HomeMy WebLinkAboutAudit Agenda - 2023-12-11Audit Committee
Agenda
Monday, December 11, 2023, 3:30 p.m. - 4:30 p.m.
Council Chambers - Hybrid
City of Kitchener
200 King Street W, Kitchener, ON N2G 4G7
People interested in participating in this meeting can register online using the delegation registration
form at www.kitchener.ca/delegation or via email at delegation (a)kitchener.ca. Please refer to the
delegation section on the agenda below for registration in-person and electronic participation
deadlines. Written comments received will be circulated prior to the meeting and will form part of the
public record.
The meeting live -stream and archived videos are available at www.kitchener.ca/watchnow.
*Accessible formats and communication supports are available upon request. If you require
assistance to take part in a city meeting or event, please call 519-741-2345 or TTY 1-866-969-9994.*
Chair: Mayor B. Vrbanovic
Pages
1. Commencement
2. Disclosure of Pecuniary Interest and the General Nature Thereof
Members of Council and members of the City's local boards/committees are
required to file a written statement when they have a conflict of interest. If a
conflict is declared please visit www.kitchener.ca/conflict to submit your written
form.
3. Delegations
Pursuant to Council's Procedural By-law, delegations are permitted to address
the Committee for a maximum of five (5) minutes. All Delegations where
possible are encouraged to register prior to the start of the meeting. For
Delegates who are attending in-person, registration is permitted up to the start
of the meeting. Delegates who are interested in attending virtually must register
by 1:00 p.m. on December 11, 2023, in order to participate electronically.
4. Status Updates
4.1 4th Quarter Audit Status Report, CAO -2023- 15 m 3
509
5. Discussion Items
5.1 2024 Internal Audit Work Plan, CAO -2023-527 15 m 21
6. Information Items
6.1 None.
7. Adjournment
Marilyn Mills
Committee Administrator
Page 2 of 29
Staff Report
Chief Administrator's Office www.kitchener.ca
REPORT TO: Audit Committee
DATE OF MEETING: December 11, 2023
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 17, 2023
REPORT NO.: CAO -2023-509
SUBJECT: 4th Quarter 2023 Audit Status Report
RECOMMENDATION:
For information.
REPORT HIGHLIGHTS:
• The purpose of this report is to provide information regarding recent audits.
• There are two audits included in this report: 1) Physical Inventory Count; and 2) Market
Alcohol Control status report.
• Results of the audits were positive, with no fraud detected.
• 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 October to December 2023. The table below shows the audits
contained in this report.
Assurance work is in progress on the following topics:
Consulting work is in progress on the following reviews:
• Training Documentation - process review
• External billable work orders — Lean review
• Contractor Management — gap analysis 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 29
The physical inventory count verification found three variances, which resulted in a $2,029.90
write-up. Total adjustments for the year were $143,147 write-down related mainly to salt and
aggregate adjustments. Overall, the physical inventory process is in control and no concerns
were identified.
The Market Alcohol status update found that 100% of audit recommendations to better protect
alcohol inventory from theft have been implemented.
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 an
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.
REPORT:
1. Physical Inventory — Count Verification
Completed: November 5, 2023
Overview
The Procurement -Stores section of the Financial Operations division is responsible for the
receipt, storage, and disbursement of a variety of physical inventory used in City operations.
This inventory is stored within the Stores warehouse within the Kitchener Operations Facility
(KOF), as well as some larger items being stored outside in the yard. (e.g., large pipe, catch
basins, aggregates, salt). Stores staff perform an annual inventory of all parts and materials to
ensure that financial records match the amounts on hand. Internal audit then counts a sample
of parts to provide assurance that staff counts are accurate. This is a standard audit activity. In
addition, staff make adjustments to inventory balances within SAP throughout the year and
during the physical inventory count to restore the financial balance to equal the quantity on
hand. An analysis of the total adjustments for the year is also included below.
Page 4 of 29
Definitions
Controllable stock - stock which the Stores staff have direct control over with regards to
purchases and usage. Located within the warehouse.
Floor -to -sheet audit — randomly selecting parts in the warehouse, counting them, and
comparing the quantity to what is in the financial system (SAP).
Sheet -to -floor audit — pre -selecting parts based on unit value or total value, counting them,
and comparing the quantity to what is in SAP. This includes both warehouse and outdoor
inventory.
Shrinkage rate — the percentage of total inventory purchases that are written -down or lost due
to factors such as theft, error, fraud, or damage.
Uncontrollable stock - stock which is located in the KOF yard which are not under direct
supervision by the Stores division.
Write-down - the quantity on hand was less than what was recorded in SAP and therefore the
financial records were decreased to match the physical quantity. Usually occurs when
inventory is used without updating SAP.
Write-up — the quantity on hand was more than what was recorded in SAP and therefore the
financial records were increased to match the physical quantity. Usually occurs due to keying
errors when setting up or relieving inventory, or when the wrong unit of measure was used
(e.g., number of cartons counted instead of individual parts).
Audit Process and Findings
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 25% of the total value
of inventory. The sheet -to -floor audits covered the top 10 unit values and top 10 total values.
The floor -to -sheet audits consisted of twenty random shelf locations. Three variances, which
equates to 8% of the sample, were found through this verification process which resulted in a
$2,029.90 write-up. This is considered a very low value of variances found through the audit
process and is consistent with prior years. It represents 0.05% of total inventory on hand.
Total Adjustments
In addition to reporting on the variances found through the audit process during the physical
inventory, the total adjustments for the year are also reported below. These numbers include
the adjustments made by staff during the physical inventory and the $2,030 write-up driven by
the internal audit verification, as well as all other adjustments made throughout the year. The
purpose of this analysis is to identify any material groups or part numbers that have large or
unusual adjustments to ensure the root cause has been identified and actions put in place to
eliminate or reduce adjustments in the future.
Note that positive numbers represent write-ups and negative numbers represent write-downs.)
Year
2021
2022
2023
Controllable stock write-up
$15,701
$82,029
$84,936
Uncontrollable stock write-
up (down)
($185,017)
($222,268)
($228,043)
Total write-up (down)
($185,316)
($140,239)
($143,107)
Page 5 of 29
In 2023 the total adjustments for the year (Nov. 10/22 to Nov.9/23) were $143,107 write-down.
Usually, the total adjustments are a write-down between $50,000 - $200,000 related to
adjustments to aggregates and salt in the yard and therefore this figure is within normal
expectations. The 2023 total write-down represents 1.1 % of the total inventory purchases for
the year of $12 million. Industry standards indicate that up to 2.5% is an acceptable shrinkage
rate. The ending inventory balance was $3,940,387.
Controllable Stock Adjustments
Of the 2023 adjustments, $84,936 write-up was from controllable stock. In 2023 the write-up
was attributable to multiple material groups and there was not a large write-up in any specific
part number. However, the material groups which saw the largest total write-ups included gas
utility parts and vehicle maintenance parts. Write-ups are most often due to errors in issuing
out stock, such as using the wrong unit of measure causing too much inventory to be relieved.
Stores implemented regular cycle counts in January 2023 which see each high moving part
number counted at least three times per year, including the full physical inventory. This will
allow variances to be identified earlier and investigated to determine root cause of the error,
allowing real-time corrections to be made and eliminating the need to write parts up or down.
Currently they are counting approximately 170 parts per week and finding an accuracy rate of
about 80-90%. If they can determine the root cause and the user of the part, they will charge it
out to that job or cost centre. If they are unable to ascertain ownership, then they will use the
write-up or write-down function which then charges the amounts on a prorated basis to all user
groups.
Over time, as more root causes of variances are determined and rectified, it is anticipated that
the total amount of adjustments will decrease.
Uncontrollable Stock Adjustments
The remaining $228,043 of write-down is related to stock which is outside in the KOF yard
which are not under direct supervision by Stores staff. It is impractical to have dedicated staff
monitoring the outdoor inventory on a 24/7 basis and therefore there is a reliance on staff to
inform Stores when they take inventory from the yard. However, this often does not happen,
leading to the many smaller write-downs in products such as pipe or aggregates. This year
$75K of the write-down is related to salt purchased by the Region that was invoiced to the City
in error. The City is working to recover the funds from the Region which will offset this
adjustment.
Conclusion
Overall, the physical inventory process is in control and no concerns were identified. The
adjustments to controllable stock are generally small write-ups. Uncontrollable stock
adjustments are typical and are expected given the current uncontrolled environment.
Improvements to measurement techniques and ongoing cycle counts will help reduce the
amount of inventory adjustments.
Page 6 of 29
2. Market - Alcohol Inventory — Status Update
Completed: October 27, 2023
Overview:
In 2013 an audit of the Kitchener Market's inventory control for alcohol was done. At that time,
it was found that there were no controls in place to ensure that all alcohol purchased on behalf
of the Market, for programs such as cooking classes and events, were accounted for. There
was no oversight of expenses or physical control of product, making the process vulnerable to
theft from both the public and staff. Recommendations were made at the time to implement a
tracking sheet and reconciliation process. Market alcohol control is now part of the list of
rotating controls and compliance audits, and a repeat audit was done in September 2022. The
overall goal of the audit was to review and confirm adequate controls are in place to ensure
that alcohol purchases for the Market are used for their intended purpose and not taken by
staff or customers.
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.
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:
7
Number of recommendations complete:
7
Number of recommendations in progress:
0
Number of recommendations not started:
0
Number of recommendations not required:
0
The Market management and staff are commended for being the first division to implement
100% of the audit recommendations by the status update. Physical controls were put in place
to protect the alcohol from theft in addition to processes to:
• Confirm, track, and reconcile incoming purchases of alcohol.
• Event day tracking and reconciliation of opening balances, uses during the event,
closing balance, and sales/deposits.
• Periodic inventory counts
All of these improvements will provide better controls around alcohol inventory.
Conclusion / Next Steps:
This topic will remain on the list of rotating assurance audits.
Page 7 of 29
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 -2022-494 2023 Internal Audit Work Plan
• CAO -2022-500 4t" Quarter Audit Status Report
APPROVED BY: Dan Chapman, CAO
ATTACHMENTS: None
Page 8 of 29
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Staff Report
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Chief Administrator's Office www.kitchener.ca
REPORT TO: Audit Committee
DATE OF MEETING: December 11, 2023
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 21, 2023
REPORT NO.: CAO -2023-527
SUBJECT: 2024 Internal Audit Work Plan
RECOMMENDATION:
That the 2024 Internal Audit work plan be approved as outlined in report CAO -2023-527.
REPORT HIGHLIGHTS:
• The purpose of this report is to outline the proposed assurance and consulting activities to
be conducted by the Internal Auditor in 2024.
• The work plan consists of five assurance/compliance audits, five status updates, and four
consulting engagements.
• 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.
BACKGROUND:
Internal Audit Goal
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 Services
To fulfill the above goal, the internal auditor provides two types of service in accordance with
the Institute of Internal Auditors definitions:
Assurance services — which involve the internal auditor's objective assessment of
evidence to provide an independent opinion or conclusions regarding an entity,
operation, function, process, system, or other subject matter; and
*** This information is available in accessible formats upon request. ***
Please call 519-741-2345 or TTY 1-866-969-9994 for assistance.
Page 21 of 29
Consulting services — which 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.
Internal Audit Work plan
The assurance services included on the internal audit work plan outlined in this report consists
of topics that have been independently selected by the internal auditor. These topics fall broadly
into one of three categories:
1) Physical assets — such as physical inventory counts
2) Financial resources — such as expense audits
3) Policy compliance — such as hiring transparency
This annual plan consists of compliance and controls audits, confidential investigations, and any
other independent analysis as required. Standard assurance audit topics which are common to
most organizations or other municipalities are included in a recurring 6 -year plan. Other
assurance topics are added as required related to emerging risks, tips, or other audit findings.
The internal auditor will also provide consulting services related to process reviews, capacity
analysis, organizational structure analysis, risk assessments and value for money analysis as
the need arises. These services are provided to aid staff in continuous improvement in the
design and delivery of City services. These types of reviews are requested by divisional
management, or by Council through discussions with the CAO.
Audit reports on each work plan item will be presented to Audit Committee as completed.
REPORT:
2024 Internal Audit Work Plan
Audit Committee is asked to approve the 2024 Internal Audit work plan shown below as per
the Audit Committee terms of reference.
Assurance Services:
Audit Topic
Type of Audit
Hiring Transparency & Nepotism
Compliance
Physical Inventory
Count verification
Deposits
Controls
Fire Life Safety
Compliance
Taxable Benefit Exemption for Employer
Paid Parkin
Compliance
Parking & Mileage Expenses
Status update
Technology Field Assets
Status update
Underground Locate Services
Status update
Petty Cash & Floats
Status update
Accounting & Payroll
Status update
Confidential Investigations
As required
Page 22 of 29
Consulting Services:
Topic
Type of Analysis
INS Training Documentation
Process Review
Construction Contractor Management
Gap Analysis
Bylaw Enforcement
Organizational structure / Roles
Corporate Security
Organizational structure / Service levels
Definitions
Capacity Analysis — An analysis of current and future demand for service compared to
resourcing capacity.
Compliance audit - A test to determine if staff is following all rules, regulations and policies
associated with the service.
Confidential Investigations — Investigating staff or public complaints about any alleged staff
misconduct including, but not limited to, fraud, theft, or inappropriate behaviour.
Controls audit - An analysis and test of control points within a process to ensure that
fraudulent activity can be eliminated or mitigated.
Count Verification — Sampling physical inventory counts to verify the accuracy of staff
physical inventory counts.
Gap Analysis — Comparing current practices with best practices to determine where
improvement is possible.
Organizational Structure — Analyzing organizational structure options to best support
business objectives.
Process review — A review of process steps using Lean methodologies to eliminate waste and
improve the process efficiency and effectiveness.
Roles and responsibilities — An analysis to determine optimal breakdown of work between
related staff roles.
Status update — A check-in on the status of recommendations and benefits achieved from
previous audits or reviews.
Service Levels — An analysis of current and desired service levels and associated resourcing
and costs to achieve objectives.
STRATEGIC PLAN ALIGNMENT:
This report supports the delivery of core services.
Page 23 of 29
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:
There are no previous reports/authorities related to this matter.
APPROVED BY: Dan Chapman, CAO
ATTACHMENTS: none
Page 24 of 29
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