March 24, 1998

    To:Strategic Policies and Priorities Committee

 From:City Clerk

 Subject:Terms of Reference - 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.

  Interim Contact

Audit Committee

 Christine Dodds/

 Attachment

  March 4, 1998

  To:Audit Committee

 From:City Auditor

 Subject:Audit Committee - Terms of Reference

 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 AAn 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 Aannual 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

Jeffrey Griffiths

City Auditor

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