ARCHIVED - Audit of Fiscal 2007-2008 Year-end Cash Cut-off Procedures

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Internal Audit Report

October 2008

Table of Contents

• Executive Summary
• Introduction
  • Background
  • Risk Assessment
  • Audit Objective and Scope
  • Approach and Methodology
  • Audit Criteria
  • Statement of Assurance
• Audit Opinion
• Findings, Recommendations and Management Action Plan
  • Policies and Procedures
  • Training and Segregation of Duties
  • Recording of Cash Receipts and Cash in Transit Methodology
• Appendix - List of Acronyms

Executive Summary

Background

The Government of Canada has been reporting on a full accrual basis for the preparation of its financial statements since 2001. To support accrual accounting, the 2007-2008 Receiver General Manual stipulates that monies negotiated on or before March 31 but not credited by the Bank of Canada or any other financial institution, are classified as cash in transit (CIT). For fiscal year 2007-2008, the Canada Border Services Agency (CBSA) reported a total of over $1.3 billion of CIT.

For its annual audit of the CBSA for the Public Accounts of Canada, the Office of the Auditor General of Canada relies on the audit work conducted by the CBSA's Internal Audit Directorate pertaining to the year-end cash receipts cut-off procedures and the recording of amounts in the proper fiscal year. The Directorate performs the financial attestation relating to the year-end cash receipts cut-off procedures, and it provides an independent verification of the CIT calculation to give assurance on the accuracy of the CIT amount reported by the CBSA.

Objective and Scope

The objective of the audit was to provide assurance that CIT is recorded in the appropriate fiscal year and to conduct a follow-up on the audit results found in the Internal Audit Report of the Audit of Fiscal 2006-2007 Year-End Cash Cut-Off Procedures (2006-2007 audit). The current audit was conducted between April and June 2008.

The scope of the audit included a follow-up on the management action plans outlined in the 2006-2007 audit and a review of current fiscal year operations in the Comptrollership Branch. A sample of customs revenue reports (K10 forms[ 1 ]) was selected from April 1 to 21, 2008[ 2 ] for all eight CBSA regional offices. This sample period was considered to represent the most risk when analyzing data from the “Date of Receipt” field of the G11 screen because cash receipts may have been recorded in the “new year” when in fact they could have been received in the “old year” and consequently been identified incorrectly as non-CIT transactions.

Assurance Statement

The audit engagement was planned and conducted in accordance with the Internal Auditing Standards for the Government of Canada.

Audit Findings

The audit found that CIT was properly recorded in the appropriate fiscal year and that all management action plans from the 2006-2007 audit were completed.

Main Observations

As indicated above, CIT was properly recorded in the appropriate fiscal year. The audit identified an immaterial variance relating to the CIT amount. The Comptrollership Branch, as part of its sampling methodology, also identified this amount. An adjustment was not made to the accrued CIT amount because the variance was considered immaterial and it was found after the year-end reporting deadline.

With regard to the 2006-2007 audit, all management action plans relating to policies and procedures, as well as those relating to training and segregation, have been completed. Furthermore, the Comptrollership Branch implemented an additional sampling methodology for use during the CIT calculation process to help validate CIT computations at fiscal year-end.

Introduction

Background

The year-end cash cut-off procedures audit is an annual audit carried out by the CBSA's Internal Audit Directorate. It has been performed over the last 10 years because the Office of the Auditor General of Canada relies on the results of the audit for the purposes of the annual audit of the Public Accounts of Canada.

The Canada Border Services Agency (CBSA) collects approximately $26 billion in revenue in a year. It uses the Customs Commercial System (CCS) and the Corporate Administrative System (CAS) to capture revenue receipts deposited to the credit of the Receiver General for Canada.

Cash in transit (CIT) is defined as public monies received on or before March 31 and that are negotiable on or before March 31, but are not credited by the Bank of Canada or any other financial institution to the account of the Receiver General[ 3 ]. At the end of fiscal year 2007-2008, the CBSA reported a total of over $1.3 billion of CIT.

To ensure that receipts are recorded in the proper fiscal year, the Comptrollership Branch issues instructions towards the end of every fiscal year to ports of entry and regional offices for the processing of cash payments received at year-end. This year, the Comptrollership Branch issued instructions on February 26, 2008, to ports of entry and regional offices that explained how to input cash receipt information in the G11 screen of the CCS[ 4 ], with special attention given to the “Date of Receipt” field. This field is critical in ensuring that the revenue is being recognized by the CBSA in the proper fiscal year.

Risk Assessment

Based on the preliminary risk assessment, the audit noted the following high-risk areas:

• The Internal Audit Report of the Audit of the Fiscal 2006-2007 Year-End Cash Cut-Off Procedures (2006-2007 audit) identified opportunities for improvement relating to policies and procedures, the segregation of some roles and the training of additional employees on year-end procedures. There is a risk that some of these issues still exist in the Comptrollership Branch.
• There is a risk that the data entered in the “Date of Receipt” field in the G11 screen of the CCS is not accurate. This should be examined to ensure that the regions are properly recording cash in the correct fiscal year.

Audit Objective and Scope

The objective of the audit was to provide assurance that CIT is recorded in the appropriate fiscal year and to conduct a follow-up review of the recommendations noted in the 2006-2007 audit.

The audit scope included a determination of corrective measures undertaken by the Comptrollership Branch on the previous fiscal year's audit recommendations. A review of current fiscal year operations in the Comptrollership Branch relating to CIT procedures was also carried out. A sample of customs revenue reports (K10 forms) from April 1 to 21, 2008, was selected for all eight regional offices. The period up to April 21 was used because that was the cut-off date for accruals. The post-fiscal-year-end period represents the most risk when analyzing the data in the “Date of Receipt” field because cash receipts may have been recorded in the “new year” when in fact they were received in the “old year.” Consequently, postings could be incorrectly identified as non-CIT.

As per the preliminary risk assessment, K10 forms with receipt dates for old fiscal year transactions (March 29 to 31, 2008) were not selected, as was the case for the 2006-2007 audit, since that period was considered to be low risk.

Approach and Methodology

The methodology used to conduct the audit included the following:

• A review of the Comptrollership Branch's instructions and methodology for cash data entry, bank reconciliation and CIT calculations.
• Interviews with key players in regard to year-end cash procedures in the Comptrollership Branch.
• A review of CCS downloads to check the accuracy of the G11 screen fields and an analysis of a sample of customs revenue report (K10 form) packages to compare the factual date received with the “Date of Receipt” field. The sample size was 68 K10 packages, each with an amount of $100,000 or greater.
• A verification and follow-up of the 2006-2007 audit recommendations.

Audit Criteria

The following lines of enquiry and audit criteria were developed based on the results of the risk-assessment analysis:

Line of Enquiry	Audit Criteria
Policies and procedures and monitoring of the regions	The policies and procedures related to K10 cash data entry, bank reconciliation and CIT calculation are all complete and up-to-date. Year-end cash procedures are communicated and understood by employees in the regions to ensure proper recording of cash receipts.
Training and segregation of duties	Training has been provided at the Comptrollership Branch to additional employee(s) regarding the CIT calculation process. There is an appropriate segregation in the Comptrollership Branch of employees' roles and responsibilities for the bank reconciliation process.
Recording of cash receipts	The “Date of Receipt” field in the CCS/G11 screen does in fact equal the date that the payments were actually received.

Statement of Assurance

The audit engagement was planned and conducted in accordance with the Internal Auditing Standards for the Government of Canada.

Audit Opinion

The audit found that CIT was properly recorded in the appropriate fiscal year and that all management action plans from the 2006-2007 audit were completed.

Findings, Recommendations and Management Action Plan

As previously indicated, CIT was properly recorded in the appropriate fiscal year. The audit identified an immaterial variance relating to the CIT amount. The Comptrollership Branch, as part of its sampling methodology, also identified this amount. An adjustment was not made to the accrued CIT amount because the variance was considered immaterial and it was found after the year-end reporting deadline.

With regard to the 2006-2007 audit, all management action plans relating to policies and procedures, as well as those relating to training and segregation, have been completed. Furthermore, the Comptrollership Branch implemented an additional sampling methodology for use during the CIT calculation process to help validate CIT computations at fiscal year-end.

Policies and Procedures

The Comptrollership Branch issued directives to the regions regarding year-end cash data entry and the bank reconciliation and year-end CIT procedures were updated as per the management action plans from the 2006-2007 audit.

Year-end procedures and cash input instructions for regional staff

The Comptrollership Branch made changes to the year-end procedures that are distributed to regional staff in response to the management action plans from the 2006-2007 audit. The Branch issued year-end procedures on February 26, 2008, to the regional offices with instructions on how to complete the CCS/G11 screen with special attention given to the “Date of Receipt” field. These instructions were also updated to include a glossary of frequently used terms and a listing of the regional time zones, as per suggestions put forth by the regions during the 2006-2007 year-end process. In addition, the Comptrollership Branch also instituted conference calls, as required, to ensure better communication and awareness of the requirements.

Attached with the regional instructions was a “certificate of receipt” to help ensure that the year-end cash process was fully understood. Each office was instructed to sign the certificate and send it back to the Comptrollership Branch after the instructions were discussed with all the implicated sections and specific individuals (i.e. superintendents, supervisors, cashiers, etc.). The audit found that 119 of the 200 offices had submitted the signed receipt certificate by the end of the 2007-2008 fiscal year. In fact, more certificates continued to be received from the regions late into June 2008. Furthermore, it was also noted that there were some cases where the procedures were reviewed; however, the certificates were not submitted. Based on the interviews with the Comptrollership Branch, the receipt certificates received from the regions did not include comments or suggestions for improvement on the directives. Consequently, the results imply that, overall, the receipt certificate process may not be the optimal communications tool for ensuring that the regions understand their specific role and responsibility relating to year-end procedures. It is recognized, however, that this is a tool for ensuring that, within the regions, there is clear responsibility for the year-end cash process.

Interviews indicated that the Comptrollership Branch will continue to provide guidelines and communicate processes through pre-fiscal-year-end conference calls and directives. In addition, the CCS-G11 K10 Procedures in the Comptrollership Manual - Finance Volume were finalized and posted on the CBSA intranet. The manual provides detailed screen instructions on how to enter K10 data into the CCS/G11 screen.

Bank reconciliation procedures

The Comptrollership Branch is responsible for the reconciliation of all remittances made to the Receiver General for Canada through the various regional offices. Although reconciliation is primarily centred within the revenue ledger, the undertaking requires the use of the CCS/G11 screen, tools and various techniques to ensure proper accounting of all remittances.

The audit found that the bank reconciliation procedures have been updated and reflect the implementation of the revenue ledger, which came into effect in January 2008.

CIT calculation procedures

The 2006-2007 audit management action plans indicated that CIT procedures should be amended to reflect the implementation of the revenue ledger and to include an overview, a discussion of objectives and a delineation of roles and responsibilities. The audit found that the procedures were updated to reflect this action plan.

The 2006-2007 audit also noted that there was no formal written sign-off of the CIT amount to be reported in the Public Accounts of Canada. The current audit found that this step has been added to the CIT procedures as per the management action plan that the Comptrollership Branch had provided.

The audit found that there was no formal written sign-off of the 2007-2008 fiscal year-end amount as per the CIT calculation procedures that had been established. However, interviews indicated that an oral approval was provided by the Comptrollership Branch in regard to the CIT amount being forwarded for the Public Accounts reporting purposes. Subsequent communication with the Comptrollership Branch indicated that a new procedure would be implemented to have written approval by the applicable director of all periodic trial balances prepared, which will also include the CIT amount reported at fiscal year-end.

Training and Segregation of Duties

The management action plans relating to training additional employees on CIT procedures and segregating duties within the bank reconciliation unit have been completed.

The 2006-2007 audit noted that only one person in the Comptrollership Branch had adequate CIT knowledge at the time of the audit. There was a potential risk that corporate memory, continuity and functional capacity could be lost if that individual left the Agency. The management action plan provided by the Comptrollership Branch stated that one additional employee was to be trained during the 2007-2008 year-end exercise. The current audit found that there were two employees within the unit who were trained on the CIT procedures for the 2007-2008 year-end exercise.

The 2006-2007 audit found that cash data input and monitoring roles were assigned to the same individual and that the individual was able to access the CCS/G11 screen to add, change and delete K10 information while reconciling remittances with the bank statements. The current audit confirmed that further resources were acquired by the Comptrollership Branch to perform the bank reconciliation process. Currently, the duties are segregated as a revenue analyst is assigned to a CBSA region and is responsible for performing the reconciliation related to the specific region. At the time of the audit, all of the revenue analysts had been trained on the cash data input function. The Comptrollership Branch has implemented a process whereby, if an explicit function is required for a specific region, another revenue analyst who is not responsible for that region must perform the entry. The audit found that this process addressed the management action plan that was provided in the 2006-2007 audit.

Recording of Cash Receipts and Cash in Transit Methodology

Through the analysis of K10 customs revenue reports, the audit noted an immaterial variance relating to the accrued CIT amount. In response to the recommendation from the 2006-2007 audit, the Comptrollership Branch developed and implemented an additional sampling methodology.

In the CCS/G11 screen, two mandatory fields must be entered: 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 and 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 actual deposit date, to allow for CIT to be correctly identified and reported. It should be noted that data from the G11 screen is automatically posted to the revenue ledger on the basis of the entry date.

At the end of each fiscal year, the Comptrollership Branch uses an accrual accounting engine (AAE) to calculate the amount of CIT. The AAE calculates the adjustments required to current revenue amounts to obtain the appropriate accrual balances. For the period of April 1 to 21, the AAE identified K10 customs revenue reports in the revenue ledger with a receipt date before April 1 and recorded the cash receipt in the old year. The amount accrued by the AAE for the 2007-2008 fiscal year was $1.3 billion.

Ideally, all receipts and deposits would be recorded accurately so that the AAE would correctly select all amounts received before April 1 as old year transactions. However, because some errors are made when information is entered at ports of entry and regional offices, some cash is entered as received in the new year, when in fact it was actually received in the old year. The AAE would not be able to segregate and identify those cash receipts as CIT, and the accrual amount would not be accurate. Therefore, manual intervention is conducted by the Comptrollership Branch to identify errors that could affect the fiscal year-end accrued amount.

The sampling methodology used for the audit involved the examination of 68 K10 customs revenue report packages, each with an amount of $100,000 or greater for the period of April 1 to 21, 2008. Documents were requested from all eight CBSA regions for detailed review and to identify any possible errors in the “Date of Receipt” field. The documents received supported the actual date when the funds were received at the CBSA port of entry or office. The primary indication was a “duty paid” stamp on a document, which would clearly identify the actual receipt date when the monetary amount was recognized as being received.

During the review of the transactions, the audit found an immaterial variance to the amount reported by the AAE. The K10 customs revenue reports containing those errors had marked receipt dates of April 1 to 3, 2008; however, the supporting documentation provided indicated actual receipt dates of March 25 to 31, 2008. These amounts were considered to be non-material when taking into account the full value of the AAE of $1.3 billion. The audit also noted that one of the K10 customs revenue report variances contained both old year and new year cash. In addition, the audit found that some K10 customs revenue reports were completed for cash that was received on two different days in the month of April. These errors were found to be infrequent in the sample selected and did not affect the CIT amount.

As per the management action plan from the 2006-2007 audit, the Comptrollership Branch indicated that an additional sample would be taken from the last and first few days of the previous and new fiscal years. The audit found that this sampling methodology had been performed. In addition, the unit performed an analysis of the “fiscal year” identifier and the “Date of Receipt” field of the CCS/G11 screen. The “fiscal year” identifier changes automatically on April 1 and clearly identifies the fiscal year when the cash was received. This analysis was performed from March 17 to April 21, 2008, to identify and subsequently correct any errors that are identified. This analysis was performed in previous years during the CIT calculation process; however, early detection and correction has allowed for a more accurate AAE amount.

The sampling methodology used by the Comptrollership Branch found a variance of approximately $2 million, which included the immaterial amount found by the audit. Therefore, the Comptrollership Branch identified all discrepancies found within the audit sample. No manual entry was made to adjust the $1.3 billion AAE amount as the discrepancies identified were found to be immaterial. The variance of $2 million found during the 2007-2008 fiscal year is considerably less than the amount that was identified during the previous 2006-2007 audit. Overall, this is an indication of the improvements in the cash data entry process performed in the regions and that the guidance and monitoring being conducted by the Comptrollership Branch has had a positive impact.

Appendix - List of Acronyms

Acronym	Description
AAE	accrual accounting engine
CAS	Corporate Administrative System
CBSA	Canada Border Services Agency
CCS	Customs Commercial System
CIT	cash in transit
K10	Customs Revenue Report
OAG	Office of the Auditor General of Canada

Notes

1. K10 forms report all deposits, losses and adjustments relating to customs revenue. This information is entered into the G11 screen of the Customs Commercial System (CCS). [Return to text]
2. April 21 was also the cut-off date selected by the Comptrollership Branch for accruals. [Return to text]
3. Receiver General Manual, Chapter 14, Year-End Timetable and Procedures 2007-2008. [Return to text]
4. System used to input information from K10 customs revenue reports. This information feeds into the Agency's revenue ledger. [Return to text]