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HomeMy WebLinkAboutNovember 8, 1995 4 �0 OFp10 Audit Committee Meeting Minutes Subject to Adoption Present: Mayor Wayne Arthurs- Chairperson Councillor Maurice Brenner Councillor Enrico Pistrittd C.M. Timothy Sheffield,Town Manager Inga Berrey,Manager of Accounting and Payroll Services Dawn Flett,Hurren,Flett, Sinclair, Chartered Accountants Neil Sinclair,Hurren,Flett Sinclair, Chartered Accountants The first meeting of the Audit Committee was held on November 8, 1995 at 4:00 p.m. in Committee Room 1 of the Pickering Civic Complex. The following matters were discussed. 1. Selection of Chairperson It was decided that Mayor Arthurs would chair the initial meeting. The selection of the Chairperson was deferred until the next meeting. 2. Terms of Reference It was determined that the following Terms of Reference would be utilized initially and would be expanded upon if necessary. Meetings will take place after the completion of the interim audit to discuss the auditor's findings on internal control, and after the completion of the audit to review the annual financial report, management letter and final audit fee. 3. Nature and Function of the Committee Audited Financial Report The Committee will review the annual financial statements in depth with management and the external auditor and review any recommended changes in accounting principles and practices. Related to the Work of the Auditor The Committee will discuss with the auditor the annual evaluation of the internal control systems and the recommendations for improvements. It is expected that the interim report will be completed in November 1995 and will be forwarded to the Committee for comment. It is anticipated that the year-end report and the management letter will be submitted to the Town Manager and forwarded to the Committee for comment by the end of April 1996. Meeting adjourned at 5:25 p.m. 1;\counc\co 1500\misc\auditcom.doc • OFFICE OF THE TOWN MANAGER MEMORANDUM January 15, 1996 To: Mayor Arthurs Councillor Brenner Councillor Pistritto From: Timothy Sheffield Town Manager Subject: 2nd Audit Committee Meeting - January 17, 1996 (4:00pm) [postponed from December 6, 1995] - File: TF6100 Attached for your information are the following documents for consideration at the 2nd Audit Committee Meeting: • Minutes(pending adoption) of the Audit Committee Meeting of November 8, 1995. • Letter dated November 9, 1995 from Hurren, Flett, Sinclair providing excerpts from documents relating to the communication of information in respect of the functions of an audit committee. • Letter dated November 22, 1995 from Hurren, Flett, Sinclair suggesting an informal information session be held at their offices respecting concerns and questions raised about the functions and roles of members of the Audit Committee. • Letter dated November 23, 1995 from Hurren, Flett, Sinclair presenting to the Committee two comments arising from the interim audit. Timothy Sheffield TS: Copy for: Treasurer Manager, Accounting and Payroll Services 1:\ fm\t.f6100\corres\m6011501.doc TOWN MANAGER gktt V ifidabc RECEIVED ��VVDAWN"AA'. TT, B.B.A. C.A. FILE NO. WARREN C. HURREN C.A. / ABEY.TO: NEIL SINCLAIR, B.B.A. C.A. / `e .A n / FWD_/COPY TO: MAYOR COUNCIL EXEC.DIR.OPNS CLERK CUL.&REC. PLANNING FIRE CHIEF TREASURER November 9, 1995 PARKS&FAC. SOLICITOR PUBLIC WORKS MGR.-HR. TRANSIT EMPL.EQUITY LIBRARY H.&SAFETY MGR.-IS. ECON.DEV. The Corporation of The Town of Pickering Pickering Civic Complex One The Esplanade Pickering, Ontario L1V 6K7 Attention: Mr. C.M. Timothy Sheffield, B.A., L.L.B. Town Manager Dear Mr. Sheffield: As requested during the Audit Committee meeting of November 8, 1995, we are pleased to provide the following to you: (a) Rules of Professional Conduct(the chartered accountants' responsibilities to those he or she serves). (b) Auditing and Related Services Guideline: Communications With Audit Committees (Or Equivalent) - AuG-11 In the context of our ability, as auditors of The Town of Pickering, to communicate with the Audit Committee in a public fashion, we wish to draw your attention to the following: 1. Rules of Professional Conduct (Page 5-05 Principal marked 4) "A member or student has a duty of confidence in respect of the affairs of any client and shall not disclose, without proper cause, any information obtained in the course of his or her duties." This concept is codified in Rule 210 of the Rules of Professional Conduct. This has been • enclosed for your reference and is on page 5-13. The exceptions to this rule are very clear and are codified in paragraphs (a) through (d). Rules 211 and 302 are also enclosed for your reference. .../2 P.O. BOX 458 PICKERING, ONTARIO L1V 2R7 TEL:(905)683-8856 FAX:(905)683-3428 Ie page 5 06 July 1990 • .. .,�,.. . . ,::.•....,._tea �:� .� � , � � I I The Corporation of the Town of Pickering Page 2 November 10, 1995 2. Communications With Audit Committees (AuG-i1) This provides items that the public accountant should consider in his or her communication with audit committees. (a) Paragraph 5 on page 2 addresses methods of communication. The last states that written reports should indicate that it is intended solely for the use of the audit committee. (b) Paragraph 10 on page 4 provides a short list of matters that the auditor may communicate upon. We trust that you will find the foregoing in order. Very truly yours, HURREN, FLETT, SINCLAIR CHARTERED ACCOUNTANTS C9'('CL.) Warren C. Hurren, C.A. NS:dm ICAO Rules of Professional Conduct THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ONTARIO RULES OF PROFESSIONAL CONDUCT: Completely revised rules of professional conduct were approved by the members on June 11, 1973 through the passing of the First Bylaw of 1973. The relevant part of that bylaw • appears below, including the transitional provision in respect of the former rules. FIRST BYLAW OF 1973 BE IT ENACTED AND IT IS HEREBY ENACTED as the First Bylaw of 1973 of THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ONTARIO (her' inafter called the Institute") as follows: 1 (a) The rules of professional conduct in the form attached hereto and marked Appendix "A" are hereby adopted as the rules of professional conduct of the Institute. (b) The rules of professional conduct existing immediately before these rules take effect are repealed, provided that the repeal of such rules shall not affect their previous operation nor that of any right, privilege,liability or obligation acquired,accrued,accruing or incurred under the repealed rules;and any investigation proceeding or remedy relating to disciplinary matters arising previous to the coming into force of these rules may be instituted, continued or enforced or any penalty or punishment may be imposed as if the repealed rules had not been repealed. July 1990 page 5 03 • • • Rules of Professional Conduct ICAO THE INSTITUTE OF CHARTERED ACCOUNTANTS OF ONTARIO RULES OF PROFESSIONAL CONDUCT' (the chartered accountant's responsibilities to those he or she serves, to the public and to his or her colleagues) FOREWORD Rules of professional conduct (hereinafter, rules), comprehensive in their scope, practical in application and addressed to high moral standards, serve not only as a guide to the profession itself but as a source of assurance of the profession's concern for the public it serves. It is a mark of a profession that there is a voluntary assumption, by those who comprise it -- the professional community -- of ethical principles which are aimed, first and foremost, at protection of the public and, second, at achieving orderly and courteous conduct within the profession. It is to these purposes that the Institute's rules are directed. • * * Rules presume the existence of a profession. Since the word "profession" has lost some of its earlier precision, through widespread application, it is worthwhile reviewing the characteristics which mark a calling as prcfessional in the traditional sense. Much has been written on the subject and court cases have revolved around it. The weight of the authorities, however, identifies the following distinguishing elements: - • there is mastery by the practitioners of a particular intellectual skill, acquired by lengthy training and education; • the foundation of the calling rests in public practice -- the application of the acquired skill to the affairs of others for a fee; • the calling centres on the provision of personal services rather than entrepreneurial dealing in goods; • there is an outlook, in the practice of the calling, which is essentially objective; • there is acceptance by the practitioners of a responsibility to • subordinate personal interests to those of the public good; • there exists a developed and independent society or institute, comprising the members of the calling,which sets and maintains standards of qualification, attests to the competence of the individual practitioner and safeguards and develops the skills and standards of the calling; 'Being Appendix "A" to the First Bylaw of 1973, including any revisions from time to time page 5 04 July 1990 1 ICAO Rules of Professional Conduct • there- is a specialized code of ethical conduct, laid down and enforced by that society or institute, designed principally for the • protection of the public; • there is a belief, on the part of those engaged in the calling, in the virtue of interchange of views,and in a duty to contribute to the development of their calling, adding to its knowledge and sharing advances in knowledge and technique with their fellow members. By these criteria chartered accountancy is a profession. It is essential to recognize that a profession does not cease to be a profession because a proportion of its members enter salaried private employment; nor do those members thereby cease to belong to the profession. * * • The rules, as a whole, flow from the special obligations embraced by the chartered accountant. The reliance of the public, generally, and the business community, in particular, on sound and fair financial reporting and competent advice on business affairs -- and the economic importance of that reporting and advice -- impose these special obligations on the profession. They also establish, firmly, its social usefulness. The rules centre about a number of principles -- fundamental statements of accepted conduct whose soundness is,for the most part, self-evident. These principles are: • A member or student shall conduct himself or herself at all times in a manner which will maintain the good reputation of the profession and its ability to serve the public interest. Z • A member or student shall perform his or her professional services with integrity and care and accept an obligation to sustain his or her professional competence by keeping himself or herself informed of, and complying with, developments in professional standards. .5 • A member who is engaged in an attest function such as an audit or review of financial statements shall hold himself or herself free of any influence, interest or relationship, in respect of his or her client's affairs, which impairs his or her professional judgment or objectivity or which, in the view of a reasonable observer, would impair the member's professional judgment or objectivity. • A member or student has a duty of confidence in respect of the affairs of any client and shall not disclose, without proper cause, any information obtained in the course of his or her duties, nor shall he or she in any way exploit such information to his or her / advantage. 5 • The development of a member's practice shall be founded upon a reputation for professional excellence. The use of methods of advertising which do not uphold professional good taste, which could be characterized as self-promotion, and which solicit, rather than inform, is not in keeping with this principle. July 1990 page 5 05 • 1 Rules of Professional Conduct ICAO Co • A member shall act in relation to any other member with the • courtesy and consideration due between professional colleagues and which, in turn, he or she would wish to be accorded by the ,other member. • • • A number of the principles need not be expounded upon -- those which concern: upholding the honor and good reputation of the profession;the performance of professional services with integrity and care; the duty of confidence; and the duty to act with courtesy and consideration toward professional colleagues. Some aspects of the principles and of the rules of professional conduct derived from them'do, however, warrant discussion: • the sustaining of professional competence; • the duty to avoid conflicts of interest in respect of a client's affairs; and • the development of a practice upon a reputation for professional excellence. It is apparent that the more sophisticated and complex society becomes, the greater the demands it makes of its institutions, including its professions. Society's expectations of the accounting profession -- particularly in its financial reporting roles and its business advisory services -- will, therefore, continue to rise. This underscores the need, expressed in the statement of principles, for sustaining individual professional competence by keeping abreast of and complying with developments in professional standards in all functions where the member practices,claims to specialize or is relied upon because of his or her calling. It makes imperative, too, the duty that the chartered accountant has to bring,and be seen to bring,the qualities of objectivity and integrity to his or her professional services. It thus becomes a cardinal position of a member of the profession that he or she will not subordinate his or her professional judgment to the will of others, and that he or she expresses his or her conclusions honestly and impartially. In this respect, clearly, chartered accountants cannot practise their profession and participate in the affairs of their community without being exposed to circumstances that may place pressures upon their objectivity and integrity, and it would be impractical to impose detailed proscriptions intended to cover all conceivable situations. To do so on a rigid basis would be to inhibit the rendering of useful services even when the likelihood of impairment of the chartered accountant's objectivity is relatively remote. It may be difficult for a chartered accountant always to appear completely free of any disabling influence, interest or relationship in respect of his or her client's affairs. Pressures, however,upon his or her objectivity or integrity are subject to powerful countervailing forces and restraints. These forces include liability in law, responsibility to the profession for his or her page 5 06 July 1990 • • 1 ICAO Rules of Professional Conduct professional actions and, most importantly, the inbred resistance of a disciplined professional person to any infringement upon his or her basic impartiality and integrity in the rendering of services. The public must be assured of the chartered accountant's freedom from any conflict of interest. The profession tests the existence of this freedom against the criterion of whether a reasonable observer would conclude that a specified relationship between a chartered accountant and a client posed an unacceptable threat to the chartered accountant's independence of judgment. Only thus can public confidence in the obj ec ivity and integrity of the chartered.accountant be sustained, and it is upon this public confidence that the reputation and usefulness of the profession rest. The reasonable observer should be regarded as a hypothetical individual who has knowledge of the facts which the chartered accountant knew or ought to have known, and applies judgment objectively with integrity and due care. Turning to the matter of building a practice -- strictures against publicly claiming skills or attributes superior to those possessed by colleagues with equal qualifications, and against direct solicitation for entrusted engagements are readily understood by a member of a profession. A professional regards these acts, almost instinctively, as the very antithesis of professionalism -- a scrambling for clientele inappropriate to an essentially intellectual calling which emphasizes quality of service, the need for unbiased professional judgment, and absolute objectivity. The profession can validly assert that such strictures as exist provide a result which is in the public interest. It would not be in the public interest that a practitioner could,publicly, claim for himself or herself professional skills exceeding those of similarly qualified practitioners, in a purely subjective fashion and without hindrance or reasonable constraint; nor that quality of service in the important realm of rights and property,in which chartered accountants function, should become secondary to price -- for example, a public accounting engagement being tailored to a bid price rather than to the needs of the engagement, as they emerge, in the professional judgment of the chartered accountant; nor that individual members, by self- promotional advertising, seek to differentiate themselves from their peers. It is not an exaggeration to suggest that these rules are basic to a profession, and serve the public interest in the quality of services provided by chartered accountants. The removal of all constraints would lead to downgrading the quality of service and the profession's reputation for competence and integrity. The public interest might not be served by an elimination of all constraints upon practitioners. * * * The rules which follow are based on the principles expressed in this Foreword. The principles themselves have emerged out of the June 1993 page 5 07 1 Rules of Professional Conduct ICAO collective experience of the profession as it has sought, down the years, to demonstrate its sense of responsibility to the public it serves. By their commitment to honorable conduct, members of the Institute, throughout its history, have given particular meaning and worth to the designation "chartered accountant". They have done so by recognizing that rules which are enforceable by sanctions, cannot by their nature state the most that is expected of members, or students, but simply the least. The rules thus define a minimum level of acceptable conduct: ethical conduct in its highest sense, however, is a product of personal character -- an acknowledgement by the individual that the standard to be observed goes beyond that of simply conforming to the letter of a list of prohibitions. Application • A member not engaged in the practice of public accounting must observe these rules except where the wording of any rule makes it clear that it relates specifically to the practice of public accounting or there is a specific exception made in a particular rule. • Where the term "professional services" is used it means, in its application to a member not engaged in the practice of public accounting, those of his or her activities where the public or his or her associates are entitled to rely on his or her membership in the Institute as giving him or her particular competence. • A member is responsible to the Institute for compliance with these rules by others associated with him or her in the public practice of the functions covered by the rules who are either under his or her supervision or share with him or her proprietary interest in the practice, and must not permit others to carry out on his or her behalf acts which if he or she carried them out himself or herself would place him or her in violation of the rules. • A member who is resident outside Ontario is expected to abide by the rules of the organized accounting profession in the jurisdiction in which he or she resides and to ensure that his or her actions do not bring disrepute upon the Institute. Interpretation In interpreting the rules, they are to be read in light of the Foreword to the rules and the definitions in and provisions of the bylaws of the Institute. page 5 08 June 1993 • ICAO Rules of Professional Conduct 210 Confidentiality of information .1 A member or student shall not disclose or use any confidential • information concernung the affairs of any client, former client, employer or former employer except: (a) when properly acting in the course of his or her duties; (b) when such information should properly be disclosed for purposes of Rule 211 or Rule 302; (c) when such information is required to be disclosed by order of lawful authority or, in the proper exercise of their duties, by the Council, the professional conduct committee or any • subcommittee thereof, the discipline committee, the appeal committee, or the practice inspection committee; or (d) when justified in order to defend himself or herself or his or. her associates or employees, as the case may be, against any lawsuit or other legal proceeding or against alleged professional misconduct or in any legal proceeding for recovery of unpaid professional fees and disbursements, but only to the extent necessary for such purpose. .2 A member engaged to perform a particular service may contract for the services of a person not employed by the member to assist in the performance of that service, provided the member first obtains the written agreement of that person to carefully and faithfully preserve the confidentiality of any information acquired for the purposes of the engagement and not to make use of such information other than as shall be required in the performance of such services. 211 Duty to report breach of rules of professional conduct A member shall bring to the attention of the professional conduct committee any apparent breach of these rules of professional conduct or any instances involving doubt as to the competence, reputation or integrity of a member, student or applicant, provided that this rule shall not apply to (a) a trivial matter, or (b) a member exempted from this rule for the purpose and to the extent specified by Council, or (c) a member who is under a specific legal requirement imposed by or pursuant to statutory authority which would preclude the disclosure of confidential information. June 1995 page 5 13 • Rules of Professional Conduct ICAO 300 -- RELATIONS WITH FELLOW MEMBERS AND WITH NON-MEMBERS ENGAGED IN PUBLIC ACCOUNTING 301.1 Obtaining or attracting clients A member engaged in the practice of public accounting shall not adopt any method of obtaining or attracting clients which tends to bring disrepute on the profession. .2 Solicitation A member shall not directly or through a party acting on behalf of and with the knowledge of the member solicit any professional engagement which has been entrusted to another member engaged in the practice of public accounting or who carries on a business or practice which constitutes a related function. 302 Communication with predecessor .1 A member shall not accept an engagement with respect to the practice of public accounting or the public practice of a function not inconsistent with public accounting, where the member is replacing another member or public accountant, without first communicating with such person and enquiring whether there are any circumstances the member should take into.account which might influence the member's decision whether or not to accept the engagement. .2 The incumbent member shall respond promptly to the communication referred to in Rule 302.1. .3 A member responding to a communication pursuant to Rule 302.2 shall inform the possible successor if suspected fraud or other illegal activity by the client was a factor in the member's resignation, or if, in the member's view, fraud or other illegal activity by the client may have been a factor in the client's decision to appoint a successor. 303 Co-operation with successor .1 A member shall upon written request of the client supply on a timely basis reasonable information to the member's successor about the work done or being assumed. .2 A member who is a predecessor on an engagement shall co-operate with the successor, recognizing the client's interests are paramount, and shall transfer promptly to the client or, on the client's instructions, to the successor, all books, documents, and other page 5 16 June 1995 introduction to auditing and related services guidelines AUTHORITY 1. The Board of Governors of The Canadian Institute of Chartered Accountants has authorized the Auditing Standards Board'to pub- lish Guidelines as the need may arise from time to time. These Guidelines set out the Board's views or opinions on: • matters requiring the public accountant's consideration n situations not specifically addressed by existing Handbook Rec- ommendations,and • suggested procedures to provide helpful guidance to practition- ers in interpreting Handbook Recommendations. 2. Guidelines express the views or opini,,ns of the Board but do not have the authority of Recommendatior 3 issued by the Board. 3. Guidelines may be withdrawn for various r Masons such as:changes in legislation; the material no longer is use ul because a Handbook Recommendation has been issued;and the t naerial is out of date. APPLICATION Gui 'elines are a useful source of guidance which a practitioner would eon ider in exercising professional judgment. In issuing Guidelines, he ionrd recognizes that there is no substitute for the exercise of prop:ssional judgment in the determination of what const tutes good practice in a particular case. TOPICAL INDEX The principal subject matter of each Guideline is included in the TOPICAL INDEX. ' i'rior to October 1, 1991 the Auditing Standards Board was known as the Auditing Standards Co?Imittee, and Guidelines were published by the Auditing Standards Steering Corn•nittee. PAGE 3—AUDITING GUIDELINES—MARCH 1995 ©Canadian Institute of Chartered Accountants AuG-11 auditing and related services guideline This Guideline is to be read in conjunction with the Introduction to Auditing ano Related Services Guidelines contained in the CICA Handbook. August 1991 (December 1994*) communications with audit committee3 (or equivalent) INTRODUCTION Purpose of the Guideline This Guideline sets out the views of the Auditing Standards Steering 1 Committee on matters arising specifically from the audit of the financial statements that the tut'itorshould communicate(or ensure that management has communicated) to tl e audit committee. The Steering Committee's views are l), sed on its underst and ng of current practice and consideration of the recommendations of the June 1988 Report of the(CICA)Commission to Study the Public's Expectations of Audits. This Guideline refers to the audit committee,since that is the committee 2 to which the board of directors usually delegates its responsibility for oversight of the financill reporting process.It t pplies equally where that committee is known b) another na:ne. In addition,there are many organizations which are not required to have 3 and do not have audit committees,including charities,hospitals,and local * Originally issued in October 1989,reissued in August 1991,and revised in May 1992 and December 1994. (a) AUDI roll's RESPONSIBILITY TO DETECT AND COMMUNICATE MISSTATEMENTS, Section 5135, issued in August 1991, defines "fraud" and requires that the auditor ensure the audit committee is suitably informed about misstatements. Paragraphs 20-21 of the Guideline have been amended to reflect the definition of"fraud"contained in Section 5135.Paragraph 26 has been amended to reflect Section 5135 requirements for communication of misstatements with the audit committee. (b) Paragraphs 14(f), 15(d) and 16 revised in May 1992 to reflect the new terminology in INTERN\L CONTROL IN THE CONTEXT OF AN AUDIT, Sections 5200 to 5220. (c) Paragraphs 18 and 19 revised in December 1994 to reflect changes arising from MISSTATEMENTS—ILLEGAL ACTS,Section 5136. • � I Auditing and Related Services Guideline—December 1994 2 governments and their agencies. In those cases, the auditor should consider this Guideline in relation to his or her communications with the board of directors(or eqr iivalent body)which has retained the oversight responsibility for the financial reporting process for the organization.For the owner/operator entity,the audit()r would exercise his or her professional judgment as to the matters to be discussed and the most appropriate manner in which to communicate. This Guideline does not deal with special legal or regulatory requirements 4 that may affect entities such as financial institutions.Nor is it specifically directed to matters arising from the review of or other services in conjunction with interim financial statements or other releases of financial information,that may be the subject of separate arrangements.However, where such arrangements al n ade,auditors and audit committees may find this Guideline useful i d termining the communication between them.For example,where tie a.iditor is assisting the audit committee in a review of interim financial statements,the audit committee would likely expect the auditor to ensure that the committee was informed about significant accounting policies and changes therein. • Method of communication It is usually helpful for the auditor to review wit'I management in advance 5 the information that each intends to communicate to the audit committee, and how this information is to be communicated. Certain matters, for example,those concerning the entity's operations and financial results, and the selection of accounting policies,are best communicated in a report f om management on which the auditor comments.Certain other matters, for example,those concerning audit findings,are best communicated in a report from the auditor on which management comments.If the auditor disagrees with a report from management or considers it to be misleading or incomplete, he or she would bring that to the attention of the audit committee.Both the auditor and management will wish to be present for the audit committee discussion of all such reports to be satisfied that each is appropriately addressed.Such reports may be written or oral.When the auditor communicates in writing, the report should indicate that it is intended solely for the use of the audit committee. Although such instances are the exception, the auditor may identify 6 matters that he or she wishes to discuss with the audit committee without management being present. The opportunity to discuss such matters in camera should be established as a routine practice in order to avoid any sense of conflict with management when these discussions take place. • 3 Communications with audit committees Evidence of communication The auditor should keep copies of written reports to the audit committee, 7 and notes of audit committee discussions at which the auditor is present, on matters specifically related to the audit of the financial statements. Such notes should be compared to the minutes of the audit committee. Where the auditor finds the minutes inconsistent with his or her own notes of the meeting, the auditor should discuss the matter with the secretary of the audit committee and consider providing a copy of those notes to the secretary. Where the auditor is still not satisfied that the inconsistency has been adequately explained or corrected,he or she may need to consider communicating directly with the audit committee or the board of directors. Timeliness of communications It is important for the auditor to communicate with the audit committee 8 on a timely basis.Although the determination of what constitutes timely is a matter of the and or's professional judgment,the auditor should be guided by the significance of the specific matter and an assessment of its urgency.Matters that affect the approval of the annual financial statements by the board of directors should be communicated prior to such approval. Other matters not affecting that approval should be communicated to the audit committee at an appropriate time in relation to the significance or urgency of the matter,the audit committee's regular cycle of meetings, and the need to allow the audit committee members sufficient time to consider important matters prior to a meeting. In exceptional circumstances the auditor may need to request a special meeting or to communicate directly to the audit committee chair. MATTERS TO BE COMMUNICATED The auditor should review the written mandate of the audit committee, 9 if there is one.Also,the auditor should discuss with the audit committee (in conjunction with,for example,the review of the engagement letter) the matters on which the committee expects the auditor to report and the matters on which the committee expects management to report. Auditing and Related Services Guideline—August 1991 4 The audit committee may expect the auditor to communicate such 10 matters as: (a) illegal acts; (b) significant transactions that appear to be inconsistent with the ordinary course of business; (c) unusual actions which significantly increase the risk of loss to the entity;and (d) actions which, if they became public knowledge, might cause serious embarrassment to the entity,such as breaches of the corporate code of conduct. These matters need to be discussed with the audit committee because of the potential for misunderstanding the nature of the items themselves and the auditor's responsibility for their identification. The audit committee's expectations need to be clarified and preferably 11 put in writing. The auditor should ensure that the audit committee understands the extent to which his or her audit of the financial statements will enable him or her to provide all the communication the audit committee expects.This places the audit committee in a position to make informed requests of the auditor to undertake additional work to meet their particular needs.Flowing from these discussions will be an agreement • on the scheduling of meetings and the agenda for each meeting. It may not be necessary to communicate each year recurring matters that 12 have already been appropriately addressed by the audit committee. Changes in audit committee membership and the passage of time should, however, influence the auditor's professional judgment on whether to communicate such matters. Set out below are the types of matters arising from the audit of the 13 financial statements which the auditor should communicate(or ensure that management has communicated)to the audit committee.This list is not meant to be all inclusive,nor in any way to restrict the communication of other matters. The auditor's responsibility under generally accepted auditing standards and planning the audit The auditor should communicate to the audit committee the level of 14 responsibility he or she assumes under generally accepted auditing standards.Such communication should cover the following matters: 5 Communications with audit committees • (a) which financial statements are covered by the auditor's report; (b) that the preparation of these financial statements and the accompanying notes are the responsibility of management; (c) that the auditor's responsibility is to express his or her opinion on these financial statements based on his or her audit; (d) that an audit is performed to obtain reasonable but not absolute assurance as to whether the financial statements are free of material misstatement; (e) that the audit includes (i) assessing the risk that the financial statements may contain material misstatements; (ii) examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements; (iii) assessing the accounting principles used and their application; and (iv) assessing the significant estimatLs made by management; (f) that a sufficient understanding of internal control will be obtained to plan the audit and that, when control risk is assessed below maximum, sufficient appropriate audit evidence will be obtained through tests of controls to support the assessment; and (g) that the auditor will express an objective opinion as to whether the financial statements present fairly in accordance with generally accepted accounting principles the financial position, results of operations,and changes in financial position of the entity. The auditor should also discuss the planning of the current audit. The 15 kinds of matters the auditor should consider for discussion could include the following: (a) the general approach to the audit,such as the cyclical coverage of branches and stock-taking in various locations; (b) areas of the financial statements identified as having a high risk of material misstatement and the auditor's response thereto; (c) the materiality and audit risk levels on which the audit is based(as noted in MATERIALITY AND AUDIT RISK IN CONDUCTING AN AUDIT,paragraph 5130.31,the question of whether to communicate these levels is a matter for the professional judgment of the auditor); • • Auditing and Related Services Guideline—May 1992 6 (d) the extent of audit work related to internal control (clarifying that this does not extend to an evaluation of internal control sufficient for expressing an opinion about its effectiveness); (e) other specific items likely to be of particular interest to the audit committee,such as related party transactions,and other matters set out in this Guideline,such as illegal acts and fraud; • (f) other areas of concern identified by the audit committee or management; (g) any extensions of the audit scope requested by the audit committee or management; (h) planned reliance on other auditors, how the expectations will be communicated to the other auditors and how their findings will be communicated to the audit committee; (i) reliance on and coordination with the work of the internal audit department; and (j) the timing of the audit. Weaknesses in internal control INTERNAL CONTROL IN THE CONTEXT OF AN AUDIT, Section 5220, 16 provides the following guidance concerning the communication of significant weaknesses in internal control: ".01 As a result of the auditor's consideration of internal control and other auditing procedures, he or she may become aware of weaknesses in internal control.Although the auditor has no duty undergenerally accepted auditing standards to report such weaknesses to the client,it is important that the appropriate representative of the client be made aware of significant weaknesses which have come to the attention of the auditor as a result of the audit.Reporting weaknesses in internal control does not,of course, relieve the auditor of the responsibility to conduct auditing procedures to gain sufficient appropriate audit evidence to support the content of his or her report on the financial statements. .02 Significant internal control weaknesses are often reported by means of an internal control letter.Such a letter should indicate that it refers only to significant weaknesses which have come to the attention of the auditor as a result of the audit and is not based on a study to determine whether internal control is adequate for management's purposes.The auditor may sometimes choose to make additional enquiries the only purpose of which is to provide a basis for suggestions concerning improvements in if tel nal control or other business matters." • • 7 Communications with audit committees Significant weaknesses should be communicated to the audit committee. 17 In communicating significant weaknesses to the audit committee, the auditor should consider the need for additional comment concerning management's actions or proposed actions in response to the significant weaknesses identified. Illegal acts MISSTATEMENTS-ILLEGAL ACTS, Section 5136 states that the term 18 "illegal act"means a violation of a domestic or foreign statutory law or government regulation attributable to the entity under audit, or to management or employees acting on the entity's behalf. Illegal acts do not include personal misconduct by the entity's management or employees unrelated to the entity's business activities.As explained in Section 5136, an auditor conducting an audit in accordance with generally accepted auditing standards may not detect an illegal act, or recognize an act as being illegal, even if the effect of its consequences on the financial statements is material.However,the auditor,by applying procedures for the purpose of forming an opinion on the financial statements,may obtain evidence which indicates that an illegal or possibly illegal act may have occurred. When the auditor has obtained evidence which indicates an illegal or 19 possibly illegal act,other than one considered inconsequential,may have occurred, the auditor should ensure the audit committee and other appropriate levels of management are informed.Paragraphs 5136.26 to 5136.30 include this and other guidance about the auditor's responsibilities to communicate illegal or possibly illegal acts. Fraud AUDITOR'S RESPONSIBILITY TO DETECT AND COMMUNICATE 20 MISSTATEMENTS,Section 5135,defines fraud as: "an intentional misstatement in financial statements, including an omission of amount or disclosure,or to a misstatement arising from theft of the entity's assets.Fraud also involves: (i) the use of deception such as manipulation, falsification or alteration of-accounting records or documentation; (ii) misrepresentation or intentional omission of events,transactions or other significant information;or (iii) intentional misapplication of accounting principles relating to amount,classification,manner of presentation or disclosure." • Auditing and Related Services Guideline—December 1994 8 Section 5135 sets out guidance to an auditor who encounters circumstances 21 that cause him or her to suspect or determine that fraud has occurred. Included is guidance on communication with management and consideration of the effect of the matters on the financial statements and the content of the auditor's report. In addition to referring to the Handbook guidance, the auditor should 22 consider the following when fraud is found to exist or when the auditor's suspicion of fraud cannot be dispelled: (a) he or she should communicate the findings to the audit committee unless the audit committee has previously clarified that frauds of certain kinds or amounts need not be communicated to it (for example, individually insignificant thefts); and (b) when a director or officer is involved, the auditor should consider obtaining legal advice as to his or her responsibilities and the appropriate course of action. Significant accounting principles and policies The auditor should determine that the audit committee is informed about: 23 (a) the initial selection of and changes in significant accounting policies, which encompass the specific principles and their method of application; (b) the methods used to account for significant unusual transactions;and (c) the effect of significant accounting policies in controversial or emerging areas for which there is a lack of authoritative guidance or consensus. The auditor should determine that the audit committee is also informed 24 about the existence of acceptable alternative policies and methods, and the acceptability of the particular policy or method used by management. It may be appropriate to discuss these matters with the audit committee on a periodic basis and not just at the time of adoption. Management judgments and accounting estimates The auditor should determine that the audit committee is informed about: 25 (a) the issues involved,and related judgments made by management,in formulating particularly sensitive accounting estimates and disclosures (for example, disclosures related to going concern and contingency issues); 9 Communications with audit committees • (b) the auditor's conclusions regarding the reasonableness of the estimates made by management in the context of the financial statements taken as a whole;and (c) the basis for those conclusions. The auditor may be requested to discuss the relative degree of conservatism of the financial statements as the result of the selection of accounting policies and the judgments made in formulating accounting estimates. Misstatements Communication of significant misstatements with the audit committee 26 is also important.The audit committee may be informed of significant misstatements either by the auditor or management.The determination of those misstatement which would be considered significant is a matter of an auditor's professional judgement.Significant misstatements include: (a) material misstatements; (b) fraud; (c) misstatements that indicate significant weaknesses in internal control,including the design or operation of the entity's financial reporting process;and (d) misstatements that may cause future financial statements to be materially misstated. The auditor need not communicate adjustments identified and made by management in the normal course of preparing the financial statements. The audit committee may be inf,armed of other misstatements which,in the auditor's judgment,need be communicated.The auditor would also consider any agreement with the audit committee about other • misstatements to be communicated. Other information in annual reports The audit committee often considers information,other than the annual 27 financial statements, Prepared by management and included in the •• annual report.The auditor's responsibility for such information is set out in THE AUDITOR'S INVOLVEMENT WITH ANNUAL REPORTS, Section 7500,and requires the auditor to read such information and determine whether any of it is inconsistent with the financial statements on which he or she has reported. It also deals with action the auditor should consider if he or she believes that a material misstatement of fact exists. • Auditing and Related Services Guideline—August 1991 10 • The auditor should discuss this responsibility with the audit committee, the procedures he or she performed,and the results. Disagreements with management The auditor should discuss with the audit committee any disagreements 28 with management about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report,whether or not satisfactorily resolved. Consultation with other accountants In some cases,management may decide to consult with other accountants 29 about auditing and accounting matters.When the auditor is aware that such consultation has occurred,he or she should discuss with the audit committee his or her views about any matters that were the subject of such consultation. Major issues discussed that influence audit appointment The auditor should discuss with the audit committee any major issues 30 that were discussed with management in connection with the initial or recurring appointment of the auditor, including,among other matters, discussions regarding the application of accounting principles andauditing standards,and fees. Difficulties encountered in performing the audit The auditor should inform the audit committee of any serious difficulties 31 he or she encountered in the performance of the audit, including unreasonable delays in management providing information required for audit purposes and an unreasonable timetable in which to complete the audit. AUDIT COMMITTEE DECISIONS Once the auditor has communicated(ordetermined that management has 32 communicated)a matter to the audit committee,his or her communication responsibility to the entity is usually at an end. It is not normally the auditor's role to pass judgment on the committee's decision,except to the extent that it affects his or her opinion on the financial statements.In rare cases,however,the auditor may consider the audit committee's action seriously inappropriate. In such cases, the auditor may need to communicate directly with the board of directors. In circumstances 1 11 Communications with audit committees where the auditor cannot resolve situations within the entity,the auditor may have an obligation under statute or regulation to report to outside authorities.The auditor may need to seek legal advice concerning the best manner of reporting to outside authorities,in view of the auditor's general obligation to preserve client confidentiality. • TOWN MANAGER RECEIVED DEC 1 19r ��--�� ��rr FILE NO. ,J GCI,/v/ es/ giet i, V C,i if I ABEY TO: ,.�yT FCl'TT, 1.3.H c.A. • MAYOR FWDI���ir . tA C.A. � arteped,� ccoantant& • EXEC.DIR.OPNS C.A. CUL.&REC. PLANNING FIRE CHIEF TREASURER PARKS&PAC. .__. SOLICITOR _ t PUBLIC WORKS MGR.-HR. TRANSIT EMPL.EQUITY November 22, 1995 LIBRARY H.&SAFETY MGR. • IS-- —•.ter ECON.DEV. f • ��z The Corporation of the Tow n of Pickering - ,'', Pickering Civic Complex One The Esplanade • Pickering, Ontario L1V6K7 Attention: Wayne Arthurs Dear Sir: Re: Audit Committee Role As a result of the concerns and questions raised at the inaugural meeting of the Audit Committee about functions and roles of members of the Audit Committee, Town Staff (including Internal Audit) and the external auditors, we would like to suggest that we lead an informal information session. An overview of the audit process, general auditing standards and our relationship to the Audit Committee could be some items of coverage. Specific questions or concerns could be addressed at the session or provided by your members to be encompassed into the presentation. We recommend that this be an informal session so as to encourage all to participate. We would be pleased to offer our board room as a location for this session. Please contact our office if you wish to discuss this matter further. Sincerely, HURREN, FLETT, SINCLAIR CHARTERED ACCOUNTANTS ICZICciA, 1 Dawn M. Flett, B.B.A., C.A. DMF:dm P.O. BOX 458 PICKERING,ONTARIO L1V 2R7 TEL: (905)683-8856 FAX:(905)683-3428 %fuetz� g&tt v`ridatei` DAWN M. FLETT, B.B.A.,C.A. WARREN C. HURREN,C.A. /via 2 NEIL SINCLAIR, B.B.A.,C.A. C/ - November 23, 1995 I + tea' LA if PERSONAL AND CONFIDENTIAL P • `'� The Corporation of the Town of Pickering • OFFICE . Pickering Civic Complex / One The Esplanade - Pickering, Ontario L1V 6K7 Attention: Mr. Wayne Arthurs, Mayor • Dear Mr. Arthurs: We have recently completed our interim audit of the Town of Pickering during which we tested the internal control system. Our testing included transactions up to the end of September, 1995. No material errors or weaknesses were noted during the testing. At this time, however, we wish to present the following comments for your review and consideration. 1. Daily Collection of Taxation Revenues As you may be aware, taxation revenues are collected in many fashions including cash, cheque. lock box and financial institutions (i.e. mortgage tax accounts). Currently, only adding machine tapes of the various source documents are prepared to cross check to the batch total of the Tax Approval Collection Register. These tapes have become cumbersome to review because: (a) If mistakes are made in keypunching the amounts collected, the amounts and totals are changed manually. (b) Subtotals of tax revenue collected from the various sources are not marked to specifically identify the source (i.e. cash, lock box, financial institution). Although staff members can readily cross reference subtotals back to the specific source documents at that time, it is difficult to do this at a later date. ...12 P.O. BOX 458 PICKERING, ONTARIO L1V 2R7 TEL:(905)683-8856 FAX:(905)683-3428 _ w r• The Corporation of the Town of Pickering Page 2 November 23, 1995 We would recommend that a standard daily summary sheet be used. This sheet would clearly identify the various sources of collection and the related amounts. The adding machine tapes should still be prepared and retained. In doing so, staff can easily trace back collections if required, and both the internal and external auditor could readily assess the work of staff. 2. Succession Planning With Respect to Senior Staff in the Treasury Department It has come to our attention that both the Treasurer and Deputy Treasurer are eligible for retirement at the end of 1997. If both were to retire at that time, a significant void would arise. We would suggest that Council/Town Manager now start to consider how to deal with this. We would further suggest that you consider whether you could hire internally or from the outside. As discussed with Inga Berrey, the remaining audit stages have been tentatively scheduled as follows: Preparation of necessary audit confirmations First week of January, 1996 (i.e. bank, investments, accounts receivable, accounts payable) Reconciliation of returned audit Depending on when confirmations confirmations as required are returned, but expected to be late January, early February, 1996 Commencement of year end audit procedures The week of March 4, 1996 Please note that during the period leading up to the commencement of our year end audit procedures, it is our normal practice to keep in contact with our clients. This keeps us informed as to the progression of the year end procedures by staff and allows us to provide any necessary assistance. We will maintain communication with Inga Berrey. This timetable has been developed keeping in mind that the various audit reports are to be filed with the Minister of Municipal Affairs and Housing by April 30, 1996. .../3 . • The Corporation of the Town of Pickering Page 3 November 23, 1995 We would like to thank you and the staff of the Town for the assistance and cooperation extended to us. Very truly yours, HURREN, FLETT, SINCLAIR CHARTERED ACCOUNTANTS it Warren C. Hurren, C.A. NS:dm cc: Mr. C.M. Timothy Sheffield Town Manager