Audit of
Payables at Year-End
March 18, 2010
Final Report
Audit of
Payables at Year-End
March 18, 2010
Final Report
Audit Key Steps
Planning completed
Engagement start date
Field work completed
Exit conference
Draft audit report completed
Report sent for management response
Management response received
Final report completed
Tabling of report to the External Audit Advisory
Committee
Approved by the Deputy Minister
March 2009
April 2009
September 2009
November 2009
November 2009
November 2009
N/A
January 2010
March 18, 2010
March 18, 2010
Acronyms
EC
DAO
FAA
PAYE
TBS
Environment Canada
Departmental Accounting Office
Financial Administration Act
Payable at year end
Treasury Board Secretariat
Prepared by the Audit and Evaluation Team
Acknowledgments
The audit team responsible for this project, comprised of Nelson Jones, Audit
Consultant, Lise Gravel, Auditor and Stella-Line Cousineau, Audit Manager under the
direction of Jean Leclerc, would like to thank those individuals who contributed to this
project and, particularly, employees who provided insights and comments as part of this
audit.
Original signed by
__________________
Chief Audit Executive
Table of Contents
EXECUTIVE SUMMARY ................................................................................................. v
1 INTRODUCTION.......................................................................................................... 1
1.1
Background ..................................................................................................... 1
1.2
Project Significance ......................................................................................... 1
1.3
Objective(s) and Scope.................................................................................... 2
1.4
Methodology .................................................................................................... 2
1.5
Statement of Assurance .................................................................................. 4
2. FINDINGS ............................................................................................................... 4
2.1
Payable at Year-End Internal Control System .................................................. 4
2.2
Testing – Payable at Year-End Transactions ................................................... 5
2.3
Prepayment of Contracts ................................................................................. 7
3
CONCLUSION ........................................................................................................ 7
Annex 1 Audit Criteria Year-End Payable Transaction Testing ........................................ 8
Annex 2 List of Background Information and Supporting Documentation ........................ 9
Environment Canada
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Audit of Payables at Year-end
EXECUTIVE SUMMARY
This audit was included in Environment Canada’s Risk-Based Audit and Evaluation Plan
2008-2011, approved by the Deputy Minister.
Environment Canada’s Corporate Accounting Division is responsible for establishing
year-end timetable and procedures and assisting the Department to be in compliance
with the Treasury Board Policy on Payables at Year-End. They are also responsible for
summarizing year-end requirements that departmental accounting offices must comply
with in order for the Department to meet its year-end obligations to central agencies;
specifically, Public Works Government Services Canada, Receiver General for Canada1
and the Treasury Board of Canada Secretariat.
The purpose of establishing payables at year-end is to ensure that liabilities existing at
the fiscal year-end for work performed, goods received, and services rendered, transfer
payment and other items are recorded in the accounts and financial statements of
Canada in the correct fiscal year. Payables at year-end are set up when payments for
old year goods/services cannot be made by the required cut off date.
The audit objectives were to provide assurance that the Department is in compliance
with the Treasury Board of Canada Secretariat Policy of Accounts Payable at Year-End
by verifying that the liabilities existing at year-end are recorded accurately in the
accounts; and that there are no material errors in the recording of contractual payments
at year-end.
A total of $60M in payable at year end was created for fiscal year 2008-09. This
included payment to external suppliers ($32.6 M), interdepartmental settlements to other
government departments ($10.7 M) and salary transactions ($17 M). The testing
included 134 transactions specific to external suppliers and interdepartmental
settlements for a total of $1,591 M.
Statement of Assurance
This audit has been conducted in accordance with the International Standards for the
Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury
Board of Canada.
In our professional judgement, sufficient and appropriate audit procedures have been
conducted and evidence gathered to support the accuracy of the conclusions reached
and contained in this report. The conclusions were based on a comparison of the
situations, as they existed as the time, against the audit criteria.
1
Receiver General Manual, Chapter 14
Environment Canada
v
Audit of Payables at Year-end
Summary of Findings and Conclusions
The audit concluded that overall, the Department is compliant with the requirements of
the Treasury Board Secretariat of Canada Policy on Payables at Year-End and
Environment Canada procedures. The audit also revealed that Environment Canada’s
internal control system to set up payable at year end is documented and communicated.
It should be noted that results were not sufficient to support an audit opinion of payables
at year-end for the purposes of audited financial statements.
In addition, the testing did not reveal material errors in the recording of contractual
payments at year-end. No recommendations are included in this audit report.
Environment Canada
vi
Audit of Payables at Year-end
1. INTRODUCTION
This audit was included in Environment Canada’s Risk-Based Audit and Evaluation Plan
2008-2011, approved by the Deputy Minister.
1.1 Background
Section 37 of the Financial Administration Act (FAA) requires all departments and
agencies to record as a charge against the appropriation to which it relates, work
performed, goods received or services rendered before the end of a fiscal year. The
Treasury Board Policy on Payables at Year-End requires that all expenditures be
recorded in the fiscal year during which the goods or services have been received but
for which payment has not been made. In some cases, an exact liability will not be
known since an invoice from the supplier will not have been received; the policy permits
the use of estimates in those circumstances.
Old year goods and services paid for in the new fiscal year must be charged against
specific payables at year-end coding supplied by Finance Corporate Services Branch
and not recorded as a charge against the new-year’s appropriation.
Environment Canada’s Corporate Accounting Division is responsible for establishing
year-end timetable and procedures and assisting the Department to be in compliance
with the Treasury Board Policy on Payables at Year-End. They are also responsible for
summarizing year-end requirements that departmental accounting offices must comply
with in order for the Department to meet its year-end obligations to central agencies;
specifically, Public Works Government Services Canada, Receiver General for Canada2
and the Treasury Board of Canada Secretariat.
A total of $60M in payable at year end was created for fiscal year 2008-09. This
included payment to external suppliers ($32.6 M), interdepartmental settlements to other
government departments ($10.7 M) and salary transactions ($17 M).
1.2 Project Significance
In 2004, Treasury Board of Canada Secretariat required departments and agencies to
conduct assessments of their readiness to completely adopt full accrual accounting
practices and be ready to withstand the rigor of an audit of their financial statements.
In November 2007, Environment Canada hired Ernst & Young to conduct the
assessment on the Department’s behalf. The assessment found that there were
deficiencies in a number of areas which included the financial statement preparation and
2
Receiver General Manual, Chapter 14
Environment Canada
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Audit of Payables at Year-end
transactional processes3. More specifically, control deficiencies in the procurement and
accounts payable processes primarily in the year-end accrual estimation and related cutoff procedures were identified.
Through internal consultation, as part of the Annual Risk-Based Audit and Evaluation
Plan, additional elements that could possibly impact the level of risk associated with
year-end expenditures were highlighted, as follows:
 the process for establishing payables at year-end is not automated;
 there is a high level of transactions in a short period of time;
 there is a risk that payables at year-end are not adequately supported by
documentation.
In 2003/2004 and in 2004/2005, Internal Audit completed two audits of the accounts
payable process in use at Environment Canada. The results of these audits found that
there were no control deficiencies, however a number of recommendations dealing with
internal procedures were made and have been fully implemented. Notwithstanding
those two audits, there has been no audit in the last ten years that assessed and
reported on the Department’s payable at year-end process. Therefore, this audit
focused on the establishment of payables at year end only for fiscal year 2008-2009.
1.3 Objective(s) and Scope
The audit objectives were to provide assurance that the Department is in compliance
with the Treasury Board Secretariat Policy on Payables at Year-End by verifying that the
liabilities existing at the fiscal year-end are recorded accurately in the accounts; and that
there are no material errors in the recording of contractual payments at year-end.
In Scope
The audit included payable at year end transactions relating to regular payments to
external suppliers ($32.6 M) and interdepartmental settlements to other government
departments ($10.7 M). Payable at year end transactions from all regions were covered
in the scope of the audit. The testing included a total of 134 transactions for a value of
$1.591 M (3.7%).
Out of Scope
Salary Management System transactions ($17 M) were scoped-out because the system
to establish payables at year-end is completely automated and leaves very little room for
error. Receivable transactions were also excluded because these were covered in the
Audit of Accounts Receivable conducted by Internal Audit in fiscal year 2008-2009.
1.4 Methodology
The audit was conducted in accordance with Generally Accepted Accounting Principles
(GAAP), the International Standards for the Professional Practice of Internal Auditing
3
Ernst & Young, Environment Canada, Audit Readiness Assessment-Phase One, Section II, Financial Statement
Processes and Transactional Controls.
Environment Canada
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Audit of Payables at Year-end
and the Treasury Board Policy on Internal Audit. The audit involved an examination of
background information, interviews and year-end transaction testing. The audit
methodology included:
Examination of Documentation
Treasury Board and departmental policies, procedures and guidelines were reviewed to
determine what tools are available and/or used to manage year-end transactions. A list
of documents examined during the audit is attached in Annex 2.
Sampling & Testing
The testing of the transactions was conducted in three parts:
1) A judgmental sample of twenty (20) payable at year-end transactions totaling
$321,372.00 was selected from the department’s financial system’s data base.
The selection was based on high risk transaction types as identified in the
Department's Statistical Payment Sampling Policy. This test was conducted to
determine whether the payments were properly supported and recorded as
payable-at year-end expenses, and to determine if the goods were received
and/or services rendered prior to fiscal year-end.
2) A random sample of fifty-three (53) contracts totaling $502,519.00 was selected
from the financial system’s data base. The sample only included contracts issued
during the months of February and March with an end-date of no later than
March 31, 2009. This test was conducted to ensure that goods and services
were in fact received prior to March 31.
3) A judgmental sample of sixty-one (61) contracts totaling $767,846.21 was
selected from the financial system’s data base. The sample was filtered to
include contracts with a value of over $5K4 and a contract end date in the new
fiscal year. This test was conducted to determine if any contracts ending in the
new fiscal year were being paid out of the old fiscal year budget.
Evidence gathered to support the testing included but was not limited to documentation
such as, contract deliverable information, purchase orders, invoices, proof of delivery,
payable at year-end spreadsheets, etc. The evidence obtained was provided by
departmental accounting officers and program managers.
Annex 1 provides detailed audit criteria for each phase of testing.
Interviews
The audit team interviewed employees in the Corporate Accounting office to obtain a
better understanding of their business processes. In addition, departmental accounting
officers provided information regarding their internal processes.
4Liabilities
to be charged to an appropriation must be accrued if they exceed the lesser of $5,000 or one-half of one
percent of the appropriation authority. Lesser amounts may be accrued at the discretion of each department. (reference
Treasury Board Secretariat of Canada Payable at year-end Policy)
Environment Canada
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Audit of Payables at Year-end
Data Source
The payable at year-end data was obtained from the National Payable at Year-End
Report created from the departmental financial reporting system (Discoverer) as at April
24th, 2009.
1.5 Statement of Assurance
This audit has been conducted in accordance with the International Standards for the
Professional Practice of Internal Auditing and the Policy on Internal Audit of the Treasury
Board of Canada.
In our professional judgement, sufficient and appropriate audit procedures have been
conducted and evidence gathered to support the accuracy of the conclusions reached
and contained in this report. The conclusions were based on a comparison of the
situations, as they existed at the time, against the audit criteria.
2. FINDINGS
Recently introduced changes to legislation governing the Proactive Disclosure of
Contracts to include the disclosure of amendments effective as of April 1st, 2009, has led
to a review of the Department’s Payable at Year-end (PAYE) procedures. As a result,
significant changes occurred this year in the way of creating payables at year-end, such
as the requirement to create them from the accounts payable module instead of the
general ledger module. As well, tighter timelines to provide payable at year-end
information were implemented.
This approach was developed in consultation with other departments to determine the
most effective means of processing PAYEs which relate to procurement contracts. In
addition to ensuring Proactive Disclosure compliance, the new approach will have
numerous benefits including:




reduced requirement for year end decommitment of contracts related to PAYE's,
purchase orders matching to appropriate financial code,
better tracking and accounting of assets, and
better internal controls for accrual balances.
2.1 Payable at Year-End Internal Control System
The Treasury Board Policy on Internal Controls requires the Department to ensure the
establishment, maintenance, monitoring and reviewing of internal controls to mitigate
risks relating to the reliability of financial reporting. Proper recording of financial
transactions permits the preparation of internal and external financial information,
reports and statements in accordance with policies, directives and standards.
Environment Canada
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Audit of Payables at Year-end
The Department’s Finance and Corporate Services Branch is centralized and has
Departmental Accounting Offices located in each region, herein after referred to as
DAOs. Finance Corporate Accounting Division is responsible for producing, publishing
and interpreting year-end timetable and procedures, as well as assisting departmental
accounting offices (DAOs) in all requests pertaining to year-end. Corporate Accounting
is also responsible for ensuring that the Department meets all requirements indicated in
Chapter 14 of the Receiver General Manual. These instructions are posted on the
Finance Intranet web page and updated as required.
Departmental accounting offices are responsible for implementing the payable at yearend procedures in their respective regions and services. While, instructions sent to
program managers are slightly different from one region to the other; the principles and
timelines are very similar across the Department and respect the Treasury Board Policy
on Payables at Year-End requirements and the instructions from the Corporate
Accounting Division.
Treasury Board Policy on Payable at year end stipulates that “Section 33 (FAA)
certification of requisitioning authority is required when the debt is charged against the
appropriation and again when the debt is settled. This permits financial officers to review
the legality of the transaction and to exercise the appropriate controls in both instances”.
Furthermore, the policy stipulates that “Section 34 (FAA) certification for performance or
compliance with contract is required at the time the appropriation is charged”
At Environment Canada, program managers are required to record and identify year end
liabilities on a “Payable at Year-End Form” or listing. In order to validate the accuracy
and integrity of PAYE, all forms require Section 34 certification by the program
managers along with back up information. These are then submitted to the responsible
departmental accounting office for processing where section 33 is performed.
While there are no formal procedures that provide specific monitoring instructions for the
departmental accounting officers, all have implemented some type of monitoring such
as, following-up with program managers, reviewing and updating outstanding payable at
year-end transactions either on a monthly basis and/or as transactions are received.
Furthermore, Corporate Accounting Division holds a formal follow-up exercise on all
outstanding payables at year end in the fall, as departments are required to submit to
the Receiver General preliminary representations by Period 9.
2.2 Testing – Payable at Year-End Transactions
Payable at year-end transactions are created for expenses that are incurred prior to
year-end, but the payment cannot be processed. In some instances it may not be
possible to receive the invoice in time from the vendor or there could be a dispute with
the vendor. In these instances, a payable at year-end is created for the amount owing
and it is paid in the following year.
This portion of the testing involved the examination of a judgmental sample of twenty
payable at year-end transactions created for fiscal year 2008-2009 totaling $321,372.00.
Environment Canada
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Audit of Payables at Year-end
The selection was based on high risk transaction types as identified in the Departmental
Statistical Sampling Policy. The following table represents the type of expenses
covered by this testing.
Table 1
Number
of PAYE
Type of expenses
Total
Training
Hospitality Expenses
Miscellaneous
Electronic Equipment
Materials
Stationary & Office Supplies
Computer Supplies (Including, cables, diskettes)
Informatics Hardware/Parts-Non Capital
1
1
1
1
1
1
2
1
$7,800.00
716.45
11,750.00
672.00
23,690.64
2,139.60
9,958.80
1,000.00
TRACKED ASSETS-Measuring, Controlling, Laboratory
1
18,232.00
TRACKED ASSETS-Video conferencing - equipment
TRACKED ASSETS-Laptops-Non Capital
1
1
381.54
1,540.00
Tracked Assets - Telecommunications Equipment
Furniture & Furnishings & Appliances
Informatics Software-Non Scientific-Non Cap
Ships & Boats (excluding parts)-Non Capital
Off-Road Vehicles
Work in Progress (WIP) Laboratories - Capital
Totals
1
3
1
1
1
1
20
43,656.32
35,051.83
350.42
6,980.00
11,220.00
146,232.61
$321,372.00
The testing looked at whether the liability existed and that it was properly recorded, that
section 34 was performed and that the goods have been received and/or that the
services have been rendered, by obtaining and reviewing supporting documentation.
When payable at year-end transactions are created, evidence such as a final report;
purchase order; packing slip or other types of documentation should exist to prove that
the work has been performed, good received and/or services rendered. The following
table presents the results of testing.
Table 2
Test
Liability existed and properly recorded
Section 34 Certification by program
managers
Pertinent back-up (Invoice, packing
slip, copy of deliverable)
PAYE Transactions (20)
All
All
14
As indicated above, all payable at year end transactions were supported by Section 34
certification of the FAA as required by Treasury Board Policy on Payables at Year-End.
Environment Canada
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Audit of Payables at Year-end
In addition, fourteen of the transactions tested were also supported by some of type of
evidence as a proof that they were in fact a bona fide payable at year end along with the
Section 34 of the FAA. The remaining six transactions were for service contracts.
The review of the control system revealed that the DAOs in four regions are clearly
requesting program managers to provide pertinent back-up documentation when
creating a payable at year end, while two other DAOs were silent on this requirement.
Although this is not a Treasury Board requirement, it can be considered as a best
practice from a control perspective, as this may ensure the integrity of the payable at
year-end process and decrease the risk of lapsing funds. However, given that there are
limited resources within Finance with already full workloads, this is not being considered
in the department at this time.
The audit also looked at year end contracts. Specifically, the analysis was conducted to
verify whether the work performed for service contracts was in fact fulfilled on or prior to
fiscal year-end and paid against the appropriate budget. This was done by examining
the evidence obtained from the program areas. Fifty-three contracts awarded towards
the end of the fiscal year totalling $502,519.55 were reviewed.
Of the fifty-three contracts examined, there was one contract in the amount $5K where
the audit team was unable to obtain evidence that the service was in fact rendered. The
testing also revealed that there was one other contract for which a PAYE was set-up for
the whole amount ($24,500) although it was only partially completed (90%).
2.3 Prepayment of Contracts
This portion of the testing involved an examination of sixty-one contracts (61) with an
end date in the new year totaling $767,846.21. The testing was conducted to validate
that the payment of all or part of a contract, with deliverables in the new fiscal year, was
not paid prior to its due date.
The results of the analysis confirmed that the payments were recorded in the proper
fiscal year.
3. CONCLUSION
The audit concluded that overall, the Department is compliant with the requirements of
the Treasury Board Secretariat of Canada Policy on Payables at Year-End and
Environment Canada procedures. The audit also revealed that Environment Canada’s
internal control system to set up payable at year end is documented and communicated.
It should be noted that results were not sufficient to support an audit opinion of payables
at year-end for the purposes of audited financial statements.
In addition, the testing did not reveal material errors in the recording of contractual
payments at year-end. No recommendations are included in this audit report.
Environment Canada
7
Audit of Payables at Year-end
Annex 1
Audit Criteria Year-End Payable Transaction Testing
AUDIT CRITERIA
Criteria 1: The payable transaction is a bona-fide payable at year-end and is
appropriately recorded in the accounts. The transaction is a proper charge to the
2008-2009 appropriation authority
The goods and services have been received?
The supporting documentation has been reviewed and is dated prior to year-end?
In general, the Department is in compliance with Treasury Board Policy on Payables at
Year-End?
Criteria 2: The payments represent contracted goods and services received or
performed prior to year-end cut-off and are properly recorded in the accounts.
The payments are a proper charge to the 2008-2009 appropriation authority
The commitment is properly recorded?
The goods have been received or services have been performed prior to year-end?
The supporting documentation (invoices, delivery or packing slips, etc.) confirms a
contract deliverable?
Environment Canada
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Audit of Payables at Year-end
Annex 2
List of Background Information and Supporting
Documentation
Treasury Board of Canada Secretariat, Policy on Payables at Year-End (PAYE)
Treasury Board of Canada Secretariat, Account Verification Policy
Treasury Board of Canada Secretariat, Internal Control Policy
Environment Canada, Corporate Accounting, Year-End Timetable and Procedures for
2008-2009, March 11, 2009
Environment Canada, Section 33 – Statistical Payment Sampling Policy
Environment Canada, Audit and Evaluation Directorate, Audit of Accounts Payable –
NCR, March 2005
Environment Canada, Audit and Evaluation Directorate, Audit of Accounts Payable, July
16, 2003
Environment Canada, Three Year Risk Based Audit and Evaluation Plan 2009-2012
Environment Canada Financial Statement 2007-2008
Ernst and Young, Environment Canada Audit Readiness Assessment – Phase One and
two, November 2007,
Justice, Financial Administration Act
PWGSC, Receiver General Manual
Environment Canada
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Audit of Payables at Year-end
Environment Canada
10