Report to The Audit Committee - Communication of audit

Report to Council - Communication of audit results

The District Municipality of Muskoka For the year ended December 31, 2010

CES-8-2011-DEL-A

Grant Thornton LLP Unit 201 85 Bayfield Street Barrie, ON L4M 3A7

T (705) 730-6574 F (705) 730-6575 www.GrantThornton.ca

Grant Thornton LLP Suite 300 6 West Street N Orillia, ON L3V 5B8

T (705) 326-7605 F (705) 326-0837 www.GrantThornton.ca

Audit • Tax • Advisory Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

August 8, 2011 To the Members of Council of The District Municipality of Muskoka

We are pleased to report that we have now substantially completed our audit of the

consolidated financial statements of The District Municipality of Muskoka for the year ended

December 31, 2010. We enclose our Report to Council - Communication of audit results to continue

our dialogue with Council on the audit of The District Municipality of Muskoka. This report

provides an overview of the results of our audit including comments on misstatements,

significant accounting policies, sensitive accounting estimates, and other matters that may be of

interest to Council.

This communication has been prepared to comply with the requirements outlined in CAS 260

Communication with those Charged with Governance. The information in this document is intended

solely for the information and use of Council and management. It is not intended to be

distributed or used by anyone other than these specified parties.

We express our appreciation for the cooperation and assistance received from the management

and staff of The District Municipality of Muskoka during the course of our audit.

If you have any particular comments or concerns, please do not hesitate to raise them at our

scheduled meeting.

Yours sincerely, Grant Thornton LLP Michael Bunn, CA Principal


Contents

Page

Status of the audit 1

Audit results 2

Reportable matters 4

Technical updates 6

Appendix A – Draft auditors’ report 7

Appendix B – Management representation letter 9

Appendix C – Internal control letter 13

Appendix D – Adviser alerts 16

Appendix E – Accounting developments 18

Report to Council – Communication of audit results The District Municipality of Muskoka For the year ended December 31, 2010

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Status of the audit

Outstanding items

We have substantially completed our audit of the consolidated financial statements of The District

Municipality of Muskoka for the year ended December 31, 2010 and the results of that audit are

included in this report.

We have attached our draft auditors’ report as Appendix A. We will finalize the report once Council

has approved the financial statements. The following items were outstanding as at the date of this

report:

Receipt of signed management representation letter (as Appendix B);

Approval of the consolidated financial statements by Council;


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Audit results

Adjusting Journal Entries

In order to expedite the audit this year, we began the year end audit in June before management had yet

completed things for the audit process. There were many journal entries from us and staff in order to

produce the audited consolidated financial statements. As a result, providing a complete list of all

journal entries here would not be beneficial.

Summary of Items not adjusted

Non-trivial items noted during the course of our audit but not adjusted in the consolidated financial

statements were as follows:

Debit /(Credit) statement of:

Unadjusted items Assets Liabilities Equity Earnings

Prior year Investment income accrual not made.

$ - $ - $ (240,974) $ 240,974

Prior year vacation accrual error and small current year change.

- (93,320) 86,047 7,273

Prior year accrued payroll difference. - - 37,318 (37,318)

Prior year unbilled revenue difference. - - 79,361 (79,361)

Prior year landfill liability adjustment not recorded.

- - 41,000 (41,000)

Prior year WSIB payable not recorded. - - 255,000 (255,000)

Audit accrual recorded this year so double expense in the current year.

- - 43,400 (43,400)

Benefits liability reversal for amount owed back to the District.

- 718,510 (498,724) (219,786)

Projected error based on our testing of vacation accrual from differences found.

- 70,805 - (70,805)

To record legal settlement paid out in 2011.

- (145,196) - 145,196

Total unadjusted items $ - $ 550,799 $ (197,572) $ (353,227)

We have discussed the unadjusted items with management and they have concluded that, individually

and in aggregate, these unadjusted items are not material to the consolidated financial statements of

The District Municipality of Muskoka.


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Additional services

In addition to providing an audit opinion we have been engaged to perform the following additional

services:

Prepare audit report on the compliance of gas tax expenditures with the Federal Gas Tax agreement.

Prepare audit reports on the revenue and expenditures in accordance with instructions issued by the

Ministry under the Provincial Offences Act and the Ministry of Aboriginal Affairs Support for

Community Negotiations Agreements.

Prepare audit reports on the revenue and expenditures for several social assistance programs,

including; Child Care and Generic Programs Consolidated, Enhanced Employment Services for

Vulnerable Persons, Ontario Works Programs Consolidated, Rent Bank Program 2004, Rent Bank

Program 2009, and Addiction Services Initiative.

Prepare tax returns required for Gravenhurst and Huntsville housing corporations.

These additional services affected the planned nature and scope of the audit by requiring more detailed

substantive procedures to be performed around trust fund accounts.


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Reportable matters

Internal control

Management is responsible for the design and operation of an effective system of internal control that

provides reasonable assurance that the accounting system provides timely, accurate and reliable

financial information, and safeguards the assets of the District.

The audit is designed to express an opinion on the consolidated financial statements. Our

understanding of internal control is sufficient to enable us to plan the audit and to determine the

nature, timing and extent of tests to be performed. However, if we become aware of a deficiency in

your internal controls systems, auditing standards requires us to communicate to Council those

deficiencies we consider significant or material. However, a financial statement audit is not designed to

provide assurance on internal control.

Our comments and recommendations on these matters have been provided in an internal control letter

and attached as Appendix C.

Significant new accounting policies

There were no significant new accounting policies noted in the year.

Sensitive accounting estimates and disclosures

Management has the responsibility for applying judgement in preparing the accounting estimates and

disclosures contained within the consolidated financial statements. The fact that estimates are used in

the preparation of the consolidated financial statements is outlined in Note 1 to the consolidated

financial statements. During the course of our audit, we noted the following sensitive accounting

estimates and disclosures:

Liability for employee future benefits: The District has recognized liabilities of $83,882 (2009 - $103,499) in employee future benefits relating to sick leave payout, as disclosed in Note 8 of the consolidated financial statements. The objective of the accounting policy is to recognize a liability in the reporting period in which employees have provided the services that gives rise to the benefits. The amounts recorded by the District are determined based on management assumptions that 50% of the employees who have earned a possible payout will not be recognized as they will not remain employed with the District until


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the age of 65. When it becomes more than likely a payout will occur, the full 100% of the liability is recognized. Landfill

The District has recognized a liability of $5.6 million (2009 - $7.4 million) in landfill closure and post

closure costs that will require funding in future periods.

The amounts recorded by the District were determined by management using a borrowing rate of 6%

and inflation rate of 4%, as disclosed in Note 9 of the consolidated financial statements.

Cooperation during the audit

We report that we received cooperation from management and the employees of The District

Municipality of Muskoka. To our knowledge, we were provided access to all necessary records and

other documentation and any issues that arose as a result of our audit were discussed with management

and have been resolved to our satisfaction.

Consultations with other accountants

To our knowledge, management did not seek the advice or opinion of other external accountants on

financial reporting or accounting matters.

Fraud and illegal acts

Our inquiries of management did not reveal any fraud or illegal acts.

Independence

As external auditors of The District Municipality of Muskoka, we are required to be independent in

accordance with Canadian professional standards. These standards require that we disclose to Council

all relationships that, in our professional judgement, may reasonably be thought to bear on our

independence. We have provided a letter to Council, dated May 5, 2011, which confirms our

independence with respect to The District Municipality of Muskoka.


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Technical updates

Canadian standards in transition

Advisor Alerts

A recent advisor alert relating to government transfers has been summarized in Appendix D.

Accounting standards

Recent changes in accounting standards have been summarized in Appendix E.

Auditing standards

Canadian Auditing Standards are in effect for year ends ending on or after December 14, 2010 and will

constitute Canadian Generally Accepted Auditing Standards (GAAS). These standards have been

incorporated into Grant Thornton’s audit approach.


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Appendix A – Draft auditors’ report

To the Members of Council, Inhabitants and Ratepayers

of The District Municipality of Muskoka

We have audited the accompanying consolidated financial statements of The District Municipality of

Muskoka, which comprise the consolidated statement of financial position as at December 31, 2010,

and the consolidated statements of operations and accumulated surplus, consolidated changes in net

financial debt and consolidated cash flows for the year then ended, and a summary of significant

accounting policies and other explanatory information.

Management’s responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial

statements in accordance with Canadian public sector accounting standards, and for such internal

control as management determines is necessary to enable the preparation of financial statements that

are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our

audit. We conducted our audit in accordance with Canadian generally accepted auditing standards.

Those standards require that we comply with ethical requirements and 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 consolidated financial statements. The procedures selected depend on the auditor’s 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, the auditor considers internal control relevant to

the entity’s preparation and fair presentation of the consolidated 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 entity’s internal control. An audit also includes evaluating the

appropriateness of accounting policies used and the reasonableness of accounting estimates made by

management, as well as evaluating the overall presentation of the financial statements.


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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 consolidated financial statements present fairly, in all material respects, the

consolidated financial position of The District Municipality of Muskoka as at December 31, 2010, and

the results of its operations and its cash flows for the year then ended in accordance with Canadian

public sector accounting standards.

Other matter

Without modifying our report we draw attention to the budget figures which are provided for

comparative purposes only. They have not been subject to audit procedures. Accordingly, we do not

express an opinion on the budget figures.

Orillia, Canada Chartered Accountants August 8, 2011 Licensed Public Accountants


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Appendix B – Management representation letter

August 8, 2011 Dear Sir/Madam: We are providing this letter in connection with your audit of the consolidated financial statements of The District Municipality of Muskoka as of December 31, 2010, and for the year then ended, for the purpose of expressing an opinion as to whether the consolidated financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of The District Municipality of Muskoka in accordance with Canadian public sector accounting standards.

We acknowledge that we have fulfilled our responsibilities for the preparation of the consolidated financial statements in accordance with Canadian public sector accounting standards and for the design and implementation of internal controls to prevent and detect fraud and error. We have assessed the risk that the consolidated financial statements may be materially misstated as a result of fraud, and have determined such risk to be low. Further, we acknowledge that your examination was planned and conducted in accordance with Canadian generally accepted auditing standards (GAAS) so as to enable you to express an opinion on the consolidated financial statements. We understand that while your work includes an examination of the accounting system, internal controls and related data to the extent you considered necessary in the circumstances, it is not designed to identify, nor can it necessarily be expected to disclose, fraud, shortages, errors and other irregularities, should any exist.

Certain representations in this letter are described as being limited to matters that are material. An item is considered material, regardless of its monetary value, if it is probable that its omission from or misstatement in the consolidated financial statements would influence the decision of a reasonable person relying on the consolidated financial statements.

We confirm, to the best of our knowledge and belief, as of August 8, 2011, the following representations made to you during your audit.


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Financial statements

1. The consolidated financial statements referred to above present fairly, in all material respects, the financial position of the District as at December 31, 2010 and the results of its operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards, as agreed to in the terms of the audit engagement.

Completeness of information

2. We have made available to you all financial records and related data and all minutes of the meetings of counsellors and committees of counsellors, as agreed in the terms of the audit engagement. Summaries of actions of recent meetings for which minutes have not yet been prepared have been provided to you. All significant Board and committee actions are included in the summaries.

3. There are no material transactions that have not been properly recorded in the accounting records underlying the consolidated financial statements. The adjusting journal entries which have been proposed by you are approved by us and will be recorded on the books of the District.

4. There were no restatements made to correct a material misstatement in the prior period consolidated financial statements that affect the comparative information.

5. We are unaware of any known or probable instances of non-compliance with the requirements of regulatory or governmental authorities, including their financial reporting requirements.

6. We are unaware of any violations or possible violations of laws or regulations the effects of which should be considered for disclosure in the consolidated financial statements or as the basis of recording a contingent loss.

7. We have disclosed to you all known deficiencies in the design or operation of internal control over financial reporting of which we are aware.

8. We have identified to you all known related parties and related party transactions, including sales, purchases, loans, transfers of assets, liabilities and services, leasing arrangements guarantees, non-monetary transactions and transactions for no consideration.

9. You provided a non-attest service by assisting us with drafting the notes related to the consolidated financial statements. In connection with this non-attest service, we confirm that we have made all management decisions and performed all management functions, have the knowledge to evaluate the accuracy and completeness of the consolidated financial statements, and accept responsibility for such consolidated financial statements.

Fraud and error

10. We have no knowledge of fraud or suspected fraud affecting the District involving management; employees who have significant roles in internal control; or others, where the fraud could have a non-trivial effect on the consolidated financial statements.

11. We have no knowledge of any allegations of fraud or suspected fraud affecting the District’s financial statements communicated by employees, former employees, analysts, regulators or others.


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12. We acknowledge our responsibility for the design, implementation and maintenance of internal control to prevent and detect fraud.

13. We believe that the effects of the uncorrected financial statement misstatements summarized in the accompanying schedule are immaterial, both individually and in the aggregate, to the consolidated financial statements taken as a whole.

Recognition, measurement and disclosure

14. We believe that the significant assumptions used in arriving at the fair values of financial instruments as measured and disclosed in the consolidated financial statements are reasonable and appropriate in the circumstances.

15. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities, both financial and non-financial, reflected in the consolidated financial statements.

16. All related party transactions have been appropriately measured and disclosed in the consolidated financial statements.

17. The nature of all material measurement uncertainties has been appropriately disclosed in the consolidated financial statements, including all estimates where it is reasonably possible that the estimate will change in the near term and the effect of the change could be material to the consolidated financial statements.

18. All outstanding and possible claims, whether or not they have been discussed with legal counsel, have been disclosed to you and are appropriately reflected in the consolidated financial statements. Refer to Note 15 in the consolidated financial statements.

19. All liabilities and contingencies, including those associated with guarantees, whether written or oral, have been disclosed to you and are appropriately reflected in the consolidated financial statements.

20. With respect to environmental matters:

(a) at year end, there were no liabilities or contingencies that have not already been disclosed to you;

(b) liabilities or contingencies have been recognized, measured and disclosed, as appropriate, in the consolidated financial statements; and

(c) commitments have been measured and disclosed, as appropriate, in the consolidated financial statements.

21. The District has satisfactory title to (or lease interest in) all assets, and there are no liens or encumbrances on the District’s assets nor has any been pledged as collateral

22. We have disclosed to you, and the District has complied with, all aspects of contractual agreements that could have a material effect on the consolidated financial statements in the event of non-compliance, including all covenants, conditions or other requirements of all outstanding debt.


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23. The Goods and Services Tax (GST) and Harmonized Sales Tax (HST) transactions recorded by the District are in accordance with the federal and provincial regulations. The GST and HST liability/receivable amounts recorded by the District are considered complete.

24. Employee future benefit costs, assets, and obligations have been determined, accounted for and disclosed.

25. There have been no events subsequent to the balance sheet date up to the date hereof that would require recognition or disclosure in the consolidated financial statements. Further, there have been no events subsequent to the date of the comparative financial statements that would require adjustment of those financial statements and related notes.

Other

26. We have considered whether or not events have occurred or conditions exist which may cast significant doubt on the District’s ability to continue as a going concern and have concluded that no such events or conditions are evident.

Yours very truly, Julie Stevens, Director of Finance Stephen Cairns, Commissioner of Finance and Corporate Services


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Appendix C – Internal control letter

Members of Council The District Municipality of Muskoka

August 8, 2011

Dear Members of Council

Re: Internal control findings from the 2010 audit Receiving observations and findings on your financial reporting processes and controls is one of the benefits of an annual financial statement audit. Grant Thornton LLP has implemented processes and technology to address the changing standards of conducting a financial statement audit. This approach includes an increased emphasis on internal control. Our procedures identified some items to bring to your attention. Our audit is planned and conducted to enable us to express an audit opinion on the annual financial statements. The matters dealt with in this letter came to our attention during the conduct of our normal examination, and as a result, this letter does not necessarily include all matters that would be uncovered through a more extensive or special engagement. The standards of the public accounting profession require us to report annually to you our findings on certain weaknesses and deficiencies in your internal controls. We have categorized our findings as follows:

Material weaknesses (individual or aggregated deficiencies that could result in a material misstatement in the financial statements due to fraud or error)

Significant deficiencies

Other deficiencies and advisory comments


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Material weaknesses No material weaknesses were discovered during the course of our audit.

Significant Deficiencies No significant deficiencies were discovered during the course of our audit

Other deficiencies and advisory comments 1. There were errors identified in the vacation pay accrual calculation. Management response The vacation pay accrual is reviewed, but every employee is not verified. In 2011, the vacation

entitlements and calculations are expected to be in the payroll system which will allow us to perform additional verification procedures.

2. A more formal process is needed for opening of tenders. There should be 3 people signing for the

opening of tenders at the same time, with one person recording and 2 witnesses to ensure it is an impartial process.

Management response

The District’s procurement policy requires a public opening of all tenders.

This procedure is followed and the results are posted on the District’s website.

Informally, the District arranges to have a representative from the issuing department, clerk’s department, finance and a Councillor at the opening to ensure an impartial process.

3. The landfill liability amount is not supported by a formal independent cost study, but rather by

internal information. Independent evidence generally provides more reliable information. Management response

Given the cost of an independent study and the fact that all closure projects are evaluated through the capital budget process, management does not believe an independent study is required at this time. As landfills are nearing closure, formal consulting work is completed for the individual project to support the budget closure costs proposed.

4. Formalized contracts should be prepared for all services with the area municipalities.

Management response

A Memorandum of Understanding has been finalized through the Information Technology Steering Committee for IT services to the area municipalities. The final MOU is expected to be signed by area municipalities during 2011.

There is a formal agreement for road work between the District and area municipalities.

5. Clerk 3 Payroll and HR assistant have the ability to make changes to payroll rates and

employee information without review. Reports should be run for all changes made to payroll rates by someone that is independent of inputting the payroll rates.


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Management response All changes to pay rates are verified to the union / pay scale agreements and approved by the Manager of Finance, Expenditures. District has recently converted to a new payroll system and will review the audit reports that are available to improve this control function.

It is management’s responsibility to weigh the costs of implementing controls against the benefits that the controls will achieve. The purpose of this letter is to provide you with the information related to the identified risks so that you can make the necessary decisions. Observations not addressed from the prior year have been repeated to allow management to challenge past judgments in the current operating environment As your auditor and advisor, it would be a pleasure to discuss our findings with you and provide you with appropriate guidance to improve your controls. The matters discussed herein are those that have been noted as of August 8, 2011 and we have not updated our procedures regarding these matters to the current date. In addition, this communication is prepared solely for the information of management and is not intended for any other purposes; we accept no responsibility to a third party who uses this communication. Yours sincerely Grant Thornton LLP Michael C. Bunn, C.A. Principal


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Appendix D – Adviser alerts

Government transfers Adviser Alert: April 2011

Overview

In March 2011 the Canadian Public Sector Accounting Board (PSAB) issued a new standard PS 3410 Government Transfers, which replaces an older standard of the same name. The new standard can be applied either retrospectively or prospectively and applies to fiscal periods beginning on or after April 1, 2012 with early adoption encouraged.

Recognition

There is no requirement for symmetrical accounting by transferor and recipient of a government transfer. Recognition requirements for transferring and recipient governments apply equally to operating transfers, capital transfers, and transfers of tangible capital assets. Transferring governments should recognize government transfers as expenses in the period the transfer is authorized and all eligibility criteria met. Recipient governments recognize government transfers as revenue differently depending on the existence of transfer terms.

Liabilities of the recipient

The determination as to whether a liability, as opposed to revenue, would arise for a recipient government is influenced by: Stipulations of the transfer alone; or Stipulations of the transfer taken together with actions and communications of recipient government before the financial statement date. Liabilities recognized are reduced and an equivalent amount of revenue is recognized as the liability is settled.

Authorization

For transferring governments authorization exists when either: 1) There is evidence that, by the financial statement date:

a) the enabling authority to provide a transfer is in place; and

b) an exercise of authority under that approved legislation, regulations or by-laws has occurred.


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2) There is evidence that both of the following have occurred:

a) actions and communications of the transferring government by the financial statement date clearly demonstrate that it has lost its discretion to avoid proceeding with a transfer; and

b) final approval in the stub period of the enabling legislation, regulations or by-laws confirms that the transferring government was demonstrably committed to approving and proceeding with the transfer at the financial statement date.

Authority to pay may need to be considered in order for a transferor to have exercised its authority and lost its discretion to avoid proceeding with a transfer. For a recipient government, authorization exists when the transfer is authorized by the transferring government as described above.

Resources

Basis for Conclusions – Government Transfers Section PS 3410 (April 2011)


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Appendix E – Accounting developments

Public Sector Accounting Board Effective date Management assessment of applicability

Withdrawal of Government assistance – Application of CICA Handbook – Accounting Section PS 3800

The section will be removed as IFRS standard IAS 20 Accounting for Government Grants and Disclosure of Government Assistance will be applicable to government business enterprises and other government entities who choose to apply IFRS. For those other government organizations following the PSA Handbook, there is sufficient guidance on this matter elsewhere in the Handbook.

Withdrawal of section is effective for fiscal years beginning on or after January 1, 2011.

Not applicable.

PSAB Section 3510 Tax Revenue

This Section establishes standards for the recognition, measurement and disclosure of tax revenue in government financial statements.

This section applies to fiscal years beginning on or after April 1, 2012.

Earlier adoption is encouraged.

Management is currently reviewing the handbook section and will apply the new standards in the fiscal year ending December 31, 2013.

PSAB Section 3410 Government Transfers

The new Section provides guidance for accounting and reporting government transfers from both a transferring government and a recipient government perspective. It clarifies the difference between eligibility criteria and stipulations and their roles in the recognition of government transfers by both government parties. It explains how the definition of liabilities in PSAB Section 3200, Liabilities, should apply to the recognition of government transfers by a recipient government. It addresses what evidence would be required to support the authorization of a government transfer from the perspective of the transferring government.

The new section applies to fiscal years beginning on or after April 1, 2012.

Retroactive or prospective application is permitted.

Earlier adoption is encouraged.

Management is currently reviewing the handbook section and will apply the new standards in the fiscal year ending December 31, 2013.

Documents

Report to The Audit Committee - Communication of audit