Western Economic Diversification Canada
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Observations and Recommendations

Management responsibility and controls

Criteria: It was expected that management has put in place measures of internal controls over financial reporting; and that internal controls were working effectively to ensure the integrity of periodic financial reporting.

To fulfill its accounting and reporting responsibilities, management has adopted the financial system called GX Financials, a shared software package used by about a dozen small departments in the federal government.

Management maintained an effective system of internal control that was designed to provide reasonable assurance that periodic financial reporting met the requirements of Treasury Board Accounting Standards 1.2 and 1.3. This was achieved mainly through documented processes, guidelines, and the training and development of staff. Transactions were properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation and policies.

The internal controls have been designed to mitigate the key risks in financial reporting to a reasonable level. The department has designed appropriate segregation of duties, oversight, reviews, proper delegation of authorities, adequate safeguarding of assets and reliable financial reporting of departmental programs.

We have conducted a number of prior internal audits to examine the effectiveness and adequacy of the department’s system of controls that impact the integrity of financial reporting. Results of those related audits were assessed and considered for the purposes of this audit.

Accounting policies, format and contents

Criteria: It was expected that the Chief Financial Officer has provided the Deputy Minister periodic departmental financial reporting information that met the form and content requirements of the Treasury Board.

For the period under audit, the system of internal controls enabled the Chief Financial Officer to prepare periodic financial reports using accounting principles and standards required by Treasury Board Accounting Standards 1.2 and 1.3. Corporate Finance maintains an ongoing dialogue with Treasury Board Secretariat officials to ensure the financial reports meet expected requirements.

The department produced the 2010-11 financial statements for the year ended March 31, 2011 and the quarterly financial reports starting in 2011-12. The statement and reports contained the financial position, financial results, risks and the significant changes with relevant information on departmental operations which met the format and content required by Treasury Board. Where necessary, management has followed Treasury Board guidelines to provide best estimates.

In one case tested, we examined an accounting estimate for the amount collectible from an outstanding account. In our professional judgement, the allowance for doubtful account was understated which resulted in an overstatement of receivables based upon the information that was available at the time of establishing the accounting estimate.

At March 31, 2011, capital assets were reported at a cost of $4.7 million, accumulated amortization at $2.3 million and net book value of $2.4 million. Compared to the total balance sheet assets of $271 million, this amount is relatively small in dollar terms. The nature of departmental business required very few operational items that met the asset capitalization criteria threshold of $10,000 or more.

Treasury Board Accounting Standard 3.1 directs that departments establish procedures that should be reviewed regularly to reflect required conditions for asset capitalization. There were no departmental capital asset guidelines in place. We found that some offices capitalized certain equipment while others did not even though the nature of asset was similar. For example, three video conference equipment units totalling over $17,000 were expensed even though each individual asset was considerably less than $10,000; software licenses under $400 were capitalized because they totaled $22,641; and leasehold improvements of $9,899 were capitalized despite being below the $10,000 threshold. Lack of the procedures advocated by Treasury Board Accounting Standards 3.1 and 3.1.1 could lead to inconsistencies in the treatment of identical assets.

The development of concise departmental capital asset procedures would help improve consistency in the accounting for capital assets. Periodic valuation, amortization of fixed assets, disposals, write-offs, and leases would be treated in a consistent manner appropriate to the nature of the capital asset and its use by the department.

We also noted that amortization rates adopted by the department were at the high end of the range provided by Treasury Board based on the nature of one particular asset. For example, video-conferencing equipment is being amortized over ten years, even though similar older equipment has been replaced in the past before they reached 5 years of age.

The cumulative total of all the above noted situations was not material enough to cause significant misstatement of the financial reports produced in the audit period.

Recommendation #1: The department should develop concise asset procedures in order to provide greater clarity and consistency to asset capitalization and amortization practices.

Attestation and Communication

Criteria: It was expected that a complete set of periodic financial reports were signed by the Deputy Minister and Chief Financial Officer after reviews and comments from Departmental Audit Committee; that the publication of reports was timely; and that the key elements of responsibility for the attestation were clear and understood.

During the audit period, the department produced a set of annual financial statements and several quarterly financial reports. All reports produced in the audit period were certified by the Deputy Minister and Chief Financial Officer and submitted as required by Treasury Board Accounting Standards 1.2 and 1.3. Executive Committee and Departmental Audit Committee presentations indicate that the reports were discussed and reviewed.

In coordinating financial information for departmental financial reporting, Corporate Finance developed an attestation template clarifying key elements in the financial reports that regions and branches were to submit to headquarters for financial reporting. There was an attestation checklist for Assistant Deputy Ministers and Financial Managers that explained what the officers were attesting to. Periodic budget forecast reports and financial statements were certified as reviewed against year to date expenditures and related financial information by appropriate responsible managers including all of the Assistant Deputy Ministers.

There was evidence that document reviews and reconciliations of documentation to support the integrity of financial reports were performed in all significant financial accounting reporting areas by the appropriate delegated authorities and officers. Adequate segregation of duties, organizational structures and assigned responsibilities were in place. Results of the audit confirmed key financial, operational and oversight controls were working; and accountability frameworks existed to safeguard the assets.

Certain attractive items that were below the $10,000 threshold were held in large quantities therefore representing significant expenditures overall. Not all of the regions had complete, reliable, and integrated information on asset management items for under $10,000, or were able to provide documentary evidence that periodic physical counts and tagging was reconciled to the financial accounting records. To enhance the existing internal controls over the safeguarding of assets, it would be prudent to perform such reconciliations for items that are at a higher risk of loss. 

The documented internal control system requires that at year end the Chief Financial Officer present departmental financial statements and notes for significant management estimates and judgments to the Departmental Audit Committee for review and discussion prior to recommendation to the Deputy Minister for approval and submission to the Treasury Board. Corporate Finance had to distribute the draft financial statements to the Departmental Audit Committee members electronically as the deadline for submission of the statements to the Treasury Board Secretariat fell in between the dates for the committee’s quarterly face to face meetings. For the same reason, the committee was only able to review the quarterly financial reports after the Deputy Minister had already approved them.

Recommendation #2:  The department should develop an appropriate asset management system to manage and reconcile attractive items below the $10,000 capitalization threshold.