Archived - Audit of the Control Framework for Transfer Payments

Prepared by
Internal Audit and Evaluation
Department of Finance Canada

Approved by the Deputy Minister of Finance Canada on the recommendation of the Audit and Evaluation Committee on December 8, 2014

Executive Summary

Background

Audit Objective and Scope

Statement of Conformance and Audit Approach

Conclusion

Findings by Audit Criteria

Appendix A: List of Departmental Employees Interviewed

Appendix B: Key Information Reviewed

Appendix C: Members of the Audit Team

The Treasury Board Policy on Internal Control (PIC) requires that a departmental system of internal control be established, maintained, monitored and reviewed in order to mitigate risks related to: (1) compliance with legislation, regulations, policies and delegated authorities; (2) effectiveness and efficiency of programs, operations and resource management, including safeguarding of assets; and, (3) reliability of financial reporting.

The Financial Management Directorate (FMD) within the Corporate Services Branch (CSB) annually reviews and tests the effectiveness of all processes determined to have a high financial reporting risk. In the 2013–14 Statement of Management Responsibility (annex of the departmental unaudited financial statements), the transfer payment process was identified as having a high financial reporting risk.

The audit objective was to provide reasonable assurance on the effectiveness of key controls related to the transfer payment process in support of the Department’s system of internal controls over financial reporting (ICFR).

The audit concluded that the key controls related to the transfer payment process in support of the Department’s system of ICFR are effective. Specifically, the following good management practices were noted:

There were no issues identified during the audit and therefore no recommendations are provided in this report.

The Audit of the Control Framework for Transfer Payments was authorized as part of the Department of Finance’s 2014-17 Internal Audit Plan, which was approved by the Deputy Minister at the departmental Audit and Evaluation Committee meeting on May 26, 2014.
This audit is one of the cyclical assurance engagements undertaken by Internal Audit and Evaluation to support the implementation of the PIC.

The PIC requires that a departmental system of internal control be established, maintained, monitored and reviewed in order to mitigate risks related to: (1) compliance with legislation, regulations, policies and delegated authorities; (2) effectiveness and efficiency of programs, operations and resource management, including safeguarding of assets; and, (3) reliability of financial reporting.

Periodic monitoring of the Department’s internal control system is performed by the FMD within the CSB. As such, FMD annually reviews and tests the effectiveness of all processes determined to have a high financial reporting risk. In the 2013–14 Statement of Management Responsibility, the transfer payment process was identified as having a high financial reporting risk.

The Department administers transfer payments to provinces and territories in accordance with the Federal Provincial Fiscal Arrangements Act and other related Acts and Regulations. These major federal transfer payment programs include: Fiscal Equalization, Territorial Formula Financing, the Canada Health Transfer, the Canada Social Transfer, Wait Times Reduction Transfer, Statutory Subsidies, Additional Fiscal Equalization to Nova Scotia, Additional Fiscal Equalization Offset Payment to Nova Scotia, Youth Allowances Recovery (YAR) and Alternative Payments for Standing Programs (APSP).

The Federal-Provincial Relations Division (FPRD) of the Federal-Provincial Relations and Social Policy Branch and FMD share ownership of the transfer payment process.

Specifically, FPRD is responsible for administering the major federal transfer programs and serves as a liaison between the Department and its provincial and territorial counterparts. FMD is responsible for recording and processing the payments in the Department's Integrated Financial and Material System (IFMS), as well as the financial reporting.

To provide reasonable assurance on the effectiveness of key controls related to the transfer payment process in support of the Department’s system of internal controls over financial reporting.

The scope of the audit included:

The audit examined transactions from the following major federal transfer payment programs: Fiscal Equalization, Territorial Formula Financing, the Canada Health Transfer, the Canada Social Transfer, Wait Times Reduction Transfer, Statutory Subsidies, Additional Fiscal Equalization to Nova Scotia, Additional Fiscal Equalization Offset Payment to Nova Scotia, YAR and APSP.

The scope of the audit did not include:

The audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada, as supported by the results of the Quality Assurance and Improvement Program.

The audit was planned and performed so as to obtain reasonable assurance that the audit objective was achieved. During the audit, appropriate procedures were followed and sufficient evidence was obtained to support the accuracy of findings and the overall audit opinion presented in this report. The findings are based on a comparison of the conditions, as they existed at the time of the audit, with the audit criteria identified in this report, which were accepted by management. The opinion applies only to the entity examined.

Audit procedures included, but were not limited to: interviews, walkthroughs, observations, reviews of supporting documents and analytical testing. The audit criteria were based on the departmental business process for transfer payments and relevant elements of (1) the Treasury Board Policy on Internal Control and (2) the Office of the Comptroller General’s Audit Criteria Related to the Management Accountability Framework.

Six individuals (listed in Appendix A) were interviewed for this audit. These individuals were consulted on one or more criteria, and with different levels of depth, depending on their role in the transfer payment process. The audit team also conducted a review and analysis of applicable legislation, authorities and delegations, as well as other financial and non-financial documents from various relevant sources. A list of key information reviewed is provided in Appendix B.

The audit approach allowed for the audit findings to be communicated so as to enable management to review and provide feedback on the findings and conclusions before they were finalized.

The audit concluded that the key controls related to the transfer payment process in support of the Department’s system of ICFR are effective.

Specifically, the following good management practices were noted:

During the planning phase, the audit team confirmed the design effectiveness of key controls in place for the transfer payment process. As such, the audit focused on the operating effectiveness of key controls identified in the Department’s documented business process and control matrix for transfer payments.

The following section presents the findings by audit criteria, based on the assessment of key controls tested as part of the audit. The assessment of operational effectiveness for each audit criterion is categorized as follows:

Effective
All key controls are operating as intended and objectives of the audited process are likely to be achieved.
Partially Effective
One or few key controls are not operating as intended. Objectives of the audited process may not be achieved. Timely action is required.
Ineffective
Several key controls are not operating as intended. Objectives of the audited process are unlikely to be achieved. Corrective action is required immediately.

Findings by Audit Criteria

Criteria Control Rating Assessment
1. Authorization and Delegation
The Department has effective controls to ensure that transfer payments transactions are authorized in accordance with legislative requirements and delegated authorities. Effective The Department has effective controls to ensure that transfer payments transactions are authorized in accordance with legislative requirements and delegated authorities.

The Financial Administration Act (FAA) requires that all payment transactions must be verified and certified under Section 34. Exercising this authority certifies that the payee is entitled to or eligible for the payment, the payment conforms with relevant agreement terms, the transaction is accurate and the correct financial coding has been provided.

The audit examined whether the Department’s transfer payments transactions were authorized in accordance with legislative requirements and delegated authorities. In addition to interviews with departmental officials, key documentation in the form of relevant acts, management plans and directives as well as delegation instruments were reviewed to determine whether authorities were in place and appropriately delegated. The audit team reviewed the transfer payment requisitions covering the 12 months of transactions for fiscal year 2013-14 and six months of transactions for fiscal year 2014-15, to assess the appropriateness of transfer payments and related approval.

The audit team’s review of the transfer payment transactions found that payments were properly authorized in accordance with Section 34 of the FAA.
2. Accurate and Timely Recording in the Departmental Financial System
The Department has effective controls to ensure that transfer payment transactions are recorded accurately and in a timely manner. Effective The Department has effective controls to ensure that transfer payment transactions are recorded accurately and in a timely manner.

Departments are expected to provide reliable financial reporting that provides transparency and accountability for how public funds are spent to achieve results for Canadians. A robust departmental system of internal controls over financial reporting ensures accurate and timely recording of transactions.

The audit tested the effectiveness of the controls in place to ensure accurate and timely recording of transfer payment transactions in the departmental financial system. The testing consisted of a process walkthrough and a detailed examination of a sample of 85 transactions.

The audit found that the controls in place to ensure accurate and timely recording of transfer payment transactions were operating effectively. The transactions tested for disbursements to provinces and territories were issued in accordance with Section 33 of the FAA and were supported by adequate documentation. All transactions tested were recorded accurately and in a timely manner.
3. Financial Reporting Controls
The Department has effective controls over financial reporting for transfer payments. Effective The Department has effective controls over financial reporting for transfer payments.

Departments are expected to provide reliable financial reporting that supports transparency and accountability for the spending of public funds. The foundation of reliable financial reporting is the departmental system of internal controls over financial reporting. Such a control framework consists of reconciliations on a periodic basis, as well as other key controls to ensure the integrity and reliability of the financial statements.

The audit conducted tests to assess whether controls over the month-end, post-period and year-end processes were carried out effectively on a regular basis. Specifically, for the period in the scope of the audit, the audit team tested 15 transactions covering YAR and APSP accrual adjustments and loan receivable adjustments, as well as trial balances and reconciliation exercises, to assess if they were completed consistently with the related controls outlined in the departmental business process for transfer payments.

The audit found that internal controls over financial reporting for transfer payments were operating effectively and in a manner consistent with the business process narrative. The key controls tested for the reporting processes were operating as intended.
4. Ongoing Monitoring Program
The Department has an effective
on-going monitoring program in support of its transfer payment process.
Effective The Department has an effective on-going monitoring program in support of its transfer payment process.

Monitoring mechanisms help identify the occurrence of errors and irregularities, as well as flagging the existence of potential control deficiencies. As such, ongoing monitoring is important in enabling adherence to controls, sound risk management and the identification of lessons learned related to the controls in place with respect to the transfer payment business process.

The audit conducted interviews and examined documentation supporting the ongoing monitoring program in place, including the frequency and results of design and operational effectiveness tests, the risk assessment process, and related reporting.

The audit found that the Department has a structured and systematic on-going monitoring program in place, led by a group dedicated to internal controls over financial reporting. Documents reviewed demonstrated:

1) management’s approach to assessing the level of financial reporting risk, for key departmental business processes; and

2) the frequency of design and operational effectiveness testing is based on the assessed risk level.

The ongoing monitoring of the transfer payment process was completed as planned with no remedial actions required for fiscal year 2013–14, as reported in the Statement of Management Responsibility
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