Report to the Audit Committee of the Board of Governors 2017 Audit Results California Independent System Operator Corporation May 16, 2018
Table of Contents Executive Summary 3 Audit Results Audit Risks and Results 7 Other Required Communications 10 Appendices Appendix I GASB Audit Report 13 Appendix II FERC Audit Report 16 This report and the information that it contains is intended solely for the information and use of the Audit Committee or management, if appropriate, and should not be used by anyone other than these specified parties.
Executive Summary
Executive Summary Status of Our Audits Completed our audits of the Company s 2017 financial statements Issued our unqualified opinions: Financial statements prepared in accordance with Governmental Accounting Standards Board (GASB) requirements: April 12, 2018 Financial statements prepared in accordance with Federal Energy Regulatory Commission (FERC) requirements: April 16, 2018 Audit opinions included in Appendix I and II Highlights The Company adopted GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, as of December 31, 2017. Financial information included in the GASB financial statements for the years ended December 31, 2016 and 2015, have been restated in accordance with the implementation guidance. Executive Summary 3
Executive Summary (Continued) Audit Risks and Results A summary of audit risks and results, including areas of audit emphasis, is included beginning on slide 7 of this report Other Required Communications Our required communications to the Audit Committee, as prescribed by professional standards, are included beginning on slide 10 of this report Highlights Performing a highquality audit in accordance with the professional standards remains our primary objective. We have planned and executed our 2017 audits of the Company in accordance with professional standards of the American Institute of Certified Public Accountants (AICPA) and relevant PwC auditing policies and procedures. Executive Summary 4
Areas of Audit Emphasis Areas of audit emphasis are detailed starting from slide 7. The most significant topic has been highlighted below. Additionally, the new accounting standard implemented in 2017 is summarized below. Management Override of Controls The risk of management override of controls is inherent in any system of internal control over financial reporting. In order to address the risk of management override, we examined journal entries and other adjustments for evidence of possible material misstatement due to fraud, among other procedures. New Accounting Standards The new Postemployment Benefits standard, GASB 75, is effective for the fiscal year ending December 31, 2018 but earlier adoption is allowed. The Company adopted GASB 75 in 2017 and amounts for December 31, 2016 and 2015, respectively, have been restated in accordance with the implementation guidance. Executive Summary 5
PwC Audit Results
Audit Risks and Results Other Areas of Audit Emphasis The table below summarizes other areas of audit emphasis. Certain elements of these areas of risk focus have been determined to represent significant audit risks and are designated with an asterisk (*). Significant audit risks represent risks which, in our judgment, require special audit consideration because of the nature of the risk, the likely magnitude of the potential misstatements, and the likelihood of the risk occurring. Description of Matter Key Areas of Judgment Our audit response Risk of management override of controls over financial reporting The risk of management override of controls is inherent in any system of internal control over financial reporting. (*) We evaluated management s antifraud program established to mitigate the risk of override of controls. We review submissions accumulated by EthicsPoint and the Company s consideration of items identified, as applicable We inquired of members of management at different levels of the organization as to their knowledge and perspective of fraud and the risk of fraud. We tested selected journal entries for appropriateness and authorization. We reviewed segregation of duties for appropriateness. We performed risk assessment analytical procedures, including disaggregated revenue analytics, to help identify any unusual behavior or wrongdoing. We evaluated the results of our substantive audit procedures to assess any fraudulent activities. Audit Results 7
Audit Risks and Results (Continued) Other Areas of Audit Emphasis Description of Matter Key Areas of Judgment Our audit response Revenue Inherent fraud risk as it pertains to revenue recognition. We assessed the design and implementation of the Company s key controls over revenue. We obtained an understanding and evaluated the company's accounting policies for recognizing and recording revenue. We tested certain revenue transactions and agreed them to supporting documentation. We performed disaggregated revenue analytical procedures. Other Postretirement Benefit Obligations ( OPEB ) accounting OPEB balances may not be properly measured or recognized in the financial statements. Required disclosures may not be properly reflected in the notes to the financial statements. We assessed the design and implementation of the Company's controls over the OPEB liabilities and plan assets. A subject matter specialist from PwC reviewed the reasonableness of significant assumptions made by management in determining OPEB obligations. We tested census data for plan participants. We tested the valuation of plan assets. We reviewed the Company s required disclosures related to the valuation of its plan assets. We performed confirmation procedures over VEBA assets. Audit Results 8
Audit Risks and Results (Continued) Other Areas of Audit Emphasis Description of Matter Key Areas of Judgment Our audit response Cash held for market participants and related liabilities Cash held and related liabilities may not be properly reflected in the financial statements. We assessed the design and implementation of the Company's controls over cash and payables. We tested specific items and traced amounts to supporting documentation including invoices, bank statements, and other thirdparty supporting documentation. We confirmed all cash and cash equivalents (including security deposits) with third parties. Determination of fair value for investments The Company may not properly value or present required disclosures in the financial statements. Legal contingencies The Company must estimate the most likely amount at which the liability will be settled and /or the range of possible loss. We assessed the design and implementation of the Company s controls over investments. We obtained an understanding and evaluated the company's accounting policy for investments in debt and equity securities. We performed confirmation procedures over all material investments. We reviewed the Company s required disclosures related to the investments and their leveling, classification and credit rating. We used internal pricing specialists to test the valuation of all material investments. We inquired of in-house legal counsel and select outside general counsel with respect to any material pending or threatened litigation, claims or assessments, in the form of confirmation letters. We reviewed the minutes of the meetings of the Board of Governors and Audit Committee. Audit Results 9
Other Required Communications Independence re-evaluation Fees for services There were no independence matters that occurred or were identified subsequent to our last communication with the Audit Committee regarding independence. In accordance with the International Ethics Standards Board for Accountants (IESBA s) Code of Ethics, we are required to communicate a breach of external independence requirements to you as soon as possible. We are not aware of any breach of external independence requirements. Management has communicated to the Audit Committee fees for all services provided by PwC, including a description of the types of services rendered. Material uncertainties related to events and conditions (specifically going concern) There were no conditions and events that we identified that indicate that there is substantial doubt about the Company s ability to continue as a going concern. Other information in documents containing audited/reviewed financial statements Disagreements with management We did not identify any information that was materially inconsistent with the information in the financial statements. There were no disagreements with management. Consultation with other accountants We are not aware of any consultations management has had with other accountants about significant accounting or auditing matters. Difficulties encountered during the audit There were no significant difficulties encountered during the audit. Audit Results 10
Other Required Communications (Continued) Fraud Illegal acts Non-compliance with laws and regulations We did not identify any potential or known fraud. We did not identify any potential illegal acts. We did not identify any instances of non-compliance with laws and regulations. Difficult or contentious matters There were no difficult or contentious matters for which we consulted outside the engagement team and we reasonably determined are relevant to the Audit Committee s oversight of the financial reporting process. Alternative accounting treatments We did not identify any alternative treatments permissible under US GAAP for accounting policies and practices related to material items, including recognition, measurement, and presentation and disclosure. Other material written communications There were no other material written communications with management. Identified misstatements There were no identified misstatements and/or any uncorrected misstatements accumulated by us during the audit, including disclosures. Control deficiencies No material weaknesses or significant deficiencies have been identified. Audit Results 11
Other Required Communications (Continued) Other matters There were no other matters arising from the audit that are significant to the oversight of the company's financial reporting process. We have performed an evaluation of whether the presentation of the financial statements and the related disclosures are in conformity with the applicable financial reporting framework, including our consideration of the form, arrangement, and content of the financial statements (including the accompanying notes). We did not identify any instances of non conformity. Quality of the company s financial reporting We have evaluated management's anticipated application of accounting pronouncements that have been issued but are not yet effective and might have a significant effect on future financial reporting. We do not have any concerns as a result of our evaluation. We have evaluated the potential effect on the financial statements of significant exposures and risks, and uncertainties, such as pending litigation, that are disclosed in the financial statements. We did not identify any matters with a material potential effect. We have evaluated whether the difference between estimates best supported by the audit evidence and estimates included in the financial statements, which are individually reasonable, indicate a possible bias on the part of the company's management. We did not identify any areas of possible bias. Audit Results 12
Appendix I GASB Audit Report PwC
Report of Independent Auditors To Members of the Board of Governors California Independent System Operator Corporation We have audited the accompanying financial statements of the California Independent System Operator Corporation, which comprise the statements of net position as of December 31, 2017 and 2016, and the related statements of revenues, expenses and changes in net position and of cash flows for the years then ended. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation 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 the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we 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 Company 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 Company s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant 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 is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP, 400 Capitol Mall, Suite 600, Sacramento, CA 95814 T: (916) 930 8100, F: (916) 930 8450, www.pwc.com/us
Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the California Independent System Operator Corporation at December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Emphasis of Matter As discussed in Note 2 to the financial statements, the California Independent System Operator Corporation changed the manner in which it accounts for other postemployment benefits in 2017. Our opinion is not modified with respect to this matter. Other Matters The accompanying management s discussion and analysis on pages 3 through 12 is required by accounting principles generally accepted in the United States of America to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in the appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audits of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Sacramento, CA April 12, 2018 2
Appendix II FERC Audit Report PwC
Report of Independent Auditors To Members of the Board of Governors California Independent System Operator Corporation We have audited the accompanying financial statements of the California Independent System Operator Corporation, which comprise the balance sheets as of December 31, 2017 and 2016 and the related statements of income, of retained earnings, of cash flows and of accumulated comprehensive income, comprehensive income and hedging activities for the years then ended, included on pages 110 through 122b of the accompanying Federal Energy Regulatory Commission Form 1. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting requirements of the Federal Energy Regulatory Commission as set forth in its applicable Uniform System of Accounts and published accounting releases described in Note 2. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation 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 the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we 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 Company'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 Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates PricewaterhouseCoopers LLP, 400 Capitol Mall, Suite 600, Sacramento, CA 95814 T: (916) 930 8100, F: (916) 930 8450, www.pwc.com/us
made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the California Independent System Operator Corporation as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended in accordance with the accounting requirements of the Federal Energy Regulatory Commission as set forth in its applicable Uniform System of Accounts and published accounting releases described in Note 2. Basis of Accounting We draw attention to Note 2 of the financial statements, which describes the basis of accounting. As described in Note 2 to the financial statements, the financial statements are prepared by the California Independent System Operator Corporation on the basis of the accounting requirements of the Federal Energy Regulatory Commission as set forth in its applicable Uniform System of Accounts and published accounting releases, which is a basis of accounting other than accounting principles generally accepted in the United States of America, to meet the requirements of the Federal Energy Regulatory Commission. Our opinion is not modified with respect to this matter. Restriction of Use This report is intended solely for the information and use of the board of directors and management of the California Independent System Operator Corporation and for filing with the Federal Energy Regulatory Commission and is not intended to be and should not be used by anyone other than these specified parties or for any other purpose. Sacramento, CA April 16, 2018 2
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