Archived - Audit of the Management of Transfer Payments to Provinces and Territories – Final Report

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

Table of Contents

Executive Summary
Background
Audit Objective and Scope
Approach, Assurance Statement and Auditing Standards Employed
Conclusions
Findings by Audit Criteria

Appendices

Executive Summary 

The Government of Canada provides significant financial support in the form of transfer payments to provincial and territorial governments on an ongoing basis to assist them in the provision of programs and services. There are four major statutory vote transfer programs: Equalization Program Transfer, Territorial Formula Financing, the Canada Health Transfer and the Canada Social Transfer. The Department of Finance (the Department) is responsible for the administration of these four transfer programs.

The objective of the Audit of the Management of Transfer Payments to Provinces and Territories was to assess the management control framework and related processes in place that oversee the administration of the four major statutory vote transfer payments to provinces and territories.

The audit concluded that overall, the Department’s controls and processes related to the administration of the four major statutory vote transfer payments are effective and appropriate. More specifically, the audit found that: effective controls and processes are in place and were operating during the period under audit; and, information systems are used appropriately to ensure the proper issuance of the transfer payments. Since no major issues were identified during the audit, no recommendations are provided and no management action plan is required.

Background 

The Audit of the Management of Transfer Payments to Provinces and Territories was approved as part of the Department of Finance Canada’s (the Department) three-year risk-based audit plan, which was approved by the Deputy Minister upon the recommendation of the Audit and Evaluation Committee.

In accordance with the Federal-Provincial Fiscal Arrangements Act, the Department administers transfer payments to provinces and territories including Fiscal Equalization, Territorial Formula Financing and support for health and social programs. The following is a list of the four major statutory vote transfer programs:

  • Equalization Program Transfer is intended to enable less-prosperous provincial governments to provide their residents with public services that are reasonably comparable to those in other provinces, at reasonably comparable levels of tax.
  • The Territorial Formula Financing is an unconditional federal transfer to territorial governments designed to enable them to provide their residents with a range of public services comparable to those offered by provincial governments.
  • The Canada Health Transfer provides long-term predictable funding for health care, and supports the principles of the Canada Health Act.
  • The Canada Social Transfer is a federal transfer to provinces and territories in support of post-secondary education, social assistance and social services, and early childhood development and early learning and childcare.

The Federal-Provincial Relations Division (FPRD) of the Federal-Provincial Relations and Social Policy Branch is responsible for federal-provincial fiscal and financial relations, administering the major transfer programs and serves as a liaison between the Department and its provincial and territorial counterparts.

The Departmental and Public Debt Reporting Division (DPDRD) of the Corporate Services Branch is responsible for recording and processing the payments in the Department’s Integrated Financial and Material System (IFMS).

Audit Objective and Scope 

Objective

The objective of the Audit of the Management of Transfer Payments to Provinces and Territories was to assess the management control framework and related processes in place that oversee the administration of the four major statutory vote transfer payments to provinces and territories.

Scope

The audit scope included the Equalization, Territorial Formula Financing, Canada Health Transfer and Canada Social Transfer program activities from April 1, 2009 to March 31, 2010 (fiscal year 2009-2010).

The audit focused on the following:

  • The administration of the transfer payments activities of FPRD and DPDRD.
  • The transfer payment key control activities.
  • The recording of the payments in IFMS, including its approval by DPDRD and reconciliations between payment requisitions in IFMS and the Receiver General’s General Ledger.

The scope did not include the following:

  • Appropriateness of the formula used in calculating the transfer payments.
  • The policy development activities of the FPRD.
  • The activities of the Equalization Research Group section of the FPRD.
  • The activities of the Strategic Planning Section of the FRPD.

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; (2) applicable authorities policies and regulations; and (3) 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.

A total of seven individuals were interviewed from FPRD and DPDRD.  The complete list of personnel interviewed is provided in Appendix A.  In addition, the audit team conducted a review and analysis of applicable authorities, policies, as well as financial and non-financial documents from various relevant sources.  The 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 overall, the Department’s controls and processes related to the administration of the four major statutory vote transfer payments are effective and appropriate.

More specifically, the audit found that:

  • Effective controls and processes are in place and were operating during the period under audit; and
  • information systems are used appropriately.

Since no major issues were identified during the audit, no recommendations are provided and no management action plan is required.

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 Departmental objectives, and is indicative of the priority management should place on addressing, if applicable, the related recommendations.

The assessment summarizes the audit observations based on the factual evidence gathered and analyzed during the audit. 

Findings by Audit Criteria
Criteria Risk Exposure Assessment
Controls and processes are in place to ensure that the four major statutory vote  transfer payments are properly issued. Low

Effective controls and processes are in place, and were operating during the period under audit, to ensure that the four major statutory vote transfer payments to provinces and territories are properly issued.

The audit examined the Department’s controls and processes related to the issuance of the four major statutory vote transfer payments. A judgemental sample of 43 transactions was tested and analyzed. The sample included payments for each of the four main transfer payments to all of the provinces and territories and included payments issued in 11 accounting periods in the 2009-10 fiscal year. The sample value was approximately $3.3 billion, representing about 7% of the total amount transferred to the provinces and territories during the period examined. The audit team determined the following for the transactions tested:

  • Appropriate segregation of duties exists for approvals of Sections 33 and 34 of the Financial Administration Act and these approvals are performed by staff with the proper delegated authority.
  • Transactions are coded, recorded accurately, and issued on time for the approved amount. Month-end reconciliations are accurately performed.
In addition, the audit team found that there is an appropriate review and approval process in place for the calculation of the payment amounts and payment schedules.
Information systems are used appropriately to ensure the proper issuance of the four major statutory vote transfer payments. Low

Information systems are used appropriately to ensure the proper issuance of the four major statutory vote transfer payments.

The audit examined the Department’s controls and processes related to the information systems used in the issuance of the four major statutory vote transfer payments. The audit team determined the following:

  • There are appropriate access controls and user profiles in place for the information systems used in the issuance of the four major statutory vote transfer payments.
  • Procedures are in place to deliver accurate and timely transfer payments in the event of a major system failure.

Appendix A 

List of Department of Finance Canada Personnel Interviewed

Director, Corporate Accounting and Public Debt, Corporate Services Branch

Manager, Corporate Accounting and Public Debt, Corporate Services Branch

Senior Financial Analyst, Departmental and Public Debt Reporting, Corporate Services Branch

Jr/Financial Analyst, Departmental and Public Debt Reporting, Corporate Services Branch

Chief, Program Payments and Estimates, Federal-Provincial Relations Division

Economist, Program Payments and Estimates, Federal-Provincial Relations Division

Economist, Program Payments and Estimates, Federal-Provincial Relations Division

Appendix B 

List of Key Documents Consulted

Legislation

  • Federal-Provincial Fiscal Arrangement Act, February 22, 2010
  • Financial Administration Act, August 31, 2010

Documents Specific to Finance Canada

  • Corporate Risk Profile, 2009-10
  • Integrated Business Plan, 2009-10
  • Business Planning Input on Risks, Fiscal-Year 2009-10
  • Department of Finance’s Main Estimates, 2009-10 & 2010-11
  • Financial Records, April 2009 to February 2010 inclusive
  • Emergency Protocol - Transfer Payments to Provinces and Territories, 2009
  • Specimen Signature Cards, Sections 33 & 34
  • System Access and Profile, IFMS, Standard Payment System, and Access to Share Drive

Other Documents

  • Office of the Comptroller General Core Management Controls: A Guide for Internal Auditors (OCG), November 2007
  • Treasury Board Policy on Internal Control, April 1, 2009
  • Report of the Auditor General – Chapter 1, December 2008

Appendix C 

Audit Team

  • Roger Vachon, MA, Audit Manager
  • Olivia Zhu, MPA, CIA, Senior Auditor
  • Beth McClurg, CMA, Senior Auditor
  • Michael Allen, BComm, Auditor
  • Christian Kratchanov, MBA, CIA, Chief Audit Executive