Archived - Audit of the Control Framework for the Transfer Payments Process

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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 transfer payments process, among others, is subject to this requirement. This audit focuses on the control framework for the transfer payments 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 transfer payments and 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 transfer payments process are operating effectively as designed.

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

Background  

The Audit of the Control Framework for Transfer Payments 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 transfer payments.

As per the Department’s unaudited financial statements, transfer payments in 2011-12 were approximately $52 billion. The Department administers transfer payments to provinces and territories in accordance with the Federal Provincial Fiscal Arrangements Act (FPFAA) and other related Acts and Regulations. The major federal transfer payments include Fiscal Equalization, Territorial Formula Financing, the Canada Health Transfer, the Canada Social Transfer, the Wait Times Reduction Transfer, Statutory Subsidies, the Youth Allowances Recovery and Alternative Payments for Standing Programs.

The Federal-Provincial Relations Division (FPRD) of the Federal-Provincial Relations and Social Policy Branch (FPRSP) and FMD are the process owners for the transfer payments. Specifically, FPRD is responsible for administering the major federal transfer programs and serves as a liaison between the Department and its provincial and territorial counterparts. FMD is responsible for recording and processing the payments 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 transfer payments process are operating effectively as designed.

Scope

The scope of the audit includes:

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

The scope does not include:

  • Official computations (for payments/recoveries) of the transfer payment programs according to various federal Acts and regulations, as there were covered in the OAG’s Annual Public Accounts audit which recently concluded in August 2012.
  • 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 transfer payments 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, four 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 transfer payments 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 transfer payments process are operating effectively as designed. This includes effective controls regarding approval of transfer payments transactions to provinces/territories 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 transfer payments are authorized in accordance with legislative requirements and delegated authorities.
  • The Department has effective controls to ensure that transfer payment transactions are recorded accurately and in a timely manner.
  • The Department has effective internal controls over financial reporting for transfer payments.
  • The Department has effective controls to ensure that transfer payment 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 transfer payments. 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 transfer payment transactions are authorized in accordance with legislative requirements and delegated authorities. Effective The Department has effective controls to ensure that transfer payments are authorized in accordance with legislative requirements and delegated authorities.

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

The audit conducted detailed payment authorization tests to assess whether controls regarding the approval of transfer payments were operating consistent with the control matrix. The audit reviewed a population of payment requisitions representing 12 months of cash payments for fiscal year 2011-12 and six months of cash payments for fiscal year 2012-13, to assess the appropriateness of transfer payments and related approval.

The audit found that, as described in the departmental business process for transfer payments, controls were operating effectively as designed and that approval of payments for 2011-12 and 2012-13 (up to September 30, 2012) were authorized in accordance with Section 34 of the FAA.
2. Timely Recording into IFMS
The Department has effective controls to ensure that transfer payment transactions are recorded accurately and in a timely manner. Effective The Department has effective controls to ensure that transfer payment 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 transfer payment control framework. Specifically, the audit tested 70 transactions for fiscal year 2011-12 and 31 transactions for the first two quarters of fiscal year 2012-13.

The audit found that, as described in the departmental business process for transfer payments, controls in place to ensure accurate and timely recording of payment transactions were operating effectively as designed. The transactions tested for disbursements to provinces were accurate and authorized in accordance with Section 33 of the FAA; and the controls designed for recoveries from provinces 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 transfer payments. Effective The Department has effective internal controls over financial reporting for transfer payments.

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 and post-period process were carried out effectively on a regular basis. Specifically, for fiscal year 2011-12 and the first two quarters of fiscal year 2012-13, the audit tested transactions for Youth Allowance Recovery (YAR) accrual and loan receivable adjustments, as well as trial balances and reconciliation exercises to assess if they were completed consistently with the related controls outlined in the departmental business process for transfer payments.

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

The master recipient files contain the payment and banking information for the provincial and territorial recipients. Maintaining these files with the most up to date information is critical to ensure that payments 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 provincial and territorial recipients 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
  • Manager, Public Debt, Financial Management Directorate, Corporate Services Branch
  • Economist, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch
  • Senior Financial Analyst, Departmental and Public Debt Reporting, Financial Management Directorate, Corporate Services Branch

Appendix B - Key Reference Documents

Legislation

  • Federal-Provincial Fiscal Arrangements Act - Current to June 27, 2012
  • Federal-Provincial Fiscal Arrangements Regulations, 2007 - Current to September 4, 2012
  • Financial Administration Act

Policy

  • TB Policy on Internal Control
  • TB Policy on Transfer Payments

Other Document

  • OCG’s Audit Criteria Related to the Management Accountability Framework
  • OAG Public Accounts Audit - Department of Finance – For the year ended March 31, 2012

Documents Specific to Finance Canada

  • Budget 2012: Chapter 4: Sustainable Social Programs and a Secure Retirement
  • Business process for transfer payments 2011-12 and 2012-13
  • Financial Signing Authorities Manual
  • Additional Departmental documentation related to transfer payments

Appendix C – Members of the Audit Team

This audit was conducted by:

  • Olivia Zhu, MPA, CIA, CRMA, CFE – Acting Audit Manager, Internal Audit and Evaluation
  • Abdillahi Roble, B.Comm, CGA, CIA – Acting Audit Manager, Internal Audit and Evaluation
  • Ziad Shadid, B.Comm, CGA, CIA – Audit Manager, Internal Audit and Evaluation
  • Christian Kratchanov, MBA, CIA, CRMA, CMC – Chief Audit and Evaluation Executive, Internal Audit and Evaluation