tools. These may include: Service delivery reviews Lean tools and techniques including process mapping and assessing adequacy of controls Time studies Value for money analysis Organizational structure review Review of workplace culture Risk assessments Policy review Compliance audits; and Physical inventory and cash counts 2 - 2 2018 Internal Audit Work Plan The 2018 internal audit work plan includes service reviews as well as controls audits and recurring internal audit activities. Audit Committee is asked to approve the 2018 Internal Audit work plan shown below as per the Audit Committee terms of reference. A description of the types of review is included in Appendix A. The service review portion of the work plan is typically composed of a combination of services chosen from the prioritized list of services and Council requests. This year neither of those factors has influenced the content of the work plan. This is because there is considerable work from the 2017 work plan which will carry over into 2018 and will consume resources in the first half of the year. This is due to two of the service improvement resources being temporarily assigned to other special projects, and the extra time that was required to perform the Lean process review of the Revenue division which was not originally factored into the work plan schedule. The CAO has also committed to conducting a development service review which will be supported by Internal Audit and the other city staff. The process review component of this service review will start in the second half of 2018 and will be a very complex and lengthy review. In addition to these known work plan items, there may be additional work required to perform organizational reviews at the division or section level in some areas following the larger corporate organizational review which will be completed early in 2018. As such, staff needs to maintain some capacity in the work plan for this potential work. Internal audit will continue to conduct the annual physical inventory, and any confidential investigations as required. Other small controls or compliance reviews could be done on an ad hoc basis as time permits such as regular cash, employee expenses or VISA card audits. The Council priorities for service reviews that were solicited during the September 2017 Audit Committee meeting can, however, be advanced in other ways outside of the internal audit or service review work plans. The following priorities were identified by Council: Special Events – workload, capacity Economic Development – workload, capacity, process Facility Planning – capital costing process INS Administration – organizational structure Parking Enterprise – technology utilization, revenue maximization The Economic Development division is recently under new leadership. As part of the new Executive Director’s initial activities, a review of division capacity and resourcing is 2 - 3 being done. This includes the Special Events section. Therefore, it is considered redundant to initiate a separate audit or service review at this time. Regarding the request for a review of facility planning, it is understood that Council was looking for a condition assessment of city facility assets as input into the business plan for next year. Due to the specialized skill set required for this work it is not possible to complete it with internal resources. Facilities Management is in the process of conducting a condition assessment of the top 3 building assets and there will be further work conducted through the Leisure Facilities Master Plan to evaluate facility renewal requirements. Concerns around the interim nature of the INS Administration team will be resolved through the corporate organizational review. Additional analysis related to the effectiveness and capacity of INS support services is being reviewed internally and therefore a separate internal audit is not required at this time. The Parking Enterprise has been exploring a number of new parking technologies throughout 2017 (listed below). Staff do not feel a separate review is required. A new Pay by Mobile parking application is planned to be implemented in early 2018 complementing the City’s existing surface parking lot pay & display ticket system. The Pay by Mobile parking app will provide customers the ability to pay for parking via their cell phones and will offer a greater user experience by offering the ability to extend parking space use remotely and on-line receipts for parking payments. The newly installed LED street lighting and associated narrowband smart control infrastructure platform provides the opportunity for potential applications that could result in significant operational and economic improvements including Smart Parking. This opportunity will be explored more fully as part of the Digital Kitchener Innovation lab. Smart Parking includes parking management systems such as parking displays and guidance systems that enable users to find convenient and available parking. A new night-time user rate is also planned to be offered before 2019 allowing residents in the downtown area the ability to park their vehicles overnight in secured parking garage facilities for a reduced monthly fee over the existing day time monthly fee. In summary, all of the areas of Council interest are being addressed in some form within the corporation. If staff have misinterpreted Council’s direction regarding these topics, further clarification can be provided during the Audit Committee meeting. However, there is a very limited amount of capacity available for new work in 2018. 2 - 4 Listed below is the proposed Internal Audit work plan: Audit Area Type of Review Notes Service Reviews Operations – Winter Comprehensive Review Carried over from 2017 Maintenance Fire – Administration Process (Lean), Capacity Carried over from 2017 By-law Enforcement – Workload, Capacity, Process Carried over from 2017 Property Standards (Lean) DevelopmentComprehensive Controls Audits SAP – User Profiles Separation of DutiesCarried over from 2017 Recurring Internal Audit Activity Physical Inventory Count verification Confidential Investigations As required 2018 Integrated Service Review Work Plan The 2018 integrated service review work plan is for information only. In addition to the service reviews from the internal audit work plan above, the following reviews are also included in the integrated service review work plan: Service Type of Review Resource(s) Benefits and Pensions Capacity, process (carried over FCS Administrationfrom 2017) Utilities Risk assessment (carried over INS from 2017) Use of Consultants Value for money (carried over INS from 2017) Volunteer Resources Capacity, process CSD Reporting All service reviews assigned to Internal Audit will be brought forward through the Audit Committee in audit status reports on a quarterly basis. All service reviews assigned to other resources will be brought forward through the Audit Committee in an annual summary report in conjunction with Internal Audit’s year in review report. The report will contain the status of the reviews and any major findings or recommendations but will be much smaller in scope and detail than the internal audit reports. If further explanation or detail is required by Council this can be provided upon request. Any reports which require a decision by Council will be brought forward to the appropriate committee with a detailed report.For example, if recommendations within the report indicate that a service should be discontinued, changed significantly or additional funding is required then it would be brought forward for Council approval. 2 - 5 ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: This report supports the achievement of the city’s strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: There are no financial implications related to this report. COMMUNITY ENGAGEMENT: INFORM – This report has been posted to the City’s website with the agenda in advance of the council / committee meeting. ACKNOWLEDGED BY: Lesley McDonald, Acting Deputy CAO, Finance and Corporate Services 2 - 6 APPENDIX A: TYPES OF REVIEWS TypeofReviewDefinition CapacityAreviewoftheactualtransactionorworkvolume,theaverage timetocompleteeachtransactionandtheestimatedrequired resourcingcomparedtotheactualresourcing. ComplianceAtesttodetermineifstaffisfollowingallrules,regulationsand policiesassociatedwiththeservice. ComprehensiveAnallencompassingreviewofthedivisionorserviceincluding thingslikeprocessreview,organizationstructurereview,controls, compliance,riskassessment,servicedelivery,customer satisfaction,valueformoney,capacity,benchmarkingandany otheranalysisrequired. ControlsAnanalysisandtestofcontrolpointswithinaprocesstoensure thatfraudulentactivitycanbeeliminatedormitigated. CostanalysisAdetailedanalysisofdirectandoverheadcostsofaserviceand analysisofchargeoutratesifapplicable. CustomersatisfactionAreviewofcustomersatisfactionwithaserviceandwhere improvementscouldbemade. FollowupAnadditionalreviewofanytype,notsoonerthan1yearafterthe "___________"originalreviewinordertoassesstheimpactoftheoriginal recommendationsandproactivelyidentifyanynew/emerging risks. ProcessAnanalysisofhowaprocessisdoneandwhereefficiency& effectivenessimprovementscouldbemade,including considerationofallstakeholdersrelatedtotheprocess. RiskassessmentAnidentificationofallofthepossiblerisksthatcouldaffecta serviceincludingratingtheprobabilityandimpactoftheriskusing thecorporateriskmatrix. RoleclarificationClarification,documentation,andcommunicationofrolesand responsibilitiesofsimilarrolestoensurethereisnooverlapin duties. ServicedeliveryAreviewtodeterminetheoptimalmethodofdeliveringaservice includingexploringoptionsofcontractingoutornotdeliveringthe serviceatall. ValueformoneyAcomparisonofthefullyburdenedcostofprovidingaservice (includingalldirectcostsplusoverhead)comparedtothecostof obtainingtheservicefroma3rdparty. 2 - 7 PLAN AND WORK AUDIT REVIEW INTERNAL 013 17 FCS 2018SERVICE 2 - 8 efficient protect & procedures to źƓƷĻƩĻƭƷƭ Reviews policy, ğƓķ effective adequate with are ğƭƭĻƷƭ are Service of /źƷǤ͸ƭ loss operationscontrolscompliance ƷŷĻ from Goal legislation ƦƩƚƷĻĭƷ EnsuringEnsuringassetsEnsuringand ƚƷŷƩƚǒŭŷʹ••• 2 - 9 years based review on six the last review over of based corporate work for ofapprove date to Process created only reviewed and services priorities, plan allprogram plan Plan areas required budget work Council work service list, prioritize Work consistent Audit all to expense review Committee risk, Processon ServiceprioritizedprioritiesOngoing,EnsuresAuditInternal ••••• 2 - 10 other starting 2018 work of drive in review half may to: first currently due review into (not Process Development work over projects of Revenue new reviews special for Plan organization carrying add to level to 2018 complexity review of year reviews assigned Work corporate and Lean section half / of this of 2017 scope ResourcesLength second –– capacity plan)Largein SeveralOutcomedivisional No••• 2 - 11 ways: structure other process process in utilization, capacity costing ΑĭğƦğĭźƷǤͲ Priorities addressed be ΑƚƩŭğƓźǩğƷźƚƓğƌ ΑƷĻĭŷƓƚƌƚŭǤ ΑĭğƦźƷğƌ will ΑǞƚƩƉƌƚğķͲ Council Development maximization Enterprise Events Planning priorities Administration EconomicFacilityINS SpecialParkingrevenue Council••••• 2 - 12 Plan Capacity Work (Lean),(Lean),Capacity Review of 2) ProcessComprehensive Process of 1 approval: Audit (page your For MaintenanceComprehensive ΑtƩƚƦĻƩƷǤ Internal Α‘źƓƷĻƩ Reviews: Enforcement AreaType Α!ķƒźƓźƭƷƩğƷźƚƓ law 2018 Audit Service OperationsFireByStandardsDevelopment 2 - 13 Plan duties of Work Review of required 2) CountverificationAs of 2 approval: Audit (page your For Activity Internal Investigations profilesSeparation InternalAudit Audits: Inventory AreaType 2018 Α ƭĻƩ Audit Controls SAP Recurring PhysicalConfidential 2 - 14 Plan plus: plan Work work moneyINS capacityFCS ReviewResources for Audit of assessmentINS information Internal Review the your of all For Includes AdministrationProcess, Service Pensions and AreaType 2018 Service BenefitsUtilitiesRiskConsultantsValueVolunteerResourcesCapacity,processCSD 2 - 15 REPORT TO: Audit Committee DATE OF MEETING: December 11, 2017 SUBMITTED BY: Corina Tasker, Internal Auditor, 519-741-2200 ext. 7361 PREPARED BY: Corina Tasker, Internal Auditor, 519-741-2200 ext. 7361 WARD(S) INVOLVED: All DATE OF REPORT: November 30, 2017 REPORT NO.: FCS-17-011 SUBJECT:4th Quarter Audit Status Report ___________________________________________________________________________ RECOMMENDATION: No recommendation required. The following information is being provided as an update and assurance on internal audit matters, in accordance with the Audit Committee Terms of Reference. BACKGROUND: The following report provides a summary of the Internal Audit activities completed during the period of October 2017 to November 2017. The chart below shows the audits contained in this report. Division / Topic Scope Physical Inventory Inventory Count The following items are currently in progress and will be brought forward at a future audit committee meeting: By-law Enforcement – Property Standards, process / capacity review Fire Administration, process / capacity review Winter Maintenance, comprehensive audit SAP user access – separation of duties *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 3 - 1 REPORT: 1. Physical Inventory Status: Complete, October 28, 2017 Audit Process and Findings Internal Audit participated in the annual physical inventory counts at the Kitchener Operations Facility (KOF) location. Standard floor-to-sheet and sheet-to-floor audits were done to confirm the physical quantity of parts on hand compared to what staff had counted. The audit covered 19% of the total value of inventory. The sheet-to-floor audits covered the top 30 unit values and top 30total values. The floor-to-sheet audits consisted of 30 random shelf locations. Ten variances, which equates to 11% of the sample, were found through this verification process which resulted in an $11,699 write- down. Total Adjustments In 2017 the total adjustments for the year to date (up to Nov.29) were $297,306 write- down which represents 3.2% of the total inventory purchases for the year to date of $9.3 million. Industry standards indicate that up to 2.5% is an acceptable shrinkage rate. However, this year there were two large adjustments totalling $77K made in non- controllable stock which normally would not happen. They were the result of miscommunication between staff and vendors and are anomalies. If those two anomalies are removed from the total, the shrinkage rate is reduced to 2.3% which is within acceptable limits. The ending inventory balance was $2,080,589. The 2017 total adjustment is higher than 2016. However, if the two anomalies are removed, the 2017 total is comparable to 2016. Year 2016 2017 year to date - 2017 year to date – up to Nov.29 excluding anomalies Total write-down $219,438 $297,306 $219,543 Controllable Stock Adjustments Of the 2017 adjustments, only $12,555 write-down was from controllable stock (i.e. stock which the Stores staff have direct control over with regards to purchases and usage). The magnitude of these adjustments is comparable to 2016, although is a write-down this year instead of a write-up. Many of the adjustments relate to unit of measure errors (for example cases vs. individual units within a case). Work will be undertaken by Stores to identify and clarify all parts which have a unit of measure other than individual units in order to avoid adjustments in the future. Year 2016 2017 (up to Nov.29) Controllable stock write-down (write-up) ($9,525) 12,555 3 - 2 Uncontrollable Stock Adjustments The remaining $284,751 of write-downs is related to stock which is located in unsecured outside locations within the KOF yard which are not under direct supervision by the Supply Services division. The write-downs are caused by City staff having unrestricted access to take the inventory for use in their jobs without notifying Stores staff to relieve inventory in the system. Many of the variances are related to aggregates and road building supplies. Supply Services delayed changes to the utilization of the scale and layout of the inventory located outside until the completion of the Aggregates review in mid- 2017. Operations and Supply Services are working together to implement the recommendations of the aggregate audit in alignment with the work Supply Services had underway to improve controls around non-controllable stock. This project includes integration of the scale with the City’s financial system (SAP). This collaborative approach will ensure that the yard layout and utilization of the scale will provide increased controls for the aggregates and other non-controllable stock and will continue into 2018. The adjustments for uncontrollable stock included the following: (Note that positive numbers represent write-downs and negative numbers represent write-ups.) Material Group 2016 2017 (up to Nov.29) Manholes & catch basins $4,726 $30,923 Road building materials $44,331 $39,193 Road maintenance supplies (includes salt) $180,278 $174,101 Seed, sod, fertilizer ($1,422) $31,420 Sign shop – raw materials $6,565 $10,366 Steel, aluminum, plate $0($20,828) All other categories ($6,938) $19,572 Total write-downs (non-controllable stock) $228,964 $284,751 Overall, the physical inventory process is in control. Adjustments to controllable stock are considered negligible. Adjustments to uncontrollable stock are to be expected given a lack of process to effectively relieve inventory, and are considered very small regardless. ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: This report supports the achievement of the city’s strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: There are no financial implications related to this report. 3 - 3 COMMUNITY ENGAGEMENT: INFORM – This report has been posted to the City’s website with the agenda in advance of the council / committee meeting. ACKNOWLEDGED BY: Lesley MacDonald, Acting Deputy CAO, Finance and Corporate Services 3 - 4 STATUS AUDIT QUARTER 011 17 FCS 4THREPORT 3 - 5 review audit Standards, capacity / comprehensive ΑtƩƚƦĻƩƷǤ process duties review of Summary capacity Inventory / Maintenance, Enforcement ΑƭĻƦğƩğƷźƚƓ Administration, law progress: PhysicalBy processFireWinterSAP Complete:In 3 - 6 INVENTORY Verification Count PHYSICAL 3 - 7 by captured Process value and counts staff audits: audits: values values inventory locations counts floor verify sheet totalunit total Objective to 3030 to random of TopTop30 ––– verification SheetFloor19% Objective:••• 3 - 8 write Adjusted Nov.29) $219,543 rate of $11.7K (as audit: (Nov.29)2017 down shrinkage 2017$297,306 2.5% during write anomalies is Results for date purchases found 2016 to standard total adjusted of year down$219,438 variances 2.3% Write – 10downTotal3.2%Industry Year Total •••• 3 - 9 Amount$31.4K down plate($20.8K) down materials$39.2K small write write sod,fertilizer very $284.8K and Adjustments = $12.6K = of AmountMaterial$19.6K stock expected stock control supplies$174.1KSeed, in basins$30.9KRoadbuilding Detail materials$10.4KSteel,aluminum, catch & raw categories maintenance ControllableUncontrollable ProcessAdjustments Shop other •••• Material ManholesRoadSignAll 3 - 10 and measure layout of from unit yard with units scale Improvements regarding parts weigh flag audit recommendations individual of and Planned than IdentifyotherImplementAggregatesutilization •• 3 - 11