Financial Monitoring for Administered Activities Audit

Final Report

Audit, Evaluation, and Risk Branch
February 2013


Table of Contents

Executive Summary

Background

The Canada Revenue Agency (CRA) administers revenues and expenses on behalf of federal, provincial, territorial and First Nations governments in accordance with tax laws and social and benefit programs. The Finance and Administration (F&A) Branch is responsible for ensuring that these revenues and expenses are appropriately accounted for and reported in the CRA Annual Report to Parliament. The Directive on Financial Monitoring for Administered Activities outlines the financial monitoring conducted by the Financial Administration Directorate (FAD) for administered activities. The Financial Monitoring for Administered Activities (FMAA) program’s mandate is to develop and implement a comprehensive and effective risk-based annual financial monitoring plan of transactions in order to provide assurance on the reliability of the CRA administered activities financial information.

Objective

The audit objective was to provide assurance on adequacy of the design and operation of the key monitoring processes and controls within FMAA.

The audit focus was to assess whether adequate monitoring procedures for administered activities are in place and followed consistently in the regions. The audit covered the review of monitoring activities for the 2011 calendar year and measures taken in 2012 to improve the program and was carried out at the Headquarters as well as in Atlantic, Ontario and Pacific Regions.

Conclusion

The design and operation of the FMAA monitoring processes and controls are effective and support the FMAA mandate. Roles and responsibilities of the FMAA stakeholders are adequately defined. The FMAA guidelines and procedures exist and have been communicated to the regional staff. An appropriate sampling methodology was developed in 2011. Resources available to FMAA have been optimized to meet its objective. Proper and timely reporting is in place to communicate the FMAA results; follow-up procedures exist to confirm implementation of recommendations/action plans to address identified deficiencies.

Monitoring processes and procedures are in place and followed by all regions and HQ. Controls to address program objectives and their associated risks are in place and working as intended to ensure accuracy and completeness of processing and reporting of administered revenues in the provincial Tax Sharing Statements and the CRA financial statements. The implementation of a quality review process on the regional monitoring activities and reports would enhance overall monitoring activities by enabling comparability and accuracy of regional sample reviews and reporting of monitoring results.

Action Plan

The F&A Branch agreed with all recommendations and has provided action plans to address the findings of the audit and to further strengthen the FMAA process. From 2013 monitoring year onwards, F&A Branch will conduct an overall risk-assessment, update the FMAA manual and procedures, standardize monitoring templates and update the monitoring procedures in order to improve the consistency in the FMAA processes. F&A Branch will develop a quality review process and a communication plan to emphasize the procedures to be carried out by the regions. In addition, F&A Branch will consider the other administered activities on the CRA’s Financial Statements of Administered Activities for risk-assessment and inclusion in the monitoring process.

Introduction

The Canada Revenue Agency (CRA) administers revenues and expenses on behalf of federal, provincial, territorial and First Nations governments and other organisations in accordance with tax laws and social and benefit programs. The Finance and Administration (F&A) Branch is responsible for ensuring that these revenues and expenses are appropriately accounted for and reported in the Financial Statements for Administered Activities published annually as part of the CRA Annual Report to Parliament. The Directive on Financial Monitoring for Administered Activities outlines the financial monitoring conducted by the Financial Administration Directorate (FAD) for administered activities. The Revenue Accounting Reporting and Analysis Division (RARAD) in FAD carries out monitoring of tax revenue transactions resulting from the assessment of tax returns.

The Financial Monitoring for Administered Activities (FMAA) program’s mandate is to develop and implement a comprehensive and effective risk-based annual financial monitoring plan of transactions in order to provide assurance on the reliability of the CRA administered activities financial information.

FMAA is managed from Headquarters (HQ), while the field work is conducted by the regional monitoring and control units that review samples of tax returns for completeness and accuracy using the flow-through methodology on a monthly basis. This technique tracks transactions from tax returns through related client accounts and to the reporting accounts in the Revenue Ledger (RL).

Focus of the Audit

The audit objective was to provide assurance on adequacy of the design and operation of the key monitoring processes and controls within FMAA.

The focus of the audit was to assess whether adequate monitoring procedures for administered activities are in place and followed consistently in the regions. The audit covered the review of monitoring activities for the 2011 calendar year and measures taken in 2012 to improve the program and was carried out at the Headquarters as well as in Atlantic, Ontario and Pacific Regions.

The audit was conducted in accordance with the International Standards for the Professional Practice of Internal Auditing.

Findings, Recommendations and Action Plans

1.0 Design of Processes and Controls

The design of FMAA processes and controls was adequate. Monitoring processes and controls addressed the FMAA objective by monthly tracking of sampled transactions from source documents through to related client accounts and the reporting accounts in the RL for all CRA administered revenue lines. The FMAA roles and responsibilities have been adequately defined, documented, communicated and supported by training and procedures (e.g. the FMAA Manual and the Directive on Financial Monitoring for Administered Activities).

RARAD has developed a comprehensive FMAA framework. The FMAA framework maturity is demonstrated by updated releases of the FMAA directive and procedures, expansion of targeted monitoring, and more detailed monitoring plans in 2011 and 2012. In 2011, RARAD developed a statistical sampling methodology for FMAA. For 2012, revisions to the sampling design and approach include enhancements that should further facilitate reporting of statistically valid sampling results.

The comprehensive risk-based approach to financial monitoring of administered activities is crucial for providing assurance of complete and accurate administered activities financial information, as well as enhancing efficiency of the FMAA. At the time of the audit, RARAD conducted general monitoring supplemented by risk-based targeted monitoring. However, it did not prepare an overall risk assessment to take into account results of previous monitoring procedures in order to plan general and targeted monitoring.

Recommendation

F&A Branch should review the approach to identification and prioritization of FMAA activities to ensure a comprehensive risk-based approach to both general and targeted workflows in order to focus on the FMAA objective as well as consider the CRA Transformation Agenda (e.g. E-Business).

Action Plan

For 2013, F&A Branch will conduct an overall risk assessment in order to determine the scope of review procedures, including general monitoring.

2.0 Monitoring Processes

Overall, FMAA monitoring processes have been carried out effectively. The FMAA delivery requirements were balanced with available resources by effective sample scheduling, reducing sample sizes to minimal statistically valid, and focusing on paper-based tax returns for the 2012 monitoring plan. Changes were also made in 2012 to the distribution of work across the regional monitoring teams and RARAD.

The regional monitoring units used HQ selected samples of tax returns to test for accuracy and completeness. Although RARAD provided to the regions a generic sampling template that covered the key elements to test for each sample, it did not supply standard instructions on processing sample results and on the start point for the review (i.e. at the taxable income or at the assessed taxes). As a result, the regional monitoring units used locally developed approaches to perform the sample review (e.g. macros or formulas for tax calculations). Use of standardized templates and approaches would permit sharing of best practices among the regions and enhance national consistency, comparability and efficiency.

Based on comments from interviews and documentation review, quality reviews of FMAA monitoring activities are not conducted on a regular basis. RARAD performed a review of regional mailroom sampling processes in 2008 and carried out a compilation of the T1 flow-through process in 2011. However, such reviews were not performed for other revenue streams nor incorporated into the operational procedures. RARAD would benefit from enhancing its challenge function in validating the regional monitoring results to ensure the reliability of the FMAA financial information.

Recommendations

F&A Branch should provide the regions with standardized templates for tracking and analyzing the sample transactions, review the sample verification procedures and implement standards to support consistent application of monitoring procedures and practices in all regions.

Action Plan

In 2012, the FMAA Unit started the process of standardizing templates in collaboration with the regions with an objective of having all general monitoring templates completed by 2013. The FMAA Unit is improving the procedures for all FMAA processes that have to be followed by the regions and by HQ staff in order to improve the consistency in the FMAA processes. The updated version of the FMAA manual as well as the procedures will specify the level of verification required of the samples. A communication plan to the regions will be developed and put in place during 2013, to emphasize the procedures to be carried out by the regions.

F&A Branch should establish a quality review process as an integral part of the FMAA program to assess the quality and consistency of the regional monitoring activities on a regular basis.

Action Plan

In 2012, the FMAA Unit initiated a quality review of all the monitoring reports received from the regions in order to ensure that results are reported consistently on the templates and errors are clearly documented. The regional results will be compiled and communicated to the region for further corrective actions. This quality review process will be documented in the FMAA manual and procedures will be developed accordingly.

3.0 Assessing and Reporting the Results

Reporting of the FMAA monitoring results to RARAD and to the appropriate responsibility areas of the program branches was timely. The regions complied with the reporting guidelines stipulated in the Directive on Financial Monitoring for Administered Activities. Control weaknesses or errors were investigated by the regions and reported to RARAD. Recommendations from RARAD were addressed to the appropriate HQ branch management. In addition, the Annual Monitoring Summary Report was distributed to the appropriate program area(s).

Follow-up procedures were in place for recommendations and corrective actions. At the time of the audit, there were no unresolved issues. The annual plans for 2011 and 2012 indicated that RARAD has incorporated follow-up procedures for implementation of recommendations as a requirement in the annual planning and reporting process. Regional monitoring of key reporting steps was not always complete. For example, one region reported in the regional reporting template that all assessments were posted completely and accurately in the client accounts. The walkthrough demonstrated that the region did not verify the Goods and Services Tax/Harmonized Sales Tax assessment data in client accounts in the Standardized Accounting (SA) and, therefore, the statement that this information is complete and accurate in the Annual Summary Report is not substantiated.

The reporting of mailroom samples results differed from region to region (e.g. some regions referenced amounts posted to RL accounts while others did not). The Annual Summary Report for Financial Monitoring stated that the mailroom samples were processed within the standard processing time of 4-6 weeks but verification of this statement has been performed only in one region. Furthermore, the FMAA monitoring of tax returns processed within the standard processing time duplicated the monitoring of processing time performed at the CRA Tax Centres and, therefore, reduced efficiency of the FMAA.

The FMAA certification of monitoring results supports the Tax Sharing Statements (TSS) and reporting in CRA’s external financial statements (no errors were identified in the flow-through review of administered activities transactions). The titles of FMAA and applicable Directive on Financial Monitoring for Administered Activities imply that FMAA covers all administered activities in the CRA financial statements; however, administered expenses were not included in the monitoring plan.

Recommendations

F&A Branch should review the regional reporting templates to ensure all required data fields are accurate. F&A Branch should also verify accuracy of regional reports to ensure that all assessments were posted completely and accurately in the client accounts as well as in the RL.

Action Plan

In 2012, the FMAA unit initiated a quality review of all the monitoring reports received from the regions for all tax revenue streams and for all quarters. Results will be compiled and communicated to the region for further corrective actions. This quality review process will be documented in the FMAA manual and procedures will be developed accordingly.

Guidelines on regional reporting should clarify the procedures to enhance consistency related to the mailroom samples. F&A Branch should eliminate the verification of standard processing time of tax returns from FMAA as the FMAA does not intend to duplicate verification processes performed by tax programs.

Action Plan

The updated version of FMAA manual as well of the procedures will specify the level of verification required of the mailroom samples. The standard processing time will not be monitored. A communication plan to the regions will be developed and put in place during 2013, to emphasize the procedures to be carried out by the regions.

F&A Branch should revise all related FMAA documentation to address the issue that monitoring activity is performed only on administered revenues and not on administered expenses or include administered expenses in the monitoring plan.

Action Plan

Beginning 2013, the FMAA unit will consider the other administered activities on the CRA’s Financial Statements of Administered Activities for risk assessment in the monitoring process.

Conclusion

The design and operation of the FMAA monitoring processes and controls are effective and support the FMAA mandate. Roles and responsibilities of the FMAA stakeholders are adequately defined. The FMAA guidelines and procedures exist and have been communicated to the regional staff. The appropriate sampling methodology was developed in 2011. Resources available to FMAA have been optimized to meet its objective. Proper and timely reporting is in place to communicate the FMAA results; follow-up procedures exist to confirm implementation of recommendations/action plans to address identified deficiencies.

Monitoring processes and procedures are in place and followed by all regions and HQ. Controls to address program objectives and their associated risks are in place and working as intended to ensure accuracy and completeness of processing and reporting of administered revenues in the provincial Tax Sharing Statements and the CRA financial statements. The implementation of a quality review process on the regional monitoring activities and reports would enhance overall monitoring activities by enabling comparability and accuracy of regional sample reviews and reporting of monitoring results.

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