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HomeMy WebLinkAboutFIN-09-151 - 2009 Audit Plan & KPMG Report ) cfb KITCHENER Financial Services REPORT TO: DATE OF MEETING: SUBMITTED BY: PREPARED BY: WARD(S) INVOLVED: DATE OF REPORT: REPORT NO.: SUBJECT: Mayor Carl Zehr, Chair, and Members of the Audit Committee November 2, 2009 Dan Chapman, General Manager of Financial Services Sheri Brisbane, Supervisor of Financial Reporting All October 22, 2009 FIN-09-151 2009 EXTERNAL AUDITOR'S PLAN RECOMMENDATION: That the 2009 audit plan as presented by KPMG (November 2, 2009) be approved. BACKGROUND: The Audit Committee Terms of Reference states that one of the responsibilities of the audit committee is to "approve external audit plans". The purpose of this report and associated presentation from KPMG is to layout the plan for the 2009 audit and allow for questions and input from Audit Committee members. REPORT: In August 2009, KPMG was appointed as the City's External Auditor for the fiscal periods 2009 through 2013. In KPMG's proposal to serve as the External Auditor, the firm committed to meet with the Audit Committee twice annually. It is important to have open communication between the external auditor and the Audit Committee to ensure that both parties are kept up to date on issues impact the annual audit. A second meeting for fiscal 2009 will be held once the audit is complete so that KPMG may present the audit report. FINANCIAL IMPLICATIONS: N/A ATTACHMENTS: KPMG's "Audit Planning Report to the Audit Committee for the year ending December 31, 2009" ACKNOWLEDGED BY: Dan Chapman, General Manager of Financial Services Contents Topics for discuss ion ..................................................................................................................... 1 Audit plan for audit committee consideration .............................................................................. 2 What has changed from last year.................................................................................................. 2 Mil esto n es and de live rab I es .......................................................................................................... 5 Aud it process....................................................................................................................... .......... 6 Audit response to identified financial reporting risks .....................................................................7 Executi ng the aud it ......................................................................................................................... 8 Service team and m u Itidiscipli nary resou rces ............................................................................... 8 Fees and assu mptions .................................................................................................................... 8 Ap pe n dices .............................................................................................................................. . . . . . . .. 9 Appendix 1 : Engagement letter..................................................................................................... 9 Append ix 2: Ou r aud it process.................................................................................................... 1 0 Appendix 3: KPMG's Audit Committee resources ....................................................................... 11 This Audit Planning Report (the "Report") for the year ending December 31 , 2009 provides an overview for the audit committee of the audit plan. This Report is confidential and intended solely for the use of the audit committee in carrying out and discharging its responsibilities, and should not be used for any other purposes. No responsibility for loss or damages, if any, to any third party is accepted as this Report has not been prepared for, and is not intended for, any other purposes. KPMG LLP, Chartered Accountants, Licensed Public Accountants Topics for discussion Auditors initiating discussion with the audit committee We propose to highlight the following topics with the audit committee at the upcoming audit committee meeting. Audit committee input (page 1) Raise potential concerns, questions and requests What has changed from last year (page 2) Review Audit response to identified financial reporting Review and comment risks (page 7) Audit Committee input/matters to be raised with the auditors Audit committee members should use this section to note any areas of potential concern that should be raised and discussed at the audit planning meeting. Audit committee members should use this section to note any other matters to be raised or requested at the audit planning meeting. .. 1 Audit plan for audit committee consideration What has changed from last year Entity-specific changes The City has completed the implementation of the SAP system for the purposes of being the primary source of the accounting records. The 2009 audit will be the first audit for which the financial data will come primarily from that system. o KPMG will be performing a review of the system conversion, including identification and testing of selected internal controls to support our audit opinion. Specific findings from the review will be presented to the Treasurer in accordance with your request for proposal. The City received $22 million in federal and provincial stimulus funding in 2009. Projects to be funded include those aimed a making the community more environmentally sustainable, strengthening the local arts and culture community, and helping to address the City's infrastructure deficit. Significant projects include the construction of the consolidated maintenance facility (CMF), which is set to open in 2010. This new facility will consolidate the City's five current operation sites including road maintenance, snow clearing, watermain & sewer maintenance, gas-line works/utilities, parks and woodland maintenance, fleet repair, city facilities management, corporate call centre, stockrooms, salt storage, bulk material storage and greenhouses. This project is being funded by a portion of the $14M in federal infrastructure stimulus funding. Regulatory environment Regulations under the Safe Drinking Water Act, 2002 These regulations are still under development but will require the development and approval of financial plans for the water system. These plans must show that the drinking water system is financially viable. These regulations have not yet been released although extensive stakeholder consultations have been held. The regulations may require auditor involvement with respect to the accuracy of these plans. Accounting standards PS 3150 Tangible Capital Assets Overview Public Sector Accounting Board Standards ("PSAB") passed a standard dealing with Tangible Capital Assets that requires local governments to adopt fixed asset accounting for the year ended December 31, 2009. The standards will · Move from "expenditure" accounting to "expense" basis of accounting for capital assets which means that capital expenditures will be reported as an asset on the statement of financial position · Require development of inventory of capital assets, capitalization thresholds, costing, amortization and disclosure in financial statements Implications for the City of Kitchener .. 2 Audit plan for audit committee consideration (continued) Implement process changes for capturing and recording of fixed assets for fiscal 2009. KPMG will be auditing the implementation of this new standard during the year end audit. Financial Statement Presentation PSAB published revisions to financial statements presentation standards including PS 1000, Financial Statement Concepts, PS 1100 Financial Statement Objectives, and PS 1200 Financial Statement Presentation. The effective date of the amendments is to be coincidental with the change in reporting of tangible capital assets. The financial statement presentation standards are effective for fiscal 2009. The amendments to PS 1000, PS 1100, and PS 1200 are as follows: · This reporting framework will have a substantial impact on the presentation in the financial statements. · Results by fund will no longer be reported on the statements of financial position and operations. · The statement of operations will be on a consolidated basis only (operating, capital and reserve) and will require consolidated budget comparisons. Will replace current "Total Fund Balance" section of statement of financial position with a single line Government Transfers This project is still under development. It has been redrafted the second round of public comment ended September 15, 2009. The Public Sector Accounting Board is currently reviewing the comments received. The project has been quite controversial prompting the CICA to re-evaluate the original recommendations. The point of contention revolves around the recognition of government transfer revenues. Many government transfers received by the City would be considered to be cost shared arrangements. Cost shared arrangements for the acquisition of tangible capital assets will be recorded as revenue in the period in which the asset is acquired. Since the asset is no longer expensed as is presently the case, surpluses will result. Financial Instruments Exposure Draft The Exposure Draft addresses the recognition, measurement and related disclosures for derivative and non-derivative financial instruments. Comments are requested by December 11, 2009. This is a project undertaken by PSAB and is not yet effective. Environmental Liabilities This project is being undertaken to assist with the application of the principles set out in PS 3200 Liabilities with respect to environmental liabilities. The result could require the accrual of obligations not currently accrued in the financial statements. .. 3 Audit plan for audit committee consideration (continued) - This is a project undertaken by the PSAB board and not yet effective. Auditing standards There are a number of proposed changes to auditing standards with a proposed effective date for audits commencing after December 15,2009 as follows: Subsequent Events o This project proposes that the audit report date for the financial statements can be no earlier than the date on which the financial statements are approved in final form by Council. Currently the audit report date is determined by the date of substantial completion of the audit. Auditing Accounting Estimates o Defines estimation uncertainty and when an auditor must consider the impacts of estimation uncertainty. o Enhanced requirements over misstatements and the potential for management bias. o Requires an auditor to consider how management has assessed the effect of estimation uncertainty when an estimate gives rise to significant uncertainty. Communications with Those Charged with Governance o Confirmation of independence and communication of fees for audit and non-audit services will no longer be required. ... 4 Audit plan for audit committee consideration (continued) Milestones and deliverables The following are deliverables and key dates in the audit process, which the audit committee should consider: Topic Date Present the Audit Planning Report to the Audit Committee November 2009 Present the Engagement Letter to the Audit Committee - See Appendix 1 November 2009 Conduct interim audit field work September 28 - October 2, 2009 Conduct year-end audit field work April 2009 Present the Audit Findings Report, including our Independence Letter, to the audit committee May - June 2009 Release audit opinion on financial statements June 2009 Provide management letter to the audit committee June 2009 .. 5 Audit plan for audit committee consideration (continued) Audit process Our audit process, which takes a top-down, risk-based approach, is outlined in Appendix 2. As part of the audit process, we consider materiality when determining the nature, timing, and extent of our audit procedures as well to evaluate the effect of misstatements. Quantitative measure of materiality for planning purposes We define a level of materiality to provide a quantitative starting point for planning the nature, timing, and extent of our audit procedures. We define this as materiality for planning purposes. For the current year, materiality for planning purposes was established at $3,200,000, which was calculated as 1 % of total revenue. Reporting materiality Reporting materiality is the threshold we use to evaluate the effect of misstatements at the completion of the audit. As part of our Audit Findings Report, we will communicate to you all corrected misstatements identified by us during the audit as well as uncorrected misstatements identified by us during the audit that management has determined to be immaterial. .. 6 Audit plan for audit committee consideration (continued) Audit response to identified financial reporting risks Significant financial reporting risks, including risks of fraud Taxation revenue and receivables User charges revenue Grant Revenue Expenses and accruals Substantive approach recalculating tax revenue using approved tax rates and assessment. Assess collectability of taxes receivable with environmental concerns Assessment and testing of controls over cash receipts and recording Verifications of revenue using substantive analytical methods. Test the grant revenue using substantive testing methods Ensure proper revenue recognition of grants received Verify expenses and accruals using substantive testing methods. Gasworks Enterprise Post retirement liabilities Development charges received Examination of year end balances and reconciliations for inventory to third party information Substantive testing of gas purchase transactions Assessment and testing of controls over the recording of sales and collections of gas Review the actuarial valuation of the liability for reasonableness of assumptions used. Use of External Experts Actuary Test the controls over deferred development charges reconciliation Test the controls over the expense authorization of development charges .. 7 Executing the audit Service team and multidisciplinary resources We will continue to make every effort to meet your needs and exceed expectations by: utilizing professionals who understand the key issues being addressed by management keeping pace with changes in the industry and at the Entity anticipating issues and adequately planning all aspects of our service being available and responsive. Tom Mennill Lead Audit Engagement Partner Telephone: 519-747-8221 email: tmennill@kpmg.ca Matthew Betik Engagement Project Manager Telephone: 519-747-8245 email: mbetik@kpmg.ca Jessica Greco Audit Engagement Senior Telephone: 519-747-8800 email: jgreco@kpmg.ca Fees and assumptions Our fees for the current year end are estimated as follows: Financial statement audit (including Trust Funds, Gasworks Enterprise, and Notice to Reader reports for Doon Valley Golf Club, Rockway Golf Club, Waterworks Enterprise, and Sewer Surcharge Enterprise ital Asset Review $80,400 $1 , These fees are agreed to under our proposal for audit services. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. @ 2008 KPMG LLP, a Canadian limited liability partnership and a member firm ofthe KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. .. 8 Appendices Appendix 1: Engagement letter .. 9 Appendix 2: Our audit process Planning Control Evaluation Substantive Testing Completion Perform risk assessment procedures and identify significant accounts and disclosures and risks Determine audit strategy, including materiality for planning purposes Evaluate the design and implementation of entity level controls Determine planned audit approach for significant accounts and disclosures Present Audit Planning Report to the audit committee Understand accounting and reporting activities Evaluate the design and implementation of selected activity level controls Test operating effectiveness of selected activity level controls Plan and perform substantive procedures Evaluate misstatements Evaluate the sufficiency and appropriateness of audit evidence Perform completion procedures Present Audit Findings Report to the audit committee Form and release audit opinion on financial statements .. 10 Appendix 3: KPMG's Audit Committee resources General Audit Committee Update, Issue 2008-01, Audit Committee Institute Shaping the Canadian Audit Committee Agenda (2006 edition), Audit Committee Institute Canadian Survey of Audit Committee Members - 2007, Audit Committee Institute (12/2007) Our System of Audit Quality Controls, KPMG (2006) Accountability e-Lert - periodic electronic newsletter. Subscribe at www.kpmg.ca/accountability Certification of Internal Control: New Revised Certification Rules, KPMG (05/2008) Governance of Tax - Discussion paper, KPMG (2007) Focus on Financial Reporting, KPMG (12/2007) Audit Committee Institute - Audit Committee Roundtables held each spring and fall Audit Committee Institute Web site - www.kpmg.ca/auditcommittee .. 11