Terms of Reference - Audit Committee
The Strategic Policies and Priorities Committee recommends the adoption of the
recommendation of the Audit Committee embodied in the following transmittal letter
(March 25, 1998) from the Audit Committee:
Recommendation:
The Audit Committee on March 24, 1998, recommended to the Strategic Policies and Priorities
Committee, and Council, the adoption of the Terms of Reference for the Audit Committee set out
in the report (March 4, 1998) from the City Auditor.
The Audit Committee reports, for the information of the Strategic Policies and Priorities
Committee, and Council, having requested the Chair of the Audit Committee to place a notice of
motion on the agenda for the Council Meeting to be held on April 16, 1998, requesting Council
to:
(1) reconsider its decision made at its meeting held on January 2, 6, 8 and 9, 1998, to appoint
three members to the Audit Committee;
(2) increase the size of the Audit Committee to a membership of five; and
(3) authorize the introduction of the necessary Bill in Council to amend Procedure By-law
No. 23-1998 to give effect thereto.
Background:
On March 24, 1998, the Audit Committee had before it a report (March 4, 1998) from the City
Auditor, setting out Terms of Reference for the Audit Committee and recommending that the
size of the Committee be increased to five. The Audit Committee approved the Terms of
Reference recommended and also to increasing the membership of the Committee, but
recognized that changing the membership would require the re-opening of a previous decision of
Council. A notice of motion therefore will be placed on the agenda for the Council Meeting to
be held on April 16, 1998, by the Chair of the Committee.
--------
(Report dated March 4, 1998, addressed to the
Audit Committee from the City Auditor)
Recommendations:
It is recommended that:
(1) the Terms of Reference of the Audit Committee as outlined in this report be adopted; and
(2) the composition of the Audit Committee be increased from three members to five
members.
Background:
The Toronto Transition Team in its December 1997 report, recommended the formation of an
Audit Committee. The report indicated that "An Audit Committee should be formed once a year,
or as required, to arrange for and receive on behalf of Council, the annual external audit of the
City's books. This committee would be required only for this function, and would not have
ongoing duties. We suggest a committee of three Councillors, who are not chairs of standing
committees, chairs of community councils or members of the Budget Committee."
In addition, the Transition Team recommended that the "annual attest audit should be done by an
external auditor hired by an Audit Committee of Council and the City should have an internal
audit function to provide audit services to the Corporation."
Comments:
Audit Committees in both the private and the public sector have a wide range of responsibilities.
These responsibilities relate to both the attest audit process and the internal audit function. The
report of the Transition Team indicates that the role of the Audit Committee should be restricted
to the attest audit only. The Transition Team's recommendation is inconsistent with the practice
in both the private and public sector and consequently, is inappropriate. In order to operate
effectively, the role of the Audit Committee at the City of Toronto should encompass the
activities of both the attest and the internal auditor.
The responsibilities of the Audit Committee in terms of the attest audit and the internal audit are
as follows:
(1) The Responsibilities of the Audit Committee in relation to the Attest Auditor:
The Municipal Act requires that City Council appoint an auditor to audit the financial statements
of the municipality and its local boards. The term of the appointment is to be for five years or
less.
The auditor's prime duties are prescribed by the Ministry but, in addition, the auditor may also
undertake such duties as may be required by Council, or any local board, that do not conflict with
the duties prescribed by the Ministry.
The Audit Committee should meet with the attest auditor at least twice during the annual audit
cycle. The first meeting should relate to the actual planning of the attest audit. The second
meeting should be to receive the auditor's report on the annual financial statements. Additional
meetings may be called by either party.
Planning Meeting:
The first meeting, probably in September/October of each year, should focus on reviewing the
auditors' audit plan. The planning meeting should:
(1) Provide the attest auditor the opportunity to present:
(a) the proposed scope of audit work;
(b) areas to which he or she intends to give particular attention;
(c) any anticipated areas of difficulty with the upcoming audit;
(d) any changes in audit approach; and
(e) any change in prescribed duties.
(2) Provide the Audit Committee with the opportunity to advise the Auditor of any areas of
concern that the Committee would like him or her to address during the audit, and discuss
any additional fees this may involve.
Meeting on Presentation of Auditor's Report:
The second essential meeting should be when the financial statements and the auditor's report on
those statements are presented. The auditor's management letter, including management's
responses to significant points raised, would also be presented and reviewed at the same time.
It is management's responsibility to prepare and present the financial statements. It would be
usual for the City Treasurer to review the financial results and significant features of the financial
statements with the Committee.
It is the attest auditor's responsibility to express an opinion on the financial statements prepared
by management based on his or her audit. The auditor's opinion represents an assurance that the
financial statements fairly present the financial position of the City at year end and the results of
the year's operations, in accordance with appropriate accounting principles.
The auditor will normally present to the Committee the highlights of the audit and any
significant observations or recommendations he or she wishes to make. The Committee ought
also to hear management's responses to the points raised.
(2) The Responsibilities of the Audit Committee in Relation to the Internal City Auditor:
The key responsibilities of the Committee and suggested guidelines in connection with the City
Auditor are outlined below.
Three-Year Audit Work Plan:
The Office of the City Auditor should operate on the basis of a three-year work plan, reviewed
and updated annually. Since this plan determines where audit resources are utilized, it is critical
that the Audit Committee ensure that the plan addresses areas of importance and reflects the
requirements of the Audit Committee, Council and Senior Management.
The following steps are suggested:
Audit Committee Input:
The Audit Committee should review with the City Auditor a preliminary draft of the 3 year audit
work plan. Key questions that should be addressed in this review are:
(1) Has the Office of the City Auditor developed an adequate description of all areas that
could be subject to audit?
(2) What basis has been used to determine the risks associated with each potential audit area?
(3) How has the City Auditor arrived at the particular selection of audit projects that appear
in the preliminary draft plan? What will, as a result, not be audited in the next three
years?
(4) What input has Council, the Chief Administrative Officer and other senior management
staff and the Attest Auditor had into this preliminary draft?
(5) Is there appropriate coordination between the internal and attest auditors?
The Audit Committee, based on these considerations, should be in a position to determine if it
wishes other audits to be included in the work plan, and should direct the City Auditor
accordingly.
Changes to the Work Plan by the Audit Committee or Council:
As a matter of practice, the Audit Committee may at any time direct the City Auditor to
undertake an audit or review not included in the work plan. The City Auditor will not undertake
projects at the request of individual Members of Council.
Services to Management:
The City Auditor should be viewed as providing a constructive service to management as well as
to Committee and Council. In this regard, it is imperative that the Chief Administrative Officer
and senior management have available an audit resource to address ongoing concerns identified
by staff. Consequently, the City Auditor's work plan should be flexible to the extent that there
are resources available to address such concerns. Many of these concerns would be resolved at
the senior management level and would not necessarily result in the preparation of a formal
report.
Audit Reports:
The City Auditor is required to prepare and present a report to the Audit Committee on the
completion of each audit in his work plan, setting out his findings and recommendations. The
report should also contain management's comments on the City Auditor's recommendations.
In reviewing each audit report, the Audit Committee might consider the following:
(1) Are the recommendations in the audit report appropriate in the light of the audit findings?
(2) Are management's responses and proposed actions appropriate and sufficient?
(3) Has management addressed the findings and recommendations from previous audits?
(4) What additional directions, if any, does the Committee wish to give?
(5) Are there related issues, not covered in the audit report, that are of concern to the
Committee?
(6) Does the City Auditor plan to do a follow-up audit?
(7) Are there any unresolved issues between management and the City Auditor? What are
the implications?
Meetings:
The Audit Committee should meet at least on a quarterly basis. Additional meetings may be held
as deemed necessary by the Chair of the Committee or as suggested by the attest or internal
auditor. During the transition process, it is recognized that more regular meetings may be
required.
Composition of the Audit Committee:
An Audit Committee consisting of three members is inadequate, particularly in the context of its
wide ranging responsibilities. A three member committee does not serve to recognize the
importance of the role of the committee, particularly when viewed in relation to the size of the
new City. Audit Committees generally work best when they comprise a blend of different skills
and business experience. It is suggested that an Audit Committee of five members could
generally provide this blend. Various research has indicated that in practice, an Audit Committee
of five members is the most common number in terms of effectiveness.
Conclusion:
The responsibilities of the Audit Committee as suggested by the Toronto Transition Team are
inadequate and should be amended to encompass the activities of both the attest and the internal
auditor, as outlined in this report. In addition, the composition of the Audit Committee should be
expanded from three members to five members to more accurately reflect the importance of the
responsibilities of the Committee.
Contact Name and Telephone Number:
Jeffrey Griffiths, 392-8461
|