Town of View Royal 2021 Audit Service Plan Report to Mayor and Council

Town of View Royal

2021 Audit Service Plan Report to Mayor and Council December 31, 2021

Cory Vanderhorst, CPA, CA T: (250) 734-4319 E: cory.vanderhorst@mnp.ca

October 22, 2021

To Mayor and Council of Town of View Royal

Dear Sirs and Mesdames:

We are pleased to present our Audit Service Plan for Town of View Royal (the “Town”). In this plan we describe MNP’s audit approach, our engagement team, the scope of our audit and a timeline of anticipated deliverables. We are providing this Audit Service Plan to Mayor and Council on a confidential basis. It is intended solely for the use of Mayor and Council and is not intended for any other purpose. Accordingly, we disclaim any responsibility to any other party who may rely on this report.

Our audit will include an audit of the Town’s consolidated financial statements for the year ended December 31, 2021, prepared in accordance with Canadian public sector accounting standards. Our audit will be conducted in accordance with Canadian generally accepted auditing standards.

At MNP, our objective is to perform an efficient, high quality audit which focuses on those areas that are considered higher risk. We adhere to the highest level of integrity and professionalism. We are dedicated to maintaining open channels of communication throughout this engagement and will work with management to coordinate the effective performance of the engagement. Our goal is to exceed Mayor and Council ’s expectations and ensure you receive outstanding service.

Our Engagement Letter has also been included along with this report. Our Engagement Letter is the formal written agreement of the terms of our audit engagement as negotiated with management and outlines our responsibilities under Canadian generally accepted auditing standards.

We look forward to discussing our Audit Service Plan with you and look forward to responding to any questions you may have.

Sincerely,

MNP LLP Chartered Professional Accountants

SUITE 400 - 345 WALLACE STREET, NANAIMO BC, V9R 5B6 T: (250) 753-8251 F: (250) 754-3999 MNP.ca

AUDIT SERVICE PLAN OVERVIEW

To make strategic business decisions with confidence, your stakeholders and Mayor and Council of the Town need relevant, reliable and independently audited financial information. But that’s not all. You need an audit team that can deliver insight beyond the numbers and enhance the Town’s strategic planning and implementation processes so you can embrace new opportunities while effectively managing risk. Our senior team members have extensive knowledge of municipalities from many years of experience. Our audit strategy is risk based, and considers the limitations and opportunities you encounter each day, allowing our recommendations to be implemented with greater ease. Committed to your success, MNP delivers meaningful, reliable financial information to not only help you fulfill your compliance obligations, but also to achieve your key strategic goals.

Our Audit Service Plan outlines the strategy we will follow to provide the Town Mayor and Council with our Independent Auditor’s Report on the December 31, 2021 consolidated financial statements.

TOPICS FOR DISCUSSION

We are committed to providing superior client service by maintaining effective two-way communication. Topics for discussion include, but are not limited to:

• Changes to your business operations and developments in the financial reporting and regulatory environment
• Business plans and strategies
• Any other issues and/or concerns
• Documents comprising the annual report, and their timing of issuance
• Fraud, including how fraud could occur, the risk of fraud and misstatement, and any actual, suspected or alleged fraud
• The management oversight process
• Your specific needs and expectations

KEY CHANGES AND DEVELOPMENTS

Based on our knowledge of the Town and our discussions with management, we have noted the recent developments set out below. Our audit strategy has been developed considering these factors.

Detailed information on Key Changes and Developments are included as Appendix A.

THE MNP AUDIT APPROACH

Mayor and Council is responsible for approval of the consolidated financial statements and Town policies, and for monitoring management’s performance. Mayor and Council should consider the potential for management override of controls or other inappropriate influences, such as earnings management, over the financial reporting process. Mayor and Council , together with management, is also responsible for the integrity of the accounting and financial reporting systems, including controls to prevent and detect fraud and misstatement, and to monitor compliance with relevant laws and regulations.

Effective discharge of these respective responsibilities is directed toward a common duty to provide appropriate and adequate financial accountability, and quality financial disclosure.

Key responsibilities of MNP and management are outlined in the Engagement Letter (see attached). More detailed discussion about MNP’s audit process is provided in Appendix B.

AUDIT MATERIALITY

Materiality is an important audit concept. It is used to assess the significance of misstatements or omissions that are identified during the audit and is used to determine the level of audit testing that is carried out. Specifically, a misstatement or the aggregate of all misstatements in consolidated financial statements as a whole (and, if applicable, for particular classes of transactions, account balances or disclosures) is considered to be material if it is probable that the decision of the party relying on the consolidated financial statements, who has reasonable understanding of business and economic activities, will be changed or influenced by such a misstatement or the aggregate of all misstatements.

The scope of our audit work is tailored to reflect the relative size of operations of the Town and our assessment of the potential for material misstatements in the Town’s consolidated financial statements as a whole (and, if applicable, for particular classes of transactions, account balances or disclosures). In determining the scope, we emphasize relative audit risk and materiality, and consider a number of factors, including:

• The size, complexity, and growth of the Town;
• Changes within the organization, management or accounting systems; and
• Concerns expressed by management.

Judgment is applied separately to the determination of materiality in the audit of each set of consolidated financial statements (and, if applicable, for particular classes of transactions, account balances or disclosures) and is affected by our perception of the financial information needs of users of the consolidated financial statements. In this context, it is reasonable to assume that users understand that consolidated financial statements are prepared, presented and audited to levels of materiality; recognize uncertainties inherent in the measurement of amounts based on the use of estimates, judgment and consideration of future events; and make reasonable economic decisions based on the consolidated financial statements. The foregoing factors are taken into account in establishing the materiality level.

We propose to use $750,000 as overall materiality for audit planning purposes.

TIMING OF THE AUDIT

Based on the audit planning performed and areas of audit risks identified, the following timelines for key deliverables have been discussed and agreed upon with management:

AUDIT TEAM

Team member continuity is important in developing a solid relationship with the Town, as well as to understanding your business, risks and processes. We also know team member turnover results in lost knowledge. While some team member transition likely is inevitable, we work at reducing this through our promoting practices, learning and training, working closely with team members on career growth and development, and valuing our professionals.

In order to ensure effective communication between Mayor and Council and MNP, we outline below the key members of our audit team that will be responsible for the audit of the Town and the role they will play:

In order to serve you better and meet our professional responsibilities, we may find it necessary to expand our audit team to include other MNP professionals whose consultation will assist us to evaluate and resolve complex, difficult and/or contentious matters identified during the course of our audit.

Any changes to the audit team will be discussed with you to ensure a seamless process and that all concerned parties’ needs are met.

FEES AND ASSUMPTIONS

If any significant issues arise during the course of our audit work which indicate a possibility of increased procedures or a change in the audit timetable, these will be discussed with management by the engagement partner, so a mutually agreeable solution can be reached.

Invoices will be rendered as work progresses in accordance with the following schedule:

APPENDIX A – KEY CHANGES AND DEVELOPMENTS

We would like to bring to your attention the following accounting and auditing developments, which may have some impact on your financial reporting.

ISSUES AND DEVELOPMENTS SUMMARY

NEW REPORTING DEVELOPMENTS

PS 3280 Asset Retirement Obligations (New) In August 2018, new PS 3280 Assets Retirement Obligations was included in the CPA Canada Public Sector Accounting Handbook (PSA HB). The new PS 3280 establishes standards on how to account for and report a liability for asset retirement obligations (ARO). As asset retirement obligations associated with landfills are included in the scope of new PS 3280, PS 3270 Solid Waste Landfill Closure and Post-Closure Liability will be withdrawn.

The main features of this standard are as follows:

• An ARO represents a legal obligation associated with the retirement of a tangible capital asset.
• Asset retirement costs increase the carrying amount of the related tangible capital asset and are expensed in a rational and systematic matter.
• When an asset is no longer in productive use, the associated asset retirement costs are expensed.
• Measurement of the ARO liability should result in the best estimate of the amount required to retire a tangible capital asset at the financial statement date.
• Subsequent measurement of the ARO liability results in either a change in the carrying amount of the related tangible capital asset or an expense. The accounting treatment depends on the nature of the remeasurement and whether the asset remains in productive use.
• The best method to estimate the liability is often a present value technique.

This standard is effective for fiscal years beginning on or after April 1, 2022. Early adoption is permitted.

PS 3400 Revenue (New) In November 2018, new PS 3400 Revenue was included in the CPA Canada Public Sector Accounting Handbook (PSA HB). The new PS 3400 establishes standards on how to account for and report on revenue by distinguishing between revenue arising from transactions that include performance obligations and transactions that do not have performance obligations. The main features of this Section are as follows:

• Performance obligations are enforceable promises to provide specific goods or services to a specific payor.
• Performance obligations can be satisfied at a point in time or over a period of time.
• The new standard outlines five indicators to determine if the revenue would be recognized over a period of time.
• Revenue from a transaction with a performance obligation(s) is recognized when, or as, the entity has satisfied the performance obligation(s).
• Revenue from transactions with no performance obligation is recognized when a public sector entity has the authority to claim or retain an inflow of economic resources and a past event that gives rise to a claim of economic resources has occurred.

Further editorial changes have also been made to other standards as a result of the issuance of PS 3400.

This Section is effective for fiscal years beginning on or after April 1, 2022. Early adoption is permitted.

PS 3450 Financial Instruments (Amendment) In April 2020, the Public Sector Accounting Board (PSAB) issued amendments to PS 3450 Financial Instruments. The main features of the amendments include:

Bond Repurchase Transactions Bond repurchase transactions are only to be treated as extinguishments when they are either:

• Legally discharged;
• An exchange of debt instruments with substantially different terms; or
• A substantial modification of the terms of an existing financial liability or part of it.

Section Application

• Clarification that PS 3450 does not apply unless a contractual right or a contractual obligation underlies a receivable or payable. By definition, there must be a contract for there to be a financial instrument.
• Clarification for how to account for a transfer of collateral pursuant to a credit risk management mechanism in a derivative contract.
• Addition of application guidance explaining that derecognition of a financial asset does not occur if the transferor of a financial asset retains substantially all the risks and benefits of ownership.

Transitional Provisions

• Clarification that a controlling government should use carrying values of the financial assets and liabilities in the records of its government organizations when consolidating a government organization.
• For financial assets or financial liabilities in the cost or amortized cost category which have an associated unamortized discount, premium or transaction costs, the unamortized discount, premium or transaction costs should be included in the item’s opening carrying value.
• For derivatives which may not have been recognized or may not have been measured at fair value prior to the adoption of PS 3450, any difference between the previous carrying value and fair value should be recognized in the opening balance of accumulated remeasurement gains and losses.

The amendments were to be effective for fiscal years beginning on or after April 1, 2021. On June 25, 2020, the PSAB made the decision to defer the effective date by one year due to the impact of the COVID-19 pandemic. The new Section and amendments are now effective for annual financial statements relating to fiscal years beginning on or after April 1, 2022. Early application continues to be permitted.

PS 1201 Financial Statement Presentation (Amendments) In April 2021, the Public Sector Accounting Board (PSAB) issued amendments to PS 1201 Financial Statement Presentation.

The narrow-scope amendments clarify the presentation of derivatives, specifically allowing public sector entities to present the remeasurement impact of derivatives separately on the statement of change in net debt. Other minor presentation clarifications have also been included such as allowing a new subtotal for the change in net debt excluding the impact of remeasurement gains and losses on the statement of change in net debt and allowing the inclusion of a footnote on the net debt indicator in the statement of financial position to refer to additional detail provided on the statement of change in net debt.

The amendments are effective in the same period PS 2601 Foreign Currency Translation and PS 3450 Financial Instruments are adopted. PS 2601 and PS 3450 are to be adopted together and are effective for annual financial statements relating to fiscal years beginning on or after April 1, 2022. Early application continues to be permitted.

IMPACT OF COVID-19 ON OUR AUDIT

MNP's COVID protocols are based on recommendations by the Province of British Columbia. At the date of this Audit Service Plan we are adhering to the following:

Social Distancing; No Non-Essential Attendance at External Business Development, Conferences or Training; No Non-Essential Business Travel and; International Travel - Self-Isolation for 14 days.

Wherever possible, we use our Client Portal website to facilitate transfer of documents and requests for information. This allows for ease of sharing documents without a file size restriction, while maintaining security and confidentiality over your documents and information. During the height of COVID, we performed our audits remotely, using email, phone, and the Client Portal to share information. Meetings were held virtually on a variety of platforms, including Teams and Zoom, and we were able to complete and deliver our usual high-quality audits.

In the current "reopening" scenario, we have started doing fieldwork visits again. Before our team members attend fieldwork, we will be sending out a questionnaire to ascertain if it is safe for our team to be onsite as well as to learn your current COVID protocols. The safety of your team and ours is paramount at all times. All team members will be apprised of the City's protocols before we arrive onsite. If the Province increases restrictions related to COVID we are prepared to perform fieldwork remotely.

APPENDIX B – THE AUDIT PROCESS

OUR PLAN

Our overall audit strategy is risk-based and controls-oriented. Assessment and identification of risk is performed continuously throughout the audit process. We focus on the risks that have a potential impact on the financial accounting systems and subsequent financial reporting.

Our overall audit strategy does not, and is not intended to involve the authentication of documents, nor are our team members trained or expected to be experts in such authentication. Unless we have reason to believe otherwise, we accept records and documents as genuine. The subsequent discovery of a material misstatement resulting from fraud does not, in and of itself, indicate a failure to comply with Canadian generally accepted auditing standards.

AUDIT PROCEDURES

To meet our responsibilities in accordance with Canadian generally accepted auditing standards, our audit examination includes:

• Obtaining an understanding of the entity and its environment, including its controls, in order to identify and assess the risk that the consolidated financial statements contain material misstatements due to fraud or misstatement;
• Assessing the adequacy of and examining, on a test basis, the key controls over significant transaction streams and over the general organizational and computer environments;
• Assessing the systems used to ensure compliance with applicable legislative and related authorities pertaining to financial reporting, revenue raising, borrowing, and investing activities;
• Examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements;
• Assessing the appropriateness and consistency of accounting principles used and their application;
• Assessing the significant estimates used by management; and,
• Assessing the entity’s use of the going concern basis of accounting in the preparation of the consolidated financial statements.

As part of our planning process, we will also undertake to inform Mayor and Council of concerns relating to management’s implementation and maintenance of controls, and the effects of any such concerns on the overall strategy and scope of the audit. These concerns might arise from the nature, extent and frequency of management’s assessments of controls in place to detect fraud and misstatement, and of the risk that the consolidated financial statements may be misstated; from a failure by management to appropriately address significant deficiencies in controls identified in prior audits; and, from our evaluation of the Town’s control environment, and management’s competence and integrity.

OVERALL RELIANCE

For the December 31, 2021 audit, we are planning to place low reliance on the Town’s accounting systems. This level of reliance is consistent with the prior year will involve mainly substantive tests of details.

The amount of substantive work will be reduced for cycles where there are controls in place that MNP can test and rely on.

As part of our audit work we will update our understanding of the entity and its environment, including the controls relevant to our audit of the principal transaction cycles, sufficient to identify and assess the risks of material misstatement of the consolidated financial statements resulting from fraud or misstatement. This will be accomplished through inquiries with management and others within the entity, analytical procedures and observation and inspection. Furthermore, we will consider whether effective controls have been established to adequately respond to the risks arising from the use of IT or manual systems and test the operation of those controls to an extent sufficient to enable us to reduce our substantive work. Our review of the Town’s controls will not be sufficient to express an opinion as to their effectiveness or efficiency.

Although we will provide Mayor and Council with any information about significant deficiencies in internal control that have come to our attention, we may not be aware of all the significant deficiencies in internal control that do, in fact, exist.

INHERENT LIMITATIONS IN THE AUDITING PROCESS

An auditor cannot obtain absolute assurance that material misstatements in the consolidated financial statements will be detected due to factors such as the use of significant judgment regarding the gathering of evidence and the drawing of conclusions based on the audit evidence acquired; the use of testing of the data underlying the consolidated financial statements; inherent limitations of controls; and, the fact that much of the audit evidence available to the auditor is persuasive, rather than conclusive in nature.

Because of the nature of fraud, including attempts at concealment through collusion and forgery, an audit designed and executed in accordance with Canadian generally accepted auditing standards may not detect a material fraud. While effective controls reduce the likelihood that misstatements will occur and remain undetected, they do not eliminate that possibility. Therefore, the auditor cannot guarantee that fraud, misstatements and non-compliance with laws and regulations, if present, will be detected when conducting an audit in accordance with Canadian generally accepted auditing standards.

The likelihood of not detecting material misstatements resulting from management fraud is greater than for employee fraud, because management is in a position to manipulate records, present fraudulent information or override controls.

We will inform the appropriate level of management or Mayor and Council with respect to identified:

• Misstatements resulting from errors, other than clearly trivial misstatements;
• Fraud, or any information obtained that indicates that fraud may exist;
• Evidence obtained that indicates non-compliance or possible non-compliance with laws and regulations, other than that considered inconsequential;
• Significant deficiencies in the design or implementation of controls to prevent and detect fraud or misstatement; and
• Related party transactions that are not in the normal course of operations and that involve significant judgments made by management concerning measurement or disclosure.

Our concern as auditors is with material misstatements, and thus, we are not responsible for the detection of misstatements that are not material to the consolidated financial statements taken as a whole.

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