ARCHIVED - Internal Audit Report of Fiscal 2006-2007 Year-End Cash Cut-Off Procedures

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December 2007

Table Of Contents

• Executive Summary
• Introduction
• Audit Objective and Scope
• Approach and Methodology
• Findings, Recommendations and Action Plans
  • Adequacy of Revenue Systems and Procedures
  • Recording of Cash Receipts
  • Cash in Transit Calculation Methodology and Internal Controls
• Appendix A - List of Acronyms
• Appendix B - Audit Criteria

Executive Summary

Background

The Government of Canada changed its basis of accounting to full accrual basis for the preparation of financial statements as part of the Financial Information Strategy in 2001. To support accrual accounting, the 2006-2007 Receiver General Manual stipulates that monies negotiated on or before March 31, 2007, but not credited by the Bank of Canada or any other financial institution, are classified as cash in transit (CIT). For fiscal year 2006-2007, the Canada Border Services Agency (CBSA) reported a total of over $1.3 billion of CIT.

In its examination for the Public Accounts of Canada audit of the CBSA, the Office of the Auditor General of Canada (OAG) relies on the work of the CBSA Internal Audit Directorate for oversight activities related to the year-end cash receipts cut-off. The Directorate currently completes one financial attest internal audit relating to the year-end cash receipts cut-off and provides an independent verification of the CIT calculation in order to ensure the accuracy of the CIT amount reported by the CBSA.

Objective and Scope

The objective of the Audit of Fiscal 2006-2007 Year-End Cash Cut-Off Procedures is to ensure that the CIT was recorded in the appropriate fiscal year and to conduct a follow-up of the results found in the Audit of Fiscal 2005-2006 Year-End Cash Cut-Off Procedures. The 2006-2007 audit was conducted between June and August 2007.

The scope of the audit included a follow-up of previous fiscal year recommendations and current fiscal year operations in the Comptrollership Branch of the CBSA. A sample of customs revenue reports (K10 forms) from March 29 to May 31, 2007, were selected from eight regional offices with receipt dates for old fiscal year transactions (March 29 to 31, 2007).

Assurance Statement

This audit concluded that the CBSA was compliant with government year-end procedures for fiscal year 2006-2007. The audit found that the CIT was recorded in the appropriate fiscal year with no material error. However, procedural improvements were identified to help reduce future risks of material errors in year-end cash figures.

Audit Findings

In response to the previous year's audit, management actions are still underway. The Comptrollership Branch issued year-end procedures on February 28, 2007, to the regional offices with instructions on how to input cash receipts in the Customs Commercial System (CCS) G11 screen, with special attention given to the “Date of Receipt” field. In addition, the Comptrollership Branch developed a formal CIT methodology and prepared a draft CCS/G11 manual that was sent to the Admissibility Branch for review. The Comptrollership Branch indicated that the manual would be distributed to regional offices before the end of fiscal year 2007-2008.

During this audit, errors were identified with the “Date of Receipt” in the CCS/G11 screen and were corrected by the CBSA in their calculation of the CIT.

Opportunities for improvement were noted with respect to the training of employees on the CIT methodology and segregation of duties. Recommendations were made, such as clarifying the CIT methodology, training employees to provide continuity and corporate memory, and developing a sampling methodology to examine the transactions that are most at risk from regional offices.

Management Response

The CIT and bank reconciliation procedures will be modified to include additional information, making the procedures more “user-friendly” and clarifying roles and responsibilities. Input and monitoring duties have been segregated, and additional resources are being trained to ensure continuity in the CIT calculation and bank reconciliation functions. The upcoming year-end CIT calculation will include a sampling of at-risk transactions.

In addition to the actions taken to address the specific recommendations, the implementation of the Revenue Ledger should eliminate some of the complexity in determining the CIT amount. The Revenue Ledger is scheduled to be implemented in January 2008 for use at the 2007-2008 year-end.

Introduction

The Canada Border Services Agency (CBSA) collects approximately $28 billion in revenue per year. The Agency uses a Customs Commercial System (CCS), as well as the Corporate Administration System (CAS) for capturing revenue receipts deposited to the credit of the Receiver General for Canada.

The Comptrollership Branch of the CBSA issues instructions at the end of every fiscal year to ports of entry / regional offices for the processing of cash payments received at year-end. Cash in transit (CIT) is defined as public money received on or before March 31 that is negotiable on or before this date, and is not credited by the Bank of Canada or any other financial institution to the Receiver General for Canada. For fiscal year 2006-2007, the CBSA reported a total of over $1.3 billion of CIT.

The Audit of the 2005-2006 Year-End Cash Cut-Off Procedures found that the CIT was reported in a satisfactory manner. The audit noted that there were no documented procedures for the calculation of the CIT. As a result, the audit recommended that the Comptrollership Branch provide all regional offices and ports of entry with clear and complete instructions on how to complete the cash received G11 screen, with special attention given to the “Date of Receipt” field.

As part of the 2006-2007 Public Accounts of Canada audit of the CBSA, the Office of the Auditor General of Canada (OAG) relies on the work of the Internal Audit Directorate for activities related to the year-end cash cut-off.

Audit Objective and Scope

The objective of the Audit of Fiscal 2006-2007 Year-End Cash Cut-Off Procedures is to ensure that CIT was recorded in the appropriate fiscal year and to conduct a follow-up of the results found in the Audit of Fiscal 2005-2006 Year-End Cash Cut-Off Procedures. The 2006-2007 audit was conducted between June and August 2007.

The scope of the audit included a follow-up of previous fiscal year recommendations and current fiscal year operations in the Comptrollership Branch of the CBSA. A sample of customs revenue reports (K10 forms) from March 29 to May 31, 2007, was selected from eight regional offices with receipt dates for old fiscal year transactions (March 29 to 31, 2007).

Approach and Methodology

The audit was conducted in accordance with the Treasury Board of Canada Secretariat's Policy on Internal Audit. The approach used in carrying out the audit included the following:

• reviewing the Comptrollership Branch instructions and methodology for processing year-end cash receipts;
• interviewing stakeholders engaged in year-end cash management and collection;
• examining CCS/G11 (a system that collates all payment entries made to the CBSA) screen fields and sampling stratified data based on materiality;
• reviewing Customs Revenue Report (K10 form) packages so that the date received can be compared with the “Date of Receipt” field. This entailed reviewing remittance and accounting documents such as the K10 form worksheet, cash book, receipt, invoice (if applicable), G11 screen printout, bank deposit slip with the bank stamp and the shortage/overage report (if applicable); and
• validating the CIT value based on the relevant CCS/G11 screen fields for this fiscal year, and verifying the recommendation from the last fiscal year relating to general ledger corrections.

Findings, Recommendations and Action Plans

Overall, the year-end cash cut-off procedures were followed and the reporting of the CIT by the Comptrollership Branch was in accordance with government year-end policies, procedures and methodology. In response to the previous audit, the Comptrollership Branch issued a year-end cash cut-off procedure (on February 28, 2007) that provided regional offices and ports of entry clear and complete instructions on how to complete the “Date of Receipt” field in the G11 screen. As well, the Comptrollership Branch documented the procedure for the calculation of the CIT.

During this audit, data input errors were identified in the “Date of Receipt” field in the CCS/G11 screen. These errors were largely identified and corrected by the Comptrollership Branch in its calculation of the CIT. An immaterial variance was identified with the CIT reported amount and was brought to the attention of the Comptrollership Branch for further examination.

Opportunities for improvement were noted with respect to the training of employees on the CIT methodology and segregation of duties. Recommendations were made, such as clarifying the CIT methodology, training employees to provide continuity and corporate memory, and developing a sampling methodology to examine the transactions that are most at risk from regional offices.

Adequacy of Revenue Systems and Procedures

Year-End Procedures and Cash Cut-Off Data Input Instructions for Regional Staff

In response to the previous year's audit, management actions are underway. The Comptrollership Branch issued year-end procedures on February 28, 2007, to the regional offices with instructions on how to complete the CCS/G11 screen, with special attention given to the “Date of Receipt” field. The Branch also instituted monthly conference calls to ensure better communication and awareness of the requirements. Out of 200 offices, 75 confirmed receipt of the procedures by signing and returning a certificate indicating that the procedures were communicated, understood and discussed with the relevant regional employees (e.g. superintendents, supervisors and cashiers), and the offices obtained clarification, where required, from the Comptrollership Branch.

As part of the audit, feedback was requested from the regions regarding the acceptability of year-end procedures. The regions indicated that the year-end procedures were adequate for the recording of payments at year-end. However, they suggested that the time zone for the cash cut-off should be specified in the procedures and that a glossary at the end of the document would be useful for regional employees not familiar with accounting terms.

In addition, a draft CCS/G11 system manual was prepared by the Comptrollership Branch and reviewed by the Admissibility Branch. The manual should provide a comprehensive overview and explain all functions used under the CCS/G11 system. A user group of regional employees is currently finalizing the manual, which is to be released later this fiscal year.

Bank Reconciliation Procedure at the Comptrollership Branch

The Comptrollership Branch is responsible for the reconciliation of all remittances made to the Receiver General for Canada through the CBSA's regional offices. Although reconciliation is primarily centered within the Revenue Ledger, this undertaking requires the use of the CCS/G11 screen, as well as tools and various techniques to ensure the proper accounting of all remittances. The procedures for bank reconciliation are technical and do not include a general overview of key elements, such as duties, responsibilities and linkages to other systems. Additional context and guidance would provide a better understanding of various procedures to ensure timely bank reconciliation, continuity and corporate memory.

Cash in Transit

The audit noted that the CIT procedure was formalized but not formally approved by senior management. The CIT procedure was developed and followed by the Comptrollership Branch. A walk-through of this procedure identified that the procedure was technical and required additional details in order to be understood and used by finance personnel, who may not have knowledge of CBSA financial systems and procedures or an understanding of their roles, responsibilities and authorities.

The audit also noted that only one person in the Comptrollership Branch had adequate CIT knowledge. Therefore, there is a risk that corporate memory, continuity and functional capacity could be lost if the individual left the CBSA.

As well, the final CIT amount was finalized and presented orally within the Comptrollership Branch for acceptance of the amount to be reported in the Public Accounts of Canada. Oral approval does not facilitate the tracing of dates of reviews or ensure the necessary corrections.

Recommendation

1. The Comptrollership Branch should do the following:
   1. finalize procedures related to the CIT calculation and bank reconciliation to include an overview of these procedures, clearly delineate the Branch's roles and responsibilities and include a description of the related systems and data;
   2. develop training and a succession strategy /backup to ensure the continuity of corporate memory and functional capacity; and
   3. modify the procedures to include written approval of the CIT amount to be reported in the Public Accounts of Canada.

Recording of Cash Receipts

The regions did not always follow the requirement for one Customs Revenue Report (K10 form) against one deposit. The bank reconciliation duties in the Comptrollership Branch were not appropriately segregated, as the person who carried out these duties was responsible for both cash cut-off data input and bank reconciliation.

K10 Form Worksheets

Once a transaction is paid, it is recorded on a manual K10 form worksheet and in a cashbook. At the end of the day, it is normally deposited at the bank and includes the bank authorization number (BAN). The following day, when the deposit slip is returned stamped by the bank, the transaction is entered in the CCS/G11 system. For control purposes, the system does not allow the regions to backdate payments after a few days, and the regions are instructed to request that the Comptrollership Branch register the payments in the G11 on their behalf.

The old year-end remittance procedures stipulate that a deposit/BAN includes only one K10 form with the total dollar amount distributed to the appropriate revenue codes indicated on the payment documents. The audit found that this procedure was not always being followed, and this non-compliance resulted in an increased workload in the Comptrollership Branch to reconcile amounts since the unmatched amounts have to be matched manually to calculate the CIT.

Bank Reconciliation

The audit found that cash data input and monitoring roles were assigned to the same individual. At the time of the audit, the individual was able to access the CCS/G11 system to add, change and delete customs revenue reports while reconciling remittances with the bank statements. The Comptrollership Branch relies on accurate and complete reconciled data before proceeding with the CIT calculation. While the audit did not uncover any problems associated with this lack of segregation, dual access could be problematic in terms of data integrity and reliability. It is noted that the segregation of duties in the Comptrollership Branch was identified as an issue within the Comptrollership Branch in the Audit of Cash Management of 2006.

Recommendation

2. The Comptrollership Branch should review the duties related to bank reconciliation and ensure that they are properly segregated.

Cash in Transit Calculation Methodology and Internal Controls

Errors in the “Date of Receipt” field required manual adjustment by the Comptrollership Branch.

Accuracy of the Cut-off Date for Cash Data Input

In the CCS/G11 system, data must be entered in two mandatory fields: the “Date of Receipt”, which is the date payment was received by the regional offices, and the “Deposit Date”, which is the date the payment was deposited at the financial institution. Ports of entry / regional offices must be diligent in accounting for and reporting amounts received on or prior to March 31 as “old year cash,” regardless of the date actually deposited so that the CIT can be correctly identified and reported. The G11 system posts data in the Revenue Ledger on the basis of the entry date.

In the examination of 57 Customs Revenue Reports over $100 thousand, the audit found 4 immaterial instances where the “Date of Receipt” entered in the G11 was in fact the deposit date. In particular, some remittances made on March 31 showed the “Date of Receipt” as April 3, which was the date of deposit at the bank. Instructions at year-end stress the need to reflect all cash received as of March 31 as having been received in the same fiscal year regardless of the date entered or deposited. Most cashiers complied with this requirement; however, some errors did occur and the cash was entered as received in the new fiscal year. This was due to a lack of awareness, missing or misplaced instructions by regional employees or a lack of supervisory review. If the date of receipt is entered incorrectly, the cash and the accounts receivable will be incorrectly stated at year-end.

Completeness of the CIT Methodology

The calculation of the CIT is an automated function of the Agency's financial system and the “Date of Receipt” drives its calculation. The current CIT methodology includes manual manipulation to reduce the risk of errors related to the “Date of Receipt” field described above. The audit noted that the methodology did not include a sampling or confirmation of the K10 transactions most at risk for the last and first few days of the previous and new fiscal years. There is a risk that the amounts received before year-end are not included in the CIT if the “Date of Receipt” is incorrectly input in the CCS/G11 system. This additional step would further validate reporting the CIT amount.

Recommendation

3. The Comptrollership Branch should develop a sampling methodology to examine the transactions that are most at risk from regional offices.

Appendix A - List of Acronyms

Appendix B - Audit Criteria