This report presents the findings of the audit of the Departmental practices associated with recording prepaid expenditures. The objective of the audit was to determine the extent to which the Department appropriately and consistently accounts for its prepaid expenditures in accordance with prescribed accounting standards and relevant policies.
The Department's Chart of Accounts contains nine Prepaid asset General Ledger (GL) accounts. We are concerned with the accuracy of the balance in each of these GL accounts.
The Department of Foreign Affairs and International Trade (DFAIT) policy on Accounting for Prepaid Expenses does not provide clear direction, nor does it clearly assign the responsibility for monitoring prepaid expenditures to the various departmental stakeholders. Our audit tests indicate that there is a high degree of inconsistency in the accounting treatment of prepaid expenditures both between, and within, missions. We attribute the inconsistency, in large part, to the noted policy deficiencies. We are, therefore, unable to conclude that the balances recorded in IMS for Prepaid Rent, and related expense accounts, are accurate and complete. Consequently, the accuracy of the Prepaid asset financial information disclosed in the Department's financial statements is questionable.
A total of 3 audit recommendations are raised in the report; 2 are addressed to SMS and one is addressed to SMF. Management has responded to each recommendation indicating action already taken or decisions made, as well as future action. Of the 3 recommendations, management has stated that one recommendation has been implemented. For each of the remaining 2 recommendations, management has indicated the initiatives in progress or the intended future action.
1.1.1 The audit covered the Departmental accounting practices related to prepaid expenditures. More specifically, the audit assessed the IMS posting practices that apply to Crown Leased property payments by missions to ensure that prepayments and related expenses are properly recorded in the Department's financial records.
1.2.1 The overall audit objective was to determine the extent to which the Department appropriately, consistently and efficiently accounts for its prepaid expenditures in accordance with prescribed accounting standards and relevant policies. In particular, the audit focused on determining whether:
1.3.1 The internal audit was conducted in accordance with the Treasury Board Policy on Internal Audit and the Institute of Internal Auditors Standards for the Professional Practice of Internal Auditing.
1.3.2 The audit examined the major posting processes and practices associated with Crown Leased property payments at Missions, as recorded in IMS. The examination phase of the audit was conducted during February 2003.
1.3.3 We conducted a comprehensive review of the transactions posted to 15 General Ledger (GL) accounts during the 2002/03 fiscal year, both prepaids (9 accounts) and expenses (6 accounts), to determine their purpose and use.
1.3.4 Twenty-two other expense GL accounts capture expenditures that may contain prepayments. These accounts were analyzed to assess the potential impact of any prepayments on financial reporting requirements based on the materiality of the expenses involved.
1.3.5 Based on the information gathered, the Audit Team identified potential audit issues and made decisions regarding which GL accounts to examine in detail, as reflected in the following table.
|GL Account #||Description||Notes|
|Prepaid Asset GL Accounts|
|15500 to 15504||Five specific Prepaid Expense accounts||1|
|15520||Prepaid Expense - O & M||1|
|15525||Prepaid Expense - Capital||1|
|15530||Prepaid Expense - Rent||2|
|15560||Advance for Contributions||3|
|Crown-Lease Expense GL Accounts|
|41450||Rental of residential buildings||2|
|41470||Rental of office buildings||2|
|41471||Rental of other office buildings||2|
|41475||Rental of commercial buildings||2|
|41480||Rental of recreational property||2|
|41481||Rental of other buildings (excluding office space)||2|
|Other Expenditures GL Accounts|
|41208||Storage and warehousing||5|
|41496||Rental - other||4|
|40721 to 41495||Nineteen other expense accounts that have the potential to include prepaid expenses||5|
1.3.6 For the GL's included in the audit scope, audit programs were developed to test compliance with policies and procedures which govern prepayments.
2.1.1 Treasury Board (TB) Accounting Standard 3.3 states that, for accrual accounting purposes, prepaid expenses are payments made for goods/services to be received in future fiscal years. In addition, the standard states that amortization of any prepayment should be expensed in a systematic and rational basis.
2.1.2 Chapter 10 of the DFAIT Accounting Manual describes prepaid expenses as "current assets that arise when payment for a good or service is made prior to when the service is rendered or the good received within the same accounting period". The Policy also states that any prepayment with a monthly value greater than $50K is required to be set up as a prepaid expenditure and expensed on a monthly basis. Several options are then provided as to how prepayments with monthly values less than $50k should be processed. The policy finally notes that a year-end entry at March 31 is required to expense an appropriate amount if the prepayment period crosses fiscal years.
2.1.3 Several GL accounts are established in the Chart of Accounts for prepaid expenditures. The only account with significant activity is GL 15530 - Prepaid Rent. Other accounts available include prepaid postage, transportation and communication, professional services, utilities, repair and maintenance, operation and maintenance, and capital.
2.2.1 Roles, responsibilities and Central Agency Reporting requirements, as they pertain to Prepaid Expenses, are described in Chapter 10, Section 6 of the DFAIT Accounting Manual. Responsibilities are assigned to:
2.3.1 The following table provides the March 31, 2002 and 2003 IMS balance of the General Ledger (GL) accounts selected for examination.
|Selected Crown Lease GL Accounts - Tombstone Financial Data|
|GL #||GL Account Title||Balance at 31/03/02||Balance at 31/03/03|
|Prepaid Asset GL Account|
|15530||Prepaid Expense - Rent||$ 5,646,000||$ 4,199,000|
|Crown Lease Expense GL Accounts|
|41450||Rental of residential buildings||$ 58,963,000||$ 66,297,000|
|41470||Rental of office buildings||$ 39,075,000||$ 44,680,000|
|41471||Rental of other office buildings||$ 157,000||$ 159,000|
|41475||Rental of commercial buildings||$ 689,000||$ 1,699,000|
|41480||Rental of recreational property||$ 129,000||$ 145,000|
|41481||Rental of other buildings||$ 423,000||$ 392,000|
|Total||$ 99,436,000||$ 113,372,000|
|Other Expenditure GL Accounts|
|41496||Rental - other||$ 23,000,000||$ 25,203,000|
|41522||Condominium charges||$ 6,800,000||$ 6,793,000|
|41208||Storage and warehousing||$ 604,000||$ 654,000|
|Total||$ 30,404,000||$ 32,650,000|
3.1.1 Treasury Board Accounting Standard 3.3 specifies four categories of prepayments: prepaid expenses, deferred charges, transfer payments paid in advance and payments made prior to the completion of the work, delivery of goods or rendering of the service. The DFAIT policy on Accounting for Prepaid Expenses (herein referred to as the Prepaid policy) deals only with the prepaid expenses category. It does not describe the rationale for excluding the other three categories from its scope of coverage.
3.1.2 The Prepaid policy and procedures provide unclear direction. For example, it:
3.1.3 SMF and SMS confirmed that the Prepaid asset account balance should, for internal and external reporting purposes, only reflect expenditures which relate to activities covering more than one fiscal year. While the DFAIT Prepaid Policy recognizes this reporting standard, it also calls for the recording of prepaids that are subsequently expensed within the fiscal year. The requirements of the Prepaid policy are, therefore, not consistent with SMF's expectations as to the basis for recording and reporting prepaids.
3.1.4 The results of our audit tests indicate that there is an inconsistent accounting treatment of prepaid expenditures between and within Missions. We attribute, in large part, this inconsistency to the policy deficiencies described above. Examples of the inconsistency include:
The above noted inconsistencies adversely impact the accuracy of the Department's financial statements and any corporate use made of the related IMS data.
3.1.5 SMS, in consultation with SMF and other stakeholders, should simplify and strengthen DFAIT's Prepaid Policy and procedures by:
3.1.6 SMS should provide CFSI officials with the revised Prepaid Policy per 3.1.5 so that they may update the IMS training materials and manual accordingly.
3.1.5 SMS agrees with all recommendations and has assigned them to SMSP who will consult with all stakeholders for development of a revised departmental policy. The headquarters policy was completed and posted on the departmental web site. The Mission policy will be completed by January 2004.
3.1.6 SMSP has also been assigned the responsibility to liaise with CFSI. The policy was sent to CFSI on July 2003. CFSI is to arrange a meeting with the trainers and SMSP to review the new policy for incorporation into the IMS training material by February 2004.
3.1.7 SMF should update, as necessary, the Department's Chart of Accounts to ensure that it is consistent with the Prepaid asset and Expense GL Accounts referred to in the revised Prepaid Policy.
3.1.7 The proposed adjustments were discussed with SMSP and the resulting changes to the Department's Chart of Accounts were made before in July 2003 for headquarters GLs. Mission GLs will be changed in January 2004, when SMS have finalized the policy.