Statement of management responsibility, including internal control over financial reporting (2012-2013)

Responsibility for the integrity and objectivity of the accompanying financial statements for the year ended March 31, 2013, and all information contained in these statements rests with the management of the Correctional Service Canada (CSC). These financial statements have been prepared by management using the Government's accounting policies, which are based on Canadian public sector accounting standards.

Management is responsible for the integrity and objectivity of the information in these financial statements. Some of the information in the financial statements is based on management's best estimates and judgment, and gives due consideration to materiality. To fulfill its accounting and reporting responsibilities, management maintains a set of accounts that provides a centralized record of CSC's financial transactions. Financial information submitted in the preparation of the Public Accounts of Canada, and included in the CSC's Departmental Performance Report, is consistent with these financial statements.

Management is also responsible for maintaining an effective system of internal control over financial reporting (ICFR) designed to provide reasonable assurance that financial information is reliable, that assets are safeguarded and that transactions are properly authorized and recorded in accordance with the Financial Administration Act and other applicable legislation, regulations, authorities and policies.

Management seeks to ensure the objectivity and integrity of data in its financial statements through careful selection, training, and development of qualified staff; through organizational arrangements that provide appropriate divisions of responsibility; through communication programs aimed at ensuring that regulations, policies, standards, and managerial authorities are understood throughout CSC and through conducting an annual risk-based assessment of the effectiveness of the system of ICFR.

The system of ICFR is designed to mitigate risks to a reasonable level based on an ongoing process to identify key risks, to assess effectiveness of associated key controls, and to make any necessary adjustments.

A risk-based assessment of the system of ICFR for the year ended March 31, 2013 was completed in accordance with the Treasury Board Policy on Internal Control and the results and action plans are summarized in the annex.

The effectiveness and adequacy of CSC's system of internal control is reviewed by the work of internal audit staff, who conduct periodic audits of different areas of CSC's operations, and by the Departmental Audit Committee, which oversees management's responsibilities for maintaining adequate control systems and the quality of financial reporting, and which recommends the financial statements to the Commissioner.

The financial statements of CSC have not been audited.

As at March 31

Contingent liabilities (note 11)
Contractual obligations (note 12)

The accompanying notes form an integral part of these financial statements.

For the Year Ended March 31

Segmented information (note 15)

The accompanying notes form an integral part of these financial statements

For the Year Ended March 31

The accompanying notes form an integral part of these financial statements.

For the Year Ended March 31

The accompanying notes form an integral part of these financial statements.

Notes to the Financial Statements (unaudited)

For the Year Ended March 31

The constitutional and legislative framework that guides the Correctional Service Canada (CSC) is set out by the Constitution Act 1982 and the Corrections and Conditional Release Act (CCRA).

CSC, as part of the criminal justice system and respecting the rule of law, contributes to public safety by actively encouraging and assisting offenders to become law-abiding citizens, while exercising reasonable, safe, secure and humane control. It delivers its mandate under four major program activities:

Custody: This program activity ensures that offenders are provided with reasonable, safe, secure and humane custody while serving their sentence. This program activity provides much of the day-to-day needs for offenders in custody including a wide range of activities that address health and safety issues (such as providing food, clothing, mental health services, and physical health care). It also includes security measures within institutions including drug interdiction, and appropriate control practices to prevent security incidents;

Correctional Interventions: This program activity, occurs in both institutions and communities, and is necessary to help bring positive changes in behaviour and to successfully reintegrate offenders. This program activity aims to address problems that are directly related to offenders' criminal behaviour and that interfere with their ability to function as law-abiding members of society. This program activity also includes CORCAN, a Special Operating Agency of Correctional Service Canada, that employs federal offenders as its workforce and, in doing so, provides them with working skills and working habits necessary to compete in the workforce once released from federal custody;

Community Supervision: This program activity ensures eligible offenders are safely reintegrated into communities through the provision of housing and health services where required, and staff supervision for the duration of the offenders sentence. The expected results for this program activity are offenders who are reintegrated into the community as law-abiding citizens while maintaining a level of supervision, which contributes to public safety;

Internal Services: Internal Services are groups of related activities and resources that are administered to support the needs of programs and other corporate obligations of the organization. These groups are: Management and Oversight Services; Communications Services; Legal Services; Human Resources Management Services; Financial Management Services; Information Management Services; Information Technology Services; Real Property Services; Materiel Services; Acquisition Services; and Travel and Other Administrative Services. Internal Services include only those activities and resources that are not provided specifically to a program.

These financial statements have been prepared using the Government's accounting policies stated below, which are based on Canadian public sector accounting standards. The presentation and results using the stated accounting policies do not result in any significant differences from Canadian public sector accounting standards.

Significant accounting policies are as follows:

a) Parliamentary authorities

CSC is financed by the Government of Canada through Parliamentary authorities. Financial reporting of authorities provided to CSC do not parallel financial reporting according to generally accepted accounting principles since authorities are primarily based on cash flow requirements. Consequently, items recognized in the Statement of Operations and Organizational Net Financial Position and in the Statement of Financial Position are not necessarily the same as those provided through authorities from Parliament. Note 3 provides a reconciliation between the bases of reporting. The planned results amounts in the Statement of Operations and Organizational Net Financial Position are the amounts reported in the future-oriented financial statements included in the 2012-13 Report on Plans and Priorities. The future-oriented financial statements for 2012-2013 were prepared prior to the adoption of the Treasury Board Accounting Standard 1.2 that requires departments disclose revenues net of non-respendable amounts and expenses net of those incurred on behalf of government. The future-oriented financial statements have been restated to reflect this change in presentation. The restatement resulted in a $5,543,000 increase in net costs of operations before government funding and transfers. In addition, the future-oriented financial statements have also been reclassified to conform to the current year presentation.

b) Consolidation

These consolidated financial statements include the accounts of the sub-entity that the Commissioner is accountable for, which is CSC's revolving fund, CORCAN. The accounts of this sub-entity have been consolidated with those of CSC, and all inter-organizational balances and transactions have been eliminated.

c) Net Cash Provided by Government

CSC operates within the Consolidated Revenue Fund (CRF), which is administered by the Receiver General for Canada. All cash received by CSC is deposited to the CRF and all cash disbursements made by CSC are paid from the CRF. The net cash provided by Government is the difference between all cash receipts and all cash disbursements including transactions between departments of the Government.

d) Due from the Consolidated Revenue Fund (CRF)

Amounts due from the CRF are the result of timing differences at year-end between when a transaction affects authorities and when it is processed through the CRF. Amounts due from the CRF represent the net amount of cash that CSC is entitled to draw from the CRF without further authorities to discharge its liabilities.

e) Revenues

• Funds received from external parties for specified purposes are recorded upon receipt as deferred revenue. These revenues are recognized in the period in which the services are rendered or goods are sold.
• 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 organization has an obligation to other parties for the provision of goods, services or the use of assets in the future.
• Other revenues are accounted for in the period in which the underlying transaction or event that gave rise to the revenue takes place.
• Revenues that are non-respendable are not available to discharge CSC's liabilities. While the Commissioner is expected to maintain accounting control, he or she has no authority regarding the disposition of non-respendable revenues. As a result, non-respendable revenues are considered to be earned on behalf of the Government of Canada and are therefore presented in reduction of the entity's gross revenues.

f) Expenses

Expenses are recorded on the accrual basis:

• Vacation pay and compensatory leave are accrued as the benefits are earned by employees under their respective terms of employment;
• Services provided without charge by other government departments for accommodation, employer contribution to the health and dental insurance plans, legal services and worker's compensation are recorded as operating expenses at their estimated cost;
• Transfer payments are recorded as expenses when authorization for the payment exists and the recipient has met the eligibility criteria or the entitlements established for the transfer payment program. In situations where payments do not form part of an existing program, transfer payments are recorded as expenses when the Government announces a decision to make a non-recurring transfer, provided the enabling legislation or authorization for payment receives parliamentary approval prior to the completion of the financial statements. Transfer payments that become repayable as a result of conditions specified in the contribution agreement that have come into being are recorded as a reduction to transfer payment expense and as a receivable.

g) Employee future benefits

• Pension benefits: Eligible employees participate in the Public Service Pension Plan, a multi-employer plan administered by the Government. CSC's contributions to the Plan are charged to expenses in the year incurred and represent the total organizational obligation to the Plan. CSC's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.
• Severance benefits: Employees entitled to severance benefits under labour contracts or conditions of employment earn these benefits as services necessary to earn them are rendered. The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole.

h) Accounts and loans receivable from external parties

Accounts and loans receivables are stated at the lower of cost and net recoverable value. However, when the terms of the loans are concessionary, such as those provided with a low or no interest clause, they are recorded at their estimated present value. A portion of the unamortized discount is recorded as revenue each year to reflect the change in the present value of the loans outstanding. Transfer payments that are unconditionally repayable are recognized as loans receivable. A valuation allowance is recorded for accounts and loans receivable where recovery is considered uncertain.

i) Contingent liabilities

Contingent liabilities are potential liabilities which may become actual liabilities when one or more future event(s) occur or fail to occur. To the extent that the future event is likely to occur or fail to occur, and a reasonable estimate of the loss can be made, an estimated liability is accrued and an expense recorded. If the likelihood is not determinable or an amount cannot be reasonably estimated, the contingency is disclosed in the notes to the financial statements.

j) Environmental liabilities

Environmental liabilities reflect the estimated costs related to the management and remediation of environmentally contaminated sites. Based on management's best estimates, a liability is accrued and an expense recorded when the contamination occurs or when CSC becomes aware of the contamination and is obligated, or is likely to be obligated, to incur such costs. If the likelihood of CSC's obligation to incur these costs is not determinable, or if an amount cannot be reasonably estimated, the costs are disclosed as contingent liabilities in the notes to the financial statements.

k) Inventories

• Inventory held for resale include raw materials, finished goods and work-in-progress. They belong to the CORCAN revolving fund and are valued at the lower of cost or net realizable value. The organization makes provisions for excess and obsolete inventory;
• Inventory not for resale consist of materials and supplies held for future program delivery and is valued at cost. If there is no longer any service potential, inventory is valued at the lower of cost or net realizable value.

l) Tangible capital assets

All tangible capital assets and leasehold improvements having an initial cost of $10,000 or more are recorded at their acquisition cost. CSC does not capitalize intangibles, works of art and historical treasures that have cultural, aesthetic or historical value, assets located on Indian reserves and museum collections.

Amortization of tangible capital assets is done on a straight-line basis over the estimated useful life of the asset as follows:

Assets under construction are recorded in the applicable capital asset class in the year that they become available for use and are not amortized until they become available for use.

m) Measurement uncertainty

The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in the financial statements. At the time of preparation of these statements, management believes the estimates and assumptions to be reasonable. The most significant areas where estimates are used are contingent liabilities, environmental liabilities, the liability for employee future benefits and the useful life of tangible capital assets. Actual results could significantly differ from those estimated. Management's estimates are reviewed periodically and, as adjustments become necessary, they are recorded in the financial statements in the year they become known.

CSC receives most of its funding through annual Parliamentary authorities. Items recognized in the Statement of Operations and Organizational Net Financial Position and the Statement of Financial Position in one year may be funded through Parliamentary authorities in prior, current or future years. Accordingly, CSC has different net results of operations for the year on a government funding basis than on an accrual accounting basis. The differences are reconciled in the following tables:

a) Reconciliation of net cost of operations to current year authorities used

b) Authorities provided and used

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year. Budget 2012 was tabled in Parliament on March 29, after the tabling of the Main Estimates on February 28, 2012. As a result the measures announced in the Budget 2012 could not be reflected in the 2012-2013 Main Estimates, i.e., these authorities did not take into consideration any effect from the Deficit Reduction Action Plan. For CSC, it represents a reduction of $85,547,000 for 2012-2013.

Collective agreements covering approximately 44% of CSC's workforce have expired (primarily with the Union of Canadian Correctional Officers). New agreements could result in significant financial pressure for CSC. An amount of approximately $90,500,000 was earmarked as part of the Operating Budget Carry Forward to offset the potential cost of new agreements.

Furthermore, a reduction of $265,800,000 relating to CSC Accommodation Plan was also not reflected in the 2012-2013 authorities. Through the Accommodation plan, CSC returned funds related to projected inmate population growth which has not materialized for the Tackling Violent Crime Act and the Truth in Sentencing Act.

The following table presents details of CSC's accounts payable and accrued liabilities:

Deferred revenue represents the balance at year-end of unearned revenues stemming from amounts received from external parties which are restricted to fund the expenditures related to specific projects, and amounts received for fees prior to services being performed. Revenue is recognized in the period that these expenditures are incurred or the service is performed. Details of the transactions related to this account are as follows:

a) Pension Benefits

CSC's employees participate in the Public Service Pension Plan, which is sponsored and administered by the Government. Pension benefits accrue up to a maximum period of 35 years at a rate of 2% per year of pensionable service, times the average of the best five consecutive years of earnings. The benefits are integrated with Canada/Québec Pension Plans benefits and they are indexed to inflation.

Both the employees and CSC contribute to the cost of the Plan. The 2012-2013 expense amounts to $170,895,973 ($174,230,891 in 2011-2012), which represents approximately 1.7 times (1.8 in 2011-2012) the contributions by employees.

CSC's responsibility with regard to the Plan is limited to its contributions. Actuarial surpluses or deficiencies are recognized in the financial statements of the Government of Canada, as the Plan's sponsor.

b) Severance benefits

CSC provides severance benefits to its employees based on eligibility, years of service and salary at termination of employment. These severance benefits are not pre-funded. Benefits will be paid from future authorities. Information about the severance benefits, measured as at March 31.

As part of collective agreement negotiations with certain employee groups, and changes to conditions of employment for executives and certain non-represented employees, the accumulation of severance benefits under the employee severance pay program ceased for these employees commencing in 2012. Employees subject to these changes have been given the option to be immediately paid the full or partial value of benefits earned to date or collect the full or remaining value of benefits on termination from the public service. These changes have been reflected in the calculation of the outstanding severance benefit obligation.

Pursuant to section 111 of the Corrections and Conditional Release Regulations, the Inmate Trust Fund is credited with moneys received from inmates at the time of incarceration, net of earnings of inmates from employment inside institutions, moneys received for inmates while in custody, moneys received from sales of hobbycraft, moneys earned through work while on day parole, and interest. Disbursements may occur either at the time of release or for inmate purchases in line with rehabilitation programs.

The following table presents details of accounts receivable, advances and loans:

The following table presents details of the inventory, measured at the lower of cost or net realizable value:

The cost of consumed inventory recognized as an expense in the Statement of Operations and Organizational Net Financial Position is $106,601,544 in 2012-2013 ($118,748,348 in 2011-2012). The value of consumed inventory for fiscal year 2011-2012 was adjusted from $193,850,192 to $118,748,348 to exclude the cost of items that are not held in inventory. This correction has no impact on the Statement of Operations and Organizational Net Financial Position.

(1) This column includes assets under construction of $250,691,045 ($20,590,726 in 2011-2012) that were transferred to the other categories upon completion of the assets. This column also includes assets received from the Parole Board of Canada for an amount of $262,124 and from Shared Services Canada for an amount of $171,605. Furthermore, an adjustment was made to reduce CSC's net book value of assets transferred to Shared Services Canada in 2011-2012 for an amount of $891,163.

Contingent liabilities arise in the normal course of operations and their ultimate disposition is unknown. They are grouped into two categories as follows:

a) Contaminated sites

Liabilities are accrued to record the estimated costs related to the management and remediation of contaminated sites where CSC is obligated or likely to be obligated to incur such costs. CSC has identified approximately 40 sites (42 in 2011-2012) where such action is possible and for which a liability of $3,697,562 ($5,640,983 in 2011-2012) has been recorded in accrued liabilities. CSC has estimated additional clean-up costs of $690,000 ($771,000 in 2011-2012) that are not accrued, as these are not considered likely to be incurred at this time. CSC's ongoing efforts to assess contaminated sites may result in additional environmental liabilities related to newly identified sites, or changes in the assessments or intended use of existing sites. These liabilities will be accrued by CSC in the year in which they become likely and are reasonably estimable.

b) Claims and litigations

Claims have been made against CSC in the normal course of operations. These claims include items with pleading amounts and others for which no amount is specified. While the total amount claimed in these actions is significant, their outcomes are not determinable. CSC has recorded an allowance for claims and litigations where it is likely that there will be a future payment and a reasonable estimate of the loss can be made. Claims and litigations for which the outcome is not determinable and a reasonable estimate can be made by management amount to approximately $1,062,000 ($1,650,000 in 2011-2012) at March 31, 2013.

The nature of the CSC's activities can result in some large multi-year contracts and obligations whereby the organization will be obligated to make future payments when the services/goods are received. Significant contractual obligations that can be reasonably estimated are summarized as follows:

CSC is related as a result of common ownership to all government departments, agencies, and Crown corporations. CSC enters into transactions with these entities in the normal course of business and on normal trade terms. During the year, CSC received common services which were obtained without charge from other government departments as disclosed below.

a) Common services provided without charge by other government departments

During the year, CSC received services without charge from certain common services organizations related to accommodation, legal services, the employer's contribution to the health and dental insurance plans, and worker's compensation coverage. These services without charge have been recorded in CSC's Statement of Operations and Organizational Net Financial Position as follows:

The Government has centralized some of its administrative activities for efficient, cost-effective, and economic delivery of programs to the public. As a result, the Government uses central agencies and common service organizations so that one department performs services for all other departments and agencies without charge. The costs of these services, such as the payroll and cheque issuance services provided by Public Works and Government Services Canada and audit services provided by the Office of the Auditor General, are not included in CSC's Statement of Operations and Organizational Net Financial Position.

b) Other transactions with related parties

Transfer to Shared Services Canada

Effective November 15, 2011, CSC transferred responsibility for the control and supervision of email, data centres and networks to Shared Services Canada (SSC) in accordance with Order-in-Council 2011-1297, including the stewardship responsibility for the assets and liabilities related to the program. Accordingly, CSC transferred the following assets and liabilities related to these activities to SSC on November 15, 2011:

The operating results of the transferred activities, prior to November 15, 2011, were not disclosed in the Statement of Operations and Organizational Net Financial Position as the financial data could not be established at a reasonable cost.

During the transition period, which is after November 15, 2011, CSC continued to administer the transferred activities on behalf of SSC. The administered expenses amounted to $16,663,109 for the year. These expenses are not recorded in these financial statements.

Presentation by segment is based on the Organization's program activity architecture. The presentation by segment is based on the same accounting policies as described in the Summary of Significant Accounting Policies in note 2. The following table presents the expenses incurred and revenues generated for the main program activities, by major objects of expense and by major types of revenue. The segment results for the period are as follows:

a) Change in an accounting estimate

In Canada's Economic Action Plan 2012, the Government announced savings measures to be implemented by departments over the next three fiscal years starting in 2012-2013. As a result, CSC has recorded at March 31, 2013 an obligation for termination benefits for an amount of $17,473,155 ($55,149,153 in 2011-2012) as part of accrued liabilities to reflect the estimated workforce adjustment costs. During fiscal year 2012-2013, CSC reduced its estimation of the obligation for termination benefits as part of the accrued liabilities (note 4). The methodology used to determine the obligation was refined and actual number of employees receiving an options became available. This change in accounting estimate results in decreased accrued liabilities of approximately $37,675,998.

b) Correction of an error relating to prior period financial statements

During 2012-2013, CSC identified tangible capital assets that should have been expensed over the last five fiscal years according to Accounting Policies - Capital Assets. The correction represents a decrease to tangible capital assets in 2011-2012 and prior years. Consequently, the comparative financial statements presented for the year ended March 31, 2012 have been restated.

This document provides summary information on the measures taken by Correctional Service Canada (CSC) to maintain an effective system of internal control over financial reporting (ICFR) including information on internal control management and assessment results and related action plans.

Detailed information on Correctional Service Canada's authority, mandate, and program activities can be found in the Departmental Performance Report and the Report on Plans and Priorities.

CSC recognizes the importance of setting the tone from the top to ensure that employees throughout the organization understand their roles and responsibilities in maintaining an effective system of ICFR.

CSC has key positions and committees responsible for maintaining and reviewing the effectiveness of its system of ICFR.

Commissioner – The Commissioner, as Accounting Officer, assumes overall responsibility and leadership for the measures taken to maintain an effective system of internal control. In this role, the Commissioner chairs the Departmental Audit Committee and the Executive Committee.

Chief Financial Officer (CFO) – The CFO reports directly to the Commissioner and provides leadership for the coordination, coherence and focus on the design and maintenance of an effective and integrated system of ICFR, including an annual assessment.

Senior Organizational Managers – Senior organizational managers in charge of program delivery are responsible for maintaining and reviewing the effectiveness of systems of ICFR within their mandate.

Chief Audit Executive (CAE)– The CAE reports directly to the Commissioner and provides assurance through periodic internal audits which are instrumental to the maintenance of an effective system of ICFR.

Chief Information Officer (CIO) – The CIO is the organizational lead for IT system applications, IT security, Information Management and contributes to the assessments of IT systems and application controls.

Departmental Audit Committee (DAC) – The DAC is an advisory committee that provides objective advice and recommendations to the Commissioner regarding the sufficiency, quality and results of assurance on the adequacy and functioning of CSC's risk management, control and governance framework and processes. The DAC, established in 2006, includes the Commissioner and three external members.

CSC's control environment also includes a series of measures, approved by the Commissioner and Executive Committee, to enable its staff to manage risks through raising awareness, providing appropriate knowledge and tools as well as developing skills. Key elements of the control environment in place at CSC include:

• CSC Standards of Professional Conduct and Code of Discipline;
• CSC Values Statement;
• CSC Financial Control Framework which sets out the governance structure, values and principles and the roles and responsibilities necessary to ensure the prudent stewardship of public funds, the safeguarding of public assets, the effective, efficient and economical use of financial resources and the reliability of financial reporting;
• CSC Integrated Risk Management Framework that provides the organization with a frame for defining and managing risk at corporate and operational levels and includes the Corporate Risk Profile;
• Fraud Risk Management Committee to oversee the implementation and monitoring of CSC's anti-fraud program and to advise CSC's Executive Committee in the domain of fraud prevention and related matters.
• Three year risk based internal audit plan;
• Annual employee performance agreements and learning plans for all employees;
• A dedicated division under the CFO on internal financial controls (IFC); and
• Documentation of main business processes and sub-processes with related key risk and controls to support the management and oversight of its system of internal control over financial reporting (ICFR).

CSC relies on other organizations for the processing of certain transactions that are recorded in its financial statements as follows:

• Public Works and Government Services Canada (PWGSC) centrally administers the payments of salaries and the procurement of goods and services, as per CSC's Delegation of Authority and provides accommodation services;
• Treasury Board Secretariat provides CSC with information used to calculate various accruals and allowances, such as the accrued severance liability;
• The Department of Justice provides legal services to CSC;
• Shared Services Canada (SSC) provides IT infrastructure services to CSC in the areas of data centre and network services. The scope and responsibilities are addressed in the interdepartmental arrangement between SSC and CSC; and
• Human Resources and Skills Development Canada provides Worker's Compensation assessment services.

In 2012-13, CSC focused on completing the documentation and advancing or completing the design effectiveness of financial controls embedded in its significant business processes and sub-processes. Where design assessment had been completed and remediation actions implemented, CSC completed the operating effectiveness testing of the key controls included in those business processes.

Prior to performing design effectiveness testing, all documentation for the significant business processes and sub-processes is completed. Design effectiveness testing verified that the appropriate controls were in place and represented actual practice and ensured the alignment of key controls with the risks they are aimed to mitigate. Walkthroughs were an important element of the evaluation of design by CSC. It involved asking questions to the individual(s) performing the control and obtaining corroborating evidence to support their answers. By performing walkthroughs at the design effectiveness stage, any documented key controls which are found not to be effective, are addressed through a management action plan and corrected prior to performing operating effectiveness testing.

Entity-level controls have a pervasive effect on an organization and can have significant consequences on the overall assessment of the effectiveness of internal control over financial reporting. Building on documentation and assessments completed in previous years, entity level controls documentation was updated along with the risk assessment, the communication and monitoring processes. Using the COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework, CSC identified and documented 75 control objectives and corresponding control statements demonstrating how the organization addresses each control objective. Design and operating effectiveness testing were advanced and will be completed in fiscal year 2013-14.

Using the information and data collected from various assessments performed in previous years by CSC's Internal Audit Sector and outside firms, the organization commenced the documentation and design assessment of its ITGCs. A financial system risk assessment was conducted to clarify and validate the scope of the ITGCs that required review in order to meet the requirements of the Treasury Board Policy on Internal Control (PIC). A list of relevant applications to financial reporting was compiled and each system was mapped against the applicable business process and the financial statement line item impacted. Existence of critical functionality, automated controls and interfaces were then determined for each system. Based on this information an analysis was performed to determine whether each system posed a significant and material risk to financial reporting and CSC's operations. Both financial and operational risks were assessed and an aggregate risk for each system was established. A priority rating of high, medium or low was assigned to each financial application that was determined to be in scope. The priority assigned was in relation to the relevance that the system has on PIC compliance and the level of risk associated with the system. Since the Integrated Financial and Material Management System (IFMMS) was the only system identified as a high priority, it will be the system that will be assessed in 2013-14.

As in previous years, CSC continued to maintain and update a multi-year work plan that contains the timelines for the ICFR assessments for its business processes, listed in 4.2, where the priority is set in accordance with the results from the annual risk assessment. During 2012-13, CSC completed the documentation and substantially advanced or completed the design effectiveness testing for the following business processes:

• Payables/Payments
• Amortization
• Tangible capital assets
• Interdepartmental settlements
• Financial Statement Close/Reconciliations and GL adjustments
• Procurement/Contracting

As a result of design effectiveness testing, CSC identified the following improvement opportunities:

• Improving the segregation of duties in regards to the access controls for setting-up or modifying vendors and the ability to enter invoices in the financial system;
• Developing standard procedures for the set-up and modification of vendors in the accounts payable system and ensuring the maintenance of an audit trail;
• Implementing a risk-based system of post-payment verification for non-pay related payments;
• Establishing an organizational sampling framework for both pay and non-pay related payments;
• Reviewing the amortization calculation including the establishment of benchmarks for reasonableness;
• Performing complete reconciliations between the Accounts Payable sub-ledger, the Fixed Assets module and the General Ledger; and
• Developing a process by which all Interdepartmental settlements are certified with Section 33.

Management action plans have been developed to implement changes by the end of the fiscal year 2013-14.

In 2012-13, CSC continued operating effectiveness testing of its salary controls. Required remediation has been completed for the following:

• Standard operating procedures were developed to ensure regular monitoring and follow-ups are performed for the process of salary overpayments for current and former employees and roles and responsibilities for both Finance and Human Resources staff have been defined and communicated;
• Delegation of Section 34 of the Financial Administration Act (FAA) to all compensation advisors performing the verification function was completed to ensure that the pay procedures were aligned with the common government-wide financial management pay administration guideline and the full implementation of the Pay Administration Model (PAM);
• Post-payment verification of pay transactions results are communicated within 3 months following the end of the testing period; and
• National procedures were developed to ensure consistent application of the compensation transaction peer verification process.

For the following items, remediation will be completed in 2013-14:

• Strengthening access controls (segregation of duties) to the Regional Pay System and the monitoring of these controls;
• Implementing databases for all specimen signature cards to allow easy access for Human Resources and Finance staff for verification of financial authorities; and
• Developing procedures to discontinue the use of the batch authorization feature in the Regional Pay System which may allow high-risk pay transactions to be authorized without pre-payment verification.

Operating effectiveness testing of the travel process was deferred until 2013-14 due to the introduction, in mid-year, of an automated system to manage travel more efficiently. The documentation for the Travel process will be modified in 2013-14 to reflect the changes and operating effectiveness testing will be performed on all key controls within the travel process.

For the Hospitality process, one remediation item was still outstanding at the end of 2012-13 from the last round of operating effectiveness testing. The financial Directive for the Verification of Hospitality Expenditures will be updated in 2013-14 to reflect policy changes introduced in October 2012 and August 2013 in the Treasury Board's revised Directive on Travel, Hospitality, Conference and Event Expenditures. Key financial controls will be retested, in accordance with CSC's multi-year plan.

On-going monitoring is a systematic, integrated approach to monitoring in support of continuous improvement of ICFR, which includes periodic risk-based assessments and timely remediation. In the current year, CSC completed planned on-going monitoring of the key controls within the allowance for doubtful accounts process. Controls were found to be effective.

During 2012-2013, CSC has continued to make significant progress in assessing and improving its key controls. Below is a summary of the main progress made by CSC based on the plans identified in the previous fiscal year's annex:

Building on progress to date, CSC is positioned to substantially complete the assessment of the operating effectiveness testing for all of its significant business processes and sub-processes, including Entity Level Controls and ITGCs by the end of 2014-15. The timelines are contingent on the level of effort required to address any gaps that will be identified in future design and operating effectiveness testing. CSC will continue to apply its rotational on-going monitoring plan to reassess control performance on a risk basis across all control areas. The status and action plan for the completion of the identified control areas for the next and subsequent fiscal years is as follows: