AUDIT District of Sault Ste. Marie Social Services Administration Board Audit Findings Report For the year ending December 31, 2011 KPMG LLP, Chartered Accountants, Licensed Public Accountants kpmg.ca
Dear Board members, We have prepared this audit findings report to assist you with your review of the financial statements and the carrying out of your responsibilities. We are here to help. We encourage you to ask us for more information on any of the matters covered in this report and beyond. Audit quality The quality of an audit and the resulting financial statements are receiving an increased level of scrutiny around the world. Audit quality is at the core of everything we do at KPMG, and we believe that it is not just about providing the right audit opinion, but also the steps we take to provide that audit opinion. One component of our efforts in this area is the development and implementation of the KPMG Audit Quality Framework to help ensure that every partner and professional concentrates on the fundamental skills and behaviours required to deliver an appropriate and independent audit opinion. We invite you to review KPMG s Audit Quality Framework, summarized in the appendices of this report. Reaching out to audit committees KPMG s Audit Committee Institute holds Audit Committee Roundtables across the country twice yearly. You are cordially invited to attend. For information and registration, please visit www.kpmg.ca/auditcommittee/roundtables.html. We appreciate the assistance of management and staff in conducting our audit. We hope this audit findings report is of assistance to you as you carry out your agenda, and we look forward to discussing our findings and answering your questions at the upcoming Board meeting. Yours sincerely, Michael Marinovich Partner For KPMG s audit committee resources, please visit kpmg.ca/auditcommittee
Contents Executive summary... 2 Significant audit, accounting and reporting matters... 3 Significant qualitative aspects of accounting practices... 6 Misstatements... 7 Independence... 8 Appendices... 9
Executive summary Overview The purpose 1 of this Audit Findings Report is to assist you, as a member of the Board of Directors, in your review of the consolidated financial statements of District of Sault Ste. Marie Social Services Administration Board and the Sault Ste Marie Housing Corporation for the year ended December 31, 2011. Status As of the date of this report, we have completed the audit of the financial statements, with the exception of certain remaining procedures which include: completing our discussions with the Board obtaining evidence of the Board's approval of the financial statements. Please refer to the Appendices for our draft audit report. We will update you on any significant matters arising from the completion of the audit, including completion of the above procedures. Our audit report will be dated upon completion of any remaining procedures. 1 This Audit Findings Report should not be used for any other purpose or by anyone other than the Board. KPMG shall have no responsibility or liability for loss or damages or claims, if any, to or by any third party as this Audit Findings Report has not been prepared for, and is not intended for, and should not be used by, any third party or for any other purpose. Audit findings report to the Board of Directors P a g e 2
Significant audit, accounting and reporting matters Matters to discuss Included in this report are matters we have highlighted for discussion at the upcoming board meeting. We look forward to discussing these matters and our findings with you. Auditors responsibility: To form and express an opinion on the financial statements that have been prepared by management with oversight of the audit committee and that the audit for the financial statements does not relieve management or the Board of Directors their responsibilities. Changes from the Audit Plan We have highlighted below changes between our audit plan and the actual audit procedures completed during the audit. - No changes Matters related to management s judgment and estimates We have highlighted below significant matters related to management s judgment and estimates that we would like to bring to your attention: HST Paramunicipal Rebate Receivable: The DSSAB has recorded a receivable of $495,000 (2010, $163,000) for HST rebate under the municipal status rules allowing for municipal organizations to claim a rebate of 86% of the HST paid. The rebate is based on 100% of the 5% federal portion and 78% of the 8% provincial portion of the HST paid, which is the same as the City of SSM is entitled to. Municipal status of the DSSAB has not yet been approved by Canada Revenue Agency (CRA). CRA has determined the Board to be a not for profit and entitled to rebate of 50% of the 5%federal portion and 82% of the 8%provincial portion paid. KPMG comments [regarding effect on the audit] KPMG is assisting in the process to have municipal status approved by CRA. KPMG has audited the balance set up in receivable and believes that the organization should meet the requirements to be considered a municipal organization under the Excise Tax Act. Misstatements None Significant deficiencies None Audit findings report to the Board of Directors P a g e 3
Prior year funding payable to Province of Ontario At December 31, 2011, $2,131,533 has been recorded as payable to Province of Ontario relating to excess program funding. Of the total above: Amounts relating to the years 2007 2011 total $1,482,762 Amounts relating to the years Pre 2007 total $ 648,771 These amounts may be recovered in the future by the province when the priors have been closed by the respective Ministries KPMG comments [regarding effect on the audit] Management s opinion is that it is still appropriate to provide for the payable until formal confirmation of the Ministry s intent to claw back funds is received. Misstatements None Significant deficiencies None Audit findings report to the Board of Directors P a g e 4
Other matters We have highlighted below other significant matters that we would like to bring to your attention: Canada-Ontario Affordable Housing Program (AHP): Northern Housing and Homeownership Component AHP offers the Northern Housing and Homeownership component which was established to encourage the repair of owned or rented housing in Northern Ontario. In 2009 Phase 2 of the program began and additional funding was announced. The Program provides funding for certain housing repairs to low to moderate income residents of Northern Ontario in the form of a forgivable loan. The loan period for phase 1 is 20 years and is forgivable at a rate of 8% per annum for the first 10 years and 2% per annum for the remaining 10 years providing the borrower maintains ownership of the dwelling. Phase 2 loans are forgivable at the rate of 10% per year. During the year $1,607,595 (2010; $1,518,932) was advanced and $4,447,890 (2010; $3,439,723) was outstanding as loans from both phases. The Board received additional funding during the year amounting to $640,818 (2010; $2,205,150) and this is reflected as an increase in the liability as the Board is required to reinvest or return the funding of any amounts repayable by the borrower under this agreement. The total liability at December 31, 2011 is $4,472,352 (2010; $4,287,566). New Rental Housing Component AHP offers the New Rental Housing component which was established to encourage the creation of new affordable rental housing units. The program provides funding to proponents of the program for certain new rental housing units to low-income seniors and persons with disabilities in the form of a forgiven loan. The loan period is 20 years and is forgiven at a rate of 5% per annum provided the borrower maintains certain conditions of the program. During the year $660,000 (2010 - $660,000) was advanced and $1,254,000 (2010 - $660,000) was outstanding as loans. The Board received additional funding during the year amounting to $660,000 (2010 - $660,000 and this is reflected as an increase in the liability. The total liability at December 31, 2011 is $1,254,000 (2010: $660,000). KPMG comments [regarding effect on the audit] KPMG has reviewed the Canada-Ontario Affordable Housing Program agreements. KPMG has selected a sample of the receivables and agreed them to the supporting documentation and agreed the payments received under the program to actual receipts Misstatements None Significant deficiencies None Audit findings report to the Board of Directors P a g e 5
Significant qualitative aspects of accounting practices The following are the significant qualitative aspects of accounting practices that we plan to discuss with you: Significant accounting policies Significant accounting estimates Significant disclosures There have been no significant changes in the accounting policies of the Board. There has been no significant application of new accounting pronouncements There are no significant accounting policies in controversial or emerging areas The significant accounting policies followed by the Board are disclosed in note 1 of the financial statements The accounting estimates include: o Valuation of accounts receivable and, o Valuation of Canada-Ontario Affordable Housing Program loans receivable Management has appropriate process in place for making accounting estimates There are no indicators of possible management bias Disclosure of estimation uncertainty in the financial statements There are no issues involved, and related judgments made, in formulating particularly sensitive financial statement disclosures There are no issues with the overall neutrality, consistency, and clarity of the disclosures in the financial statements The potential effect on the financial statements of significant risks, exposures and uncertainties are appropriately addressed in the notes to the financial statements Audit findings report to the Board of Directors P a g e 6
Misstatements Identification of misstatements Misstatements identified during the audit have been categorized as follows: uncorrected misstatements, including disclosures corrected misstatements, including disclosures. Uncorrected misstatements We have not identified misstatements that remain uncorrected. Professional standards require that we request of management and the audit committee that all uncorrected misstatements be corrected. Corrected misstatements We have communicated all misstatements to management which are listed in the representation letter included in the Appendices. We would like to highlight, however, the following corrected misstatements: Income effect Financial position Description (Decrease) Increase Assets (Decrease) Increase Liabilities (Decrease) Increase Equity (Decrease) Increase Correction of account reconciliation for the Land Ambulance program Total misstatement 169,874 - (169,874) - 169,874 - (169,874) - Audit findings report to the Board of Directors P a g e 7
Independence We have prepared the following comments to facilitate our discussion with you regarding independence matters. The following summarizes the professional services rendered by us to the Entity to the date of this report: Description of professional services Auditing services Assistance relating to HST rebate filings Professional standards require that we communicate the related safeguards that have been applied to eliminate identified threats to independence or to reduce them to an acceptable level. Although we have policies and procedures to ensure that we did not provide any prohibited services and to ensure that we have not audited our own work, we have applied the following safeguards regarding to the threats to independence listed above: We did not assume the role of management by instituting policies and procedures to prohibit us from making management decisions or assuming responsibility for such decisions We obtained management s acknowledgement of responsibility for the results of the work performed by us regarding non-audit services, and we have not made any management decisions or assumed responsibility for such decisions Audit findings report to the Board of Directors P a g e 8
Appendices Draft audit report KPMG s Audit Quality Framework Other current developments Audit findings report to the Board of Directors P a g e 9
Draft audit report To the Members We have audited the accompanying financial statements of District of Sault Ste. Marie Social Services Administration Board, which comprise the statement of financial position as at December 31, 2011, the statements of financial operations and accumulated surplus, changes in net financial assets and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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 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 our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those 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. 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. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of District of Sault Ste. Marie Social Services Administration Board as at December 31, 2011, and its results of operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards. Audit findings report to the Board of Directors P a g e 10
KPMG s Audit Quality Framework Audit quality, and the respective roles of the auditor and audit committee, is fundamental to the integrity of financial reporting in our capital markets. This is why audit quality is at the core of everything we do at KPMG. And we believe that it is not just about reaching the right opinion, but how we reach that opinion. To help ensure that every partner and employee concentrates on the fundamental skills and behaviours required to deliver an appropriate and independent opinion, we have developed our global Audit Quality Framework. The framework comprises seven key drivers of audit quality. The seven key drivers of audit quality Driver What it does What it means to you Tone at the top Association with the right clients Clear standards and robust audit tools Recruitment, development and assignment of appropriately qualified personnel Audit quality is part of our culture and our values and therefore nonnegotiable Allows the right behaviours to permeate across our entire organization and each of our engagements Ethics above all Eliminates any potential independence and conflict-of-interest issues A solid rule book Rigorous internal policies and guidance that help ensure our work meets applicable professional standards, regulatory requirements, and KPMG s standards of quality People who add value Helps us attract and retain the best people and reinforces the importance of developing their talents Assigns Partners portfolios based on Assures you that: Our culture supports our promise to you of excellent client service and a high quality audit consistently You re receiving an independent, transparent, audit opinion You re receiving an efficient and high quality audit that will help you maintain investor confidence in your financial statements. Provides you with: An engagement team handpicked for your business needs a team with relevant professional and industry experience An audit engagement team whose qualifications evolve Audit findings report to the Board of Directors P a g e 11
Driver What it does What it means to you Commitment to technical excellence and quality service delivery Performance of effective and efficient audits their specific skill sets The right tools for the right job Promotes technical excellence and quality service delivery through training and accreditation, developing business understanding and industry knowledge, investment in technical support, development of specialist networks, and effective consultation processes We understand that how an audit is conducted is as important as the final result. A code of conduct, audit delivery tools, and internal policies and procedures that help ensure the work performed by engagement personnel meets applicable professional standards, regulatory requirements, and our standards of quality as your business grows and changes An audit opinion that continues to meet your needs as a participant in the capital markets Assists you with: Assessing the effectiveness and efficiency of the audit Performing your governance role with confidence. Commitment to continuous improvement Comprehensive and effective monitoring We solicit our clients regularly for feedback. Our robust internal quality review program ensures the work of each partner is reviewed every three years. Additionally, our procedures and a sample of our audits of listed clients are reviewed by the Canadian Public Accountability Board (CPAB), the independent regulator of the accountancy profession in Canada. The Public Accountability Oversight Board (PCAOB) in the US also conducts an annual inspection of a sample of our audits of SEC registrants. Finally, a sample of other audits and reviews is undertaken annually by the various provincial institutes in Canada. We consider the recommendations that come from these reviews and implement actions to strengthen our policies and procedures, as appropriate. Audit findings report to the Board of Directors P a g e 12
The regulatory landscape is changing Uncertain economic forecasts and a changing regulatory environment define today s world; reliable financial information and high-quality audits have never been more essential. We believe that high quality audits contribute directly to market confidence and we share your objectives of credible and transparent financial reporting. Our Audit Quality Framework is particularly relevant to Audit Committees, and we see our role in being transparent to you as a key mechanism to support you in the execution of your responsibilities. Our commitment to quality The independence, judgment and professional skepticism of your auditors add value to your financial statements, and we believe it is important to be transparent about the processes we follow to develop a KPMG audit report. We want you to have absolute confidence in us and in the quality of your audit. Our own professional standards dictate technical requirements for reaching and communicating an audit opinion. And we live and abide by these requirements. We invest heavily in our quality, and the Audit Quality Framework helps ensure these investments are the right ones that they help us continuously drive and maximize our quality improvements. But we feel it is also important that we communicate to you how we view and implement audit quality. The seven key drivers outlined here, combined with the commitment of each individual in KPMG, are meant to do just that. KPMG member firms across the world use this audit quality framework to describe, focus on and enhance audit quality for the benefit of our clients and in support of the efficacy of our capital markets. It is our hope that sharing our vision of what audit quality means is a significant step in building confidence in the value of our audits. Audit quality is fundamental to the way we work it is non-negotiable. Audit findings report to the Board of Directors P a g e 13
Other current developments Overview of Accounting Standard Changes for Not-for-Profit Organizations In December 2010, the Accounting Standards Board of the Canadian Institute of Chartered Accountants ( AcSB ) and the Public Sector Accounting Board ( PSAB ) issued the accounting standards impacting the future financial reporting framework for not-for-profit organizations. These standards were released as a result of a joint, comprehensive standard setting process by both Boards. These standards are effective for years beginning on or after January 1, 2012. Not-for-profit organizations have an option to early adopt these new standards. The PSAB is responsible for the accounting standards used by not-for- profit organizations that are controlled by a government (referred to as government not-for-profit organizations ). The AcSB is responsible for the accounting standards used by not-for-profit organizations that are not under the control of a government (referred to as other not-for-profit organizations ). Canadian not-for-profit organizations will need to assess whether they are a government not-for-profit organization or other not-for-profit organization to ensure that they are reporting under the appropriate financial reporting framework. Government Not-For-Profit Organizations Under the new accounting standards issued by the PSAB, government not-for-profit organizations will apply public sector accounting standards contained in the Public Sector Accounting (PSA) Handbook. To aid in the transition to public sector accounting standards, the PSAB has included the former Section 4400 series of accounting standards used currently by not-for-profit organizations in the PSA Handbook with minimal changes. These not-for-profit accounting standards are the Section 4200 series in the revised PSA Handbook. Government not-for-profit organizations have the option of applying the PSA Handbook supplemented by the S4200 series or applying the PSA Handbook without the S4200 series. This accounting policy choice must be made prior to the date of transition. Impact of Accounting Standard Changes on Not-for-Profit Organizations A summary of the more significant impacts of these accounting standard changes is provided below. The practical application of these new accounting changes will evolve over the next two years as general consensus emerges through the implementation phase. KPMG professionals are at the forefront of the standard setting process and will communicate current thinking to management on a proactive basis. Government Not-For-Profit Organizations For government not-for-profit organizations transitioning to the PSA Handbook supplemented by the PS4200 series, the financial statement presentation and the accounting treatment of most items will not change from current practice. However, there are differences in other applicable public sector accounting standards that may impact government not-for-profit organizations. As well, there are transitional provisions that all government not-for-profit organizations will need to apply when preparing the first financial statements under public sector accounting standards. A summary of the more significant accounting changes to be considered is provided below. All Government Not-for-Profit Organizations: Transitional Guidance: 1) The first financial statements are to be prepared using retrospective application as at the transition date. However, Section 2125 provides mandatory exceptions and optional elections for the entity to not apply retrospective application. Audit findings report to the Board of Directors P a g e 14
2) Statement of cash flows is required and must be prepared in accordance with PS1200. Capital transactions are presented separately from investing transactions. 3) Optional elections related to revised accounting standards are discussed below. Other optional elections include: Elect to not apply Business Combinations Section 2510 to business combinations entered into prior to transition date Elect not to apply modified equity method to government business enterprises before the transition date Elect not to apply modified equity method to government business partnerships before the transition date Elect not to write down tangible capital assets that occurred prior to the date of transition. (e.g. reverse the prior years write down) 4) Estimates made at transition must be consistent with the historical estimates. Hindsight cannot be used. 5) The first financial statements prepared under the new accounting standards must contain: A statement of financial position with three columns current year, comparative year and the transition date (beginning of comparative year) A note providing a reconciliation from the previously-reported amounts for opening net assets, excess of revenues over expenses and cash flows (if significant). Audit findings report to the Board of Directors P a g e 15
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