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HomeMy WebLinkAboutFIN-2022-520 - External Audit Planning Report for Fiscal Year 2022 Financial Services Department www.kitchener.ca REPORT TO: Audit Committee DATE OF MEETING: December 19, 2022 SUBMITTED BY: Greg Demacio, Manager, Financial Reporting and Analysis, 519-741- 2200 ext. 7895 PREPARED BY: Greg Demacio, Manager, Financial Reporting and Analysis, 519-741- 2200 ext. 7895 WARD(S) INVOLVED: All DATE OF REPORT: December 9, 2022 REPORT NO.: FIN-2022-520 SUBJECT: External Audit Planning Report for Fiscal Year 2022 RECOMMENDATION: That the Audit Planning Report for the year ended December 31, 2022 prepared by KPMG, attached as Appendix A to report FIN-2022-520 be approved. REPORT HIGHLIGHTS: The purpose of this report iexternal auditors (KPMG). The approach being proposed is consistent with previous years. This report supports the delivery of core services. BACKGROUND: Item 3 (e) of the Audit Committee Terms of Reference states that one of the responsibilities of the 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. This is the first of those meetings for the 2022 fiscal year. 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 which is attached as of Kitchener Audit Planning Report for the year ended Dece STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. FINANCIAL IMPLICATIONS: None. COMMUNITY ENGAGEMENT: INFORM council / committee meeting. It will provide the public with information to assist them in consolidated financial statements for the year ended December 31, 2022, will be the subject of this audit. The 2022 audited consolidated financial statements, once completed and approved, will be posted on the City website and notice will be provided to all residents through a widely distributed newspaper in accordance with Section 295 (1) of the Municipal Act, 2001. PREVIOUS REPORTS/AUTHORITIES: Municipal Act, 2001 APPROVED BY: Jonathan Lautenbach, Chief Financial Officer, Financial Services ATTACHMENTS: Appendix A The Corporation of the City of Kitchener Audit Planning Report for the year ended December 31, 2022 The Corporation of the City of Kitchener Audit Planning Report for the year ended December 31, 2022 November 28, 2022 KPMG contacts Key contacts in connection with this engagement Matthew Betik Courtney Cheal Lead Audit Engagement PartnerLead Senior Manager 519-747-8245519-747-8884 mbetik@kpmg.caccheal@kpmg.ca Catherine Okon Manager 519-747-8238 catherineokon@kpmg.ca 2 Digital use Tableof contents information This Audit Planning Report is also available as a “hyper-linked” PDF Audit qualityKPMG ClaraHighlights document. 467 If you are reading in electronic form (e.g. In “Adobe Reader” or “Board Books”), clicking on the Audit planAudit scopeAudit risks home symbol on the top 81011 right corner will bring you back to this page. Key milestones and Appendices deliverables 1314 Click on any item in the table of contents to navigate to that section. This report to the Audit Committee is intended solely for the information and use of management, the Audit Committee, and theboard of directors and should not be used for any other purpose or any other party. KPMG shall have no responsibility or liability for loss or damages or claims, if any, to or by any third party as this report to the Audit Committee has not been prepared for, and is not intended for, and should not be used by, any third party or for any other purpose. 3 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality: How do we deliver audit quality? Quality essentially means doing the right thing and remains our highest priority. Our Global Quality Framework outlines how we deliver quality and how every partner and staff member contribute to its delivery. ‘Perform quality engagements’sits at the core along with our commitment to continually monitor and remediate to fulfil on our quality drivers. Our quality value drivers are the cornerstones to our approach underpinned by the supporting drivers and give clear direction to encourage the right behaviours in delivering audit quality. We define ‘audit quality’ as being the outcome when: •audits are executed consistently, in line with the requirements and intent of applicable professional standards within a strong system of quality controls; and •all of our related activities are undertaken in an environment of the utmost level of objectivity, independence, ethics and integrity. Doing the right thing. Always. 4 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality: Indicators (AQIs) The objective of these measures is to provide more in-depth information about factors that influence audit quality within an audit process. Below are the AQIs that we have agreed with management are relevant for the audit. We would like to obtain agreement of the Audit Committee that these are the relevant AQIs. We will communicate the status of the below AQIs onan annual basis. Team compositionEngagement hours Technology in the audit Experience of the teamHours spent by level and phase Implementation of technology of the audit in the audit •Role –number of years experience in the industry, number of years on this •Increase in use of technology in the audit •Number and percentage of hours incurred by engagement year over year EQCR, Partners, Executive Directors by significant risk or key audit matter •Number and percentage of hours incurred by Directors, Senior Managers and Managers by significant risk or key audit matter Management and Audit Timing of prepared by •Number and percentage of hours incurred by Committee responsibilities client (PBC) items audit staff and seniors by significant risk or key audit matter •Number and percentage of hours incurred by Timeliness of PBC items Results of internal and external reviews professionals with specialized skills by •Number of timely and overdue items received •Number and nature of findings specific to the significant risk or key audit matter by the audit team. audit engagement 5 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Our audit platform –KPMG Clara Building upon our sound audit quality foundations, we are making significant investments to drive consistency and quality acrossour global audit practices. We’ve committed to an ongoing investment in innovative technologies and tools for engagement teams, such as KPMG Clara, our smart audit platform. KPMG Clara analytics KPMG Clara workflowKPMG Clara for clients Real-time collaboration and Insights-driven efficient operations Globally consistent execution transparency Using the latest technologies to analyze A modern, intuitively written, highly Allows the client team to see the real- applicable audit methodology that data, KPMG Clara allows us to visualise time status of the engagement and the flow of transactions through the allows us to deliver globally who from our KPMG team is leading consistent engagements.system, identify risks in your financial on a deliverable. data and perform more specific audit procedures. Learn more Learn moreLearn more 6 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Highlights Scope of the audit Our audit of the consolidatedfinancial statements (“financial statements”) ofThe Corporation of the City of Kitchener (“the Company”) as of and for the yearendingDecember 31, 2022, will be performed in accordance with Canadian generally accepted auditing standards (CASs). Significant risks Rebuttable significant risksRequired communications We have identified significant risks of The presumed fraud risk involving improper material misstatement for the audit. revenue recognition has been rebutted by us. See Appendix: Other required See significant risks section for communications. The engagement details. letter will be provided at a later date 7 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Materiality Plan and perform the audit We initially determine materiality to provide a basis for: •Determining the nature, timing and extent of risk assessment procedures; •Identifying and assessing the risks of material misstatement; and •Determining the nature, timing, and extent of further audit procedures. We design our procedures to detect misstatements at a level less than materiality in individual accounts and disclosures, to reduce to an appropriately low level the probability that the aggregate of uncorrected and We initiallydeterminemateriality atalevelatwhichweconsiderthat undetected misstatements exceeds materiality for the financial statements as misstatementscouldreasonablybeexpectedtoinfluencethe a whole. economicdecisionsofusers.Determiningmaterialityisamatterof professionaljudgement,consideringbothquantitativeandqualitative Evaluate the effect of misstatements factors,andisaffectedbyourperceptionofthecommonfinancial informationneedsofusersofthefinancialstatementsasagroup.We donotconsiderthepossibleeffectofmisstatementsonspecific We also use materiality to evaluate the effect of: individualusers,whoseneedsmayvarywidely. •Identified misstatements on our audit; and We reassessmateriality throughouttheauditandrevisematerialityif •Uncorrected misstatements, if any, on the financial statements and in webecomeawareofinformationthatwouldhavecausedusto forming our opinion. determineadifferentmaterialitylevelinitially. 8 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Materiality % Benchmark% Other Relevant Metrics 2021 total revenues 12 12 $482,202,918 11 11 (2020: $462,542,874) 10 10 9 9 8 8 2021 total expenses 7 7 Materiality $376,675,172 6 6 $10 million (2020: $364,149,087) 5 5 (2021: $10.35M) 4 4 3 3 2021 Net financial assets 2 2 $309,588,965 1 1 (2020: $270,286,073) 0 0 Prior year 2021 total 2021 Net Debt 2021 total Current year expenses revenues 9 Audit QualityKPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Scope Entities Scoping The Corporation of the City of KitchenerAudit City of Kitchener Gasworks Enterprise (special audit, not considered a component)Audit Kitchener Public LibraryAudit The Centre in the Square Inc.Audit Kitchener Downtown Improvement AreaAudit Belmont Improvement AreaAudit Kitchener Power Corp./Enova Energy CorporationAudit The Trust Funds of the Corporation of the City of Kitchener (special audit, not consolidated within the City of Kitchener financial statementsAudit 10 Audit Quality KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Advanced Significant risks Technologies RISK OF Our KPMG Clara Journal Management Override of Controls FRAUD Entry AnalysisTool assists in the performance Why is it significant?Audit approach of detailed journal entry testing based on Presumption Management is in a unique position to perpetrate As this presumed risk of material misstatement due to of the risk of fraud fraud because of its ability to manipulate accounting fraud is not rebuttable, our audit methodology engagement-specific risk resulting from records and prepare fraudulent financial statements incorporates the required procedures in professional identification and management by overriding controls that otherwise appear to be standards to address this risk. These procedures include: override of circumstances. Our tool operating effectively. Although the level of risk of •testing of journal entries and other adjustments, controls management override of controls will vary from entity provides auto-generated to entity, the risk nevertheless is present in all entities.•performing a retrospective review of estimates journal entry population •evaluating the business rationale of significant statistics and focusses our unusual transactions. audit effort on journal entries that are riskier in nature. Click to learn more 11 Audit Quality KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Other areas of focus AreasRisk due to errorAudit approach Post-employment benefits Elevated-Communicate with management’s actuarial specialist Weare focusing on this area due to this being an -Assess the reasonableness of assumptions used, and estimate with significant judgment used by -Test the reasonableness of the underlying data, including employee populations management and management’s specialists. Additionally there is complexity of the accounting -We will also use the work of MondelisActuarial (actuarial consultant) in our audit of the guidance. accounts and disclosures Tangible capital assets Base-Discuss capitalization policies and their application with management We are focusing on this area due to the -Test a sample of capital additions to ensure existence and accuracy of additions significance of the account balances and there is -Test items recorded as repairs and maintenance or other similar accounts to ensure a risk of error in inappropriately recognizing costs completeness of capital additions as either capital or operating. Obligatory reserve fund Elevated -Test controls around the recording of revenues/cash receipts revenue and deferred We are focusing on this area due to revenue -Perform substantive testing over amounts being recognized as revenue by ensuring the revenue recognized from development charge reserve projects which the development charges are allocated to are appropriate and the fund is subject to judgment as capital projects related expenditure has incurred; and must be growth related in nature -Perform substantive testing over the collections of development charges recorded in the deferred revenue account Investment in Enova Base -Test the accounting for the merger Energy Corporation We are focusing on this area due to the change in the City’s investment in Kitchener Power Corporation to the newly merged Enova Energy Corporation 12 Audit Quality KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Key milestones and deliverables 13 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendices Newly effective Other required auditing standardscommunications AA Insights to enhance your business A 14 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Other required communications CPAB communication protocol The reports available through the following links were published by the Canadian Public Accountability Board to inform Audit Committees and other stakeholders about the results of quality inspections conducted over the past year: •CPAB Audit Quality Insights Report: 2021 Annual Inspections Results •CPAB Audit Quality Insights Report: 2022 Interim Inspections Results •The 2022 Annual Inspection Results will be available in March 2023 The current year engagement letter will be provided to management at a later date. 15 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Newly effective auditing standards CAS 315 (Revised) Identifying and Assessing the Risks of Material Misstatement has been revised, reorganized and modernized in response to challenges and issues with the previous standard. It aims to promote consistency in application, improve scalability, reduce complexity, support a more robust risk assessment and incorporate enhanced guidance material to respond to the evolving environment, including in relation to information technology. Conforming and consequential amendments have been made to other International Standards on Auditing. Applies to audits of financial Affects both preparers of statements for periods financial statements and beginning on or after 15 auditors December 2021 See here for more information from CPA Canada A risk of material misstatement exists when there is We design and perform risk assessment procedures to obtain a reasonable an understanding of the: possibility of a •entity and its environment; misstatement •applicable financial reporting framework; and occurring and being •entity’s system of internal control. material if it were to occur The audit evidence obtained from this understanding provides a basis for: •identifying and assessing the risks of material misstatement, whether due to fraud or error; and •the design of audit procedures that are responsive to the assessed risks of material misstatement. 16 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Newly effective auditing standards Impact on management Key change Impact on the audit team Overall, a more robust risk When assessing inherent risk for identified risks of material If the effect of this consideration is that our assessment of the risks identification and assessment misstatement, we consider the degree to which inherent risk of material misstatement is higher, then our audit approach may process, including: factors (such as complexity, subjectivity, uncertainty, change, increase the number of controls tested and/or the extent of that susceptibility to management bias) affect the susceptibility of testing, and/or our substantive procedures will be designed to be •New requirement to take into assertions to misstatement.responsive to the higher risk. account how, and the degree to We use the concept of the spectrum of inherent risk to assist us which, ‘inherent risk factors’ affect We may perform different audit procedures and request different in making a judgement, based on the likelihood and magnitude of the susceptibility of relevant information compared to previous audits, as part of a more focused a possible misstatement, on a range from higher to lower, when assertions to misstatement response to the effects identified inherent risk factors have on the assessing risks of material misstatement assessed risks of material misstatement. •New concept of significant classes The changes may affect our assessments of the risks of material of transactions, account balances misstatement and the design of our planned audit procedures to and disclosures and relevant respond to identified risks of material misstatement. assertions to help us to identify and If we do not plan to test the operating effectiveness of controls, assess the risks of material the risk of material misstatement is the same as the assessment misstatement of inherent risk. •New requirement to separately assess inherent risk and control risk for each risk of material misstatement •Revised definition of significant risk for those risks which are close to the upper end of the spectrum of inherent risk 17 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Newly effective auditing standards Impact on management Key change Impact on the audit team Overall, a more robust risk When making this evaluation, we consider all audit evidence obtained, In certain circumstances, we may perform additional risk identification and assessment whether corroborative or contradictory to management assertions. If assessment procedures, which may include further inquires of process, including evaluating we conclude the audit evidence obtained does not provide an management, analytical procedures, inspection and/or observation. whether the audit evidence appropriate basis, then we perform additional risk assessment obtained from risk assessment procedures until audit evidence has been obtained to provide such a procedures provides an basis. appropriate basis to identify and assess the risks of material misstatement Overall, a more robust risk We evaluate whether our determination thatcertain material classes In certain circumstances, this evaluation may result in the identification and assessment of transactions, account balances or disclosures have no identified identification of additional risks of material misstatement, which will process, including performing risks of material misstatement remains appropriate.require us to perform additional audit work to respond to these risks. a ‘stand back’ at the end of the risk assessment process 18 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Newly effective auditing standards Impact on management Key change Impact on the audit team Modernized to recognize the New requirement to understand the extent to which the business We will expand our risk assessment procedures and are likely to evolving environment, model integrates the use of IT. engage more extensively with your IT and other relevant personnel including in relation to IT when obtaining an understanding of the entity’s use of IT, the IT When obtaining an understanding of the IT environment, including IT environment and potential risks arising from IT. This might require applications and supportingIT infrastructure, it has been clarified that increased involvement of IT audit professionals. we also understand the IT processes and personnel involved in those processes relevant to the audit.Changes in the entity’s use of IT and/or the IT environment may require increased audit effort to understand those changes and Based on the identified controls we plan to evaluate, we are required affect our assessment of the risks of material misstatement and to identify the:audit response. •IT applications and other aspects of the IT environment relevant to those controlsRisks arising from the use of IT and our evaluation of general IT •related risks arising from the use of IT and the entity’s general IT controls may affect our control risk assessments, and decisions controls that address them. about whether we test the operating effectiveness of controls for the purpose of placing reliance on them or obtain more audit evidence Examples of risks that may arise from the use of IT include from substantive procedures. They may also affect our strategy for unauthorized access or program changes, inappropriate data testing information that is produced by, or involves, the entity’s IT changes, risks from the use of external or internal service providers for applications. certain aspects of the entity’s IT environment or cybersecurity risks. Enhanced requirements New requirement to design and perform risk assessment procedures We may make changes to the nature, timing and extent of our risk relating to exercising in a manner that is not biased toward obtaining audit evidence that assessment procedures, such as our inquires of management, the professional skepticism may be corroborative or toward excluding audit evidence that may be activities we observe or the accounting records we inspect. contradictory. Strengthened documentation requirements to demonstrate the exercise of professional scepticism. 19 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Newly effective auditing standards Impact on management Key change Impact on the audit team Clarification of which controls need We will evaluate the design and implementation of controls that We may identify new or different controls that we plan to evaluate to be identified for the purpose of address risks of material misstatement at the assertion level as the design and implementation of, and possibly test the operating evaluating the design and follows:effectiveness to determine if we can place reliance on them. implementation of a control •Controls that address a significant risk. We may also identify risks arising from IT relating to the controls we •Controls over journal entries, including non-standard journal plan to evaluate, which may result in the identification of general IT entries. controls that we also need to evaluate and possibly test whether •Other controls we consider appropriate to evaluate to enable they are operating effectively. This may require increased us to identify and assess risks of material misstatement and involvement of IT audit specialists. design our audit procedures 20 KPMG ClaraHighlightsAudit PlanAudit ScopeAudit RisksKey Milestones and DeliverablesAppendices Audit Quality Appendix: Insights to enhance your business Learn more We have the unique opportunity as your auditors to perform a deeper dive to better understand your business processes that are relevant to financial reporting. Lean in Audit How it works StandardAudit Typical process and how it's Lean in Audit™is KPMG’s award-winning audited methodology that offers a new way of looking at processes and engaging people within your finance function and organization through the audit. TM By incorporating Lean process analysis techniques Lean inAudit Applying a Lean lens to into our audit procedures, we can enhance our perform walkthroughs understanding of your business processes that are Typically 95% + is considered relevant to financial reporting and provide you with redundant through a new and pragmatic insights to improve your customer’s lens processes and controls. How Lean in Audit Make the process more Clients like you have seen immediate benefits such helps businesses streamlined and efficient for all as improved quality, reduced rework, shorter improveprocesses processing times and increased employee engagement. Value: whatcustomers Redundant:non-essential Necessary: required We look forward to using this approach on your want(maximize) activities(remove) activities(minimize) audit this year. ProcesscontrolsKey controlstested 21 kpmg.ca © 2022 KPMG LLP, an Ontario limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG member firms around the world have 227,000 professionals, in 145 countries.