Specified Procedures on the Departmental Financial Statements for FY 2012-13

Foreign Affairs and International Trade Canada
Office of Audit, Evaluation and Inspection

August 2013

Executive Summary

Each year, the Office of the Audit, Evaluation and Inspection undertakes detailed audit work on specified areas of the Departmental Financial Statements. In the past two years, specified audit procedures were carried out in the following areas: Canada Based Staff (CBS) Payroll, Transfer Payments, Tangible Capital Assets, Locally Engaged Staff (LES) Salary, Pension and Severance payments as well as Severance Liabilities.

This year, specified audit procedures were carried out on four revenue streams reported under three program activities in the departmental financial statements:

• Fees collected from consular services and specialized consular services;
• Participation fees collected from foreign applicants under the International Experience Canada Program;
• Import and export permit fees; and,
• Fees collected from the trade fairs, missions and other international development services.

Why is this important?

Departmental Financial Statements are a principal tool for accountability to Parliament. Ensuring the reliability of the information contained within the statements supports sound stewardship.

In previous years, the specified procedures focused on expenses. This year, the focus was on revenues. To fulfill Department of Foreign Affairs and International Trade’s (DFAIT) mandate, DFAIT is authorized to collect service fees through various regulations and Order in Councils. DFAIT reported approximately $486 million in revenues from the sale of goods and services in the FY 2012-13 Departmental Financial Statements.

The complexity of billing, collecting, and recording revenues from different lines of services posed a high risk to accurate reporting in the Departmental Financial Statements. Specifically, the following factors were noted:

• Fees are paid through different payment options, such as, cash, certified cheques, credit cards or direct bank transfers. Fees are collected and recorded in both missions abroad and at headquarters;
• Revenue transactions are either manually recorded in IMS or automatically transferred into IMS through system interfaces such as the Export and Import Controls System (EICS) interface; and,
• Revenues are reported by Program Activity and by major type in the segmented information of the departmental financial statements.

What did we examine?

The auditors carried out specified procedures to:

• Gain a high level understanding of the roles and responsibilities, policies, procedures and controls in place;
• Perform analytical procedures to assess the reasonableness of the revenue reported; and,
• Conduct tests of details on transactions recorded in IMS.

This audit covered four revenue streams reported under three program activities:

What did we find?

As a result of performing specified procedures, a number of issues need to be addressed:

1. Consular revenue, Passport Revenue and IEC revenue are recognized and reported on a cash basis. This revenue recognition practice is contrary to the revenue recognition policy stated in the Departmental Financial Statements - Note 2 Summary of Significant Accounting Policies. This note stated that revenues from regulatory fees are recognized based on service provided in the year, and deferred revenue was recorded for funds received but service not yet rendered. There was no reported revenue from trade fairs, missions and other services in the Departmental Financial Statements. Participation fees from trade fairs, missions and other international development services were not properly accounted for in DFAIT’s financial system (IMS). The auditors were unable to accurately assess the full quantitative impact on the financial statements due to time, resource and information restrictions. Partial analysis, however, indicated approximately $5.34 million in participation fees were collected from various trade events in FY2012-13.
2. Year-end procedures related to receipt of public money were not properly followed. Some funds received at year-end were not recorded in the proper period. In one instance, the auditors identified $1.11 million of IEC deposits received in the month of February and March 2013, but not recorded in FY2012-13.
3. Departmental Year-end Procedures for FY2012-13 did not include requirements for deferred revenue (unearned revenue) set-up at year-end to account for money received but service not yet rendered. As a result, there is no year-end deferred revenue (unearned revenue) set up in FY2012-13 for revenue recognized on a cash basis, such as, consular revenue, passport revenue and IEC revenue.
4. Several control weaknesses were noted over the current Consular and IEC revenue reporting processes, recommendations were made for improvements.

Conclusion

The auditors observed inconsistent practices with respect to revenue recognition. The auditors recommend that Note 2 Summary of Significant Accounting Policies on Revenues be amended to reflect the current revenue recognition practices of Consular, Passport and IEC revenue.

Additionally, using the accrual basis of accounting is mandatory according to Treasury Board Accounting Standard 1.2 - Departmental and Agency Financial Statements. Therefore, year-end procedures must be established to recognize deferred revenue and accrued revenue in the future.

Overall, in the auditor’s performance of specified procedures over revenues reported, the audit found that revenues were understated by a total of $6.45 million. Using a materiality threshold of $9 million, or 2% of total revenues, the auditors believe that this amount does not have a material impact on the overall reliability of the Departmental Financial Statements.

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, Inspector General and Chief Audit Executive

1.0 Observations

1.1 Revenue from Consular and Specialized Services

1.1.1 High-level understanding of processes and controls

Canadian consular services are supported by a number of fees paid by the travelling public. There are two regulations in this regard: Consular Services Fees Regulations and Consular Fees (Specialized Services) Regulations.

According to the Consular Services Fees Regulations, there is a $25 CAD consular service fee levied for all adult travel documents issued including passports, certificates of identity and refugee travel documents.  This $25 consular fee is charged and collected as part of the application fee when the request for the document is made. Therefore, the application fee for an adult travel document includes two parts: the $25 consular fee reported by DFAIT as consular service revenue and the remaining (e.g. $62 passport fee) recognized and reported as passport revenue by Passport Canada (PPT).

Specialized consular service fees are levied for notarial, fund transfer and other services. This applies to the specialized services provided to Canadian citizens at mission abroad by consular staff. Revenue collected from these specialized services is reported as the department’s net-voted revenue.

At missions abroad, DFAIT consular officers provide consular services to Canadians living and travelling abroad.  In FY2012-13, there was $3.04 million in consular service revenue reported for applications for adult travel documents. In addition, missions abroad generated $3.24 million in specialized service fees for the provision of legal, notary and other services.

Audit work on the Audit of Revenue and Cash Handling Controls addressed issues related to consular revenue processes and controls at missions abroad.

Approximately 94% of total consular service fees are collected through PPT’s service locations for applications made within Canada. When PPT receives an application for an adult travel document, a file is opened in the Passport Management System (PPT-IRIS). There is an interface between the PPT- IRIS and Passport Canada’s finance system (PPT-IMS) that automatically downloads the accounting transactions nightly into PPT -IMS and separates the application fee into two parts: passport fee ($62) and consular fee ($25). The $25 consular fee is recorded as PPT’s accounts payable to DFAIT in PPT’s General Ledger account.

On a monthly basis, PPT settles the account payable based on the account balance. PPT finance staff has access to DFAIT-IMS system and they post consular revenue entries into DFAIT’s IMS on behalf of DFAIT.

Based on the understanding of current consular revenue reporting process, the auditors noted two areas of concern:

For the consular revenue collected through PPT, DFAIT neither recorded nor performed any validation of the revenue reported. Therefore, DFAIT has no internal control to prevent or detect a significant error over financial reporting in this regard.

Consular revenue represents over 50% of DFAIT’s total revenue and it is DFAIT’s responsibility to properly record and report consular revenue.

The current practice allows PPT finance staff access to DFAIT-IMS system and to post revenue entries; these transactions are not reviewed by DFAIT, and no supporting documentation is requested by DFAIT to substantiate the amount.

Passport Canada operates on a revolving fund basis and its financial statements are subject to an external audit each year.  This might reduce, to some extent, the risk of material error. However, DFAIT cannot rely on another organization to fulfil its reporting responsibilities.

This control weakness was identified by the Finance Branch (SMO) in its revenue design effectiveness report and two management actions were developed to be implemented in FY2013-14. However, given the transfer of PPT to Citizenship and Immigration Canada (CIC), DFAIT will need to design new controls over the consular revenue process.

In the auditor’s opinion, DFAIT should be in charge of recording consular revenue entries in DFAIT-IMS, develop an agreement with CIC on the standard financial procedures and request proper supporting documentation from PPT to ensure that consular revenue collected through PPT is properly recorded and reported.

Revenues from Consular Fees are not recognized on an accrual basis

As with the passport service fee, revenues stemming from the consular service fees are recognized upon receipt of payment and verification of applications for completeness. These fees are charged for service of a regulatory nature and recorded as revenues when payments were received.

A consular service fee is charged for the issuance all adult travel documents. This fee is used to cover the cost of potential consular services for Canadians travelling abroad. The Consular Service Regulations indicate that this fee is for a travel document that is issued and will be refunded if a travel document (such as a passport) is refused.

DFAIT’s Accounting Manual indicates that revenues should be accounted for in the period in which the transactions or events giving rise to the revenues occurred. For example, user fees are recorded in the period when the goods or services are provided, sales when the sales are made and revenue from cost sharing arrangements when the costs are incurred to earn that revenue.

In the auditor’s opinion revenue should be recognized after issuance of the travel document. At this point, DFAIT is obligated to provide consular services and the service fee is no longer refundable.

Departmental year-end procedures for FY2012-13 did not provide specific instructions and requirements regarding deferred revenue (unearned revenue) set-up at year-end to account for money received but service not yet rendered. Additionally, in FY2012-13, the auditors confirmed with PPT that there was no process to estimate and set up deferred revenue (unearned revenue) for consular revenue and passport revenue.

The basis of accounting on revenue recognition has not been properly reflected in the Departmental Financial Statements - Note 2 Summary of Significant Accounting Policies.

In the prior years and current Departmental Financial Statements, the Note 2 Summary of Significant Accounting Policies - Revenues states that:

• “Revenues from regulatory fees are recognized in the accounts based on the services provided in the year.
• Funds that have been received are recorded as deferred revenue, provided the Department has an obligation to other parties for the provision of goods, services or the use of assets in the future. ”

In the auditor’s opinion, the above revenue recognition policy statement is contrary with both the Passport Revenue and Consular Revenue recognition practice.

This observation is further supported by Note 2 of Passport Canada’s Audited Financial Statements which states:

The basis of accounting used in these financial statements differs from Canadian Generally Accepted Accounting Principles because:

1. (a) revenues from passport service request fees are recognized upon receipt of payment and verification of an application for completeness as stated in the Regulations prescribing fees for passport services; and,

Therefore, Note 2 to Financial Statements - Summary of Significant Accounting Policies should be revised to reflect the basis of revenue recognition for both Passport and Consular revenue.

1.1.2 Analytical Procedures of Consular revenue reported

Reported revenue from Consular Services and Emergency Management in FY2012-13 totalled $107.92 million, of which $104.68 million is the consular service fees collected from the issuance of adult travel documents, and $3.24 million is net-voted revenue on specialized service fees for the provision of legal, notary and other services.

The auditors conducted revenue sub-category analysis and performed two forms of analytical procedures to assess the reasonableness of the total amount reported:

• Comparison of the consular revenue reported in the prior year by sub-category, i.e. consular services fee versus specialized services fees; geographic (fund center) revenue analysis within revenue sub-category; and
• Predictive analysis to assess the reasonableness of consular revenue reported.

Total revenue reported from consular services in FY2012-13 was $107.92 million. The total revenue reported in FY2011-12 was $101.05 million. This represents an increase of $6.86 million or 6.8%. This increase was further identified as:

• $7.17 million increase in Consular Services fees, and
• $0.31 million decrease in Specialized Services fees

For the $7.17 million increase of consular service revenue, the auditors conducted revenue analysis by Fund Center. The bulk of this increase ($7.12 million) stemmed from an increase in consular service fees collected through PPT. This amount ($7.12 million) surge could be explained by the increase of 288,000 applications in PPT domestic issuing offices.

To assess the completeness of total consular service fees reported, the auditors requested the adult travel document application data from Passport Canada’s Passport Management System (IRIS) to conduct predictive analysis.

In FY2012-13, a total of 4,210,851 adult travel document applications were received, based on the rate of $25 consular fee per adult travel document, the auditors expected a total of $105.27 million in consular revenue. Comparing this expected revenue amount with the reported amount (actual amount) of $104.68 million, the difference is $0.59 million. This difference can be explained by two main factors:

• $25 consular fee refunds to the rejected applicants; and
• Passports issued free of charge due to various reasons such as passport lost through the mail, errors made by Passport Canada including the wrong information in the passport, etc.,

Based on the above analytical procedures, the auditors found no reason to believe that the regulatory fees reported from consular services and specialized services are materially misstated.

1.1.3 Tests of details

In addition to the analytical procedures, the auditors also performed limited sample testing. The purpose was to assess whether revenue transactions were valid, fees were charged in compliance with the fee regulations, recorded at the proper amount and in the proper period(i.e. cut-off testing).

Given that 94% of total consular revenue is collected through PPT, we selected four transactions out of a total 17 IMS transactions in FY2012-13 posted by the PPT finance team. In addition, associated with IEC revenue testing, the auditors also selected 11 samples from four missions with a specific focus to test year-end cut-off procedures.

In the samples tested, the auditors noted that 3 out of 4 missions selected had year-end cut-off issues; consular revenue collected in February and March 2013 was recorded as revenue for FY2013-14 instead of FY2012-13. This amount has minimal impact on the overall financial statements. It did, however, support the audit observation in the Audit of Revenue and Cash Handling Controls that there is limited awareness of the importance of year-end procedures to ensure revenues are recorded in the proper period.

Except as noted above, the auditors were satisfied that the transactions tested were appropriately recorded in DFAIT’s financial records.

1.2 Revenue from International Experience Canada

1.2.1 High-level understanding of processes and controls

International Experience Canada (IEC) is a program established to promote reciprocal international cultural exchanges through travel, life and work experience between Canadian and international youth based on bilateral agreements. As at March 31, 2013, IEC had bilateral agreements with 32 countries.

According to the Order-in-Council JUS-609929, any IEC applicant who applies to enter Canada under the IEC program shall, if the application is approved, pay a participation fee of $150 Canadian. IEC is one of DFAIT’s net-voted activities. The participation fees collected are used to offset the cost of administration of the program, such as the cost of assessment of IEC eligibility by DFAIT and admissibility by Citizenship and Immigration Canada (CIC). The IEC program is operated on a full cost recovery basis.

IEC application processing involves two stages and two departments: DFAIT and CIC. DFAIT is responsible for receiving and managing IEC applications, assessing the application for completeness and program eligibility, collecting and managing participation fees and communicating with applicants.

Once applicants meet the DFAIT-IEC eligibility criteria, the applications are then passed to CIC for their admissibility review. If applicants are accepted by CIC, a letter of introduction would be issued to applicants. This letter of introduction is the critical step in the process, once it is issued, participants can no longer withdraw their application and receive a refund.

The auditors interviewed the IEC program group (GLEE) at headquarters, and made inquiries to missions finance staff to gain an understanding of the roles and responsibilities, systems used, processes followed and controls in place for the collection of participation fees and the recognition and recording of revenues.

Of the 32 countries, as at March 31, 2013, there were 16 countries using the Kompass online application system. DFAIT Headquarters processed 6 countries’ application packages while the other 10 countries’ applications were processed at various mission locations. The remaining 16 countries used paper application forms submitted through the mail, these applications were processed locally by missions using a standalone system.

Participation fees are collected and processed through the mission/hub mission of the applicant’s country of citizenship. It is up to the mission to determine the payment options and when applicants are requested to pay. At the time of the audit, 24 out of 32 countries requested participation fees paid through electronic bank transfer and eight countries used non-negotiable financial instruments such as money order or certified cheques. Participation fees were collected at different application stages in different missions. For example, participation fees might be requested at the time when the applicant submits their application. In other countries, however, applicants are requested to pay upon receiving their letter of conditional acceptance which indicated that DFAIT has completed the IEC eligibility assessment and they meet DFAIT eligibility requirements. These inconsistencies had an impact on the revenue recognition and recording.

The IEC program has developed Standard Operating Procedures (SOP) in an effort to standardize procedures to manage the finances and reporting. However, based on the interviews with the program group and information received from seven missions, there are some concerns noted over IEC revenue recognition and recording in IMS.

Revenue from IEC participation fees was recognized upon receipt of payment rather than based on the service rendered.

In most missions, participation fees were recorded and recognized by mission finance upon fees received in the mission bank account. Participation fees were requested and recorded at different application stages in different missions. The auditors observed inconsistent practices, such as:

• In some missions, IEC payment was requested and collected at the time when the applicant submitted their application.
• In other missions, IEC payment was requested after verification of applications for IEC eligibility but before sending to CIC for admissibility assessment.
• In one case, the auditors noted that, certified cheques were required at the time of application. These cheques were not forwarded to the Mission’s finance until the application passed the two- stage assessment processes - DFAIT’s IEC eligibility assessment and CIC’s admissibility assessment.

These inconsistent practices lead to inconsistent revenue recognition and recording in DFAIT’s financial system.

In most missions, the IEC program manager did not review IMS transactions and there was no periodic reconciliation of IMS revenue with the number of applications.

Of the 32 countries, 24 collected participation fees through direct bank transfer. Participation fees are directly paid to mission’s bank account, and IEC revenues are recorded in IMS by Mission Finance based on deposits made to the mission’s bank account.

Given the fact that there is no separate IEC bank account in most missions, there is a high risk that IEC deposits could be mixed with other types of deposits and IEC deposits are not properly accounted for in IMS. The auditors observed variances/errors incurred in the detailed testing.

Therefore, to ensure participation fee payments are properly recorded and reported, it is a key control that IEC program staff review IMS transactions to verify the accuracy of the amount recorded, and perform periodic reconciliation of IMS revenue with the number of applications. However, only one mission indicated that the IEC program manager reviews and signs off monthly IMS IEC revenue records.

IEC deposits were not recorded in IMS on a timely basis, and specific financial coding requirements in the Standard Operating Procedures were not properly followed making it difficult for the program to properly forecast and budget.

Standard Operating Procedures (SOP) requires IEC deposits to be recorded on a weekly basis. In the tests of details, the auditors observed that, in a hub mission (London), which processes over 20% of total IEC revenue, IEC deposits were accumulated for several months before being recorded in IMS.

IEC revenue is re-spendable. The IMS IEC revenue record is the base for the program to forecast and budget its program spending, therefore, timely recording of IEC revenue in IMS is critical for the program to properly manage its resources.

In addition, given that IEC revenue is net-voted revenue, SOP required a special financial coding (IMS text field information) be followed when recording IEC revenue in IMS. However, this requirement was not properly followed by many missions. Without properly coded IMS field information, it is difficult to identify the revenue collection source, reconcile funds collected with applications and conduct meaningful financial analysis and program monitoring.

The auditors recognize that the IEC program will be transferred to CIC in September 2013. In addition, the IEC program is in the process of rolling-out the Kompass on-line system and credit card payment solution (MOPS) to all participating countries. Therefore, the IEC revenue reporting process will undergo significant changes. These changes may address the identified control weaknesses. However, until the Kompass and MOPS are fully implemented, program management and finance should address these control weaknesses to ensure that IEC revenue is properly recorded and reported.

1.2.2 Analytical Procedures of Participation Fees Reported

The total reported IEC revenue in IMS from participation fees for fiscal year 2012-13 was $10.42 million. The auditors performed predictive analysis to assess the reasonableness of the $10.42 million IEC revenue reported.

Given the fact that participation fees were recognized and recorded in IMS at different processing stages in different missions, the auditors used data from both applications received and applications pre-approved to determine the expected IEC revenue range.

According to the IEC program, in FY2012-13, 87,823 applications were received and 71,478 applications were assessed as pre-qualified and sent to CIC. To apply this application volume with a rate of $150 CAD per application, the expected IEC revenue in FY2012-13 should be in the range of $10.72 million to $13.17 million.

However, given the consideration of the missions who requested and recorded IEC payment only after participants passed the IEC eligibility assessment, the expected IEC revenue range should be between $10.72 million and $11.60 million.

Comparing the expected IEC revenue range to the actual reported $10.42 million, the analysis indicated that the IEC revenues reported are understated. The understated amount could be from $0.29 million to $1.18 million. This understated amount, in large part, could be explained by the following findings observed through substantive testing:

• IEC deposits were not recorded in the proper period. The auditors noted that $1.11 million IEC fees deposited to the mission bank account in February and March, 2013, were not recorded in IMS in FY2012-13.
• IEC refund transactions, related to approximately 220 rejected and/or withdrawal applications ($0.03 million), were not recorded in IMS as at March 31, 2013.

Based on the above analytical procedures, the auditors believe that the reported amount of $10.42 million IEC revenue was understated if revenue was recognized on a cash basis. However, this understated amount will not have a material impact on the overall departmental financial statements.

1.2.3 Tests of Details

The auditors performed tests of details on IEC revenue recorded in the general ledger. The purpose was to assess whether revenue transactions were valid, recorded at the proper amount and recorded in the proper period, as well as to determine if refund transactions were properly authorized.

The auditors selected a total of 64 IEC transactions from 7 missions. These 7 missions were selected based on three factors: revenue size, application system used (paper application vs. on-line application), and payment options (direct bank transfer vs. non-negotiable financial instruments).

Given issues raised in the samples selected, the auditors conducted further analysis for IEC revenue recorded by one mission to assess the amount of unrecorded IEC deposits at year-end, and further validated the amount assessed.

This substantive testing noted that:

• $1.11 million in IEC deposits in February and March 2013 in the missions’ bank account were not recorded and accounted in FY2012/13.
• 220 rejected and/or withdrawn applications ($0.03 million CAD) had not been refunded or accrued in IMS as at March 31, 2013

Except as noted above, the auditors were satisfied that the transactions tested were recorded accurately in DFAIT’s financial records. In the auditors’ opinion, there is no material impact on the overall financial statements.

1.3 Revenue from Import and Export Permit fees

1.3.1 High-level understanding of processes and controls

The import/export revenue activities are derived from DFAIT’s authority on the administration of the Export and Import Permits Act. The Act delegates DFAIT the authority to grant or deny applications for import or export permits for the products listed in the Import/Export Control List.

According to the Export and Import Permits and Certificates Fees Order and Softwood Lumber Products Export Permit Fees Regulations, import/export permits issued for certain product groups are subject to permit fees either based on the permit value or based on each application, while permit applications for other products are made free of charge.

Combined with the audit work in the Audit of Revenue and Cash Handling Controls, the auditors interviewed the staff of the Trade Controls and Technical Barriers Bureau (TID) and Financial Operations (SMFR) and reviewed system documentation to gain an understanding of the roles and responsibilities, processes followed and controls in place over permit fees recording, billing and collection.

The Trade Controls and Technical Barriers Bureau (TID) are responsible for issuing permits and certificates. Export and Import Controls System (EICS) is the main application system to support the application, approval, and processing of import/export permits. Once a permit was approved and issued, EICS is programmed to decide whether permit fees applies, then performs the calculation of applicable permit fees.

On a daily basis, EICS automatically transmits billing transaction data to DFAIT’s Integrated Management System (IMS) through the IMS-EICS interface. SMFR performs the file loading. Approximately 95% of permit revenue invoices are posted through this interface, and transactions are automatically recorded in the revenue general ledgers, and Accounts Receivable Ledger and sub-ledgers.

The remaining 5% of revenue transactions are manually entered by SMFR, which are permit fees associated with export permits issued through the Export Controls On-Line system (EXCOL). At the beginning of each month, SMFR receives a report for permits issued in the previous month and these transactions are recorded in IMS. The auditors were advised that TID is in the development of EICS-II, which will eliminate this manual invoice.

On a monthly basis, SMFR prints all the statements of accounts from IMS for each customer and requests payment. Customer payments are paid to DFAIT’s cashier office, and then daily cash receipts with supporting information are forwarded to SMFR for posting payment entries into the related customer account in IMS.

As indicated in the Audit of Revenue and Cash Handling Controls, systems and processes are in place to account for import/export fees, and duties are properly segregated over permit issuance, permit fees billing, recording and collection. Any potential areas for improvement were addressed in the audit report of Revenue and Cash Handling Controls.

1.3.2 Analytical Procedures of Permit fees reported

Total Sales of Goods and Services from International Commerce reported by management totalled $2.58 million, of which $2.56 million are the regulatory fees collected for the issuance of export and import permits.

The auditors conducted revenue sub-category analysis and performed two forms of analytical procedures to assess the reasonableness of the total amount reported.

• Comparison of the fees collected to prior year permit fees collected by sub-category.
• Predictive analysis using operational data on permit issuance by permit production group categories with fees applied to assess the reasonableness of revenue reported.

Total reported regulatory fees collected from the issuance of permits in FY 2012-13 were $2.56 million. The total revenue reported in FY2011-12 was $2.50 million. This represents an increase of $0.06 million. This increase is due to the increase of permit fees collected from permits issued on softwood lumber.

To assess the completeness of total permit fees reported, the auditors requested that TID provide data on the permits issued from EICS and EXCOL to estimate revenue based on the volume of permits issued. By applying the number of permits issued with the rate, the estimated revenue was $2.24 million. Comparing this expected amount with the actual amount of $2.56 million reported in IMS, resulted in a difference of $0.22 million. Discussion with TID indicated that the current version of EICS made it difficult to generate operational data. Their opinion was that the operational data was not accurate enough to conduct reasonable analysis.

Based on the above analytical procedures, the auditors found no reason to believe that the reported regulatory fees collected from the issuance of import/export permits are materially misstated.

1.3.3 Tests of details

Combined with the understanding of internal controls and analytical procedures, the auditors performed limited sample testing. The purpose of this was to assess whether revenue transactions were valid, rates charged were in compliance with the fee regulations/orders, recorded at the proper amount and recorded in the proper period.

The auditors randomly selected 15 transactions from different types of transactions: four samples from credit memos, three samples from manually entered sales transactions, and eight samples from transactions posted through EICS interface, including both Softwood Lumber export permits and other import/export permits issued.

In addition, given the understanding the revenue recording process, the auditors assessed that transactions around the cut-off date represent a higher risk. The auditors scanned all revenue transactions recorded at year-end (March and April 2013) to assess whether year-end procedures were properly followed to ensure transactions were recorded in the proper period.

From the above substantive testing, the auditors noted the following:

There were $25,036 in permit fees associated with permits issued in the month of March, 2013, which should be recorded as FY2012-13 revenue. However, these transactions were recorded in April 2013 in IMS as FY2013-14 revenue. This amount represents approximately 1% of total import/export permit fees reported in FY2012-13.

Except as noted above, the auditors were satisfied that the transactions tested were appropriately recorded in DFAIT’s financial records. In the auditors’ opinion, there is no material impact on the overall financial statements.

1.4 Revenue from the Trade Fairs, Missions and Other International Business Development Services

1.4.1 High-level understanding of processes and controls

The audit work on Revenue and Cash Handling Controls found that DFAIT did not properly account for revenue collected from trade events. Participation fees from various trade events were recorded by Specified Purpose Accounts (SPA) in IMS instead of Revenue for net-voted activities.

The process and control issues related to this revenue stream have been addressed in the Audit of Revenue and Cash Handling Controls. This audit only assesses its impact on FY2012-13 Departmental Financial Statements.

By using Specified Purpose Accounts (SPA), funds received are accounted as a liability and related disbursements are recorded to directly offset the liability. Additionally, revenues from trade fairs and missions are recorded to a general SPA account that includes funds collected from normal SPA activities. Therefore, recording participation fees by Specified Purpose Accounts instead of a net-voted revenue would have the following impacts on Departmental Financial Statements:

• Understating both Revenues and Expenses reported on the Financial Statements; and,
• Unable to accurately determine and report total amount of funds collection for trade fairs and missions; and total expenditures related to these events.

1.4.2 Analytical Procedures to Assess Funds Collected in FY2012-13

The auditors confirmed that there was no reported revenue from trade fair, missions and other services in the Departmental Financial Statements for FY 2010-11, FY2011-12 and FY2012-13.

The auditors were advised that there were two SPA GL accounts used to record these types of fund collections. Given the accounting nature of SPA account (i.e. recording funds collected (in) and spending (out) by financial commitments, it is very difficult to separate funds collected on trade fairs and missions activities from other SPA transactions, and further to determine the total funds collected and total expenditures.

Given the timing, resource and information constraints, the auditors were unable to fully assess the quantitative impact on the financial statements.

The auditors did however; conduct a preliminary assessment of the impact on the financial statements. The auditors reviewed SPA HQ GL24100 RS tracking sheet developed by HQ Finance, and noted a total of $5.34 million fees collected related to three types of trade events organized by DFAIT:

• $0.36 million in participation fees were collected in FY2012-13 for six minister-led missions organized by Canada Trade Missions Bureau.
• $3.18 million in participation fees were collected from various Education Fairs in FY2012-13. Missions organize education fair events and activities to promote Canada’s Education Brand and to attract students to study in Canada. Each fair invites various Canadian schools and/or institutes to participate and fees are collected to cover the fair costs;
• $1.80 million was collected for various projects named trade fairs, missions, shows and/or conferences from participating companies or provinces. The auditors were advised that missions abroad organize trade fairs/shows, missions would contract with a third party to set up the spaces/ booths, companies/exhibitors paid a fee to the mission directly or indirectly to be used to cover trade show booth or other costs of the events.

In all three arrangements, the participating companies received “goods and services” in return for money provided. The department collected funds to offset the cost of the specified trade events, with any shortfall covered by appropriations. Therefore, these funds collected constitute revenue from net-voted activities where revenue is generated to offset operating costs. In the auditors’ opinion, funds collected should be recognized and reported as revenue in the Departmental Financial Statements.

The audit team was unable to fully assess the impact on the financial statements as revenues are recorded to SPAs both at HQ and at Missions. As indicated above, the auditor’s preliminary analysis identified $5.34 million in unrecorded revenue. This amount is within the $9.2 million materiality threshold set up for this audit. Therefore, based on analysis done to date, this amount will not have a material impact on the reliability of reported revenues in the Departmental Financial Statements.

2.0 Recommendations

As a result of performing specified procedures, potential areas for improvement were identified. The following summarizes the recommendations in that regard.

• Corporate Finance, Planning and System Bureau (SMD) should revise Note 2 Summary of Significant Accounting Policies - Revenue in the Departmental Financial Statements to properly reflect the basis of accounting on passport, consular and IEC revenue recognition.
• Corporate Finance, Planning and System Bureau (SMD), in the next fiscal year, should set up year-end procedures to estimate and record accrued revenues and deferred revenues at year-end.
• Corporate Finance, Planning and System Bureau (SMD) should develop an agreement with CIC on the standard financial procedures and ensure that DFAIT employees are recording consular revenues in DFAIT-IMS with adequate supporting documentation.
• The IEC program (GLEE) should continue to roll-out the on-line application system (Kompass) and the Mission Online Payment System (MOPS) to develop consistency over the application process, the participation payment requirement, and IEC revenue recognition.
• IEC program (GLEE) should require that IEC Program Managers review and sign-off on IMS- IEC revenue records on a monthly basis to reconcile the numbers of the applications with the participation fee recorded in IMS.

The management response and action plan to address these recommendations is contained in Appendix A.

3.0 Conclusion

The auditors observed inconsistent practices with respect to revenue recognition. The auditors recommend that Note 2 Summary of Significant Accounting Policies on Revenues be amended to reflect the current revenue recognition practices of Consular, Passport and IEC revenue.

Additionally, using the accrual basis of accounting is mandatory according to Treasury Board Accounting Standard 1.2 - Departmental and Agency Financial Statements. Therefore, year-end procedures must be established to recognize deferred revenue and accrued revenue in the future.

Overall, in the auditor’s performance of specified procedures over revenues reported, the audit found that revenues were understated by a total of $6.45 million. Using a materiality threshold of $9 million or 2% of total revenues, the auditors believe that this amount does not have a material impact on the overall reliability of the Departmental Financial Statements.

Appendix A: Management Action Plan

1. Audit Recommendation: Corporate Finance, Planning and System Bureau (SMD) should revise Note 2 Summary of Significant Accounting Policies - Revenue in the Departmental Financial Statements to properly reflect the basis of accounting on passport, consular and IEC revenue recognition.

Management Action: Note 2 discloses the accounting policies of the department. It is DFAIT’s policy to account for revenues on an accrual basis.

For Passport Canada revenue, we have added the following to Note 2: Passport Canada recognizes revenue from passport fees upon receipt of payment and verification of the passport application for completeness.

Responsible: Financial Policy and Controls (SMO)

Expected Completion Date: Complete

2. Audit Recommendation: Corporate Finance, Planning and System Bureau (SMD), in the next fiscal year, should set up year-end procedures to estimate and record accrued revenues and deferred revenues at year-end.

Management Action: An analysis will be performed to determine if the revenue amounts are material. If it is determined that such procedures are warranted, the year-end procedures for FY 2013-14 will be updated to record accrued and deferred revenues.

Responsible: Financial Operations (SMF)

Expected Completion Date: Complete

3. Audit Recommendation: Corporate Finance, Planning and System Bureau (SMD) should develop an agreement with CIC on the standard financial procedures and ensure that DFAIT employees are recording consular revenues in DFAIT-IMS with adequate supporting documentation.

Management Action: An agreement with CIC will be developed once the merge is completed.

Following the recommendation from the Policy on Internal Control review, SMF now has such a process in place with Passport Canada.

Responsible: SMD, SMF

Expected Completion Date: Complete

4. Audit Recommendation: The IEC program (GLEE) should continue to roll-out the on-line application system to develop consistency over the application process, the participation payment requirement, and IEC revenue recognition. 

Management Action: International Financial Projects Group (SMFB) in conjunction with GLEE will integrate Kompass to the Mission Online Payment Service (MOPS), this will enable the capacity of accepting credit card payment via online web channels. We recommend that the implementation be completed and effective before the next wave of applications. We also recommend that this be the only method of payment used for any online applications. This should address this recommendation if all applications are treated online.

Responsible: SMFB and GLEE

Expected Completion Date: Complete

5. Audit Recommendation: IEC program (GLEE) should require that IEC Program Managers review and sign-off on IMS- IEC revenue records on a monthly basis to reconcile the numbers of the applications with the participation fee recorded in IMS.

Management Action: GLEE will include in the IEC Standard Operating Procedure (SOP) the recommendation of the auditors and will request training on IMS for the IEC program managers. GLEE will reconcile every month the number of the applications with the participation fee recorded in IMS. IEC staff will also need to have access to IMS for all 32 missions.

Responsible: GLEE

Expected Completion Date: Complete