HomeMy WebLinkAboutCAO-2022-418 - 3rd Quarter 2022 Audit Status ReportStaff Report
Chief Administrator's Office
REPORT TO: Audit Committee
DATE OF MEETING: September 19, 2022
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: August 25, 2022
REPORT NO.: CAO -2022-418
SUBJECT: 3rd Quarter 2022 Audit Status Report
RECOMMENDATION:
1
�C R
www.kitchener.ca
That report CAO -2022-418, regarding the 3rd Quarter 2022 Audit Status Report, be
received for information.
REPORT HIGHLIGHTS:
• The purpose of this report is to provide information regarding recent audits.
• There are two audits included in this report as noted in the table below, plus reporting on
three confidential investigations.
• Results of the two audits were positive, with no fraud detected and meaningful process
improvements made. The confidential investigations resulted in termination with cause of
two employees and recovery of funds.
• There are no financial implications.
• Community engagement included this report posted to the city's website with the agenda in
advance of the council / committee meeting.
• This report supports the delivery of core services.
EXECUTIVE SUMMARY:
The following report provides a summary of the Internal Audit assurance and consulting services
completed during the period of January to September 2022. The table below shows the audits
contained in this report.
r
Sign Shop
Lean process review/ Inventory control
Procurement
Status Update
Confidential Investigations
Theft
Consulting work is in progress on the following reviews:
• Training Documentation - process review
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
Page 3 of 35
Note that some audit work has been paused due to pandemic pressures and workload in
subject areas. Support was given to the Emergency Operations Centre until June 2022 and to
other areas where needed instead.
The Sign Shop Lean process review examined the inventory control processes related to the
manufacture of signs. Multiple process improvements were made to improve customer service,
inventory and workorder accuracy. The section is well positioned to continue improving their
processes.
The Procurement status update found that three of five recommendations have been completed,
one is in progress, and one not started. There are no high-risk outstanding actions currently.
This topic will remain in the rotation of controls and compliance audits.
Over the past year there have been three allegations of theft brought to Internal Audit for
investigation. One lacked enough detail to substantiate, while the other two uncovered theft of
City funds. The confidential investigations resulted in termination with cause of two employees
and recovery of funds.
BACKGROUND:
The overarching goal of internal audit is to protect the City's assets and interests. 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.
Internal Audit provides assurance and consulting services in accordance with the International
Standards for the Professional Practice of Internal Auditing (Standards)", IIA 2012. These
services are independent, objective activity designed to add value and improve and
organization's operations. It helps an organization accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes.
Assurance services provide an objective assessment of evidence to provide an independent
opinion or conclusions regarding an entity, operation, function, process, system, or other subject
matter.
Consulting services are advisory in nature and are generally performed at the specific request
of an engagement client. When performing consulting services, the internal auditor should
maintain objectivity and not assume management responsibility.
Audit topics are selected independently by the Internal Auditor and approved by Audit Committee
on an annual basis. Audit results are brought back to Audit Committee in reports such as this
on a quarterly basis as completed.
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REPORT:
1. Sign Shop — Lean Process Review / Inventory Control
Completed. July 26, 2022
Overview:
In 2021 a comprehensive review of Stores Inventory was completed. As part of that review
both Stores staff and internal customers provided input on various topics including processes
and controls. There were some comments from both Stores and Sign Shop staff and internal
customers indicating that the process of inventory control between the two units could be
improved.
Review Objective:
The overall goal of this review was to analyze the process and associated inventory controls
related to sign shop raw materials, work in process, and finished goods to ensure inventory is
being accurately recorded and billed, and the process is as efficient and effective as possible.
Scope:
The following areas are within scope for this review:
• Citizen and internal customer sign order processes
• Stores raw material procurement process
• Raw material ordering and fulfillment from Stores
• Work in progress documentation / inventory tracking
• Finished goods transfer back to inventory
• Determination of unit prices and price estimation process
• Internal and external customer satisfaction
• Criteria for when to use the sign shop vs. outsource
• Clarification of roles and responsibilities
The following areas are out of scope for this audit:
• Value for money analysis
Methodology:
The following activities were completed in this review:
• Staff training on Lean philosophy and basic tools
• Map the current in -scope processes, including:
o Individual or team interviews to capture the step-by-step process
o Documentation of the end-to-end process in a swim lane diagram
o Confirmation of the process maps by both teams
• Survey of existing internal and external customers
• Identification of existing or missing control points to ensure inventory records are correct
• Identification of problems within the process, including quantifying waste
• Root cause analysis of problems
• Solution generation and map the future state process
• Implementation planning
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• Facilitation of Kaizens for any quick -wins or easy to implement improvements
• Support for staff to implement longer term or more complex improvements
Sign Shop Overview:
The Sign Shop, located at the Kitchener Operations Facility within the Operations -Roads and
Traffic division, is responsible for manufacturing regulatory, non -regulatory and information
signage that may be needed on rights-of-way, City of Kitchener facilities and other City of
Kitchener property including City vehicles. They also provide signs to Waterloo Region District
School Board, City of Waterloo, the Region and other external customers upon request. All the
signs along Kitchener rights-of-way, on trails, in parks, and within City facilities were made by
the City of Kitchener sign shop.
The Sign Shop manufactures the following products:
• Stock signs (e.g., stop signs, yield signs, etc.)
• Custom order signs (for internal customers only)
• Name plates (for offices, cubicles, or desks)
• Vehicle graphics
• Interior wall graphics
• Decals and stickers
• Braille signage (in large lots only)
They do not, however, produce the following:
• Illuminated signs
• Braille signage (one -offs or small lots)
• Custom signage for external customers
• Sandblasted wood signage
Findings:
Through the Lean review of Sign Shop processes, three main problems were identified. A
summary of these problems along with their implemented solutions and expected impacts are
included below.
A. Sign Shop cost estimates and intake process
Problem: Customers want to know up front how much a sign will cost them. This requires
much time and effort on part of the Sign Shop to gather necessary information to determine
what the customer is looking for in order to create an estimate. Time is also spent following up
on missing information such as valid cost centres to charge the work to. The time spent on
estimating is not chargeable on the work order, and some projects to do not proceed; in all
cases this process leaves the Sign Shop bearing the cost of the time spent on estimates.
Solutions:
• Created an online intake form to gather all required information including cost centre for
each sign order for internal City requests.
Page 6 of 35
• Created a Sign Shop intranet page for City staff which includes the following helpful
content for customers:
o How to order a sign and link to new intake form
o What products are available from the Sign Shop and what is out of scope
o Pictures of material types and relative prices
o Pictures of finished products
o Contact information including preferred single communication channel
Expected Impacts:
The intranet page will allow customers to get an idea of what is possible and what materials
they can choose from, prior to contacting the Sign Shop. The scope of work provided in-house
is now well defined to make it clear when to go externally for sign orders. Showing the relative
prices of materials is expected to cut down on the number of customers who ask for a formal
cost estimate. Showing the order process, including the intake form, will funnel all requests
through one channel eliminating the possibility of missed orders. The intake form has
mandatory fields which will ensure all the necessary information is gathered up front, saving
both staff and customers wasted time in following up on this information. Early feedback from
customers indicates the form is easy to complete and knowing what to expect in the process is
helpful.
B. Sign Shop inventory accuracy
Problem: Multiple divisions touch the work order (both electronic input and handling the paper
copy) leading to missing paperwork which delays inventory relief. Sometimes the Sign Shop
does not have the right number of raw materials to complete the job, due to either short -
shipped orders from Stores or out of stock situations, which can be caused by the missing
paperwork. At other times excess or incorrect materials are dispersed in error and then need
to be returned, which causes wasted staff effort.
Solutions:
• A regular cycle count program for all stock was designed which will see all parts
counted 4 times per year (rather than just once during the annual physical inventory)
• The minimum re -order point for all Sign Shop raw materials was verified and enabled in
SAP
• Sign Shop staff were given access to view SAP inventory levels
• A digital solution including scanners, barcodes and Excel replaced the paper stock
usage sheets
• Stock which hasn't moved in more than 5 years was assessed and declared surplus if
no longer usable
• Incoming bundles of raw material will be counted by Stores and labeled with the
quantity in each bundle (since supplier bundles are inconsistent)
• A template for each type of sign blank with the correct specification is located in the
storage bins to check incoming materials against
• Similar sized raw materials were moved to separate shelves in Stores and clearly
labeled
Page 7 of 35
Expected Outcomes:
The cycle count program, minimum order quantity system flags, and Sign Shop visibility to
inventory levels will help ensure accurate inventory quantities at all times and no stock outs. In
addition, the new digital method of recording raw materials used in real time will eliminate the
possibility of lost paperwork and the time delay to relieve inventory. Cleaning up obsolete
inventory will provide more workspace and cut down on the number of parts required to be
counted during cycle counts or the physical inventory count. Counting the quantity in incoming
bundles of raw materials will ensure the quantity received from the vendor is correct and that
the quantity dispersed to the Sign Shop is correct. Previously the quantity was assumed to be
in multiples of 5 or 10 but this was not always the case. Comparing incoming stock to the
verified templates will ensure all sign blanks are to the correct specifications before dispersing
to the Sign Shop for use. This will save time and eliminate rework. Rearranging the location of
similar stock on the shelves will reduce the likelihood of staff picking the wrong part to fulfill
Sign Shop raw material orders. This will save time and eliminate rework.
C. Sign Shop work order accuracy
Problem: Work orders should contain the material, labour and equipment charges incurred to
produce the job. In some cases, work orders have had additional materials added that were
not used in the job (sign shop materials as well as other items). Assigning inventory relief to
work orders is a manual process and subject to keying errors. In addition, some sign materials
are charged out in full sheets but only a portion of the sheet is used for the job. All of these
issues could mean customers are charged far more than the job is worth.
Solutions:
A digital solution including scanners, barcodes and Excel replaced the paper stock
usage sheets (as noted above)
Stores staff provided access and training on CityWorks (work order system) to view
work orders
Sheets of material will now use the digital solution for material usage and only the
amount used will be charged to the work order.
Expected Outcomes:
The digital solution, as noted previously, will allow real time inventory relief. It will eliminate
data keying errors of part numbers as these are now entered using scanners and barcodes.
Future improvements to this solution include changes to Cityworks to convert the workorder
number to a barcode as well, to eliminate keying errors. Stores staff can now look up
workorder numbers provided by Stores customers to ensure the product matches the project
(e.g., not charging aggregates to a sign shop order). This will reduce the number of incorrect
workorders. Customers will be charged accurately for the time and materials used to create
their sign order.
Conclusion:
Several small, simple solutions have been implemented as part of this project which will have
significant impacts on accuracy of inventory and workorders, as well as providing better
customer service and reducing wasted effort and rework.
Page 8 of 35
2. Procurement Controls — Status Update
Completed. June 27, 2022
Overview:
A comprehensive audit of the Purchasing division (now the Procurement team) was completed
in November 2014. A status update was conducted in March 2020 to determine the status of
the original recommendations. However, no controls or compliance testing was done at that
time. Procurement controls are a standard audit topic which are part of the ongoing rotation of
controls and compliance audits, and it was time in 2021 to complete such an audit. A controls
audit of Procurement processes was conducted in June 2021.
Audit Objective:
All services which have undergone a service review in the past are subject to a status update,
not sooner than one year following the original audit. The purpose of status updates is to hold
staff accountable for addressing the audit findings and to identify any areas that have not seen
significant progress. In addition, if applicable, further testing or review may also be done to
test whether improvements have had the intended effect.
Scope:
This status update includes:
• A status of all recommendations from the controls testing performed in June 2021.
Status Definitions:
• Complete = the recommendation has been fully implemented.
• In progress = implementation has begun.
• Not started = no work has begun yet but will in the future.
• Not required = the recommendation either does not require any action, or it is no longer
relevant, and no work will be done to implement it.
Number of original recommendations:
5
Number of recommendations complete:
3
Number of recommendations in progress:
1
Number of recommendations not started:
1
Number of recommendations not required:
0
In July 2021 an audit detection feature within SAP Concur was activated which audits all
expenses by cross referencing expenses with receipts to catch duplicates, out of spend policy,
suspicious merchants or attendees, and excessive spend. This enhancement will greatly
mitigate risks related to employee expenses.
While Procurement Specialists do monitor business unit purchase order creation and vendor
spends and will inquire when multiple purchases are made with the same vendor, a detailed
vendor analysis to determine when blanket POs may be appropriate has not been completed
due to resourcing constraints.
Page 9 of 35
Lack of resources has also prohibited the analysis of the vendor master file to clean-up
duplicate records. However, this does not pose a large risk.
Conclusion / Next Steps:
There are no serious outstanding procurement risks at this time. This topic will remain on the
rotation for periodic controls audits.
3. Confidential Investigations
Internal Audit is responsible for investigating and responding to any allegations of fraud, theft
or misconduct of City staff or Council which are brought forward by staff or the public.
In the past year there have been three allegations of theft or misuse of assets which have
been investigated by Internal Audit. In one case there were not enough details to substantiate
the theft or misuse.
The remaining two cases related to employee expense fraud and theft of deposits and petty
cash, respectively. The City will not tolerate theft of any kind and therefore investigations have
resulted in termination with cause of two employees and recovery of funds. A review of the
related controls revealed these were isolated instances. Detective controls were in place to
identify the fraud when preventative controls were overridden.
STRATEGIC PLAN ALIGNMENT:
This report supports the delivery of core services.
FINANCIAL IMPLICATIONS:
Capital Budget — The recommendation has no impact on the Capital Budget.
Operating Budget — The recommendation has no impact on the Operating Budget.
COMMUNITY ENGAGEMENT:
INFORM — This report has been posted to the City's website with the agenda in advance of the
council / committee meeting.
PREVIOUS REPORTS/AUTHORITIES:
• CAO -2022-008: 2022 Internal Audit Work Plan
APPROVED BY: Dan Chapman, CAO
Page 10 of 35
Cr1l"ll I'll , IM, -
ACY-2022-4,",1.8
3RD QUARTER AUDIT STATUS
REPORT
Page 11 of 35
Completed:
✓Sign Shop — Lean process review / Inventory
control
✓Procurement Controls — status update
✓3 Confidential Investigations
In progress:
LJTraining documentation review
Page 12 of 35
SIGN SHOP LEAN PROCESS REVIEW
& INVENTORY CONTROL
Page 13 of 35
Overview,.,
The Sign Shop manufactures regulatory and non -regulatory
signage for the City and external customers
Product ff ri n
• Stock Signs
• Custom order signs
• Name plates
• Vehicle graphics
• Interior wall graphics
• Decals & stickers
Page 14 of 35
Audit Objective:
To analyze sign shop process and inventory controls to
ensure inventory is accurately recorded and billed, and
the process is efficient and effective as possible.
Scope:
• Sign shop process from order to fulfillment
• Customer satisfaction
• When to use sign shop vs. outsource
Out of Scope:
• Value for money analysis
Page 15 of 35
9
• Staff training on Lean
• Current state mapping
• Customer survey (internal and external)
• Identification of problems and control gaps
• Root cause analysis
• Solution generation
• Implementation planning and execution
Page 16 of 35
• 3 main problem areas identified:
— Cost estimates and intake process
—Inventory accuracy
— Work order accuracy
Page 17 of 35
Problem:
• Customers want to know upfront how much
the custom sign will cost
• Time and effort required to gather
requirements and follow up on valid cost
centres to charge
• Estimation time is not chargeable to the
customer — Sign Shop must bear this cost
Page 18 of 35
• Online intake form with mandatory fields
• Sign Shop intranet page
Signs
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Page 19 of 35
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• Customers can self -serve information such as
sign ideas, materials, relative cost, when to
outsource
• Decrease in cost estimates requested
• No missing information or cost centres
• Saves both staff and customers time
• No missing or delayed orders
Page 20 of 35
Problem:
• Multiple divisions touch the work order which
leads to missing paperwork and delay in
inventory relief
• Incorrect raw materials due to:
—Stock outs related to missing paperwork
—Short -shipped orders from Stores or supplier
—Incorrect quantity or material dispersed from
Stores
Page 21 of 35
• Regular cycle count program
• Minimum re -order point set in SAP
• Sign Shop given access to view SAP inventory
• Digital solution for stock usage including
scanners, barcodes and Excel
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Page 22 of 35
• Stock clean-up of parts >5 years old
• Racking for better visibility of stock
Before
Page 23 of 35
• Specification templates created for each type
Page 24 of 35
• Incoming bundles counted and labeled
• Reorganized and labeled storage shelves
After
Page 25 of 35
E
M
• No missing paperwork or delayed inventory relief
• Accurate inventory levels at all times and no
stock -outs
• More space and decreased number of parts to
count
• Signs meet specifications
• Correct quantity and part numbers dispersed
• Save time and eliminate rework
Page 26 of 35
Problem:
• Work orders found to have incorrect materials
charged
• Manual process subject to keying errors
• Some product charged out in full sheets vs.
what was used
• Over or under charge the customer
Page 27 of 35
• Digital solution for stock usage
• Cityworks access for Stores staff
• Use digital solution for sheet material and
only charge out what material was used
Page 28 of 35
Jr 9�� , i % �IIIIII�(Li/' 1
• No keying errors on parts
• Ability to look up workorders to ensure
product matches the project
• Reduction in incorrect workorders
• Customers are accurately charged for their
signs
Page 29 of 35
• Simple solutions with large impacts
—Improved accuracy of inventory and workorders
—Improved customer service
— Reduction in waste and rework
• Sustainment plan to ensure completion of
actions and continued focus on improvement
Page 30 of 35
Page 31 of 35
Status Update Objective:
To hold staff accountable for addressing audit findings
and identify areas without significant progress.
Original Audit Objective:
To ensure that procurement controls are adequate to
safeguard from theft.
Page 32 of 35
Total recommendations 5
Complete 3
In progress 1
Not started 1
Not required 0
• Audit detection feature activated in SAP Concur
• Lack of resources for vendor and master file
analysis
Page 33 of 35
CONFIDENTIAL INVESTIGATIONS
Page 34 of 35
9
3 Cases:
• 1 case —not enough details to substantiate
• 2 cases —termination with cause and recovery of
funds
• Isolated instances
• Detective controls in place when preventative controls
overridden Page 35 of 35
