2010-2011 Selected Fiscal Year-End Procedures Audit
Final Report
Corporate Audit and Evaluation Branch
October 2011
Table of Contents
Executive Summary
Background: The Canada Revenue Agency (CRA) prepares annual Administered Activities Financial Statements for the reporting of tax revenues. The financial information is incorporated into the Public Accounts of Canada and is included in the Agency’s Annual Report to Parliament. As in prior years, the Internal Audit Division (IAD) in the Corporate Audit and Evaluation Branch (CAEB) provided assurance to CRA management on the accuracy of selected procedures and information used to derive the allowance for doubtful accounts (ADA) estimates for the 2010-2011 fiscal year.
The work was carried out in conjunction with the annual audit of the 2010-2011 CRA financial statements conducted by the Office of the Auditor General (OAG), which is responsible for issuing an audit opinion on their fair presentation. The audit approach, methodology, and results were shared with Financial Administration Directorate (FAD) of Finance and Administration Branch (F&A) and the OAG. The work performed by IAD was relied on by the OAG in the formulation of its opinion on the CRA Administered Activities Financial Statements approved by the CRA Board of Management in August 2011.
Objective: The objective of the audit was to provide assurance to CRA management on the accuracy of the data extracted from source systems in the sampling of accounts receivable of less than $10 million, which was used by F&A in establishing the ADA estimates for the 2010-2011 fiscal year. Accounts with balances over $10 million were reviewed by the OAG.
Verification of the calculation and projection of the ADA rates and impact of any errors in these procedures on the account balances that would appear in the financial statements did not fall within the scope of this audit.
The audit took place between November 2010 and June 2011, and was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.
Conclusion: The accuracy of data used by FAD in the calculation of the ADA rates remains consistent with the results achieved in 2009-2010. IAD reviewed the accuracy of data for a risk-based sample of the line items [Footnote 1] selected by FAD for the 2010-2011 estimates, and errors were identified in 1.05% of these line items. Further analysis revealed that 0.19% of these line items had errors that could have affected the calculation of the ADA rates. In comparison, in 2009-2010, errors were identified in 1.94% of the line items and the overall error rate that could have affected the ADA was 0.16%.
As in the previous year’s audit, the small number and distribution of the dollar value of the errors this year did not allow for an estimate of the monetary impact on the final results.
Introduction
The Canada Revenue Agency (CRA) prepares annual Administered Activities Financial Statements for the reporting of tax revenue using full accrual accounting. The Office of the Auditor General (OAG) audits these financial statements each year and is responsible for issuing an opinion on their fair presentation. The financial information is incorporated into the Public Accounts of Canada and is included in the Agency’s Annual Report to Parliament.
As in prior years, the Internal Audit Division (IAD) in the Corporate Audit and Evaluation Branch (CAEB) provided assurance to CRA management on the accuracy of selected procedures and information used in the preparation of the above-mentioned financial statements.
The audit approach, methodology, and results were shared with the Financial Administration Directorate (FAD) in the Finance and Administration (F&A) Branch and the OAG. The work performed by IAD was relied on by the OAG in the formulation of its opinion on the CRA Administered Activities Financial Statements that were approved by the CRA Board of Management in August 2011.
Focus of the Audit
The objective of the audit was to provide assurance to CRA management on the accuracy of the data extracted from CRA source systems in the sampling of accounts receivable of less than $10 million for use by F&A in establishing the allowance for doubtful accounts (ADA) estimates for the 2010-2011 fiscal year. Accounts with balances over $10 million were reviewed by the OAG.
The audit was carried out between November 2010 and June 2011. Verification of the calculation and projection of the ADA rates and impact of any errors in these procedures on the account balances that would appear in the financial statements did not fall within the scope of this audit.
This audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.
Findings
The ADA is established and used by management to indicate their best estimate of the collectability of revenue amounts assessed but not collected. In the 2010-2011 fiscal year, FAD continued to benefit from increased quality assurance measures to improve the reliability of the data collected from the CRA source systems that are used for calculation of the ADA estimates. In addition to these measures, F&A has utilized automated data capture methods for T2 (Corporate Income Tax) and Goods and Services Tax (GST) revenue streams to further enhance the overall reliability of their data collection processes. Current year estimates were based on data from five years (2001 to 2005) for all revenue streams. Accounts receivable from each revenue stream in these years were stratified by age and dollar value. Approximately 21,000 line items [Footnote 2] were then randomly selected for use by FAD in the data gathering exercise.
A representative risk-based sub-sample of the accounts from each revenue stream was identified at random by IAD to assess the accuracy of the collected information. IAD replicated the data capture procedures for each account in the sub-sample to verify compliance with the FAD data capture guidelines and accuracy of the information. The data review and analysis were focused on five revenue streams: T1 (Personal Income Tax), T1 Subledger (e.g. bankruptcy, deceased), T2 (Corporation Tax), T3 (Trusts) and GST.
IAD found that 1.05% of the line items in the sub-sample had one or more errors in the data collected. Further analysis showed that only 0.19% of these line items had errors that could have affected the calculation of the ADA rates. In comparison, in 2009-2010, errors were identified in 1.94% of the data collected and the overall error rate that could have affected the ADA was 0.16%. The small number and distribution of the dollar value of the errors did not allow for an estimate of the monetary impact on the final results.
As a part of verification of the data accuracy, IAD also reviewed the account balances for the FAD samples in the corresponding source systems to ensure that accounts over $10M had not been inadvertently included in the sample [Footnote 3]. Our review indicated that all accounts over $10M were properly excluded from the final sample.
To sustain or improve on the error rates observed in this audit, continued quality assurance review from FAD management is recommended, as is the continued utilization of automated processes related to data collection.
Conclusion
The accuracy of data used by FAD in the calculation of the ADA rates remains consistent with the results achieved in 2009-2010. In 2010-2011, errors were identified in 1.05% of line items in the IAD sample and only 0.19% of these errors could have affected the calculation of the ADA estimates.
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