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Home My WebLink AboutFIN 08-22Report to Executive Committee Report Number: FIN 08-22 Date: May 2, 2022 From: Stan Karwowski Director, Finance & Treasurer Subject: 2021 Year End Audit (Interim) File: F-3300-001 Recommendation: It is recommended that the Audit Service Plan as submitted by Deloitte LLP, set out in Attachment 1 to this report, be received for information. Executive Summary: In accordance with generally accepted auditing standards, the Audit Service 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 at the commencement of the year end audit. Financial Implications: The base audit fee for City and Library is estimated at $70,000. This is the same fee as in the previous year. Discussion: In the Committee’s role as the body responsible for oversight of the financial reporting process, it must review the Audit Service Plan for the 2021 year end audit. The Audit Service 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. Attachment: 1. 2021 Audit Service Plan FIN 08-22 May 2, 2022 Subject: 2021 Year End Audit (Interim) Page 2 Prepared By: Approved/Endorsed By: Kristine Senior, CPA, CA Stan Karwowski, MBA, CPA, CMA Manager, Accounting Services Director, Finance & Treasurer Recommended for the consideration of Pickering City Council Marisa Carpino, M.A. Chief Administrative Officer Original Signed By Original Signed By: Original Signed By: 00 The Corporation of the City of Pickering 2021 Audit service plan For the year ended December 31, 2021 Attachment #1 to Report #FIN 08-22 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 ended December 31, 2021. This document describes the key features of our plan including our audit scope and approach, our planned communications with you, and our team. Our audits will include: An audit of the City of Pickerings consolidated financial statements (the Financial Statements) for the year ended December 31, 2021 prepared in accordance with Canadian Public Sector Accounting Standards (PSAS) An audit of the City of Pickering Public Library Boards financial statements for the year ended December 31, 2021 prepared in accordance with Canadian PSAS, and An audit of the Trust Funds of the City of Pickerings financial statements for the year ended December 31, 2021 prepared in accordance with Canadian Accounting Standards for Not-for-Profit Organizations. Our commitment to you is straightforward: we will provide you with outstanding professional services delivered by an experienced and dedicated team of professionals. Our professionals will continue providing you with best practices and insights to face the increasingly complex array of issues and challenges encountered by the City. This report has been provided to the Executive Committee (the Committee) on a confidential basis. It is intended solely for the use of the Committee to assist you in discharging your responsibilities with respect to the various financial statement audits enumerated above and is not intended for any other purpose. We look forward to discussing our audit service plan with you and answering any questions you may have. Yours truly, Chartered Professional Accountants Licensed Public Accountants Deloitte LLP Bay Adelaide East 8 Adelaide Street West Suite 200 Toronto ON M5H 0A9 Canada Tel: 416-601-6150 Fax: 416-601-6610 www.deloitte.ca April 8, 2022 Private and confidential To the Members of the Executive Committee of The Corporation of the City of Pickering 1 The Esplanade Pickering ON L1V 6K7 2021 Audit service plan Original signed by Deloitte LLP The Corporation of the City of Pickering | Table of contents i © Deloitte LLP and affiliated entities Table of contents Executive summary 1 Deloittes Next Normal 3 Audit risks 5 Appendix 1 Audit approach 8 Appendix 2 Communication requirements 12 Appendix 3 New and revised public sector accounting standards 14 Appendix 4 Deloitte resources a click away 15 The Corporation of the City of Pickering | Executive summary 1 © Deloitte LLP and affiliated entities Executive summary 1 Revenue recognition 2 Management override of controls 3 Management judgments and accounting estimates 4 Implementation of new financial system 5 Preparation for new PSAS accounting standards 5% of materiality We are responsible for providing reasonable assurance that your financial statements as a whole are free from material misstatement. Materiality (for consolidated City audit) 3% of expenses Preliminary materiality Clearly trivial threshold Audit scope and terms of engagement We have been engaged to perform an audit of the City, Library and Trust Funds Financial Statements, as at, and for the year ended, December 31, 2021 (the Financial Statements) prepared in accordance with Canadian Public Sector Accounting Standards (PSAS) for the City and the Library Board, and Canadian Accounting Standards for Not-For-Profit Organizations for the Trust Funds. Our audit will be conducted in accordance with Canadian generally accepted auditing standards (Canadian GAAS). The terms and conditions of our engagement are described in the Master Services Agreement for Professional Services dated October 17, 2019, and Confirmation of Changes letter dated November 2, 2020, which have been signed on behalf of the Committee and management,. Audit risks Our materiality levels are based on professional judgment and will be determined using total expenses or fund balances as a reference point for the ultimate determination of materiality as follows: Consolidated financial statements for the City approximately 3% of expenses City of Pickering Public Library Board approximately 3% of expenses, and City of Pickering Trust Funds approximately 3% of fund balances We will inform the Executive Committee of all uncorrected misstatements greater than a clearly trivial amount (5% of materiality) and any misstatements that are, in our judgment, qualitatively material. In accordance with Canadian GAAS, we will ask that any misstatements be corrected. The Corporation of the City of Pickering | Executive summary 2 © Deloitte LLP and affiliated entities Fraud risk We will develop our audit strategy to address the assessed risks of material misstatement due to fraud. Determining this strategy will involve: 1.Enquiry of those involved in the financial reporting process about inappropriate or unusual activity. 2.Testing a sample of journal entries throughout the period as well as adjustments made at the end of the reporting period. 3.Identifying and obtaining an understanding of the business rationale for significant or unusual transactions that are outside the normal course of business. 4.Evaluating whether your accounting policies may be indicative of fraudulent financial reporting resulting from managements effort to manage earnings. 5.Evaluating whether the judgements and decisions related to management estimates indicate a possible bias. 6.Incorporating an element of unpredictability in selecting our audit procedures. We will ask the Committee for their views about the risk of fraud, whether they know of any actual or suspected fraud affecting the City and their role in the oversight of managements antifraud programs. If we suspect fraud involving management, we will immediately inform the Committee of our suspicions and discuss the nature, timing, and extent of audit procedures necessary to complete the audit. Use of the work of specialists We intend to rely on the work of the following expert during our audit: Deloitte Risk Advisory We intend to use our own IT specialists to assess the design and implementation of general computer controls as well as testing of any systems conversion processes (if applicable). If our assessment does not provide us with sufficient, appropriate audit evidence, we will need to perform additional audit procedures to address the risks of material misstatements in the Financial Statements. The Corporation of the City of Pickering | Deloittes next normal 3 © Deloitte LLP and affiliated entities Deloittes next normal The Way We Work. The Work We Do. Reinvented. Deloittes Next Normal is a reimagined, flexible way of working that enables us to create value together with our clients by making purposeful choices about where and how we work and how we will define and measure success. We imagine a world which is neither all-virtual, nor all-face-to-face. It will be a world in which agility, versatility and the ability to create delightful, blended experiences for our people and clients will be a differentiator. We will work with each client to determine the best combination of virtual and in person settings to complete our audits while continuing to deliver value and insights. Our Next Normal is... Flexible. It allows each of us to make intentional choices about where and how we work so we can show up as our best and most productive selves. Iterative. We will continuously adapt our ways of working as we test and learn with our teams and our clients. Different. It will require each of us to lean into the challenge of embracing new routines. Below are some of the resources we have developed to assist with this Next Normal. Using Spotlights data analytics capabilities, were able to be laser-focused on transactions that are out of the norm. This means less burden on you and your team providing audit support, more relevant and smarter questions, and less time wasted on immaterial issues. Spotlight The Corporation of the City of Pickering | Deloittes next normal 4 © Deloitte LLP and affiliated entities A secure web-based application for preparing, sending, receiving and managing confirmations. Were able to automatically create confirmations, have you apply your signature to the entire batch, and send them electronically rather than by mail. This approach also provides much better visibility into the status of all of the confirms with a clear real-time dashboard. iConfirm The Corporation of the City of Pickering | Audit risks 5 © Deloitte LLP and affiliated entities Audit risks The following tables set out the audit risks that we identified during our preliminary planning activities, including our proposed response to each risk. Our planned audit response is based on our assessment of the likelihood of a risks occurrence, the significance should a misstatement occur, our determination of materiality and our prior knowledge of the City. Revenue recognition* Significant Audit risk Our proposed audit response Under Canadian GAAS, we are required to evaluate the risk of fraud in revenue recognition. For municipalities, there is a risk around the occurrence, completeness and accuracy of revenue, deferred revenue, and classification of recognition related to government transfer/grants. We recognize that as a result of COVID-19 there may be certain changes in volume of other revenue streams (i.e. recreation, permits and fees, etc.), and additional grants funding received which may have performance conditions. These changes to revenue will be captured as part of our audit response. Certain revenue streams are presumed areas of significant audit risk. We will test the design and implementation of controls in significant revenue streams, perform substantive analytic procedures and/or detailed testing in these areas (including testing of manual journal entries), and Substantive testing to determine if restricted contribtions (i.e. development charges), and government transfers/grants have been recognized appropriately (revenue vs. deferred revenue). Management override of controls* * Area of Significant Risk Significant Audit risk Our proposed audit response Under Canadian Auditing Standards, it is the responsibility of the management, with the oversight of those charged with governance to place a strong emphasis on fraud prevention and detection. Oversight by those charged with governance includes considering the potential for override of controls or other inappropriate influence over the financial reporting process. Management override of controls is present in all entities. It is a risk of material misstatement resulting from fraud and therefore is considered as a significant risk. Our audit tests the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of financial statements We obtain an understanding of the business rationale for significant transactions that we become aware of that are outside of the normal course of business, or that otherwise appear to be unusual given our understanding of the City and its environment We review accounting estimates for bias and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement In addition, experienced Deloitte personnel are assigned to the testing and review of journal entries and areas of estimates, and Professional skepticism will be maintained throughout the audit. The Corporation of the City of Pickering | Audit risks 6 © Deloitte LLP and affiliated entities Areas of Special Audit Consideration During our risk assessment, we identified some areas of audit risk that will require special audit consideration. These areas of risk, together with our planned responses, are described below: Management judgments and accounting estimates Implementation of new financial system Audit risk Our proposed audit response Management judgments and accounting estimates may be subject to estimation uncertainty. Significant judgements and estimates Accounts involving significant estimates include allowance for doubtful accounts, certain accrued liabilities, post-employment benefits liability, WSIB liabilities and estimates relating to the useful lives of tangible capital assets. Understand how management makes the accounting estimates and the underlying data on which those estimates are based. Review support for significant assumptions made by management. (i.e., third party source data). Evaluate whether the significant assumptions made by management provide a reasonable basis for the accounting estimate, whether and how management considered alternative assumptions or outcomes, and why they have rejected them. Review transactions and events occurring subsequent to year-end to determine the reasonableness of estimates made at year-end. Review the consistency of assumptions made by management. Audit risk Our proposed audit response The City implemented a new financial system, SAP, during fiscal 2021. Given the complexity associated with such a significant undertaking and the impact on numerous City departments, our audit focus will be on assessing the internal controls over the change management process (both during and post-implementation), as well as the accuracy and completeness of financial data converted and migrated to SAP. We will obtain an understanding of the project scope for the systems implementation through discussion with Finance and IT management to assess the implications on our audit strategy. We will obtain an understanding of the Citys data conversion and migration from the old system to the new system, including testing plan followed by the City, to assess the impact on the extent of testing required for audit purposes. We will then perform testing on the data migrated to SAP to ensure it is accurate and complete, and that the opening trial balance in SAP is accurate. We will discuss with management to understand the internal controls implemented through the implementation process, including internal controls over project decision approvals, pre-conversion testing, project governance, access provisioning in the new system, among others. We will also test the design and implementation of key controls within this process. The Corporation of the City of Pickering | Audit risks 7 © Deloitte LLP and affiliated entities Preparation for new PSAS accounting standards Audit risk Our proposed audit response In fiscal 2023, two new significant accounting standards, PS 3280 Asset retirement obligations, and PS 3450 Financial instruments, will come in effect. Both standards will require early preparation by the City, including development of accounting policies, information gathering with various City departments, engagement of external consultants to assist with valuation, and development of go-forward processes for policy maintenance. We will discuss with management their implementation plan for the new standards. We will share with management any materials we have available to guide in their adoption of the standards. Through the implementation and information gathering process, we will connect with management to monitor status and ensure implementation decisions are reasonable and judgments are properly documented and substantiated. We will provide input as requested by management. The Corporation of the City of Pickering | Appendix 1 Audit approach 8 © Deloitte LLP and affiliated entities Appendix 1 Audit approach Deloittes audit approach is a systematic methodology that enables us to tailor our audit scope and plan to address the unique issues facing the City Focus area Risk based audit Deliver a customized risk assessment, focusing our attention and resources on the audit areas that are most relevant to the City. Confidential Information Protecting the privacy and confidentiality of our clients and the firm is a cornerstone of the professional standards every Deloitte partner and practitioner commits to upholding every day. Deloitte employs technical, physical, and procedural safeguards, including our Confidential Information Program, to appropriately safeguard your data before, during, and after the course of the engagement. Professional skepticism Obtain a thorough understanding of the relevant facts and information, analyze reasonable alternatives, apply a questioning mindset and challenge managements assumptions. Perform a more rigorous review of potential contradictory evidence. Consultations Involve additional resource or consult with technical resources concerning the significant or unusual events. Understanding your current business and its structure Understanding your accounting processes and internal controls Understanding your IT systems Identifying potential engagement risks and planning control testing and substantive procedures directly related to the risks Consideration of the risk of fraud Inquiring directly of the Committee about fraud risk Assessing risks and controls relating to information technology Incorporate an element of unpredictability when selecting the nature, timing and extent of our audit procedures. Evaluating the design and determining the implementation of internal controls relevant to the audit Performing substantive audit procedures Prior to rendering our report, we will conclude whether: o The scope of the audit was sufficient to support our opinion,and o The misstatements identified during the audit do not result inthe financial statements being materially misstated. Reconfirming ourindependence Delivering professional excellence Assesssing and responding to engagement risk Developing and executing the audit plan Reporting and assessing performance Initial Planning The Corporation of the City of Pickering | Appendix 1 Audit approach 9 © Deloitte LLP and affiliated entities When general IT controls (GITCs) may be relevant? For example: A billing system that performs many functions (such as processing orders, generating invoices, and tracking financial balances) and it processes and houses data. The entity relies on the functionality and the data processed by the system. Additionally, the volume and complexity of transactions processed by system is considered high. Therefore the billing system is relevant to the audit. Factor #1 Data For example: 3-way match of the purchase order, goods receipt and invoice prior to payment The calculation of depreciation expense Access is restricted to update inventory quantity Factor #2 Automated Controls For example, a system-generated A/R aging report from the financial reporting application is used to determine the allowance for doubtful accounts. Factor #3: System Generated Reports For example, a telecommunications company uses its application system to create a log of the services provided to its customers, to initiate and process its billings for the services, and to automatically record such amounts in the general ledger. It is a highly automated environment and therefore most of the audit evidence is maintained in the application system itself. The team has concluded that substantive procedures alone would not be sufficient to address certain risks of material misstatements. Therefore, the application system is relevant for the audit. Factor #4: Substantive Procedures The determination of which IT system aspects are relevant to our audit is based on the four factors. The Corporation of the City of Pickering | Appendix 1 Audit approach 10 © Deloitte LLP and affiliated entities Focus area Audit technology Deloitte Connect Use Deloittes secure, online collaboration site to facilitate a two-way dialogue between the Deloitte team and the City team to effectively manage engagement coordination and provide greater transparency allowing both management and auditor visibility over client request status. Deloitte Spotlight - Gather data and test journal entries, identify risks and anomalies more quickly, and generate meaningful insights through data visualization. Argus Use Deloittes artificial intelligence tool to analyze the population of contracts or other documents to identify variations, potential risks and hone in on items of interest. Innovating our audit approach Use of Innovation Audit Analytics Argus Excel analytics Deloitte Spotlight Deloitte Signal Deloitte Connect Deloitte Signal delivers a comprehensive, customized, and flexible data analysis using trends, metrics, and ratios from coordinated external and internal resources. Deloittes artificial intelligence tool that extracts analytics across an entire population of documents and highlights variations that can help us identify risks. Deloittes proprietary tool, focuses testing on high-risk transactions and streamline common audit test procedures. We are leveraging specialists and technology-powered solutions in our audit delivery model to transform the way we plan and execute our audits. Deloitte Spotlight mines journal entry data to test 100 percent of select populations in a matter of minutes, identifies risks and anomalies more quickly, and generates meaningful insights through data visualization. Deloittes secure, online collaboration site that facilitates a two-way dialogue between the Deloitte team and client team to effectively manage engagement coordination. The Corporation of the City of Pickering | Appendix 1 Audit approach 11 © Deloitte LLP and affiliated entities Focus area Processes Project management - Enhance project management oversight and effective communications between the audit team and management. The Corporation of the City of Pickering | Appendix 2 Communication requirements 12 © Deloitte LLP and affiliated entities Appendix 2 Communication requirements Required communication Reference Audit Service Plan 1.Our responsibilities under Canadian GAAS, including forming and expressing an opinion on the financial statements CAS1 260.14 2.An overview of the overall audit strategy, addressing: a.Timing of the audit b.Significant risks, including fraud risks CAS 260.15 3.Significant transactions outside of the normal course of business, includingrelated party transactions CAS 260 App. 2, CAS 550.27 Enquiries of those charged with governance 4.How those charged with governance exercise oversight over managementsprocess for identifying and responding to the risk of fraud and the internal control that management has established to mitigate these risks CAS 240.21 5.Any known suspected or alleged fraud affecting the City CAS 240.22 6.Whether the City is in compliance with laws and regulations CAS 250.15 Year-end communication 7.Modification to our audit plan and strategy CAS 260.A26 8.Fraud or possible fraud identified through the audit process CAS 240.40-.42 9.Significant accounting policies, practices, unusual transactions, and our related conclusions CAS 260.16 a. 10.Alternative treatments for accounting policies and practices that have been discussed with management during the current audit period CAS 260.16 a. 11.Matters related to going concern CAS 570.25 12.Management judgments and accounting estimates CAS 260.16 a. 13.Significant difficulties, if any, encountered during the audit CAS 260.16 b. 14.Material written communications between management and us, including management representation letters CAS 260.16 c. 15.Circumstances that affect the form and the content of the auditors report CAS 260.16d. 16.Modifications to our opinion CAS 260.A21 17.Our views of significant accounting or auditing matters for which management consulted with other accountants and about which we have concerns CAS 260.A22 18.Significant matters discussed with management CAS 260.A.22 1 CAS: Canadian Auditing Standards CAS are issued by the Auditing and Assurance Standards Board of CPA Canada The Corporation of the City of Pickering | Appendix 2 Communication requirements 13 © Deloitte LLP and affiliated entities Required communication Reference 19. Matters involving non-compliance with laws and regulations that come to our attention, unless prohibited by law or regulation, including illegal or possibly illegal acts that come to our attention CAS 250.23 20. Significant deficiencies in internal control, if any, identified by us in the conduct of the audit of the financial statements CAS 265 21. Uncorrected misstatements and disclosure items CAS 450.12-13, 22. Any significant matters arising during the audit in connection with the Citys related parties CAS 550.27 The Corporation of the City of Pickering | Appendix 3 New and revised public sector accounting standards 14 © Deloitte LLP and affiliated entities Appendix 3 New and revised public sector accounting standards The following is a summary of certain new or revised Canadian Public Sector Accounting Standards that will become effective in 2022 and beyond. Public Sector Accounting Standards Title Description Effective Date Section PS 3280 Asset retirement obligations This Section establishes standards on how to account for and report on the legal obligations associated with the retirement of tangible capital assets. Effective April 1, 2022. Earlier adoption is permitted. Section PS 3450 - Financial instruments This Section establishes standards on how to account for and report all types of financial instruments including derivatives. Effective April 1, 2022, earlier adoption is permitted. Section PS 3400 - Revenue This Section establishes standards on how to account for and report on revenue. Specifically, it differentiates between revenue arising from transactions that include performance obligations and transactions that do not have performance obligations. Effective for fiscal years beginning on or after April 1, 2023. Earlier adoption is permitted. This Section may be applied retroactively or prospectively. 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