Archived - Audit of the Control Framework for the Crown Borrowing Process

Archived information

Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

Prepared by Internal Audit and Evaluation for:
Department of Finance Canada
Audit and Evaluation Committee on
December 11, 2012

Table of Contents

Executive Summary

Background

Objective and Scope

Statement of Conformance and Audit Approach

Conclusion

Findings by Audit Criteria

Appendix A – List of Finance Employees Interviewed

Appendix B – Key Reference Documents Consulted

Appendix C – Members of the Audit Team

Executive Summary 

In April 2009, the Treasury Board introduced the Policy on Internal Control (PiC) to ensure that risks relating to the stewardship of public resources are adequately managed through effective internal controls. The PiC supports deputy heads and Chief Financial Officers in their responsibilities for the establishment, maintenance, monitoring and review of the departmental system of internal control.

Within this context, federal departments are required by the PiC to review and test the effectiveness of key controls related to business processes determined to be high-risk (i.e. significant materiality) on an annual basis. The Department’s crown borrowing process, among others, is subject to this requirement. This audit focuses on the control framework for the crown borrowing process and its material financial transactions.

The Financial Management Directorate (FMD) within the Department’s Corporate Services Branch is responsible for the review and testing of key controls, as required by the PiC. FMD has designed a business process for crown borrowing and its related control matrix describing the key controls in place. These documents, reviewed and updated annually, form the basis for FMD’s annual monitoring and key control testing.

The audit objective was to provide reasonable assurance that key controls related to the crown borrowing process are operating effectively as designed.

The audit concluded that the Department’s key controls related to crown borrowing are operating effectively as designed. Specifically, this includes effective controls regarding approval of crown borrowing transactions in accordance with legislative requirements; the accurate and timely recording of crown borrowing transactions; internal controls over financial reporting; as well as maintenance of recipient master files.

Background  

The Audit of the Control Framework for the Crown Borrowing Process was confirmed as part of the Department of Finance’s (the Department) three year Risk-based Audit Plan, tabled at the Departmental Audit and Evaluation Committee meeting on March 2, 2012 and approved by the Deputy Minister.

In April 2009, the Treasury Board introduced the Policy on Internal Control (PiC). The objective of the PiC is to ensure that risks relating to the stewardship of public resources are adequately managed through effective internal controls, including internal controls over financial reporting. The PiC supports the departmental deputy heads and the Chief Financial Officers (CFO) in their responsibilities for the establishment, maintenance, monitoring and review of the departmental system of internal control.

The periodic monitoring of the internal control system in the Department is the responsibility of the Financial Management Directorate (FMD) within the Corporate Services Branch (CSB). A key responsibility of FMD, consistent with the PiC, is to review and test the effectiveness of processes determined to be of higher risk (i.e. materiality) on an annual basis.

During the planning phase of the audit, it was confirmed that management conducted adequate monitoring of the key controls for the Crown Borrowing Program.

The Crown Borrowing Program (CBP) was started in 2008-09. It covers the provision of funding to participating Crown Corporations directly from the Government, which in turn funds these requests through direct-issuance of its own. Three crown corporations are covered by the CBP: Canadian Mortgage and Housing Corporation, Business Development Bank of Canada and Farm Credit Corporation. As per the Department’s 2011-12 unaudited financial statements the CBP had a total book value of approximately $95 billion.

The Lending Desk within the Financial Sector Policy Branch (FSPB) and the Financial Management Directorate are process owners for the Crown Borrowing Program. Specifically, FSPB is responsible for administering the Crown Borrowing Program. FMD is responsible for recording and processing the crown borrowing disbursements/ repayments in the Integrated Financial and Material System (IFMS) and for financial reporting.

Audit Objective and Scope 

Objective

The objective of the audit is to provide reasonable assurance that key controls related to the crown borrowing process are operating effectively as designed.

Scope

The scope of the audit includes:

  • Review of the crown borrowing process and key controls.
  • Test of the effectiveness of key controls identified related to crown borrowing transactions completed during 2011-12, including financial statement presentation and disclosure procedures.
  • Test of the effectiveness of key controls related to crown borrowing transactions during fiscal year 2012-13, up to September 30, 2012.

The scope does not include:

  • Information Technology (IT) General Controls, including the segregation of duties related to these controls.

Statement of Conformance and Audit Approach 

Statement of Conformance

The audit was conducted in conformance with the internal audit standards of the Government of Canada, as supported by the results of the Quality Assurance and Improvement Program.

Audit Approach

The audit was planned and performed in such a way 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, against the audit criteria identified within this report, which were accepted by management. The opinion is applicable only to the entity examined and is supported by relevant and sufficient evidence to ensure its integrity.

Audit procedures included, but were not limited to, interviews, observations, review of supporting documentation, and analytical testing. The audit criteria used to develop the required audit tests were based on the departmental business process for crown borrowing and good management practices such as (1) the Treasury Board Policy on Internal Control and (2) relevant elements of the Office of the Comptroller General’s Audit Criteria Related to the Management Accountability Framework.

In total, six individuals were interviewed in the context of this audit (list of interviewees is provided in Appendix A). These departmental employees were consulted on one or more criteria, and to different levels of depth, depending on their role related to the crown borrowing process. The audit team also conducted a review and analysis of applicable authorities and policies, as well as other documents from various relevant sources (list of key documents consulted is provided in Appendix B).

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

Conclusions 

The audit concluded that the Department’s key controls related to the crown borrowing process are operating effectively as designed. This includes effective controls regarding approval of crown borrowing transactions in accordance with legislative requirements; the accurate and timely recording of these transactions; internal controls over financial reporting; and maintenance of recipient information master files.

Specifically, the following good management practices are worth noting:

  • The Department has effective controls to ensure that crown borrowing transactions are authorized in accordance with legislative requirements and delegated authorities.
  • The Department has effective controls to ensure that crown borrowing transactions are recorded accurately and in a timely manner.
  • The Department has effective internal controls over financial reporting for crown borrowing transactions.
  • The Department has effective controls to ensure that crown borrowing master files are maintained and include appropriate recipient information.

Findings by Audit Criteria  

During the planning phase, the audit team confirmed that adequate monitoring of key controls by management is taking place. As such, the focus of the audit during the examination phase was to test the effectiveness of key controls through a sample of transactions for fiscal years 2011-12 and 2012-13 (up to September 30, 2012).

The following pages present the assessment of key controls tested as part of the audit. The controls tested were based on the Department’s business process for the Crown Borrowing Program. Overall results of the testing for each audit criteria were categorized as follows:

Effective
Partially Effective
Ineffective

An effective, partially effective or ineffective rating is established based on the audit findings for the key controls tested. The assessment summarizes the audit observations based on the factual evidence gathered and analyzed during the audit.

Findings by Audit Criteria
Criterion Control Rating Assessment
1. Authorization and Governance
The Department has
effective controls to
ensure that crown borrowing transactions are authorized in accordance with legislative requirements and delegated authorities.
Effective The Department has effective controls to ensure that crown borrowing transactions are authorized in accordance with legislative requirements and delegated authorities.

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

The audit conducted detailed crown borrowing disbursement authorization tests to assess whether controls regarding the approval of crown borrowing disbursements were operating consistent with the control matrix. The audit reviewed a random sample of seven weekly reports and 24 transactions for fiscal year 2011-2012; and three weekly reports and six transactions for the first two quarters of fiscal year 2012-13, to assess the appropriateness of crown borrowing disbursements and related approvals.

The audit found that, as described in the departmental business process for crown borrowing, controls were operating effectively as designed and that approval of transactions for 2011-12 and 2012-13 (up to September 30, 2012) were authorized in accordance with the Section 34 of the FAA.
2. Timely Recording into IFMS
The Department has
effective controls to ensure that crown borrowing transactions are recorded accurately and in a timely manner.
Effective The Department has effective controls to ensure that crown borrowing 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. The foundation of reliable financial reporting is the departmental system of internal controls over financial reporting. Within this control framework the accurate and timely recording of transactions is paramount.

The audit conducted tests to assess whether controls regarding the accuracy and timeliness of recording transactions into the Integrated Financial and Material System (IFMS) were operating consistent with the crown borrowing control framework. Specifically, the audit tested a random sample of 24 transactions and two periodic reconciliations for fiscal year 2011-12; and six transactions and two periodic reconciliations for the first two quarters of fiscal year 2012-13.

The audit found that, as described in the departmental business process for the Crown Borrowing Program, controls in place to ensure accurate and timely recording of crown borrowing disbursement transactions were operating effectively as designed. The transactions tested for crown borrowing disbursements were accurate and authorized in accordance with Section 33 of the FAA; and the controls designed for the prepayments of crown borrowings were carried out as intended. All transactions tested were recorded accurately and in a timely manner.
3. Financial Reporting Controls
The Department has
effective internal
controls over financial reporting for crown borrowings.
Effective The Department has effective internal controls over financial reporting for crown borrowings.

Departments are expected to provide reliable financial reporting that provides Canadians with transparency and accountability regarding public expenditures. Reliable financial information is dependent on a Department’s ability to maintain a sound system of internal controls over its 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 process were carried out effectively on a regular basis. Specifically, for each fiscal year 2011-12 and 2012-13 (up to September 30, 2012), the audit tested a random sample of five month-end journal vouchers, four month-end reconciliations and one month-end trial balance; to assess if they were completed consistently with the related controls outlined in the departmental business process for the Crown Borrowing Program.

The audit found that internal controls over financial reporting for crown borrowing were operating effectively as designed in the business process for the Crown Borrowing Program. The key controls tested for the month-end process were operating as intended.
4. Maintenance of Recipient Information Master Files
The Department has
effective controls to ensure that crown borrowing master files are maintained and include appropriate recipient information.
Effective The Department has effective controls to ensure that crown borrowing master files are maintained and include appropriate recipient information.

The master recipient files contain the crown borrowing disbursement, including the banking information for the crown corporations. Maintaining these files with the most up to date information is critical to ensure that crown borrowing disbursements are made to the correct recipients.

The audit confirmed that the Treasury Board Secretariat maintains the recipient information master files, as part of centralized shared services provided to the Department of Finance. During fiscal year 2011-12 and for the first two quarters of fiscal year 2012-13, as the crown corporations did not change or update their financial institution and other information, there was no change made to the recipient master files. Should a change be required, the audit confirmed that the Department has a clear process and a control in place to request such a change.

Appendix A - List of Department of Finance Employees Interviewed

  • Acting Senior Director, Financial Management Directorate, Corporate Services Branch
  • Senior Financial Analyst, Departmental and Public Debt Reporting, Financial Management Directorate, Corporate Services Branch
  • Director, Financial Markets Division, Financial Sector Policy Branch
  • Chief, Government Financing, Financial Markets Division, Financial Sector Policy Branch
  • Senior Economist, Government Financing, Financial Markets Division, Financial Sector Policy Branch
  • Economist, Government Financing, Financial Markets Division, Financial Sector Policy Branch

Appendix B - Key Reference Documents 

Legislation

  • Financial Administration Act

Policy

  • TB Policy on Internal Control

Other Document

  • OCG’s Audit Criteria Related to the Management Accountability Framework

Documents Specific to Finance Canada

  • Business process for crown borrowing 2011-12 and 2012-13
  • Financial Signing Authorities Manual
  • Crown Borrowing Program Operations Manual, March 31, 2011
  • Additional Departmental documentation related to crown borrowing

Appendix C – Members of the Audit Team 

This audit was conducted by:

  • Chantale Dumornay, BAA - Auditor, Internal Audit and Evaluation
  • Jean-Luc Tétreault, CA, CGA, CMA, CIA - Audit Manager, Internal Audit and Evaluation
  • Abdillahi Roble, B.Comm, CGA, CIA – Acting Audit Manager, Internal Audit and Evaluation
  • Christian Kratchanov, MBA, CIA, CRMA, CMC - Chief Audit and Evaluation Executive, Internal Audit and Evaluation