Archived - Audit of Circulating Coins
Final Report

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Prepared by Internal Audit & Evaluation for the:
Audit and Evaluation Committee meeting of December 7, 2010
Finance Canada

Table of Contents

Executive Summary
Background
Audit Objective and Scope
Approach, Assurance Statement and Auditing Standards Employed
Conclusion
Findings by Audit Criteria
Recommendations and Management Action Plan

Appendices

Executive Summary 

The Department and the Royal Canadian Mint (RCM) have a formal agreement in place to clarify their respective responsibilities regarding the circulation of Canadian coins. This Memorandum of Understanding (MOU) is in accordance with the roles and responsibilities of both entities specified in the Royal Canadian Mint Act.  The Financial Markets Division (FMD), within the Department’s Financial Sector Policy Branch (FSPB), provides analysis and policy advice on a variety of subject areas, including the circulation of Canadian coins. 

The objective of the Audit of Circulating Coins is to assess the management control framework and related processes in place that oversees the supply of circulating coins.

Our audit concluded that overall, the Department’s controls and processes related to the management of the supply of circulating coins contribute to the effective management of this function. The Department adequately monitors adherence to its formal agreement with the RCM and processes financial transactions in accordance with relevant authorities in a timely manner. An opportunity for improvement was identified with regards to the regular monitoring of inventory against negotiated maximums specified in the MOU.  During the course of the audit, management began taking action to strengthen this area.

Background 

The Audit of the Circulating Coins, was approved as part of the Department of Finance’s (the Department) three-year risk based audit plan (RBAP), tabled at the Departmental Audit and Evaluation Committee (DAEC) meeting on December 8, 2009.

The Department and the Royal Canadian Mint (RCM) have a Memorandum of Understanding (MOU), in accordance with their roles and responsibilities specified in the Royal Canadian Mint Act (the Act).  In summary, the RCM is responsible to produce Canadian coins, and the Department is responsible to pay for the production of Canadian coins, as per sections 4(1)(c)(i) and 7(3) of the Act, respectively.

The MOU has been renegotiated and updated on a regular basis, as required, since the first version which was effective as of January 1, 2000.  The most recent MOU was signed on December 22, 2009 and was updated on June 17, 2010.  This MOU is effective for the period from January 1, 2009 to December 31, 2011.

The MOU has not been subject to an audit, since its inception in 2000; however, it was the subject of a Cost Review Report, conducted by Consulting and Audit Canada (CAC), in July 2005, on behalf of internal audit.  At the time, the CAC report had identified an over-payment by the Department, mostly related to fixed expenses, and provided the Department with suggested improvements to the MOU to reduce similar discrepancies in the future.  The suggested improvements have since been implemented and no over-payment has been noted during this audit.

In the Department, the Financial Sector Policy Branch is responsible for providing policy analysis on Canada's financial sector and on the regulation of federally chartered financial institutions. In line with these responsibilities, the Financial Markets Division (FMD), within the FSPB, provides analysis and policy advice on a variety of subject areas, including the circulation of Canadian coins. 

Audit Objective and Scope 

Objective

The objective of the Audit of Circulating Coins is to assess the adequacy of the management control framework and related processes in place that oversees the supply of circulating coins.

Scope

The audit scope includes activities under the responsibilities of the Department related to circulating coins. The audit work includes assessing the adequacy of key aspects of the MOU, obligations of both parties under the MOU and adherence to the MOU. The audit focused on:

  • The most recent MOU between the Department and the RCM effective January 1, 2009
  • The production and distribution costs (including fixed costs and management fees) relating to the production of Canadian circulating coins invoiced by the RCM to the Department for the year-ending December 31, 2009
  • Financial information and reporting mechanisms in place between the Department, the Receiver General and the RCM

The scope did not include:

  • An assessment of the RCM’s financial statements and related controls
  • Appropriateness of the negotiated amounts for general circulation coin standard costs
  • Appropriateness of the negotiated amounts for inventory levels

Approach, Assurance Statement and Auditing Standards Employed

The audit was conducted in accordance with the Internal Audit Standards of the Government of Canada and the International Standards for the Professional Practices of Internal Auditing*. These standards require that the audit be 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 conclusions presented in this report. Audit procedures included, but were not limited to, interviews, observations, review of supporting documentation, and analytical reviews. The audit criteria used to develop the required audit tests were based on: (1) good management practices; and (2) applicable authorities policies and regulations; (3) and relevant elements of the Office of the Comptroller General’s Core Management Controls.

*This audit was conducted in accordance with the International Standards for the Professional Practices of Internal Auditing.  However, the internal audit function has not undergone an external assessment at least once in the past five years or been subject to ongoing monitoring or to periodic internal assessments of its internal audit activity that would confirm its compliance with these standards.

In total, 7 individuals were interviewed including personnel from the Department’s Financial Sector Policy Branch (FSPB), Corporate Services Branch, as well as a Director from the RCM.  The complete list of interviews is provided in Appendix A.  The audit team also conducted a review and analysis of applicable authorities, policies, as well as financial and non-financial documents from various relevant sources (list of key documents consulted is provided in Appendix B).  In addition, audit tests were also conducted focusing on financial transactions.

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.

Conclusion 

The audit concluded that overall, the Department’s management control framework and related processes are adequate to oversee the supply of circulating coins.  In particular, the following key positive aspects are worth noting:

  • In general, the Department adequately monitors adherence to its formal agreement with the RCM regarding circulating coins, with the exception of inventory.
  • Financial record-keeping relating to Circulating Coins is processed in accordance with relevant authorities and in a timely manner.

An opportunity for improvement was identified with regards to the regular monitoring of inventory against negotiated maximums specified in the MOU. During the course of the audit, management began taking action to strengthen this area.

Findings by Audit Criteria 

The following table presents the assessment of the level of risk exposure identified in the audit. Levels of risk exposure are categorized by audit criteria. 

High exposure
Medium exposure
Low exposure

The risk ranking is based on the level of risk exposure. A high, medium or low ranking corresponds to the potential risk exposure auditors believe may have an impact on the achievement of Department objectives, and is indicative of the priority management should give to address, if applicable, the related recommendations.

The assessment summarizes the audit observations based on the factual evidence gathered and analyzed during the audit. Based on these assessments, issues/themes along with potential causes, impacts, management initiatives and recommendations are summarized in the “Recommendations and Management Responses” section.

Findings by Audit Criteria
Criteria Risk Exposure Assessment
The Department adequately monitors adherence to formal agreements regarding Circulating Coins. Low The Department adequately monitors adherence to formal agreements regarding Circulating Coins, with the exception of inventory. The audit examined how the Department monitored adherence to the most recent MOU for the fiscal year ending December 31, 2009.  The audit analyzed and tested over 90% of the expenses incurred in 2009, which included the costs associated with the production of all coins, fixed expenses and management fees, and determined that:
  •  Effective controls were in place to monitor expenses
  •  All amounts tested had been invoiced and paid in accordance with the relevant terms in the MOU.
Although the Department records General Circulation Coinage inventory as part of the year-end reconciliation process, FSPB does not regularly monitor inventory levels throughout the fiscal year.  Without regular monitoring of inventory, there is an increased risk of over-payment, and FSPB’s ability to effectively manage inventory-related costs is reduced.  It should be noted that management is in the process of addressing this issue.
Financial record-keeping relating to circulating coins is processed in accordance with relevant authorities in a timely manner. Low The Department’s financial record-keeping relating to circulating coins is processed in accordance with relevant authorities in a timely manner. The audit team examined how the Department monitored adherence to Sections 32, 33 and 34 of the Financial Administration Act (FAA) by analyzing all of the expense transactions related to the fiscal year ending December 31, 2009 and determined that effective controls existed regarding:
  •  Initiating invoices against an authorized expenditure, by the appropriate authority as per FAA, Section 32.
  •  Adequate segregation of duties (Section 33 and Section 34) exist between the persons exercising authority.
  •  Coinage receipt of goods and payment are properly authorized by the appropriate authority and are properly processed in accordance with authorities the FAA (Section 34).
Furthermore, the audit confirmed that adequate controls are in place to record revenues effectively and to ensure that they are processed in a comprehensive, accurate and timely manner.

Recommendations and Management Action Plan 

The following section presents the key opportunity for improvement stemming from the audit findings. The impact and recommendation is also stated. Where applicable, the relevant management initiatives already underway are included. For the recommendation, management has provided:

  • An action plan, which addresses the recommendation;
  • The position responsible for implementing the action plan; and,
  • The target date for completion.

1. Establish and implement regular controls to monitor inventory

Summary of the Audit Finding and its Impact

As part of its role relating to the management of circulating Canadian coins, the Department has a Memorandum of Understanding (MOU) with the RCM, specifying the responsibilities of each organization, the agreed upon costs related to the production of coins, and the inventory maximums for each denomination.

Although the Department records General Circulation Coinage inventory as part of the year-end reconciliation process, FSPB does not regularly monitor inventory levels throughout the fiscal year.  Without regular monitoring of inventory, there is an increased risk of over-payment, and FSPB’s ability to effectively manage inventory-related costs is reduced.

Regular monitoring of the General Circulation Coinage inventory will mitigate the aforementioned risks and will improve the Department’s ability to manage the circulation of Canadian coins.  It is important to note that during the course of the audit, management began taking action to strengthen this area, after they were informed about this issue by the audit team.

Recommendation

It is recommended that the ADM, Financial Sector Policy Branch put in place controls to ensure that the General Circulation Coinage inventory is regularly monitored.












Management Response

We agree with this audit finding and the recommendation.  Corporate Accounting & Public Debt of the Corporate Services Branch identified this issue during the 2009/10 annual reconciliation.

We are pleased to report that the Financial Sector Policy Branch (FSPB), in consultation with the Royal Canadian Mint (RCM), has developed and implemented a remedial action plan.   Effective September 17, 2010, the RCM is reporting current General Circulation Coinage inventory levels against approved levels (as contained in the MOU with the RCM), as part of the biweekly invoice submitted to FSPB.  These levels are verified for compliance with the MOU prior to approving payment.

Appendix A – List of Personnel Interviewed 

Department of Finance Personnel

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

Chief Financial Officer and Executive Director, Corporate Services Branch

Director, Corporate Accounting & Public Debt, Corporate Services Branch 

Manager – Corporate Accounting & Public Debt, Corporate Services Branch

Royal Canadian Mint Personnel

Director of Financial and Economic Analysis, Royal Canadian Mint

Appendix B – List of Key Documents consulted 

Legislation

  • Royal Canadian Mint Act
  • Currency Act
  • Financial Administration Act

Policies (TB)

  • Treasury Board Policy on Internal Control
  • Finance and Treasury Board Accounting Policy

Documents Specific to the Department

  • Department of Finance’s Financial Statements (various years)
  • Integrated Business Plan (2009-2010)
  • Corporate Risk Profile (June 2009)
  • Department of Finance’s Accounting Policy – Coinage Inventory
  • MOU (July 6, 2001) between the Department and the RCM
  • MOU (December 22, 2005) between the Department and the RCM
  • MOU (November 2, 2007) between the Department and the RCM
  • MOU (December 22, 2009) between the Department and the RCM

Other Documents

  • RCM Annual Reports (various years)
  • Consulting and Audit Canada Cost Review Report and Management Letter (July 19, 2005)
  • Deloitte Special Review & Assessment
  • The RCM Special Examination Report by OAG (2005)

Appendix C – Audit Team 

The members of the audit team are:

  • Ziad Shadid, B.Comm. CGA, Audit Manager
  • Rim Ben Saad, B.A, B.Comm, Senior Financial Auditor
  • Christian Kratchanov, MBA, CIA, Chief Audit Executive