Specified Auditing Procedures on Note 3 of the 2013–2014 Departmental Financial Statements

Foreign Affairs, Trade and Development Canada
Office of the Chief Audit Executive

August 2014

Executive Summary

In their review of prior year’s Departmental Financial Statements (the “financial statements”), the Departmental Audit Committee (DAC) requested additional information regarding the preparation of Note 3 to the Financial Statements (Parliamentary authorities).  The Office of the Chief Audit Executive (OCAE) undertook audit work related to this reconciliation to provide assurance that Note 3 was accurate.  The previous reports presented by the OCAE and recommended for approval by the DAC indicated that:

• The appropriate process was followed;
• The professional judgement used by management was sound; and,
• The DAC could be assured with respect to the outcome of the reconciliation.

In the development of the 2014-2015 Risk-based Audit Plan, the DAC again requested that the OCAE undertake the same work this year.  On behalf of the OCAE, Deloitte LLP performed specified procedures regarding the accuracy of Note 3 and its preparation in accordance with the requirements of Treasury Board Accounting Standard (TBAS) 1.2, Departmental and Agency Financial Statements.

This report details the results of these specified procedures, and Appendix A contains the specified audit procedures report.

Why is this important?

The Departmental Financial Statements are a principal tool for accountability to Parliament.  They demonstrate, in a transparent fashion, the use of public funds aligned with priorities.  Ensuring the reliability of the information contained within the statements supports sound stewardship. 

What did we examine?

The audit approach consisted of the following;

• Providing a detailed process description of how the reconciliations are performed including internal controls in place to ensure accuracy of the note;
• Describe the methodology used in the reconciliations and perform the following specified procedures regarding the accuracy and completeness of Note 3 and its preparation:
  • Reconcile amounts included in Note 3(a) to amounts otherwise disclosed within the Departmental financial statements;
  • Reconcile amounts included in Note 3(a) that are not otherwise separately disclosed within the Departmental financial statements to DFATD’s P12–2 Trial Balance;
  • Reconcile amounts included in Note 3(b) to voted appropriations, including transfers, to Public Accounts Submission – Form A (“Form A”); and
  • Reconcile lapsed amounts included in Note 3(b) to amounts reported in Form A.

Conclusion

As a result of performing the specified procedures, the auditors noted that all amounts in Note 3 had been reconciled to amounts disclosed within the Departmental Financial Statements, DFATD P12-2 Trial Balance and Form A.  No exceptions were found.

Statement of Conformance

In my professional judgment as the Chief Audit Executive, this audit was conducted in conformance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing and with the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program. Sufficient and appropriate audit procedures were conducted, and evidence gathered, to support the accuracy of the findings and conclusion in this report, and to provide an audit level of assurance. The findings and conclusion are based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed upon with management and are only applicable to the entity examined and for the scope and time period covered by the audit.

Jean Goulet
Chief Audit Executive

1.0 Background

Departmental financial statements are prepared in accordance with Treasury Board Accounting Standard (TBAS) 1.2, Departmental and Agency Financial Statements. TBAS and Treasury Board Secretariat Information Bulletins require financial statements to be presented on an accrual accounting basis. Accrual accounting aims to ensure that transactions are recorded in the period in which they occur. Revenues are recognized when earned (as opposed to when cash is received) and expenses are recognized when incurred (as opposed to when cash is paid).

Due to the use of accrual accounting, DFATD’s Statement of Operations and Statement of Financial Position may recognize items for which Parliamentary authorities were received in prior, current or future fiscal years. As such, the net results of operations presented on a government funding basis versus on an accrual accounting basis, will likely differ.

TBAS 1.2 requires that departments and agencies present a note on Parliamentary authorities, divided into the following two sections:

1. Reconciliation of net cost of operations to current year authorities used; and
2. Authorities provided and used.

The 2014 total authorities used (as reported in Note 3 to the financial statements) were $5,065,277,000.

2.0 Objective

The mandate of this audit was to perform specified auditing procedures regarding the accuracy and completeness of Note 3 and its preparation in accordance with the requirements of TBAS 1.2.  The objective of this report is to provide information on the following key components:

1. Provide a detailed process description of how the reconciliations are performed including internal controls in place to ensure accuracy of the note;
2. Describe the methodology used in the reconciliations and perform the following specified procedures regarding the accuracy and completeness of Note 3 and its preparation:
   1. Reconcile amounts included in Note 3(a) to amounts otherwise disclosed within the Departmental financial statements;
   2. Reconcile amounts included in Note 3(a) that are not otherwise separately disclosed within the Departmental financial statements to DFATD’s P12–2 Trial Balance;
   3. Reconcile amounts included in Note 3(b) to voted appropriations, including transfers, to Public Accounts Submission-–-Form A (“Form A”); and
   4. Reconcile lapsed amounts included in Note 3(b) to amounts reported in Form A.

3.0 Process Description

Detailed interviews were held with the DFATD Corporate Accounting staff in order to determine the process followed in the preparation of the Note 3 reconciliations. The auditors’ understanding is based primarily on interviews with DFATD representatives and review of selected documentation. The auditors did not test the design and implementation of internal controls and nor did they audit the underlying data supporting the amounts reported in Note 3 to the Departmental financial statements.

Preparation Process

In 2014, Note 3 information was compiled from the following documents:

1. The unaudited financial statements of DFATD: consolidated statements of operations, change in debt, financial position and cash flow;
2. Corporate Accounting-prepared Excel worksheets: trial balance details, segregated by Fund number and Financial Reporting Account (“FRA”) number;
3. Public Accounts Submission-–-Form A –-Summary of Source and Disposition of Authorities (Budgetary information);
4. Allotment reports provided by the Treasury Board Secretariat;
5. Integrated Management System (“IMS”) reports: authorities’ expenditures during the year; and,
6. Directive from the Office of the Comptroller General of Canada on Government reorganization to amalgamate Canadian International Development Agency and Department of Foreign Affairs and International Trade Canada.

The financial statements, including the notes, are prepared using an Excel worksheet designed by Corporate Accounting. This template enables Corporate Accounting to import the P12–2 trial balance text file into Excel, which then automatically organizes the information by Financial Reporting Account. The template uses pre-populated v-lookups and links to populate the financial statements and notes. Note 3(a) was populated using these linked worksheets.

Note 3(b) was populated using an “input sheet” that is prepared by Corporate Accounting. The “input sheet” is an Excel worksheet containing those items which do not appear in DFATD’s trial balance (for example: authorities provided and lapsed authorities). Relevant items on the “input sheet” are recorded from Public Accounts Submission-–-Form A.

Review Process

Note 3 was prepared by a financial analyst and reviewed by the Deputy Director, Corporate Accounting. The review included examining the underlying trial balance information as well as the presented reconciliation figures. The lapsed authorities’ figures are based on Treasury Board reports and internal information and were reviewed by the Planning and Resource Management Division.

Internal Controls

During the documentation of the preparation and review process relating to the preparation of Note 3, the auditors identified, through interviews, internal controls including:

• Segregation of duties: Note 3 to the financial statements is prepared by a financial analyst and reviewed by the Deputy Director;
• Compilation of supporting documentation and record keeping (year-end documentation binder): the year-end binder contains extensive support for financial statement line items and disclosures;
• Management refers to DFATD’s accounting policies and procedures in preparing Note 3 to the financial statements;
• Controls incorporated within IMS, such as passwords; and
• Limited access to financial statements: only Corporate Accounting staff has financial statement access — seven people in total.

The auditors were informed that internal controls implemented by management do not include a password on the financial statement worksheet; however, no DFATD employee outside of the Corporate Accounting group is able to access the financial statements while in draft format. In addition, unauthorized changes would be discovered in the review process (e.g., comparison of prior draft with updated draft) and followed up on by reviewing file back-ups which are done whenever a change is made.

Description of Reconciliation Methodology

The Note 3 reconciliation prepared by management was compared with the relevant TBAS 1.2 guidance in order to review the methodology applied in the preparation of the reconciliations.  Management prepared Note 3 using the wording suggested in TBAS 1.2 and following the format of the TBAS sample for parts (a) and (b), except as follows:

• TBAS 1.2 suggests including a brief introductory paragraph explaining the purpose of the reconciliations. DFATD includes this paragraph along with an additional paragraph detailing the causes of the variances in Note 3(a).

Description of Estimates and Professional Judgment Used in Reconciliation

The auditors identified the following significant estimates, where professional judgment was used in preparing the estimates that are included in Note 3 and in the financial statements.

Financial statement item: Bad Debt expense

Finding: DFATD is unable to set out a general formula that would be applicable to accounts receivable as a whole due to the various categories of receivable balances held. Therefore, management performs an assessment of each class of customers and develops an allowance based on the following criteria:

• Age of receivables,
• Answers received from customer queries,
• Status reports from the Collection Agency, and
• Country of customer, etc.

Financial statement item: Employee severance benefits

Finding: Canada-Based Staff (“CBS”) severance benefits are calculated as total salary expense multiplied by an annual fixed ratio provided by the Treasury Board Secretariat.

The Locally Engaged Staff (“LES”) severance benefits are calculated based on the number of eligible employees, average severance cost and a layoff/payout rate. The rate used in the LES calculation is assessed on an annual basis by the LES Pensions and Insurance Team.

Financial statement item: Amortization of tangible capital assets

Finding: Tangible capital assets are amortized on a straight line basis over the estimated useful life of the asset. TBAS 3.1 provides a guideline of asset life spans for each class of asset. TBAS 3.1 allows departments to estimate the expected useful life of a tangible capital asset.

Estimates are based on management’s assumptions and historical data prepared by Corporate Accounting; the auditors did not assess the appropriateness of the assumptions used in establishing the estimates, nor did they audit or otherwise attempt to validate that the assumptions described to us were in fact used.

Professional judgment used in the calculation of the bad debt expense is based on the analysis of the receivable balances. Professional judgment used in the calculation of severance benefits is based on the ratio provided by the Treasury Board Secretariat, as well as historical trends in Locally Engaged Staff data (e.g. layoff/payout rate). Professional judgment used in the amortization of tangible capital assets is limited as the accounting system automatically selects a useful life based on the asset class chosen when posting a capital asset acquisition.

4.0 Specified Auditing Procedures

Appendix B identifies these elements and their respective amounts for which specific procedures were performed, as presented in Note 3.

1. Reconcile amounts included in Note 3(a) to amounts otherwise disclosed within the Departmental financial statements

The auditors reconciled certain amounts (as identified) included in Note 3(a) to the same amounts that are otherwise disclosed separately within the Departmental financial statements, such as the Consolidated Statement of Financial Position, the Consolidated Statement of Operations, the note on tangible capital assets, etc. The elements of the Note so reconciled included:

• Net cost of operations: $4,979 million
• Services provided without charge by other government departments: ($88 million)
• Amortization of tangible capital assets: ($106 million)
• Bad debt expense: ($9 million)
• Acquisition of tangible capital assets: $132 million

No errors or discrepancies were noted.

2. Reconcile amounts included in Note 3(a) that are not otherwise separately disclosed within the Departmental financial statements to DFATD’s P12–2 Trial Balance

The following elements included in the Note 3(a) reconciliation could not otherwise be traced to the financial statements and, therefore, additional supporting information was obtained from DFATD staff:

• Refunds of prior year expenditures: $23 million
• Decrease in accrued liabilities for workforce adjustment costs $23 million
• Increase in accrued liability for Matching Fund ($23 million)
• Loss on disposal of tangible capital assets: ($45 million)
• Decrease in vacation pay and compensatory leave: $9 million
• Decrease in accrued employee future benefits: $4 million
• Decrease in advances to IFI: $0.2 million
• Decrease in other accrued liabilities: $0.1 million
• Allowance for claims and litigations: $0.2 million
• Interdepartmental transactions: $1 million
• Debt forgiveness of loans on behalf of Government: $98 million
• Losses on foreign exchange-IFI on behalf of Government: $46 million
• Transfer payments to IFI on behalf of Government: $29 million
• Increase in prepaid expenses: $0.6 million
• Decrease in inventories: ($7 million)
• Gains on foreign exchange: ($2 million)
• Increase in accountable advances: $0.1 million
• Revenues held on behalf of Government affecting authorities: $0.1 million

For a number of these items, the auditors could not reconcile directly to the financial statements due to:

• The amalgamation between the Canadian International Development Agency and the Department of Foreign Affairs and International Trade on June 26, 2013 as disclosed in Note 14; and
• The inclusion of the Passport Canada Revolving Fund up to June 30, 2013, as disclosed in Note 2b) to the financial statements.

As such, the auditors reconciled the amounts to the supporting documentation provided by management. No errors or discrepancies were noted for the elements above.

3. Reconcile amounts included in Note 3(b) to voted appropriations, including transfers, to Public Accounts Submission – Form A (“Form A”)

Note 3 (b) reconciles the authorities provided to and used by DFATD; DFATD reports on their authorities to the Receiver General in Form A, which is pre-populated by Treasury Board Secretariat. As such, the auditors reconciled voted appropriations, as well as reconciling items to Form A for the following items:

• Vote 1 (Operating Expenditures): $1,529 million
• Vote 5 (Capital Expenditures): $213 million
• Vote 10 (Grants and Contributions): $3,257 million
• Vote 15 (Payments, in respect of pension, insurance and social security programs or other arrangements for Locally Engaged Staff): $65 million
• Vote 16c (Debt forgiveness): $8 million
• Statutory – Passport Canada: $14 million
• Other statutory: $464 million

No errors or discrepancies were noted.

4.  Reconcile lapsed amounts included in Note 3(b) to amounts reported in Form A

Lapsed appropriations are reported only in Form A; as such, the auditors reconciled unused items to amounts reported in Form A. DFATD reported the following unused authorities in 2014:

• Authorities available for future years: $174 million
• Lapsed authorities: Operating: $88 million
• Lapsed authorities: Capital: $73 million
• Lapsed authorities: Grants and Contributions: $151 million
• Lapsed authorities: Payments, in respect of pension, insurance and social security programs or other arrangements for Locally Engaged Staff: $0.02 million

No errors or discrepancies were noted.

5.0 Conclusion

As a result of performing the specified procedures, the auditors noted that:

• All amounts in Note 3 have been reconciled to amounts disclosed within the Departmental financial statements, DFATD’s P12–2 Trial Balance, Votes Appropriations (including reconciling items) or Form A;
• Note 3 is in accordance with the disclosure requirements of TBAS 1.2;
• There were no identified discrepancies in the preparation and disclosures of Note 3 to the Departmental financial statements; and
• The auditors did not find any significant areas for improvement to bring to the DAC’s attention.

Appendix A – Specified procedures report

To: The Chief Audit Executive of the Department of Foreign Affairs, Trade and Development (DFATD)

Re: Note 3 to the 2013–2014 Departmental Financial Statements

As specifically agreed, we have performed the following procedures in connection with the Statement of Work dated July 3, 2014 as to the accuracy and completeness of Note 3 to DFATD’s Departmental financial statements for the year ended March 31, 2014:

1. Reconcile amounts included in Note 3(a) to amounts otherwise disclosed within the Departmental financial statements;
2. Reconcile amounts included in Note 3(a) that are not otherwise separately disclosed within the Departmental financial statements to DFATD’s P12–2 Trial Balance;
3. Reconcile amounts included in Note 3(b) to voted appropriations, including transfers, to Public Accounts Submission-–-Form A (“Form A”); and
4. Reconcile lapsed amounts included in Note 3(b) to amounts reported in Form A.

As a result of applying the above procedures, we found no exceptions. However, these procedures do not constitute an audit of DFATD’s Note 3 to the Departmental financial statements, and therefore we express no opinion on this Note.

It is understood that this report is for the sole use of the Chief Audit Executive in the fulfillment of his mandate.

Chartered Professional Accountants, Chartered Accountants
Licensed Public Accountants

August 1, 2014

Appendix B – Note 3 to Financial Statements

3. Parliamentary Authorities