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HomeMy WebLinkAboutFIN-18-043 - External Audit Planning Report for Fiscal 2018REPORT TO:Audit Committee DATE OF MEETING:December 17, 2018 SUBMITTED BY:Sheri Brisbane,Supervisor Financial Reporting,519-741-2200 ext 7349 PREPARED BY:Sheri Brisbane,Supervisor Financial Reporting,519-741-2200 ext 7349 WARD (S) INVOLVED:All DATE OF REPORT:December 4, 2018 REPORT NO.:FIN-18-043 SUBJECT:External Audit Planning Report for Fiscal 2018 ___________________________________________________________________________ RECOMMENDATION: That the Audit Planning Report for the year ending December 31, 2018 prepared by KPMG, attached as Appendix 1 to report FIN-18-043dated November 12, 2018, beapproved. BACKGROUND: Item 3 (e) in the Audit Committee Terms of Reference states that one of the responsibilities of 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. Committee twice annually. Thisis the first of those meetings for the 2018year end.Asecond 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 The Corporation of the City of Kitchener Audit Planning Report for the year ending December 31, 2018 ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: s strategic vision through the delivery of core service. FINANCIAL IMPLICATIONS: None at this time. Annual audit fees are provided for within the operating budget. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. 2-1 COMMUNITY ENGAGEMENT: INFORM This report and its attachment have agenda in advance of the committee meeting.Itwill provide the public with information to assist them in understanding the scope of the external audit to take place in the spring of 2019. ncial Statements as at December 31, 2018and for the year then ended will be the subject of this audit. The 2018audited financial statements, once completed and approved, will be posted on the City website and notice will be provided to all residents through the Kitchener Postin accordance with Section 295 (1) of the Municipal Act, 2001. ACKNOWLEDGED BY: Jonathan Lautenbach, Chief Financial Officer, Financial Services 2-2 Audit Planning Report for the year ending December 31, 2018 Chartered Professional Accountants, Licensed Public Accountants Prepared on November 12, 2018 for Council Meeting on December 17, 2018kpmg.ca/audit The Corporation of the City of Kitchener 2-3 2 824582738884 8221 --- - 747747747 747 --- - Matthew BetikLead Audit Engagement PartnerTel: 519mbetik@kpmg.caTom MennillQuality Control PartnerTel: 519tmennill@kpmg.caBrendan HallAudit Senior ManagerTel: 519bhall@kpmg.caCourtney ChealAudit Senior ManagerTel: 519ccheal@kpmg.ca The contactsat KPMG inconnectionwith this reportare: Executive summaryAudit scopeAudit risksMaterialityThe audit of today, tomorrow & the futureProposed fees Key deliverables and milestones Appendices New auditor reporting Current developments and audit trends z Table of contents 2-4 3 consolidated revenue. $6,000,000. focused. In planning our audit we have taken into account key - Reserve Fund Revenue, and Enterprise. 13 Group audit scopeAudit and business risksAudit materiality 6- employment benefits, Obligatory Tangible Capital assets,Gasworks ur audit is risk Oareas of focus for financial reporting. These include:•Post-•••See pages Materiality has been determined based on prior year We have determined group materiality to be See page 14 Executive summary 2-5 4 relevant to the changes are $152,400. group audit 20 for relevant accounting - Proposed FeeCurrent developments and Audit Trends Independence & Quality Control 17 Proposed fees for the annual See page Please refer to pages 18Company and relevant audit trends.. 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 approved protocols. Executive summary 2-6 5 Scoping Audit Audit Audit AuditAuditAudit AuditAudit Corp. of the City of Kitchener Entities Corporation City of Kitchener Gasworks EnterpriseCity of Kitchener Trust FundsKitchener Public LibraryThe Centre in the Square Inc.Kitchener Downtown Improvement AreaBelmont Improvement AreaKitchener Power Group Audit Scope 2-7 6 rebutted ? recognition has been significant from revenue of fraud risk Why is it The recognition Our audit approach Professional Requirements Fraud risk from revenue Audit risks 2-8 7 audit. ? have not identified any specific We significant Why is it This is a presumed fraud risk. additional risks of management override relating to this Our audit approach Professional Requirements Fraud risk from management override of controls Audit risks 2-9 8 Why are we focusing here? Estimates and judgements used by management; andComplexity of the accounting guidance –– employment benefits - Our audit approach Other areas of focus Post Audit risks 2-10 9 Why are we focusing here? Revenue recognized from the Development Charge Reserve –Fund is subject to judgement as capital projects must be growth related in nature Our audit approach Other areas of focus Obligatory Reserve Funds Revenue and Deferred Revenue Audit risks 2-11 10 and Why are we focusing here? Significance of the account balances;Risk of error in inappropriately recognizing costs as either ––tangible capital assets or expenses Our audit approach Other areas of focus Tangible Capital Assets Audit risks 2-12 11 Why are we focusing here? High volume of transactions and related complexities; and Potential impact on future gas supply and delivery rates –– Our audit approach Other areas of focus Gasworks operations Audit risks 2-13 12 Why are we focusing here? Significant accountSignificant account Analytical procedures recalculating tax revenue using approved tax rates and related MPAC assessments. Confirmation of details with investment managers. – Our audit approach Other areas of focus – Investments and related incomeTaxation Revenue Audit risks 2-14 13 , r , r transactions with significant transactions user fees Why are we focusing here? Significant accounts underSignificant accounts with significant judgment. Analytical procedures comparing current year’s expenses on a disaggregated basis to the current year budget and the prior yeaPerforming substantivetesting to ensure existence and accuracy of expenses; andTesting the completeness, existence, and accuracy of yearend accruals, most notably those that contain areas of estimate of adjusting for known changes in assumptions. Testing of internal controls over cash receipts and recording; andAnalytical procedures comparing current year’s revenues on a disaggregated basis to the current year budget and the prior yea –adjusting for known changes in assumptions;–– Our audit approach Other areas of focus –– User Fees and Service Charge RevenueExpenses Audit risks 2-15 14 . (2017: $900,000) Misstatements reported to theaudit committeeMateriality for the financialstatements as a whole $900,000 Corrected audit misstatementsUncorrected audit misstatements We will report: (2017: 6,000,000) 6,000,000 Our Materiality levels misstatement threshold for reclassification misstatement is (2017: 300,000) The 300,000 $363,957,077 Materiality represents the level at which we think misstatements will reasonably influence users of the financial statements. It considers both quantitative and qualitative factors.To respond to aggregation risk, we design our procedures to detect misstatements at a lower level of materiality. Materiality Materiality BenchmarkPrior year Consolidated Revenues 2-16 15 procedures. t team in les us to provide men Our tool provides ). Strong business acumen & advanced technology skills Consistent results, early issueidentification Enhanced focus on the risks within the business time access to the process at every - data in the planning and account al evious page r People pr . ount Analysis, Visual Ledger and Journal dge ach mation in performing our audit Acc Risk uto . Assessment Connectivity specific risk identification and circumstances. - Clara KPMG Analytics Advanced Capabilities Analysis D&A Ledger time reporting you need in one central location. - Harness the power of digital analytics for deeper insights and increased quality Broader, deeper views of your data, and richer, more informed perspectives on risks end analytics platform which we leverage to display dynamic visualization of your data. This enab - to Increasing automationin routine areas - stop shop through which we plan, execute and manage the audit, providing you with re - provides meaningful general ledger data insights during the planning phase of the audit that can be used to assist the engage ssists in the performance of detailed journal entry testing based on engagement tool is a powerful and flexible end entry tool a generated journal entry population statistics and focusses ouraudit effort on journal entries that are riskier in nature - Benefit to audit KCCC is our secure audit platform and a onestep, including exchange of information and access to the realKPMG Clara Advanced Capabilities leverage our data and analytics capabilities, enabling us to analyze 100% of your general leanalysis stage and adjust our planned audit approach accordingly to target the areas of greatest risk. It allows us to use aOur Visualizationvaluable insights to your business throughout our audit process. Our accountanalysis tool obtaining a more thorough understanding of the business processes and underlying flow of transactions through utilization of Entry Analysis functional features. Our tool enables a more precise risk assessment and development of a tailored audit approOur journalautoTeam to add details of specific D&A routines done on the client (can be combined with KPMG Clara Advanced Capabilities on the Entry Analysis Clara Advanced Tool Technology we use today KPMG Clara CollaborationKPMGCapabilitiesVisualization ToolAccount Analysis ToolJournalData & Analytics Routines The audit of today, tomorrow & the future As part of KPMG’s technology leadership, our audit practice has developed technologies and alliances to continuously enhance our capabilities and deliver an exceptional audit experience.Technology empowers us with deep analysis over your financial information, focusing our effort and interactions on the areas of greatest risk and minimizing disruption to your business. 2-17 16 16 June 2018 audit report April end fieldwork - Year December Interim fieldwork September/November Key deliverables and milestones 2-18 17 149,500 thereof; s; ion Prior period (actual) 152,400 Current period (budget) year proposal. - per proposal Matters that could impact our fee Significant changes in the nature or size of the operations of the Company beyond those contemplated in our planning processeChanges in professional standards or requirements arising as a result of changes in professional standards or the interpretatChanges in the time of our work; Our fees are estimated as follows: The proposed fees outlined above are based on the assumptions described in the engagement letter.The critical assumptions, and factors that cause a change in our fees, include:••• Proposed fees Audit of the financial statements Please note this is the final year of our five 2-19 18 n ing nt if on or ing e o ncy, and rre ing e the current of measurement gains - statement of re – page for current developments in IFRS, Canadian securities matters, use exchange amount – use exchange amount –provider to use carrying amount; recipient choice of either carrying amount or value fair. Current Developments – / use exchange amount – City: Summary and implications This standard relates to the measurement of transactions between public sector entities that comprise the government’s reportentity.Transactions are recorded at carrying amounts with the exception of the following:(a) In the normal course of business (b) Fair value consideration (c) No or nominal amount (d) Cost allocation This standard is effective for fiscal periods beginning on or after April 1, 2018 (the City’s December 31, 2019 yearend).Implications: The City will have to identify these transactions and determine if they have been measured at the carrying amourequired.A standard has been issued, establishing a standard on accounting for and reporting all types of financial instruments includderivatives. The effective date of this standard has recently been deferred and it is now effective for fiscal periods beginnafter April 1, 2019 (the City’s December 31, 2020 yearend).Implications: This standard will require the City to identify any contracts that have embedded derivatives and recognize thesthe consolidated statement of financial position at fair value. Portfolio investments in equity instruments are required to brecorded at fair value. Changes in fair value will be reported in a new financial statement 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 City. These disclosures include classes of financial instruments and qualitativequantitative risk disclosures describing the nature and extent of risk by type. The risks to be considered include credit, cuinterest rate, liquidity, and market risk. Audit Committee Institute (ACI) entity - Standard Current developments and audit trends Canadian auditing other professional standards and US accounting, auditing and regulatory matters. The following is a summarydevelopments that are relevant to the PS 3420, InterTransactionsFinancial Instruments 2-20 19 r f 2019, ect r o the current of It describes how to account for and report portfolio page for current developments in IFRS, Canadian securities matters, Current Developments / how to account for and report asset retirement obligations associated with tangible capital assets. Sector Accounting Handbook has two sections that address two major sources or revenue, government expecting to release an Exposure Draft. Summary and implications This standard describesThis standard is effective for fiscal periods beginning on or after April 1, 2021 (the City’s December 31, 2022 yearend).Implications: The City will have to identify if they have any asset retirement obligations.In recent years, governments across Canada are increasingly using various forms of public private partnership arrangements fothe provision of assets and delivery of services.This project is expected to develop in two stages. The first stage will involve contemplating specific issues, including projscope, recognition and measurement of a public private partnership and disclosure requirements. Other issues will also be considered. The second stage will involve determining how to account for public private partnerships.The objective is to develop a public sector accounting standard specific to public private partnerships. In the first quartePSAB isThis section revises and replaces PS 3040, Portfolio Investments.investments. Currently the Publictransfers and tax revenue. This new standard addresses the recognition, measurement and presentation of revenues that are common in the public sector other than government transfers and tax revenue. PSAB has approved this section. This standard will be released in the fourth quarter of 2018. Audit Committee Institute (ACI) Portfolio investments Standard Current developments and audit trends Canadian auditing other professional standards and US accounting, auditing and regulatory matters. The following is a summarydevelopments that are relevant to the Company: PS 3280, Asset Retirement ObligationsPublic Private PartnershipsPS 3041,PS 3400, Revenue 2-21 20 0, 325 or Links Link to reportLink to reportLink to report employment Benefits, Compensated Absences and Termination Benefits. Since - employer defined benefit plans and vested sick leave benefits. Other improvements to existing guidance - comment. In 2019 they will deliberate comments received on three invitations to comment. Summary and implications Identified as the top priority in PSAB’s 2014 Project Priority Survey, the Board has approved a project to review Section PS Retirement Benefits, and Section PS 3255, Postthe issuance of these Sections decades ago, new types of pension plans have been introduced and there have been changes in the related accounting concepts.This project will involve looking at issues such as deferral of experience gains and losses, discount rates, how to account fshared risk plans, multiwill also be considered.A new, comprehensive Handbook Section on employment benefits will replace the two existing Sections. PSAB have sent out an invitation to Overview Accelerate is a KPMG trends report and video series that includes the perspective of subject matter leaders from across KPMG in Canada on seven key issues impacting organizations today that are disrupting the audit committee mandate.Blockchain technology is a focused disruptor of the very foundations of external and internal audit: financial recordkeeping and reporting. This Audit Point of View article offers insight on how blockchain technology is impacting business and what audit committees should be thinking about to prepare for certain risks.Learn about KPMG's ongoing commitment to continuous audit quality improvement. We are investing in new innovative technologies and building strategic alliances with leading technology companies that will have a transformative impact on the auditing process and profession. How do we seek to make an impact on society through the work that we do? Thought Leadership Standard AccelerateThe Blockchain shift will be seismicAudit Quality 2017 Current developments and audit trends PS 3250, Employee Benefits 2-22 21 Impact to the 2018 auditors’ report Key audit matter reporting Accordingly, your 2018 auditors’ report will not include the communication of any KAMs as we have not yet been engaged to communicate them and there is no law or regulation that requires such communication. . of the is identified management’s, including management’sand auditors’ ordering of the auditors’ report including moving - Highlights of changes to your 2018 auditors’ report The 2018 Auditors’ Report Reopinion to the first sectionSeparate section on “Material Uncertainty Related to Going Concern” if a material uncertaintySeparate section on “Other Information” (e.g. MD&A)Expanded descriptions of those charged with governance, assessmentEntity’s ability to continue as a going concernNew description of responsibilities of those charged with governanceExpanded descriptions of responsibilitiesDisclosure of name of the engagement partner 2-23 22 Appendix 1: Audit quality and risk managementAppendix 2: KPMG’s audit approach and methodologyAppendix 3: Lean in Audit™Appendix 4: Required Communications Appendices 2-24 23 Assignment based on skills and experience;Performance evaluation;Development and training; and Appropriate supervision and coaching. 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.The processes we employ to help retainand 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 identify instances where we should discontinue our professional association with the client. clients / Personnel management engagements Acceptance & continuance of page for more information including access to our audit quality report, and risk standards Audit quality performance Engagement management and objectivity Independence, integrity, ethics . quality controls Audit Quality Resources Other risk monitoring Independent management on process - time support to - . Audit quality: Our hands ngagement Quality Control Before the firm issues its audit report, EReviewer reviews the appropriateness of key elements of publicly listed client audits.Technical department and specialist resources provide realaudit teams in the field. Other controls include:•••We conduct regular reviews of engagements and partners. Review teams are independent and the work of every audit partner is reviewed at least once every four yearsWe 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.We do not offer services that would impair our independence. Appendix 1: Audit quality and risk management 2-25 24 Appendix 2: KPMG’s audit approach and methodology 2-26 25 How it works 1. Lean training2. Interactive workshops3. Insight reporting Provide basic Lean training and equip our teams with a new Lean mindset to improve quality, value and productivity.Perform interactive workshops to conduct walkthroughs of selected financial processes providing end to end transparency and understanding 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. Lean in Audit employs three key Lean techniques: allowing – on tools, such as walkthroughs and flowcharts of - 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 Audit is process oriented, directly engaging organizational stakeholders and employing handsactual financial processes.By 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 us to provide actionable quality and productivityimprovement observations.Any 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 opportunity to apply such insights to streamline processes, inform business decisions, improve compliance, lower costs, increase productivity, strengthen customer service and satisfaction and drive overall performance. Appendix 3: Lean in Audit™ 2-27 26 the Committee. Annual independence letter Audit findings report Management representation letter At the completion of our audit, we will provide a report to the Audit We will obtain from management certain representations at the completion of annual audit. In accordance with professional standards, copies of the representation letter will be provided to the Audit Committee.At the completion of our audit, we will provide a letter to theAudit Committee. (October 2018) (formerly the “Big Four Firm Public Report”)(October 2018) (formerly the “Big Four Firm Public Report”) management. accordingly. by provided In accordance with professional standards, there are a number of communications that are required during the course of and upon completion of our audit. These include: CPAB Audit Quality Insights Report CPAB Audit Quality Insights Report Audit planning report Engagement letterRequired inquiries attached. The objectives of the audit, our responsibilities in carrying out our audit, as well as management’s responsibilities, are set out in the engagement letter and any subsequent amendment letters as As Professional standards require that during the planning of our audit we obtain your views on risk of fraud and other matters. We make similar inquiries to management as part of our planning process; responses to these will assist us in planning our overall audit strategy and audit approach Appendix 4: Required communications 2-28 27 2-29 2-30