Audit Committee - Roles and Responsibilities

 The Strategic Policies and Priorities Committee submits, for the information of Council, the following transmittal letter (July 9, 1998) from the Audit Committee and reports having received same:

 Recommendation:

 That the report (June 3, 1998) from the City Auditor setting out the roles and responsibilities of the Audit Committee be received by the Strategic Policies and Priorities Committee and Council for information.

 Background:

 On July 7, 1998, the Audit Committee had before it a report (June 3, 1998) from the City Auditor setting out the roles and responsibilities of the Audit Committee.

 The Audit Committee received the report from the City Auditor and directed that it be forwarded to the Strategic Policies and Priorities Committee and Council for information.

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 (Report dated June 3, 1998, addressed to the

Audit Committee from the

City Auditor)

 Recommendation:

 It is recommended that this report be received for information.

 Background:

 In view of the fact that Audit Committee did not exist in many of the former amalgamating municipalities and its concept is new to many Councillors, there is a need for a permanent document outlining the roles and responsibilities of such a committee. The document "Audit Committee - Roles and Responsibilities" meets those objectives.

 Comments:

 Most public companies are required by Corporation law to have an Audit Committee. Regulated financial institutions are generally governed by special legislation which often prescribe extensive responsibilities for the Audit Committee including communication with the regulator.

 In the Municipal Sector, although there may be no statutory requirement, Councils in many municipalities across North America have appointed audit committees. Many of the benefits derived from audit committee in the private sector are equally applicable in the municipal environment.

 The attached document "Roles and Responsibilities of the Audit Committee" will assist Members of Council in carrying out their responsibilities, and will ensure that the Council, Senior Management and the City Auditor, work together towards common goals.

 Contact Name and Telephone Number:

 Jeff Griffiths, 392-8461.

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 City of Toronto

Audit Committee - Roles and Responsibilities

 Purpose:

 This document provides specific guidance relating to appropriate responsibilities, structure and relationships for the Audit Committee at the City of Toronto.

 Introduction:

 Every citizen wants high-quality services from public sector organizations. Because there is often an expectation gap between the services citizens expect and those delivered by public sector entities, there is increasing pressure for public officials to demonstrate a higher level of accountability over the use of public funds. One means of demonstrating greater accountability and ensuring higher services is through the effective use of internal controls, and more specifically, through the establishment of an Audit Committee.

 Stricter standards of accountability cannot be achieved without an effective internal control structure. One way that public officials can enhance accountability and demonstrate proper stewardship over public funds is to establish and support an adequate control environment within their organizations. A critical element of the control environment is an effective Audit Committee that provides oversight on matters of financial reporting, auditing, and internal control.

 An effective Audit Committee can provide several important aspects of control including: ensuring the independence of the internal auditing function and ensuring appropriate action is taken on audit findings. The Audit Committee serves in a unique capacity as an important communication link between external and internal auditors and operating management, and as a means of reducing the risk of management override of key elements of the City's internal control structure.

 In general, Audit Committees exercise responsibility in three important areas:

 (1)Financial reporting;

(2)Corporate governance; and

(3)Corporate control.

 Financial Reporting:

 The responsibility of Audit Committees in the area of financial reporting is to provide assurance that financial disclosures made by management reasonably portray the municipality's:

 (1)financial condition;

(2)results of operations; and

(3)plans and long-term commitments.

 The specific steps involved in carrying out this responsibility include:

 (a)recommending the external auditors;

(b)overseeing the external audit coverage, including:

 (i)Auditor engagement letters;

(ii)estimated fees;

(iii)timing of auditor visits;

(iv)coordination with the City Auditor;

(v)monitoring of audit results;

(vi)review of external auditor performance; and

(vii)review of non-audit services if any.

 (c)reviewing accounting policies and policy decisions;

(d)examining the financial statements, including:

 (i)variance reports;

(ii)annual financial statements, auditors' opinions, and management letters; and

(iii)other reports.

 Corporate Governance:

 The responsibility of Audit Committees in the area of corporate governance is to provide assurance that the Municipality is in compliance with pertinent laws and regulations, is conducting its affairs ethically, and is maintaining effective controls against conflict of interest and fraud.

 The specific steps involved in carrying out this responsibility include:

 (1)reviewing corporate policies relating to compliance with laws and regulations, ethics, conflict of interest, and the investigation of misconduct and fraud;

 (2)reviewing significant cases of employee conflict of interest, misconduct, or fraud; and

 (3)requiring the City Auditor to report in writing annually the scope of the reviews of corporate governance and any significant findings.

 Corporate Control:

 The responsibility of Audit Committees for corporate control includes an understanding of the company's key financial reporting risk areas and system of internal control. The Committee should monitor the control process through the City Auditor.

 According to the Institute of Internal Auditors (IIA) Standards for the Professional Practice of Internal Auditing, "The scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization's system of internal control and the quality of performance in carrying out assigned responsibilities."

 The Standards would require the City Auditor to:

 (1)review the reliability and integrity of financial and operating information and the means used to identify, measure, classify, and report such information;

 (2)review the systems established to ensure compliance with those policies, plans, procedures, laws, and regulations which could have a significant impact on operations and reports;

 (3)review the means of safeguarding assets and, as appropriate, verify the existence of such assets;

 (4)appraise the economy and efficiency with which resources are employed and determine whether or not value for money is being received; and

 (5)review operations or programs to ascertain whether results are consistent with established objectives and goals and whether the operations or programs are being carried out as planned.

 Audit Committee Structure:

 The number of members on the Audit Committee should be determined by the size of Council and the size of the City. Five to seven members, however, is usually ideal. The City Audit Committee currently consists of seven elected members.

 The Audit Committee will normally find it necessary to meet three to four times annually in order to fulfill its financial reporting responsibility.

 The Relationship Between the City Auditor and the Audit Committee:

 The IIA's Position on Audit Committees views internal auditing as a corporate resource, supporting the Audit Committee. This relationship enhances the stature and independence of the internal auditing function and its ability to contribute to corporate success.

 The City Auditor must work effectively with all levels of management, keeping in mind the best interests of the organization as a whole.

 The relationship between Audit Committees and the City Auditor encompasses reporting relationships and oversight relationships.

 To be effective, the City Auditor must have organizational status sufficient to ensure a broad range of audit coverage and adequate consideration of its findings and recommendations.

 Oversight Relationships:

 The Audit Committee should exercise an active oversight role with respect to the City Auditor. Oversight activities should include:

 (1)Reviewing and Approving the Internal Audit Mandate:

 The internal audit mandate provides the functional and organizational framework within which internal auditing provides services to management and to the Audit Committee. It defines the purpose, responsibility, authority, and reporting relationships of the internal audit function.

 (2)Concurring in the Appointment or Removal of the City Auditor:

 This will safeguard the independence of the internal audit function in matters falling under the jurisdiction of the Audit Committee.

 (3)Reviewing Plans and Budgets:

 The Audit Committee must satisfy itself that the City Auditor's objectives and goals, staffing plans, financial budgets, and audit schedules provide for adequate support of the Committee's own goals and objectives.

 The Audit Committee should ensure that its review of internal audit plans and budgets do not impede or inhibit management's use of the internal audit function in the pursuit of operational goals and objectives. Since management's use of the audit function often takes the form of unplanned requests for audits or special studies, management should not be expected to specify its need for anticipated internal audit resources in detail.

 Relationship to Management:

 In order to ensure adequate independence and objectivity in all of its activities, internal auditing must have a reporting relationship with management at the senior level. It will be especially important that internal auditing be independent of the Chief Financial Officer and Treasurer to ensure objective reviews of internal accounting control and of the financial reporting process.

 (1)Reviewing Audit Results:

 The City Auditor should be required to provide summary information concerning the results of reviews of financial reporting, corporate governance, and corporate control. Specific findings and recommendations of a significant nature may also be reported.

 (2)Requesting Audit Projects:

 The Audit Committee may request the City Auditor to perform special studies, investigations or other services in matters of interest or concern to the Committee. Such projects could include:

 (a)investigation of potential or suspected fraud or other irregularities;

(b)corporate compliance with laws and regulations; and

(c)evaluation of external auditors.

 (3)Requesting Quality Assurance Reviews:

 The Institute of Internal Auditors recommends that quality assurance reviews of an internal City audit function be performed on a regular basis approximately every three to five years.

 Regular quality assurance reviews will provide assurance to the Audit Committee and to management that internal auditing activities conform to The IIA's Standards for the Professional Practice of Internal Auditing.

 The Audit Department would be subjected to the same attest audit process as other departments at the City. However, attest audits by external public accountants are conducted at a high level and depending on the scope of the audit, little specific work would be conducted on many of the smaller departments, including the Audit Department. In order to compensate for this, the City Auditor should be subjected to a peer review process.

 The City Auditor is a member of the Canadian Association of Local Government Auditors (CALGA) and the US based National Association of Local Government Auditors (NALGA). An important component of each organization is a formalized peer review process which encourages members to participate in an arrangement whereby different audit organizations review the operations of other member organizations. CALGA has prepared guidelines for the Professional Practice of Municipal Internal Auditing, pertaining to independence, professional proficiency, scope of audit work, performance of audit work and management of the internal audit office. In addition, NALGA has prepared a quality control review guide and members have been organized and trained to conduct peer reviews of audit organizations.

 It is anticipated that the City of Toronto Auditor would participate in the peer review process of either the CALGA or NALGA.

 In addition, in the early 1980's, the members of the Institute of Chartered Accountants of Ontario approved the introduction of a program whereby every member practicing public accounting in Ontario would be inspected.

 The main purpose of practice inspection is to ensure that all members in the practice of public accounting maintain an appropriate level of professional standards. Primarily, the practice inspection program is intended to be educational - to help practitioners improve their professional standards, where necessary. Essentially, through a review of current accounting and audit engagement files, practice inspection identifies where a practicing member may require assistance in maintaining prescribed professional standards. The practice inspection program does not set new standards. Rather, the standards that a member is expected to maintain are those prescribed by the Canadian Institute of Chartered Accountants Handbook and the Institute of Chartered Accountants in Ontario Handbook.

 Where the City Auditor is engaged in the practice of public accounting, the City Auditor should be subject to Practice Inspections.

 Conclusion:

 The tasks, responsibilities, and goals of Audit Committees and the City Auditor are closely intertwined in many ways.

 The Audit Committee has a major responsibility in assuring that the mechanisms for corporate accountability are in place and functioning. Clearly, one of these mechanisms is solid, well-orchestrated, cooperative working relationship with the City Auditor.