Specified Procedures on Note 3 2010-2011 Departmental Financial Statements

October 2011

Executive Summary

In their review of previous Departmental Financial Statements the Department of Foreign Affairs and International Trade Canada’s Departmental Audit Committee requested additional information regarding the preparation of Note 3 to the Financial Statements (Parliamentary Authorities). The Office of the Chief Audit Executive undertook audit work related to this reconciliation to provide assurance that Note 3 was accurate and complete. The reports presented by the CAE and approved by the DAC indicated that:

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

In their discussions on the 2010-2011 financial statements, the DAC requested similar additional information regarding Note 3 and requested that the Office of the CAE undertake the same work this year. Auditors were engaged to perform specified procedures regarding the accuracy and completeness of Note 3 and its preparation in accordance with the requirements of Treasury Board Accounting Standard (TBAS) 1.2.

This report details the results of these specified procedures.

Why is this Important?

Departmental Financial Statements are a principle tool for accountability. They demonstrate to Canadians, 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:

• Provide 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:
  • Corroborate amounts included in Note 3(a) to amounts disclosed within the Departmental Financial Statements;
  • Corroborate amounts included in Note 3(a) that are not distinctly disclosed within the Departmental Financial Statements to DFAIT’s P12-2 Trial Balance;
  • Corroborate amounts included in Note 3(b) to amounts reported in Public Accounts Submission - Form A (“Form A”);
  • Corroborate amounts included in Note 3(c) to amounts disclosed within the Departmental Financial Statements;
  • Corroborate amounts included in Note 3(c) that are not distinctly disclosed within the Departmental Financial Statements to DFAIT’s P12-2 Trial Balance.

What did we find?

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, DFAIT’s P12-2 Trial Balance, and/or Form A;
• Note 3 is in accordance with the disclosure requirements of TBAS 1.2;
• there were no discrepancies identified in the preparation and disclosures of Note 3 to the Departmental Financial Statements; and
• no areas for improvement to bring to management’s attention were found.

Conclusion

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

Statement of Assurance

In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support a high level of assurance on the accuracy of the information in this report. The results 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. The results are applicable only to the processes examined. The evidence was gathered in compliance with Treasury Board Policy, Directives, and Standards on internal audit for the Government of Canada.

Original signed by:

Yves Vaillancourt, Chief Audit Executive, October 3, 2011

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, DFAIT’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:

• (a) Reconciliation of net cost of operations to current year authorities used; and,
• (b) Authorities provided and used.

Subsequent to the DAC meeting on July 20, 2011, the DAC members requested that management prepare Note 3 (c) (Reconciliation of net cash provided by Government to current year authorities used). Note 3 (c) was previously disclosed prior to the implementation of the revised TBAS 1.2 (DFAIT early adopted this revised TBAS for its 2010 Departmental Financial Statements; the revised TBAS is mandatory for all government departments and agencies as of April 1, 2010). The disclosure of Note 3 (c) is not mandatory under the revised TBAS; however, DFAIT elected to disclose this note to ensure transparency of its use of authorities. The 2011 total authorities used (as reported in Note 3 to the financial statements) were $2,705,137,000 and reconcile to DFAIT’s authorities’ disclosures in the 2010-11 Public Accounts of Canada.

2.0 Objectives

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

• detailed process description of how the reconciliations are performed including internal controls in place to ensure accuracy of the note;
• methodology used in the reconciliations and perform the following specified procedures regarding the accuracy and completeness of Note 3 and its preparation:
  • Corroborate amounts included in Note 3(a) to amounts disclosed within the Departmental Financial Statements;
  • Corroborate amounts included in Note 3(a) that are not distinctly disclosed within the Departmental Financial Statements to DFAIT’s P12-2 Trial Balance;
  • Corroborate amounts included in Note 3(b) to amounts reported in Public Accounts Submission - Form A (“Form A”);
  • Corroborate amounts included in Note 3(c) to amounts disclosed within the Departmental Financial Statements;
  • Corroborate amounts included in Note 3(c) that are not distinctly disclosed within the Departmental Financial Statements to DFAIT’s P12-2 Trial Balance.

3.0 Process Description

Detailed interviews were held with DFAIT’s Corporate Accounting (SMOC) staff in order to determine the process followed in the preparation of the Note 3 reconciliations. The auditor’s understanding is based primarily on interviews with DFAIT representatives and a review of selected documentation. The auditors did not test the design and implementation of internal controls and did not audit the underlying data supporting the amounts reported in Note 3 to the Departmental Financial Statements.

Preparation Process

In 2011, Note 3 information was compiled from the following documents:

• The unaudited financial statements: statements of operations, equity, financial position and cash flow;
• SMOC prepared Excel worksheets: trial balance details, segregated by Fund number and Financial Reporting Account (“FRA”) number;
• Public Accounts Submission - Form A - Summary of Source and Disposition of Authorities (Budgetary information);
• Allotment reports provided by the Treasury Board Secretariat;
• Integrated Management System (“IMS”) reports: authorities’ expenditures during the year; and,
• Intra-departmental e-mail correspondence.

The financial statements, including the notes, are prepared using an Excel worksheet designed by SMOC. The Excel template was upgraded during the year to a more sophisticated (i.e. automated) version. This new template enables SMOC to import the P12-2 trial balance text file into Excel, which then automatically organizes the information by Financial Reporting Account. The template uses prepopulated 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 SMOC. The “input sheet” is an Excel worksheet containing those items which do not appear in DFAIT’s trial balance (for example: authorities provided and lapsed authorities). Relevant items on the “input sheet” are recorded from Public Accounts Submission - Form A.

Note 3(c) was manually inputted in the Excel schedule based on the 2008 TBAS. The balances were extracted from the Financial Statements or, in some cases, directly from SAP.

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

3.1 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 DFAIT’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 SMOC staff has Financial Statement access – 7 people in total.

Internal controls implemented by management do not include a password on the financial statement worksheet; however, no DFAIT employee outside of the SMOC group (7 individuals) 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.

3.2 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:

• Terminology used: TBAS 1.2 suggests the term “Authorities”, while DFAIT uses the term “Appropriations” in the introduction of Note 3 and in the tables of Note 3(a) and 3(b); and,
• TBAS 1.2 suggests including a brief introductory paragraph explaining the purpose of the reconciliations. DFAIT includes this paragraph along with an additional paragraph detailing the causes of the variances in Note 3(a).

For the preparation of Note 3(c), management followed the presentation format that was outlined in the previous version of TBAS 1.2, as the revised TBAS does not include Note 3(c) in the Illustrative Financial Statement Package.

3.3 Description of Estimates and Professional Judgement 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.

Estimates are based on management’s assumptions and historical data prepared by SMOC; the auditors did not assess the appropriateness of the assumptions used in establishing the estimates.

Professional judgment used in the calculation of the allowance for bad debts 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. Useful lives selected by DFAIT are consistent with TBAS 3.1 (Tangible Capital Assets) guidelines.

4.0 Specified Procedures

The auditors performed the following five specified procedures in relation to the content of Note 3 to DFAIT’s 2011 Departmental Financial Statements:

1. Corroborate amounts included in Note 3(a) to amounts disclosed within the Departmental Financial Statements;
2. Corroborate amounts included in Note 3(a) that are not distinctly disclosed within the Departmental Financial Statements to DFAIT’s P12-2 Trial Balance; and
3. Corroborate amounts included in Note 3(b) to amounts reported in Form A.
4. Corroborate amounts included in Note 3(c) to amounts disclosed within the Departmental financial statements.
5. Corroborate amounts included in Note 3(c) that are not distinctly disclosed within the Departmental Financial Statements to DFAIT’s P12-2 trial balance.

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

4.1 Corroborate Amounts Included in Note 3(A) to Amounts Disclosed Within the Departmental Financial Statements.

The auditors corroborated amounts included in Note 3(a) to other amounts that are 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 corroborated include:

• Net cost of operations: $2,618 million
• Services provided without charge by other government departments: ($97 million)
• Amortization of tangible capital assets: ($92 million)
• Gain (loss) on disposal and writedown of tangible capital assets – net: $0.5 million
• Allowance for bad debt expense: ($1 million)
• Decrease (increase) in vacation pay and compensatory leave: $2 million
• Increase in accrued employee benefits: ($8 million)
• Acquisition of tangible capital assets: $150 million
• Decrease in prepaid expenses: ($10 million)
• Increase (decrease) in inventory held for re-sale: $2 million
• Increase (decrease) in consumable inventory: $1 million

No errors or discrepancies were noted.

4.2 Corroborate Amounts Included in Note 3(A) That Are Not Distinctly Disclosed Within the Departmental Financial Statements to DFAIT’s P12-2 Trial Balance

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

• Refunds of prior years’ expenditures; $14 million
• Revenue not available for spending (returned to Consolidated Revenue Fund): $175 million
• Decrease in accounts payable not affecting appropriations: $NIL
• Other: ($0.3 million)
• Spending of proceeds from the disposal of surplus assets: $0.7 million

No errors or discrepancies were noted for the elements above.

4.3 Corroborate Amounts Included in Note 3(B) to Amounts Reported in Public Accounts Submission Form A

Note 3 (b) reconciles the authorities provided and used by DFAIT; DFAIT reports on their authorities to the Receiver General in Form A, which is pre-populated by Treasury Board Secretariat. As such, it was necessary to examine Form A and Note 3(b) simultaneously to ensure that both the Financial Statements and the Receiver General submission contained identical information. DFAIT reported the following authorities in 2011:

• Vote 1 (Operating Expenditures): $1,693 million
• Vote 5 (Capital Expenditures): $234 million
• Vote 10 (Grants and Contributions): $964 million
• Vote 15 (Passport Canada – Capital expenditures): $NIL
• Statutory – Passport Canada: $133 million
• Statutory expenditures: $98 million
• Total lapsed authorities: $417 million, broken down as follows:
  • Authorities available for future years: $32 million
  • Lapsed authorities: Operating: $149 million
  • Lapsed authorities: Capital: $44 million
  • Lapsed authorities: Grants and Contributions: $107 million
  • Lapsed authorities: Passport Canada Capital expenditures: $85 million

No errors or discrepancies were noted.

4.4 Corroborate Amounts Included in Note 3(C) to Amounts Disclosed Within the Departmental Financial Statements

The auditors corroborated amounts included in Note 3(c) to other amounts that are 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 corroborated include:

• Net cash provided by Government: $2,538 million
• Proceeds from disposal of tangible capital assets: $14 million
• Decrease (increase) in accounts receivable and advances: ($20 million)
• Increase (decrease) in accounts payable and accrued liabilities: $34 million
• Increase (decrease) in deferred revenue: $0.2 million

No errors or discrepancies were noted.

4.5 Corroborate Amounts Included in Note 3(C) that are Not Distinctly Disclosed Within the Departmental Financial Statements to DFAIT’S P12-2 Trial Balance

The following elements included in the Note 3(c) reconciliation could not be traced to the Departmental Financial Statements and, therefore, additional supporting information was obtained from DFAIT staff:

• Revenue not available for spending: $125 million
• Refunds of prior years’ expenditures: $14 million
• Other adjustments: ($0.7 million)

No errors or discrepancies were noted.

5.0 Overall Results, Observations and Recommendations

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, DFAIT’s P12-2 Trial Balance, and/or Form A;
• Note 3 is in accordance with the disclosure requirements of TBAS 1.2;
• there were no discrepancies identified in the preparation and disclosures of Note 3 to the Departmental Financial Statements; and
• no areas for improvement to bring to management’s attention were found.

6.0 Conclusion

As result of applying the specified procedures noted, the auditors found no exceptions. However, these procedures do not constitute an audit of DFAIT’s Note 3 to the Departmental financial statements, and therefore the auditors did not express an opinion on this Note.

Appendix A - Note 3 to the Financial Statements