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HomeMy WebLinkAboutCST 41-11 Cal, oo Report To Executive Committee PICKERIN Report Number: CST 41-11 Date: November 14, 2011 01 From: Gillis A. Paterson Director, Corporate Services & Treasurer Subject: 2011 Year End Audit Recommendation: 1. That Report CST 41-11 of the Director, Corporate Services & Treasurer be received; 2. That the Audit Plan as submitted by Deloitte & Touche LLP, included as Attachment 1 to this report be received for information; and, 3. That the Chief Administrative Officer and the Director, Corporate Services & Treasurer be authorized to sign the Auditor's Engagement Letter on behalf of the City. Executive Summary: In accordance with generally accepted auditing standards, the Audit Plan is prepared to communicate the auditor's approach and reporting responsibilities to the Executive Committee, who has oversight responsibility for the Financial Reporting Process. This plan is submitted prior to the commencement of the year end audit. Financial Implications: The audit fee, for City & Library, of $68,600 remains the same as prior year. Sufficient provision was included in the 2011 Current Budget. Sustainability Implications: This report does not contain any sustainability implications. Background: In the Committee's role as the body responsible for oversight of the Financial Reporting Process, the Committee is to review the Audit Plan for the upcoming 2011 year end audit. The Audit Plan includes the scope of the audit services to be provided, the auditor's reporting responsibilities and an outline of the audit approach. It is included as Attachment.1 to this report. At the Council meeting of June 13, 2011 Resolution 122/11 appointed Deloitte & Touche as the City's external auditors for a period of 5 years which would encompass the 2011 to 2015 audits inclusive. However, Deloitte & Touche require an annual Report CST 41-11 Date: November 14, 2011 Subject: 2011 Year End Audit Page 2 92 Engagement Letter be executed prior to each audit which summarizes their role as external auditor, management's responsibilities and provides the estimate of the audit fees. The audit fee for the 2011 overall year end audit, which includes the City and the Library, remains the same as 2010. Attachments: 1. Audit Plan 2. Engagement Letter Prepared By: Approved / Endorsed By: Kristine Senior Gillis A. Paterson Manager, Accounting Services Director, Corporate Services & Treasurer GAP: ks Copy: Chief Administrative Officer Recommended for the consideration of Pickering City it Tony Prevedel, P.Eng. Chief Administrative Officer ATTACHMENT#~TO REP©RT# L 'qi - I J 03 Deloittel. The Corporation of the City ofPickering Audit Service Plan ~ I i i For Presentation to the Executive Committee November 14, 2011 04 Delo"Itte. Deloitte & Touche LLP 5140 Yonge Street Suite 1700 Toronto ON M2N 61-7 Canada Tel: 416-601-6150 October 27, 2011 Fax: 416-601-6151 www.deloitte.ca Members of the Executive Committee The Corporation of the City of Pickering .I The Esplanade Pickering ON L1V 6K7 Dear Executive Committee Members: We are pleased to provide you with our audit service plan for The Corporation of the City of Pickering (the "City") for the year ending December 31, 2011. This plan presents the Deloitte & Touche LLP ("Deloitte") audit approach, our audit scope and our planned communications with you. Our audit will include: • an audit of the City of Pickering's consolidated financial statements for the year ending December 31, 2011 prepared in accordance with Canadian Public Sector Accounting Standards ("GAAP"); • an audit of the City of Pickering Public Library Board's financial statements for the year ending December 31, 2011 prepared in accordance with Canadian Public Sector Accounting Standards; • an audit of the Trust Funds of the City of Pickering's financial statements for the year ending December 31, 2011 prepared in accordance with Canadian Accounting Standards for Not-for-Profit Organizations; and • an audit of the City's compliance with the federal gas tax agreement. The audits above will be conducted in accordance with Canadian Generally Accepted Auditing Standards ("GAAS"). Our responsibilities under Canadian GAAS are described in more detail in our audit engagement letter dated October 27, 2011. Our team is committed to providing an efficient, high-quality audit. We recognize and are sensitive to your focus on cost management and quality. We will focus our efforts on higher risk areas and co- ordinate our activities with Management and make every effort to achieve audit efficiencies. We have provided this audit service plan to the Executive Committee on a confidential basis. It is intended solely for the use of the Executive Committee and Council to assist you in discharging your responsibilities with respect to the financial statements and is not intended for any other purpose. We accept no responsibility or obligation to any third party who may rely on this report. We look forward to discussing this audit service plan with you and answering any questions you.may have. Yours truly, Chartered Accountants Licensed Public Accountants M . rrber o4' L1L'»et2~ ToUC ieirt 5., - I i 05 Table of contents Executive summary 1 The Deloitte audit approach .......................................................................................................4 Audit scope ..........................................:...................................................................................10 The Deloitte client service commitment 13 Appendix A - Communication requirements 15 Appendix B - Accounting update and other developments (Public Sector) 16 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 06 Executive summary The Deloitte audit approach adheres to applicable professional auditing standards and, accordingly, is risk-based and tailored to address the significant risks to financial reporting - the audit risks. Our audit approach involves consideration of the following: Audit scope The audit planning and the preliminary risk assessment activities we conduct enable us to set the scope of our audit and to design procedures tailored to that scope. As auditors for the City we provide audit services for the following: . Consolidated financial statements for the City of Pickering; • City of Pickering Public Library Board; • City of Pickering Trust Funds; and . Compliance with the federal gas tax agreement. Materiality Materiality is the magnitude of a misstatement (including an omission) in the financial statements or related disclosures that would affect the judgment of a reasonable person using those statements. Deloitte is responsible for providing reasonable assurance that your financial statements are free from material misstatements. We will report to the Executive Committee on all unadjusted misstatements greater than a trivial. amount and any misstatements that are, in our judgment, qualitatively material. Audit risks Our proposed audit scope reflects the risks that we have identified and our audit response to them. Details of certain risk areas that we identified as part of our preliminary strategic audit planning activities, together with our planned audit response to-them are set out in the body of this report. Internal control We will obtain an understanding of internal control relevant to the matters audit. Although most controls relevant to the audit are likely to relate to financial reporting, not all controls that relate to financial reporting are relevant to the audit. It is a matter of professional judgment whether a control, individually or in combination with others, is relevant to the audit. 1 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 07 Executive summary Use of Our audit engagement partners are supported with online resources as well specialists as practice office and national office specialists who assist our audit engagement teams when dealing with more complex technical, accounting, auditing and reporting issues. We intend to use the work of the City's actuary in their determination of the City's post-employment and workers' compensation benefits. We will review and test any data and assumptions used, ensure the disclosure in the ' financial statements is adequate, and that the actuary is in good standing with the Canadian Institute of Actuaries. We also intend to use the work of the auditor of Veridian Corporation in our testing of the City's investment in the organization. We will complete all required communications with the component auditor, ensure that the accounting for the City's share of Veridian Corporation's net income is appropriate, and ensure the disclosure in the financial statements is adequate. Reliance on The City employs ADP Autopay in processing payroll transactions, which service has an impact on financial reporting information. organizations We intend to rely on the reports issued by the third party service organization's external auditors. If our assessment of those reports does not provide us with sufficient, appropriate audit evidence, we will be required to perform additional audit procedures to address the risks of material misstatements in the financial statements. Audit team Our firm's mission is to be the standard of excellence. The engagement team assembled to serve the City includes members with a high level of knowledge and experience in the municipal sector. We are committed to serving the City with quality and distinction. _ Complete We will provide, upon satisfactory completion of the audit, an audit report.on engagement your financial statements. reporting We also provide reports to the Executive Committee to assist you in fulfilling your responsibilities as required by applicable auditing standards. Appendix A summarizes required communications between the Executive Committee and Deloitte. Accounting The Public Sector Accounting Board ("PSAB") continues to issue new and update and other amended accounting standards relevant to the City. Appendix B developments summarizes some of the changes which may impact the City. _ Communications We expect to enjoy open and forthright communications with both management and the Executive Committee and would be pleased to respond to questions that are within our competencies as your auditors. 2 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 08 Executive summary Independence We have developed important safeguards and procedures in order to protect our independence and objectivity. We will report on our independence, in writing, at the conclusion of our engagement: Management We will obtain written and oral representations from management to representations complement our audit procedures. Such representations are intended to confirm the information that is provided to us and reduce the possibility of misunderstanding. Client service Deloitte's client service principles have been designed to help us exceed the commitment expectations of the City and its Executive Committee. These principles are our framework for providing guidance to, and coaching for members of our engagement team, and for identifying our clients' unique preferences regarding the ways they want to work with us. 3 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 09 The Deloitte audit approach A consistent approach that supports a dynamic environment The Deloitte audit approach is a systematic methodology that provides an audit scope and plan tailored specifically for the unique issues facing the City. Our risk-based audit approach has the following key attributes: Partner-led - The audit plan is driven by our partners' experience and their detailed knowledge of your organization. Significant input is provided by the audit partner at all stages of the audit engagement. Focused - We identify and design appropriate audit procedures that focus on risks to the audit engagement and involve significant accounts and assertions and disclosures. Quality focused - We are committed to providing an uncompromising level of high professional and technical quality. We consistently strive to perform the highest quality audit. Dynamic - We tailor our audit plan to respond to changing circumstances. Our systematic approach is comprised of four key phases: 1. Initial planning 2. Assessing and responding to engagement risk 3. Developing and executing the audit plan 4. Reporting and assessing performance These steps are not necessarily chronological and are not mutually exclusive. For example, once the audit plan has been developed and is being performed, we may become aware of a risk that was not identified during the planning phase. Based on the new information, we will reassess our planning activities and adjust the audit plan accordingly. Based on the specific needs of the City and our risk assessment, we will assess our planning activities in consultation with you and tailor our audit plan accordingly. 4 2011 Audit Service Plan - Region of Peel © Deloitte & Touche LLP and affiliated entities. 10 The Deloitte audit approach 1. Initial planning The Deloitte audit approach begins with an extensive planning process that includes: • assessing the current business and operating conditions; • understanding the composition and structure of your business and organization; • understanding your accounting processes and internal controls; • understanding your information technology systems; • identifying potential engagement risks; • planning the scope and timing of internal control and substantive testing which take into account the specific identified engagement risks; • co-ordinating our activities with internal audit; and • co-ordinating our activities with external parties and experts. Agreement: of the terms of our engagement The terms and conditions of our engagement are outlined in the annual engagement letter.. Understanding your business and accounting processes In addition to the development of our understanding of your business and accounting process, including the City's internal control framework and use of information technology, our audit will take into account any specific items of particular interest raised by the Executive Committee as well as any areas of concern that the Executive Committee or management identifies. Materiality Materiality is the magnitude of a misstatement (including an omission) in the financial statements or related disclosures that would affect the judgment of a reasonable person using those statements. Deloitte is responsible for providing reasonable assurance that your financial statements are free from material misstatements. 2. Assessing and responding to engagement risk Our approach includes steps to provide for an ongoing identification of risks and is flexible to allow adjustment when additional risks are identified. Since these risks may impact our audit objectives, we consider materiality in our planning to focus on those risks that could be significant to your financial reporting. Risk assessment The risks that we have identified to date and will address when conducting the audit are summarized in the Audit Scope section below. As we perform our audit, we will update our risk assessment and keep the Executive Committee and management informed of significant changes to our risk assessment including significant risks that are identified. 5 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 11 The Deloitte audit approach Consideration of the risk of fraud Fraudulent acts include the deliberate failure to record transactions, forgery of records and documents, and intentional misrepresentations to our audit engagement team. Fraud may include intentional acts by management or employees acting on behalf of the City, as well as employee fraud if management or employees are involved in actions that defraud the City. Deloitte does not assume that management is dishonest nor do we assume unquestioned honesty. Rather, in accordance with generally accepted auditing standards, we exercise professional scepticism and recognize that the conditions we observe and evidential matter we obtain, including that obtained from prior audit engagements, need to be objectively evaluated to determine whether the financial statements are presented fairly in all material respects. Maintaining an attitude of professional scepticism means that we carefully consider the reasonableness of the responses we receive to our inquiries from those charged with governance, and evaluate other information obtained from them in light of the evidence we obtain during the audit. We consider whether any misstatement or control deficiency that we identify may be indicative of fraud and what the implications of fraud and significant error are in relation to other aspects of the audit, particularly the reliability of management representations. The Executive Committee has oversight responsibilities for management's efforts to create a strong internal control environment, including the design and implementation of antifraud programs and controls. Since antifraud controls influence the tone of the entire organization they will be considered as part of our assessment. Deloitte's approach to evaluating the design of antifraud controls includes: (1) gaining an understanding of City of Pickering's policies and procedures designed to address fraud risks, (2) determining whether the programs are designed to prevent, detect or deter fraud, and (3) walkthroughs of significant processes. Deloitte's approach to evaluating the operating effectiveness of antifraud controls includes: (1) an analysis of antifraud controls to determine whether they are operating, in all material respects as designed, and (2) an evaluation of management's consideration of fraud in its risk assessment process. As required by professional auditing standards, we also enquire of the Executive Committee regarding: (1) their views about the risk of fraud, (2) their knowledge of any actual suspected or alleged fraud, and (3) the role that they exercise in the oversight of management's antifraud programs. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, it is possible that material misstatements due to error or fraud may not be prevented or detected on a timely basis. Accordingly, the assurance an auditor provides concerning the lack of misstatements arising from fraud is necessarily lower than the assurance provided concerning those arising from an. error. 6 2011 Audit Service Plan -.The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 12 The Deloitte audit approach Information technology A key part of our audit planning process involves gaining an understanding of: (1) how the computer environment is important relative to the risks to financial reporting (2) how the environment supports the control procedures we intend to rely on in the conduct of our audit; and (3) the computer based information that supports our substantive procedures. The objective of our review of general IT controls is to identify potential areas of risk and to gain evidence to support our assessment of the integrity, accuracy, validity and completeness of the data produced by the systems. We assess the operating effectiveness of the computer environment and consider whether the processing of financial information that is used to generate the financial statements is reliable. To accomplish this, we update both our understanding of your organization's computer processing environment and our understanding of the relevant general computer controls. We then conduct tests to support our conclusion on the operating effectiveness of controls considered relevant to the audit. 3. Developing and executing the audit plan The performance of an audit includes evaluating the design and implementation of internal controls relevant to the audit, testing the operational effectiveness of those controls upon which we intend to rely and the performance of substantive audit procedures. Tests of controls As part of our audit, we review and evaluate certain aspects of the systems of internal control over financial reporting to the extent we consider necessary in accordance with Canadian GAAS. The main objective of our review of internal controls in an audit is to assist in determining the nature, extent and timing of our audit tests and to establish the degree of reliance which we can place on selected controls. An audit of the financial statements is not designed to determine whether internal controls were adequate for management's purposes or to provide assurance on the design or operational effectiveness of internal control over financial reporting. The identification of weaknesses in internal control in an audit is influenced by matters such as our assessment-of materiality, our preliminary assessment of the risks of material misstatement, the audit approach used, and the nature, timing and extent of the auditing procedures conducted. For example where we use a substantive approach for a particular financial statement assertion we do not generally perform tests of controls and where we do perform tests of controls we may vary the nature, timing and extent of our testing from year to year. Accordingly, our understanding of controls as a result of the audit procedures we conduct in an audit of financial statements is limited. We will inform the Executive Committee and management of material weaknesses that are identified in the conduct of the audit, regardless of whether they were identified by us or management. 7 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. i 13 The Deloitte audit approach Substantive audit procedures Our substantive audit procedures consist of a tailored combination of analytical procedures and detailed tests of transactions and balances; these procedures take into account the results of our controls testing and are designed to enable us to obtain reasonable assurance that the financial statements are free from material misstatements. To obtain this assurance, the misstatements we identify while performing substantive auditing procedures will be considered in relation to the financial statements as a whole. Any misstatements that we identify, other than clearly trivial misstatements, will be reported to management and the Executive Committee. Use of specialists Engagement partners are supported with online resources as well as practice office and national office specialists who assist our engagement teams when dealing with more complex technical, accounting, auditing and reporting issues. We intend to use the work of the City's actuary in their determination of the City's employee future benefit and workers' compensation liabilities. We will review.and test any data and assumptions used, ensure the disclosure in the financial statements is adequate, and that the actuary is in good standing with the Canadian Institute of Actuaries. We also intend to use the work of the auditor of Veridian Corporation in our testing of the City's investment in the organization. We will complete all required communications with the component auditor, ensure that the accounting for the City's share of Veridian Corporation's net income is appropriate, and ensure the disclosure in the financial statements is adequate. 4. Reporting and assessing performance Perform post-engagement activities We will analyze the results of the audit procedures that we perform throughout the year and, prior to rendering our report, conclude whether: • the scope of the audit was sufficient to support our opinion, and • the misstatements that have been identified during the audit do not result in financial statements being materially misstated. Material adjustments and control deficiencies Our audit plan allows for constructive, timely feedback to management regarding matters deserving their attention, including, material adjustments to the financial statements and/or disclosures and/or significant deficiencies in internal control noted in the conduct of the audit. 8 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 14 The Deloitte audit approach Obtain management representations We will obtain written and oral representations from management to complement our audit procedures. These Deloitte enjoys a strong reputation for representations are not a substitute for the application of our commitment to quality. Key factors our audit procedures; instead, they are intended to confirm supporting that reputation include: the information provided to us and reduce the possibility of misunderstanding. A strong tone at the top " • A comprehensive ethics and Complete engagement reporting compliance program •.An uncompromising approach to We will provide, following satisfactory completion of client service ' appropriate audit procedures, an audit report on the . Communication of and adherence to consolidated financial statements of the City, the City of professional standards and client Pickering Public Library Board, the City of Pickering Trust service principles Funds, and on the City's compliance with the Federal Gas A mature client feedback program Tax Agreement. • A multifaceted approach to We also provide reports to the Executive Committee to monitoring independence assist you in fulfilling your responsibilities as required by • A robust technical consultation applicable auditing standards. Deloitte's client service approach principles include providing management and the • National office consultation regarding Executive Committee with insights into the condition of the areas of high risk or areas that business and offering meaningful suggestions for require significant judgment improvement. We will report these insights and • Technical training for our, suggestions to the appropriate members of management professionals and/or the Executive Committee for their consideration. • An annual internal inspection process for audit engagements, To enable us to determine how well we have achieved our • Continuous improvement based on client service objectives, including engagement quality, we lessons learned and client feedback. actively solicit feedback from our clients. This feedback is - obtained either through meetings with members of the Executive Committee and management or their completion of questionnaires. Our client feedback activities are designed to enhance our understanding of your expectations of us through your evaluation of our performance. The information allows us to refine our client service objectives to help us remain focused, responsive, and proactive in meeting your needs while fulfilling our professional responsibilities. 9 2011 Audit Service Plan - The Corporation of the City of Pickering Oc Deloitte & Touche LLP and affiliated entities. I 15 Audit scope Designed to obtain reasonable assurance and address the risks of significant misstatements. An audit is designed to search for potential misstatements that, individually or collectively, are material. To do this, we determine a specific threshold for each engagement and consider other qualitative factors. This amount is also used to assist in evaluating the significance of uncorrected misstatements ("passed" adjustments and reclassifications). Materiality Our overall materiality level is used in our assessment of significant accounts where audit effort is necessary. We will design our work so as to consider material items appropriately and to detect potential adjustment that, individually or in combination with others, would be material to the financial statements. We anticipate that our materiality level will be approximately 1.5% of budgeted expenses. If the amount of uncorrected misstatements detected when conducting our audit exceeds that which we anticipated when we planned the audit, we may need to revise the scope of the audit. Should such a situation arise, we will discuss the matter with management on a timely basis in order to agree upon the appropriate course of action. Of course, we will report to management and the Executive Committee any errors or irregularities, above an amount. we consider trivial, that we become aware of while conducting our audit. Risk assessment We compile information from a variety of sources, including discussions with management and the Executive Committee, to The results of our audit identify significant risks to the City's financial reporting process that may require attention. Our preliminary risk assessment took planning and t into account: assessment drive the . • Key business developments and transactions (internal and scope and timing of the external); auditing procedures. • Current business, regulatory and accounting pronouncements and developments;. . Key management strategies and business plans; . Prior year's audit results; and • Areas of significant judgment and risk. 10 2011 Audit Service Plan - Region of Peel © Deloitte & Touche LLP and affiliated entities. 16 Audit scope Our audit planning activities to date and our preliminary identification of audit risks enables us to set the preliminary scope of our audit and to design audit procedures tailored to the identified risks to financial reporting. The table that follows sets out the more significant areas of audit risk that we have identified, during our preliminary planning activities. The table also includes our proposed response to each of these risk areas. Our planned audit response is based on our assessment of the likelihood of each risk area's occurrence and the significance should a misstatement occur. Our planned audit response to each risk area takes into account our determination of materiality as well as our prior knowledge of the City. Revenue /deferred Revenue recognition . Substantive testing to determine if restricted amounts of grants and contributions (i.e. development charges, gas contributions tax, etc.) and government transfers have been recognized as revenue in the appropriate period Accounting Estimates require . Obtain documentation on management's estimates management controls over the development of accounting judgments (i.e. estimates for any significant management allowance for estimates and assess risk significant property tax . Focused review of calculations and support appeals, contingent . Discussions with management liabilities, actuarially . Analytic review of related accounts determined liabilities, . Assess outcome of retrospective review of etc.) estimates from prior years Tangible capital Appropriate . Review assumptions used in determining assets (TCA) accounting and completeness, valuation, recording and cut- disclosure off of 2011 additions • Review of calculations of amortization 11 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 1/ Audit scope Audit scope uncertainty Our audit service plan is based on several assumptions. Circumstances may arise during the engagement that could significantly affect our scope and the extent and timing of our audit procedures. These circumstances may include, but are not limited to, the following: • the quality of the City's accounting records deteriorates during the current year engagement compared to the prior-year engagement; • material weaknesses are identified in the City's internal control that result in the expansion of our audit procedures; • a significant level of proposed audit adjustments is identified during our audit; • significant new issues or changes arise, such as: - new accounting issues - changes in accounting policies or practices from those used in prior years - events or transactions not contemplated in our budgets - changes in the City's financial reporting process or IT systems - changes in the City's accounting personnel, their responsibilities, or their availability -changes in auditing standards - changes in the City's use of experts or the specialists and / or their work product does not meet the qualifications that Canadian GAAS require for us to be able to use their work • changes in the audit scope caused by events that are beyond our control If any of these or similar such circumstances arise during the course of our audit we will discuss them on a timely basis with management and provide the Executive Committee with a report regarding the impact on our audit at its next scheduled meeting. Matters that we consider to be significant and that may be sensitive from a reporting timing perspective will be communicated immediately. 12 2011 Audit Service Plan -The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. IBM- i 18 The Deloitte client service commitment Seamless and effective delivery focused on your specific needs The City is important to Deloitte. Your organization is unique and you deserve a customized approach to the services we provide. As a foundation for our service plan, we have developed a tailored set of service commitments to guide the delivery of every aspect of our audit services. Our client service assessment, which is central to our philosophy, emphasizes the importance of our listening to your expectations, reassessing your needs based on the feedback you provide to us in the assessment process, and responding with actions and results. We are pleased to have the opportunity to continually raise the bar by improving processes and adding value while delivering an effective and efficient audit. Our approach to client service excellence At Deloitte, our objective is to execute our audit in a way that meets our professional standards and also creates a positive client experience. Our client service principles are our framework for providing guidance, for coaching members of our engagement team, and for identifying our clients' unique preferences regarding the ways they want to work with us. They enable us to operationalize and focus our engagement teams on client service excellence. Our client service principles: We will... ✓make and meet our commitments to you by... • working with you to clearly define your expectations • delivering what is agreed upon • being easily accessible to you • providing valuable responses to all your inquiries • ensuring timeliness and accuracy in our billings I 13 2011 Audit Service Plan - Region of Peel © Deloitte & Touche LLP and affiliated entities. 19 The audit client service commitment ,/understand your business and what is important to you by... • anticipating your needs • understanding your business ,/provide value and build trust through technical competence and consistent results by... • instilling confidence and trust in the quality of our work • offering up-to-date professional skills • providing value to your organization • providing insights into the condition of the business and meaningful suggestions for improvement ,/demonstrate professionalism through effective interaction and communications by... • keeping you informed of the status of the audit • performing as a well-organized team • working collaboratively with, you provide a no surprises experience by... • proactively addressing issues • providing timely communication of changes to fees effectively managing changes to the service team At the conclusion of our audit, or at any time during the engagement, we invite you to assess our performance against these principles through our client.feedback process. 14 2011 Audit Service Plan -The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. L~ Appendix A - Communication requirements The table below summarizes our communication requirements. The communication requirements include all communications required by generally accepted auditing standards and other communications that we anticipate would help to achieve an effective audit. 1. Responsibility assumed by Deloitte 2. Our audit strategy and scope 3. Fraud or possible fraud identified through the audit process _....'~.egal or possibly ...illeg.a.l.- acts . 5. Related party transactions that are not in the normal course of business 6. Procedures performed on other public documents with which we are associated and the results thereof ; 7. Management judgments and accounting estimates 8. Audit adjustments 9 Uncorrected misstatements determined by management to be immaterial 10. Significant accounting policies and unusual transactions 11. Critical accounting policies and practices i 12. Alternative treatments in Canadian public sector accounting standards for accounting policies and practices related to material items (including specific transactions) that have been discussed with management during the current audit period, including: a. Ramifications of the use of such alternative disclosures and treatments b. The treatment preferred by Deloitte. 13. Deloitte's judgments about the quality, not just the acceptability, of the City's accounting principles as applied in its financial reporting 14 Other information in documents containing audited financial statements . 15. Disagreements with management 16 Consultation with other accountants _ . _ 17 Major issues discussed with management prior to retention 18. Problems or difficulties encountered in performing the audit and management's response 19. Material weaknesses in internal control, if any identified by us, in the conduct of the audit of the financial statements. __._......_.._._............................._i 20. Material written communications between Deloitte and management 21. All relationships between Deloitte and the City, in our professional judgment, may reasonably be thought to bear on independence. I 15 2011 Audit Service Plan - Region of Peel © Deloitte & Touche LLP and affiliated entities. 2 1 Appendix B - Accounting update and other developments (Public Sector) h i 4e= PS 3260 Liability Effective for fiscal PSAB issued CICA Public Sector Accounting Handbook Section 3260, for contaminated years beginning on or Liability for Contaminated Sites. This Section will apply to all sites. after April 1, 2014. governments and government organizations that base their accounting policies on the CICA Public Sector Accounting Handbook. Section PS 3260, Liability for Contaminated Sites, addresses the recognition criteria, measurement and disclosure requirements for reporting liabilities associated with remediation of contaminated sites that either are not in use or resulted from unexpected environmental events (such as a toxic spill or natural disaster). It also provides guidance on each of the recognition criteria, as well as issues related to initial and subsequent measurement based on the principles in Sections PS 3200, Liabilities, PS 3300, Contingent Liabilities, and PS 3390, Contractual Obligations. PS 3510 Tax Effective for fiscal PSAB has issued a new Tax Revenue, Section PS 3510. The new Revenue years beginning on or Section applies to all levels of governments. after April 1, 2012. The main features of this section are as follows: • Taxes are to be recognized as an asset and revenue when they meet the definition of an asset, they are authorized (a defined concept) and the taxable event occurs. • Tax revenue would be recognized by the government that imposes the tax except in purely flow-through arrangements. • A tax is considered authorized when the effective date of the tax has passed and the earlier of the following has occurred: the related legislation, regulations or by-laws have been approved, or, in the case of jurisdictions where the legal framework allows it, the ability to assess and-collect tax has been provided through legislative convention. • An asset acquired through a tax transaction is to be measured initially at its realizable value. • Tax revenue should not be reduced by transfers made through a tax system. • Tax revenue should not be grossed up for the amount of tax concessions (which are often referred to as tax expenditures). • Guidance for identifying and distinguishing between tax concessions and transfers made though a tax system is provided. 16 2011 Audit Service Plan - Region of Peel © Deloitte & Touche LLP and affiliated entities. 22 Accounting update and other developments PS 3410 Effective for fiscal years PSAB has issued a new Government Transfers standard, Section Government beginning on or after April PS 3410. The new Section applies to all levels of governments. Transfers 1, 2012. The main features of this section are as follows: • Government transfers should be recognized as an expense by the transferring government in the period the transfer is authorized and all of the eligibility criteria have been met by the recipient; • The recipient should recognize the transfer as revenue when the transfer has been authorized and all eligibility criteria has been met. • If there is no eligibility criteria attached to the transfer, the recipient should recognize the transfer as revenue when it the transfer has been authorized. • When a transfer is authorized and the eligibility criteria is met, the transfer should be recognized as revenue, except when the transfer creates an'obligation that meets the definition of a liability as defined in PS 3200. • A liability for a recipient government can only arise when transfer stipulations establish both specific performance requirements not yet met as well as identifiable and enforceable return requirements. • When a liability is recognized, it should be reduced as the liability is settled and an equivalent amount of revenue should be recognized. • Revenue recognition should be consistent with circumstances and evidence used to support the initial recognition of the transfer as a liability. • Revenue recognition may occur as the stipulations are met, or in accordance with the recipient government's actions and communications that determined the use of the transfer, which are consistent with the substance and intent of the transfer stipulations. • If the transfer is a capital transfer, revenue recognition may occur over the related assets useful life or over a lesser period, depending on the terms of a liability. • A transfer that is for the purchase of a non-depreciable asset, such as land, should be recognized as revenue when the asset is acquired. 17 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 2 3 Accounting update and other developments ~'CL' :.i Wig ~~_,I PS 3450 Financial Effective for fiscal years PSAB has issued a new Financial Instrument standard, Section Instruments beginning on or after April 1, PS 3450. The main features included: 2012 for Government Fair value measurement is required for derivatives and Organizations or April 1, portfolio investments that are equity instruments quoted in an 2015 for Governments. active market. • A government can choose to report non-derivative financial assets and/or financial liabilities on a fair value basis if it manages and reports performance of these items on a fair value basis. • A statement of re-measurement gains and losses will be introduced and these will report (a) the unrealized gains and losses associated with financial instruments in the fair value category, (b) amounts reclassified to the statement of operations upon de-recognition or settlement-, and (c) other comprehensive income reported when a government includes the results of government business enterprises and government business partnerships in the government's summary financial statements. • A government should disclose information that enables users of financial statement to evaluate the nature and extent of risks arising from financial instruments to which it is exposed at the reporting date. • The proposed standard will be effective for fiscal years beginning on or after April 1, 2012. Early adoption is encouraged. Any adjustment to the carrying amount of applicable assets and liabilities at the beginning of the fiscal year the standard is initially applied should be recognized as an adjustment to the accumulated surplus/deficit at that date. 18 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 1 24 Accounting update and other developments ~L. _T e : e L° ,Lai +-.........~.,..w..,.wa - ~r.. Wes. c ~-,c;..-.-.~. .®...:..-..s ..m+. P PS 2601 Foreign Effective for fiscal years PSAB has issued a new Foreign Currency Translation Standard, Currency beginning on or after April 1, Section PS 2601. Translation 2012 for Government Organizations or April 1, The main features of this standard include the following: 2015 for Governments. All monetary items and those non-monetary items included in the fair value category are translated using the exchange rate on the financial statement date. • A statement of re-measurement gains and losses will be introduced and these will report (a) exchange gains and losses associated with monetary assets and monetary liabilities denominated in a foreign currency that have yet to be settled, (b) amounts reclassified to the statement of operations upon de-recognition or settlement-, and (c) other comprehensive income reported when a government includes the results of government business enterprises and government business partnerships in the government's summary financial statements • Hedge accounting provisions in Section PS 2600 are removed: • The scope exclusion for foreign exchange reserves in Section PS 2600.04 are removed. The proposed amendments will be effective for fiscal years beginning on or after April 1, 2012 for Government Organizations and April 1, 2015 for Governments. Early adoption is encouraged. A government adopts standards contained in the Financial Instruments and the amended Foreign Currency standards in the same fiscal period. Any adjustment to the carrying amount of applicable assets and liabilities at the beginning of the fiscal year the amendments are applied should be recognized as an adjustment to the accumulated surplus/deficit at that date. In June 2010, PSAB asked the task force to draft a Re-exposure Draft with a presentation model that would report re- measurement gains and losses outside of the statement of operations. This presentation model is part of the Financial Instrument Exposure Draft which proposes that re-measurement gains and losses be presented on a separate 'Statement of Re- Measurement Gains and Losses.' 19 2011 Audit Service Plan -The Corporation of-the City of Pickering © Deloitte & Touche LLP and affiliated entities. 25 Accounting update and other developments Amendments Issued exposure draft for As a result of implementing PS 3450 and PS 2601, PSAB has arising from comment with responses due issued two exposure drafts to adopt changes to the existing Financial October 14, 2011. handbook. The main features of the exposure drafts are as Instruments and follows: Foreign Currency Standards Proposed removal of Section PS 303p, Temporary Investments, amendments to Section PS 3040, Portfolio Investments, and related amendments to other Sections as a result of proposed changes to these two Sections • Proposed amendments to Section PS 2500, Basic Principles of Consolidation, to address transfer of derivatives among entities in a government reporting entity, and proposed amendments to Section PS 2700, Segment Disclosures, to address. re-measurement gains and losses; and proposed clarifications in other Sections. Handbook Issued exposure draft for This exposure draft is meant to provide a number of updates to Improvements comment with responses due the public sector accounting handbook as a result of changes in October 28, 2011 both accounting and auditing standards. Update of Issued exposure draft for This exposure draft is meant to clarify the applicability of public Terminology comment with responses due sector standards to governments and organizations controlled by September 30, 2011 the government. 20 2011 Audit Service Plan - The Corporation of the City of Pickering © Deloitte & Touche LLP and affiliated entities. 26 www.deloittexa Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 8.000 people in 56 offices. Deloitte operates in Quebec as Samson Belair/Deloitte & Touche s.e.n.c.r.l. Deloitte & Touche LLP, an Ontario Limited Liability Partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see ~.r:w.ctacitte.con rabout for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. © Deloitte & Touche LLP and affiliated entities. ATTACHMENT #-a-TO REPORT 41 27 Deloi tte,, Deloitte & Touche LLP 5140 Yonge Street Suite 1700 Toronto ON M2N 61-7 Canada Tel: 416-601-6150 Fax: 416-601-6610 www.deloitte.ca October 27, 2011 Mr. Tony Prevedel Chief Administrative Officer The Corporation of the City of Pickering 1 The Esplanade Pickering, ON L IV 6K7 Mr. Gillis Paterson Director, Corporate Services and Treasurer The Corporation of the City of Pickering I The Esplanade Pickering, ON L IV 6K7 Dear Mr. Prevedel and Mr. Paterson: Deloitte & Touche LLP ("Deloitte" or "we" or "us") is pleased to serve as your auditors for the year ending December 31, 2011. Ms. Paula Jesty will be responsible for the services that we perform for The Corporation of the City of Pickering ("the City"). She will, as considered necessary, call upon other individuals with specialized knowledge, either in this office or elsewhere. in our firm to assist in the performance of our services. In addition to the financial statement audit we are engaged to provide under this engagement letter, we would also, be pleased to assist the City on issues as they arise throughout the year. Hence, we hope that you will call Ms. Paula Jesty whenever you believe Deloitte can be of assistance. We will perform this engagement subject to the terms and conditions set forth herein and in the accompanying appendices. The objective and scope of the audit You have requested that we audit the consolidated financial statements of the City, which comprise the statement of financial position as at December 31, 2011, and the statements of operations, change in net financial assets. and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. In addition, we will perform a financial statement audit of the City of Pickering Public Library Board and of the City of Pickering Trust Funds. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements. Appendix A provides further information about the objective and scope of the audit. 28 The Corporation of the City of Pickering October 27, 2011 Page 2 The responsibilities of the auditor We will conduct our audit in accordance with Canadian generally accepted auditing standards ("Canadian GAAS"). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with Canadian GAAS. In making our risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit. The audit of the financial statements by Deloitte does not relieve management or the Executive Committee of their respective responsibilities. Appendix A provides more information about Deloitte's responsibilities in respect of the audit. The responsibilities of management and identification of reporting framework Our audit will be conducted on the basis thai management under the oversight of the Executive Committee, acknowledge and understand that they have responsibility: • For the preparation and fair presentation of the financial statements in accordance with Canadian public sector accounting standards ("GAAP"); • For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and • To provide us with: o Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters; o Additional information that we may request from management for the purpose of the audit; and o Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence. As part of our audit process. we will request from management written confirmation concerning representations made to us in connection with the audit. We look forward to full cooperation from your staff during our audit. Management's responsibilities in connection with this engagement are further described in Appendix B. 29 The Corporation of the City of Pickering October 27, 2011 Page 3 Executive Committee's responsibilities and auditor communications As auditors of the City, we report directly to the Executive Committee as it is directly responsible for the oversight of our work. We acknowledge that the Executive Committee is also responsible for recommending our appointment and compensation. We understand that the services to be performed under this engagement letter will be acknowledged and approved by the Executive Committee. As auditors, we will discuss with the Executive Committee any potential hiring of former partners and employees of Deloitte & Touche LLP, Deloitte Touche Tohmatsu, its member firms and the affiliates of Deloitte & Touche LLP, Deloitte Touche Tohmatsu and its member firms, should the situation arise. In accordance with Canadian GAAS, we are required to communicate with the Executive Committee about various matters in connection with our audit. The Executive Committee's responsibilities and our communications with the Executive Committee are described in Appendix C. Inclusion of Deloitte reports in documents and public oral statements or references to Deloitte in other documents and on electronic sites If the City intends to publish or otherwise reproduce in any document our report on the City's financial statements, or otherwise make reference to Deloitte in a document that contains other information in addition to the audited financial statements, thereby associating Deloitte with such document, the City agrees that its management will provide Deloitte with a draft of the document to read and obtain our written consent for the inclusion or incorporation by reference of our report, or the reference to Deloitte, in such document before the document is printed and distributed. No other form of document is to be considered to signify our consent. The inclusion or incorporation by reference of our report in any such document would constitute the re-issuance of our report. Management agrees to provide adequate notice of the preparation of any such public documents. The City also agrees that it will notify us and obtain our written approval prior to including our report or financial statements with which we are associated on an electronic site. Further, it is agreed that in any electronic distribution, for example on the City's web site, management is solely responsible for the accurate and complete reproduction of our report and the subject matter on which we reported. This engagement letter, and our agreement to perform the services described in this engagement letter, does not constitute our consent to the use of our report in, or our agreement to be associated with any such documents published or reproduced by or on behalf of the City. Any request by the City to re-issue our report, to consent to its inclusion or incorporation by reference in an offering or other document, or to agree to its inclusion on an electronic site, will be considered based on the facts and circumstances existing at the time of such request. The estimated fees outlined herein do not include any services that would need to be performed in connection with any such required services or modifications needed to our report for summarized financial statements. Fees for such services (and their scope) would be subject to our mutual agreement at such time and would be described in a separate engagement letter. 30 The Corporation of the City of Pickering October 27, 2011 Page 4 Fees We estimate that our fees for this audit will be as follows, plus applicable taxes (such as Harmonized Sales Tax : The Corporation of the City of Pickering (including Trust Funds) $63,000 Pickering Public Library Board $5,600 Appendix D provides an estimated timetable for the services included in this engagement contract and the responsibilities of both Deloitte and the City's management with respect to the successful completion of the engagement. Deloitte will monitor all work and assess fees (time and expenses) as they are incurred throughout the engagement. If circumstances arise, such as those described in Appendix E, and as a .result the fees for any of the services outlined are likely to be greater than indicated due to the need for additional work, we will contact you to discuss the reason and seek your approval for this additional work. Reporting In accordance with Canadian GAAS, we expect to issue a report at the completion of our audit in the form shown in Appendix F. The form and content of our report may need to be amended in the light of our audit findings. Our ability to express an opinion and the wording of our opinion will, of course, be dependent on the facts and circumstances at the date of our report. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or decline to issue a report as a result of this engagement. If we are unable to complete our audit or if our auditor's report requires modification, the reasons therefore will be discussed with the Executive Committee and the City's management. Other matters This engagement letter, including the appendices A through G attached hereto and made a part hereof, constitutes the entire agreement between the parties with respect to this engagement and supersedes all other prior and contemporaneous agreements or understandings between the parties, whether written or oral, relating to this engagement. Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities. Yours truly, Chartered Accountants Licensed Public Accountant Enclosure 31 The Corporation of the City of Pickering October 27, 2011 Page 5 The services and terms set forth in this contract are acknowledged and approved by The Corporation of the City of Pickering: Signature Title Date Signature Title Date ICI ~I I 32 Appendix A The objective and scope of a financial statement audit and the responsibilities of the auditor The Corporation of the City of Pickering December 31, 2011 The objective and scope of a financial statement audit We will plan and perform the audit to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. The financial statements subject to audit are those of the City, prepared by management, with oversight from the Executive Committee. The audit will enable us to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with Canadian GAAP. The audit also includes evaluating the appropriateness of accounting policies and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Our report on the financial statements and communications required by Canadian GAAS will be in accordance with our findings. It is important to recognize that there are inherent limitations of an audit, where most of the audit evidence obtained is of a persuasive, rather than a conclusive nature. These limitations arise from the nature of financial reporting, the nature of audit procedures and the need for the audit to be conducted within a reasonable period of time and at a reasonable cost. Financial reporting involves judgment by management in applying the requirements of Canadian GAAP to the facts and circumstances of the City. Many financial statement items will involve a degree of uncertainty, and there may be a range of acceptable interpretations or judgments that may be made. The audit procedures we perform will be selected based on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fi-aud or error. Because of the nature of fi-aud, including attempts at concealment and forgery, an audit designed and executed in accordance with Canadian GAAS may not detect a material fraud. The performance of the audit within a reasonable period of time and at a reasonable cost requires us to plan the audit so that it will be performed in an effective manner, with audit effort directed to areas most expected to contain risks of material misstatement, whether due to fraud or error, and using selective testing and other means of examining populations for misstatements and drawing conclusions thereon. Internal control over financial reporting An independent audit conducted by Deloitte in accordance with Canadian generally accepted auditing standards is not a substitute for the maintenance of internal control necessary for the preparation of financial statements by management. Management's acknowledgment of its responsibility for the maintenance of internal control necessary for the preparation of financial statements does not imply that Deloitte will find that the internal control maintained by management has achieved its purpose or will be free of deficiencies. 33 Appendix A We obtain an understanding of internal control relevant to the audit however, not all controls are relevant to every audit. We evaluate the design of controls relevant to the audit and determine whether they have been implemented. We are not, however, required to determine whether relevant controls are operating effectively. Although it is not required by generally accepted auditing standards, we may decide that for a particular engagement, it makes sense to rely on the effective operation of some controls in determining the substantive procedures we will perform. In this case, we would go beyond evaluating the design of relevant controls and determining whether they have been implemented, to also test whether the controls on which we intend to rely are operating effectively. Accordingly, while generally accepted auditing standards require us to report to the Executive Committee any significant deficiencies that have come to our attention, we may not be aware of all material weaknesses in internal control that do, in fact,'exist. 34 Appendix B Management's responsibilities The Corporation of the City of Pickering December 31, 2011 Financial statements and the effectiveness of internal control over financial reporting The City's internal control, including its accounting books and records or accounting systems, will reflect the needs of management, the complexity of its businesses, the nature of its risks and relevant laws or regulation. Management must determine what internal control is required, including how it is designed, implemented and maintained to achieve the City's objectives. Internal control, no matter how effective, can provide the City with only reasonable assurance about achieving its financial reporting objectives due to the inherent limitations of internal control. The preparation and overall accuracy of the financial statements and their fair presentation in accordance with Canadian GAAP, together with all required disclosures concerning internal control over financial reporting is the responsibility of the City's management. Among other things, management has the responsibility for: 1. Establishing and maintaining effective internal control over financial reporting necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error and informing Deloitte of weaknesses identified in the design or operation of internal control over financial reporting; 2. Informing Deloitte of any changes in the City's internal control over financial reporting that. occurred during the year that have materially affected, or are reasonably likely to materially affect, the City's internal control over financial reporting; 3. Identifying and ensuring that the City complies with the laws and regulations applicable to its activities and informing its of any known material violations of such laws or regulations; 4. Adjusting the financial statements to correct material misstatements; 5. Safeguarding assets; 6. Providing to us all information of which management is aware that is relevant to the preparation of the financial statements including, but not limited to, all financial records and related data including information on the recognition, measurement and disclosure of specific items, and copies of all minutes of meetings of shareholders, directors and committees of directors; 7. Providing additional information that we may request from management for the purpose of the audit; 8. Providing us with unrestricted access to persons within the City from whom we determine it necessary to obtain evidence; and 9. Informing Deloitte of facts that may affect the financial statements, of which management may become aware during the period fi-om the date of the auditors' report to the date the financial statements are issued. Representation letter We will make specific inquiries of the City's management about the representations embodied in the financial statements and internal control over financial reporting. As part of our audit procedures, we will request that management provide us with a representation letter acknowledging management's responsibility for the preparation of the financial statements in accordance with Canadian GAAP and that the financial statements are fairly presented in accordance therewith. Appendix B 3 5 We will ask management to affirm their belief that the effects of any uncorrected financial statement misstatements aggregated by us during the current audit engagement and pertaining to all the periods presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole and that management has provided us with all relevant information and access as agreed in this engagement letter and has recorded and reflected all transactions in the financial statements. We will require certain written representations from management in accordance with Canadian GAAS and will request additional representations-to support other audit evidence relevant to the financial statements or one or more specific assertions therein. Those written representations are to be provided in the form of a representation letter addressed to Deloitte, as near as practicable to, but not after, the date of the auditors' report on the financial statements. Such representations will be for all financial statements and periods referred to in the audit report. The responses to inquiries and related written representations of management required by Canadian GAAS are part of the evidential matter that we will rely on as auditors in forming our opinion on the City's financial statements. Independence matters For purposes of the following two paragraphs, "Deloitte" shall mean Deloitte & Touche LLP, Deloitte Touche Tohmatsu, its member firms and the affiliates of Deloitte & Touche LLP, Deloitte Touche Tohmatsu and its member firms. Independence matters as a result of restrictions on providing certain services In connection with our engagement, Deloitte, management, and the, Executive Committee will assume certain roles and responsibilities in an effort to assist Deloitte in maintaining independence and ensuring compliance with Canadian independence rules. Management of the City will ensure that the City, together with its boards and other entities that comprise the City for purposes of the consolidated financial statements, has policies and procedures in place for the purpose of ensuring that neither the City nor any such subsidiary or other entity will act to engage Deloitte or accept from Deloitte any service that under Canadian independence rules or other applicable rules would impair Deloitte's independence. All potential services are to be discussed with Ms. Paula Jesty. Independence matters relating to hiring Deloitte must assess threats to independence created when a former Deloitte partner or member of the engagement team is employed by management. In order to assist Deloitte in maintaining independence, management should notify Ms. Paula .testy where substantive employment conversations have been had with a former or current Deloitte partner or engagement team member. 36 Appendix B Fraud and error Management is responsible for: I . Designing and implementing programs and controls to prevent and detect fraud and error; 2. Informing us about all known or suspected fraud affecting the City involving (a) management, (b) employees who have significant roles in internal control, and (c) others where the fraud could have a material effect on the financial statements; 3. Informing us of its knowledge of any allegations of fraud or suspected fraud affecting the City received in communications from employees, former employees, or others; 4. Informing us of any information it might have regarding any concerns or allegations of potential errors in the selection of accounting policies or the recording of transactions affecting the City that have been communicated to it by employees, former employees, or others, whether written or oral; 5. Informing us of its assessment of the risk that the financial statements may be materially misstated as a result of fraud; and 6. Communicating its belief that the effects of any uncorrected financial statement misstatements aggregated during the audit are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Related parties The City agrees that it will provide us with the identity of the City's related parties, including changes from the previous period, the nature of the relationships between the City and these related parties and whether the City entered into any transactions with these related parties during the period and if so, the type and purpose of the transactions. 37 Appendix C Executive Committee responsibilities and auditor communications The Corporation of the City of Pickering December 31, 2011 Executive Committee responsibilities The Executive Committee is responsible for the oversight of the financial reporting process, including management's preparation of the financial statements and monitoring of the City's internal control related to financial reporting and oversight of our work. Communications with the Executive Committee Canadian GAAS require that we communicate with the Executive Committee about a number of matters that are relevant to the financial reporting process. Planned scope and timing of the audit Our audit plan, dated November 14, 2011, has been separately communicated to you, providing an overview of the planned scope and timing of the audit. Significant Findings from the Audit We will communicate our views about significant qualitative aspects of the City's accounting practices., including accounting policies, accounting estimates and financial statement disclosures. Should the need arise, we will communicate to the Executive Committee why we would consider a significant accounting practice that may be acceptable under Canadian GAAP, not to be the most appropriate to the particular circumstances of the City. We will communicate, in writing, any significant deficiencies in internal control that we identify on the basis of the audit work performed. The purpose of our audit is to express an opinion on the financial statements. While the audit will include consideration of internal control relevant to the preparation of the financial statements in order to design audit procedures appropriate in the circumstances, it was not performed to express an opinion on the effectiveness of internal control. In addition, we will communicate: • any significant matters arising from the audit in connection with the City's related parties; • any events or conditions identified that may cast doubt on the City's ability to continue as a going concern; • any significant difficulties encountered during the audit: • any significant matters arising from the audit that were discussed or subject to correspondence with management; • written representations we are requesting; • any material uncorrected inconsistencies or misstatements in fact we identify from reading the financial and non-financial information that are included in a document containing audited financial statements and our auditors' report; and • any other matters that in our professional judgment are significant to the oversight of the financial reporting process. 33 Appendix C Independence communications In accordance with Canadian GAAS, we will disclose to the Executive Committee, in writing, all relationships between Deloitte and.the City and its related entities, that in our professional judgment may reasonably be thought to bear on our independence and confirm to the Executive Committee in such letter whether, in our professional judgment, we are independent of the City within the meaning of the Rules of Professional Conduct of our profession. For purposes of this paragraph, "Deloitte" shall mean Deloitte & Touche LLP, Deloitte Touche Tohmatsu, its member firms and the affiliates of Deloitte & Touche LLP, Deloitte Touche Tohmatsu and its member firms. Fraud, error and illegal acts If items of the following nature come to our attention, and in our judgment need to be reported to those charged with governance, we will report them directly to the Executive Committee: I . Any fraud that involves management; 2. Any fraud involving employees who have significant roles in internal control; 3. Any fraud of which we become aware that has resulted or could result in a material misstatement of the financial statements; 4. Any other matters related to fraud, which in our judgment, are relevant to the responsibilities of the Executive Committee; 5. Instances. of identified or suspected non-compliance with laws and regulations, other than when the matters are clearly inconsequential; 6. Individual uncorrected misstatements identified by us during the audit that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole; 7. Uncorrected misstatements related to prior periods on the relevant classes of transactions, account balances or disclosures and the financial statements taken as a whole; 8. Questions regarding the honesty and integrity of management; 9. Matters that may cause future financial statements to be materially misstated; and 10. Significant misstatements resulting from errors that were corrected by management. We will also be making inquiries of the Executive Committee of any actual, suspected or alleged fraud affecting the City and whether the City is in compliance with laws and regulations that may have a material effect on the financial statements. We will inform the appropriate level of management of the City and determine that the Executive Committee is adequately informed with respect to illegal acts that have been detected or have otherwise come to our attention in the course of our audit, unless the illegal acts are clearly inconsequential. The matters communicated will be those that we identify during the course of our audit. Our audit would not identify all matters that may be of interest to management or the Executive Committee in discharging its responsibilities. Communication with the appropriate level of authority in the organization's management and with those charged with governance will be determined by the type and significance of the matter to be communicated. We will also make inquiries of the Executive Committee as to whether any subsequent events have occurred that may affect the financial statements, including matters discussed at meetings of the Executive Committee and Council after December 31, 2011. I 39 Appendix D Coordination of the audit The Corporation of the City of Pickering December 31, 2011 Deloitte and the City will develop and maintain an up-to-date work plan that will govern the specific involvement, activities, work products and schedules of all individuals involved in this engagement, including those in the employ of Deloitte, the City and third parties, and regardless of whether the individuals have been assigned to the engagement by Deloitte, the City or a third party. Deloitte's responsibilities We will plan the performance of our audit in accordance with the estimated timetable outlined below. We anticipate that we will commence the interim audit during the week of November 14, 2011, our federal gas tax audit during the week of March 12, 2011, and our year-end audit for two weeks beginning March 26, 2011. We will advise management of any changes to the timetable. We will communicate to management on a timely basis concerning the status of the engagement. Should we anticipate any changes to our proposed fees, the scope of the engagement, the nature of our report or other planned deliverables, we will contact and advise management of the nature of these changes. Management's responsibilities Management will provide all documentation, as requested by Deloitte, in an accurate and timely fashion. 40 Appendix E Circumstances affecting timing and fee estimate The Corporation of the City of Pickering December 31, 2011 The fees quoted for the audit are based on certain assumptions. Circumstances may arise during the engagement that may significantly affect the targeted completion dates and our fee estimate. As a result, additional fees may be necessary. Such circumstances include, but are not limited to, the following: Audit facilitation 1. Changes to the timing of the engagement at the City's request. Changes to the timing of the engagement usually require reassignment of personnel used by Deloitte in the performance of services hereunder. However, because it is often difficult to reassign individuals to other engagements, Deloitte may incur significant unanticipated costs. 2. All audit schedules are not (a) provided by the City on the date requested, (b) completed in a format acceptable to Deloitte, (c) mathematically correct, or (d) in agreement with the appropriate City records (e.g., general ledger accounts). Deloitte will provide the City, with a separate Iisting of required schedules, information requests, and the dates such items are needed. 3. Significant delays in responding to our requests for information such as reconciling variances or providing requested supporting documentation (e.g., invoices, contracts, and other documents). 4. Deterioration in the quality of the City's accounting records during the current year engagement in comparison with the prior-year engagement. 5. A completed trial balance, referenced to the supporting analyses, schedules and financial statements, is not provided timely by the City. 6. Draft financial statements with appropriate supporting documentation are not prepared accurately and timely by the City's personnel. 7. Electronic files in an appropriate format and containing the information requested are not provided by the City on the date requested for our use in performing file interrogation. Deloitte will provide the City with a separate listing of the required files and the dates the files are needed. 8. The engagement team, while performing work on the City's premises, is not provided with access to the Internet for purposes of conducting the engagement. Significant issues or changes 1. Significant weaknesses are identified in the City's internal control that result in the expansion of our audit procedures. 2. A significant level of proposed audit adjustments is identified during our audit. 3. A significant number of drafts of the financial statements are submitted for our review or we identify a significant level of deficiencies in the draft financial statements. 4. Significant new issues or changes arise as follows: a. New accounting issues. b. 'Changes in accounting policies or practices from those used in prior years. c. Events or transactions not contemplated in our budgets. d. Changes in the City's financial reporting process or IT systems. e. Changes in the City's accounting personnel, their responsibilities, or their availability. f. Changes in auditing standards. g. Change in the City's use of specialists or the specialists and / or their work product does not meet the qualifications required by Canadian GAAS for our reliance upon their work. 5. Changes in audit scope caused by events that are beyond our control. 41 Appendix F Expected form of audit report The Corporation of the City of Pickering December 31, 2011 We will provide you with our report on the consolidated financial statements, which is expected to be in the following form. However, the final form will reflect the results of our audit. INDEPENDENT AUDITOR'S REPORT To the Members of Council, Inhabitants and Ratepayers of the Corporation of the City of Pickering: We have audited the accompanying consolidated financial statements of The Corporation of City of Pickering, which comprise the consolidated statement of financial position as at December 31, 2011, and the consolidated statements of operations, change in net financial assets, and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements, Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free fi-om material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. i 42 Appendix F Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of The Corporation of City of Pickering as at December 31, 2011 and the results of its operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. (To be signed Deloitte & Touche_LLP) Chartered Accountants Licensed Public Accountants . (Date of the auditors' report) ~I 43 Appendix G General business terms The Corporation of the City of Pickering December 31, 2011 The following general business terms (the "Terms") apply to the engagement except as otherwise provided in the specific engagement letter agreement (the "engagement letter") between Deloitte & Touche LLP ("Deloitte") and The Corporation of the City of Pickering (the "Client") to which these Terms are attached. 1. Timely performance - Deloitte will not be liable for failures or delays in performance that arise from causes beyond Deloitte's control, including the untimely performance by the Client of its obligations as set out in the engagement letter. 2. Right to terminate services - If the Client terminates the engagement or requests that Deloitte resign from the engagement prior to its completion, the Client will pay for time and expenses incurred by Deloitte up to the termination or resignation date together with reasonable time and expenses incurred to bring the services to a close in a prompt and orderly manner. Deloitte will not be responsible for any loss, cost or expense resulting from such termination or resignation. Should the Client not fulfill its obligations set out herein or in the engagement letter, and in the absence of rectification by the Client within thirty (30) days of notification in writing by Deloitte, upon written notification Deloitte may terminate its services immediately and will not be responsible for any loss, cost or expense resulting from such early termination. 3. Fees and taxes - Any fee estimates take into account the, agreed-upon level of preparation and assistance from Client personnel. Deloitte undertakes to advise management of the Client on a timely basis should this preparation and assistance not be provided or should any other circumstances arise which cause actual time to exceed that estimate. The Client is responsible for the payment of any applicable federal, provincial or other goods and services or sales taxes, or any other taxes or duties, in connection with the services provided by Deloitte. 4. Expenses - In addition to professional fees, the Client will reimburse Deloitte for its reasonable out- of-pocket expenses including travel, meals and hotels incurred in connection with this engagement. 5. Billing - Invoices will be rendered periodically as agreed in advance. All invoices shall be due and payable when rendered. Interest shall be calculated at a simple daily rate of 0.0493% (equivalent to 18% per annum). Interest shall be charged and payable at this rate on any part of an invoice which remains unpaid from thirty (30) days after the invoice date to the date on which the outstanding invoice is paid. 6. Governing law - The engagement will be governed by the laws of the Province where Deloitte's principal office performing the engagement is located and all disputes related to the engagement shall be subject to the exclusive jurisdiction of the courts of such Province. 7. Working papers - All working papers, files and other internal materials created or produced by Deloitte related to the engagement are the property of Deloitte. In the event that Deloitte is requested by the Client or required by subpoena or other legal process to produce its files related to this engagement in proceedings to which Deloitte is not a party, the Client will reimburse Deloitte for its professional time and expenses, including legal fees, incurred in dealing with such matters. Deloitte will not return or provide records or information obtained in the course of the engagement to the Client if it is illegal to do so or if Deloitte is requested to withhold the records or information by law enforcement or other public or regulatory authorities (regardless of whether the engagement has been terminated). 44 Appendix G 8. Privacy - Deloitte and the Client acknowledge and agree that, during the course of this engagement, Deloitte may collect personal information about identifiable individuals ("Personal information"), either from the Client or from third parties. Deloitte's services are provided on the basis that the Client has obtained any required consents for collection, use and'disclosure to us of personal information required under applicable privacy legislation. The Client and Deloitte agree that Deloitte will collect, use and disclose Personal Information on behalf of the Client solely for purposes related to completing this engagement, providing services to the Client and Deloitte shall not collect, use and disclose such Personal Information for Deloitte's own behalf or for its own purposes. 9. Third parties - Deloitte's engagement is not planned or conducted in contemplation of or for the purpose of reliance by any third party (other than the Client and any party to whom Deloitte's audit report is addressed) or with respect to any specific transaction. Therefore, items of possible interest to a third party will not be addressed and matters may exist that would be assessed differently by a third party, possibly in connection with a specific transaction. 10. Confidentiality - To the extent that, in connection with this engagement, Deloitte comes into possession of Personal Information or any proprietary or confidential information of the Client, Deloitte will not disclose such information to any third party without the Client's consent, except: (a) as may be required or permitted by legal authority, the rules of professional conduct/code of ethics, or to satisfy the requirements of the Canadian Public Accountability Board ("CPAB") and the Public Company Accounting Oversight Board ("PCAOB") and (b) to the extent that such information shall have otherwise become publicly available. Except as instructed otherwise in writing, each party may assume that the other approves of properly addressed fax, e-mail (including e-mail exchanged via internet media) and voice mail communication of both sensitive and non-sensitive information and other communications concerning this engagement, as well as other means of communication used or accepted by the other. 11. Survival of terms - The agreements and undertakings of the Client contained in the engagement letter, together with the appendices to the engagement letter including these Terms, will survive the completion or termination of this engagement. 12. Proportionate liability - The Client and Deloitte acknowledge where the audit is conducted pursuant to a statute governing the Client that contains proportionate liability provisions that apply to an auditor, such as the Canada Business Corporations Act, the terms of the statute shall apply to this engagement. In the event that the Client and Deloitte are not subject to such statutory provisions regarding proportionate liability, the Client agrees that in any action, claim, loss or damage arising out of the engagement, Deloitte's liability will be several and not joint and several and the Client may only claim payment from Deloitte of Deloitte's proportionate share of the total liability based on the degree of fault of Deloitte as finally determined by a court of competent jurisdiction. 13. Client misrepresentation - Deloitte shall not be liable to the Client, and the Client releases Deloitte, for all liabilities, claims, damages, costs, charges and expenses incurred or suffered by the Client related to or in any way associated with the engagement that arise from or are based on any deliberate misstatement or omission in any material information oi- representation provided by or approved by any member of management of the Client, officer of the Client or member of the Executive Committee of the Client.