Audit of Fiscal 2010–2011 Year-End Cash Cut-Off Procedures

Internal Audit Report 
October 2011

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Table of Contents

• 1.0 Introduction
  • 1.1 Background
  • 1.2 Risk Assessment
  • 1.3 Audit Objective
  • 1.4 Audit Scope, Methodology and Audit Criteria
  • 1.5 Statement of Assurance
• 2.0 Audit Opinion
• 3.0 Findings, Recommendations and Action Plans
• Appendix A: Audit Scope, Methodology and Audit Line of Enquiry and Criteria
• Appendix B: Acronyms

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1.0 Introduction

1.1 Background

The Government of Canada has reported on a full accrual basis for the preparation of its financial statements since 2001. To support accrual accounting, the 2010–2011 Receiver General Manual stipulates that monies negotiated on or before March 31, 2011, but not credited by the Bank of Canada or any other financial institution, are classified as cash in transit (CIT). For fiscal year 2010–2011, the Canada Border Services Agency (CBSA) reported $1.7 billion of CIT.

The CBSA collects approximately $21 billion annually in revenue. 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.

For its annual audit of the Public Accounts of the CBSA, the Office of the Auditor General (OAG) relies on the audit work conducted by the CBSA internal audit pertaining to the year-end cash receipts cut-off procedures and recording of amounts in the proper fiscal year. The Internal Audit and Program Evaluation Directorate (IAPED) performs the financial attestation relating to the year-end cash receipts cut-off, and provides an independent verification of the CIT calculation, in order to provide assurance to the OAG on the CIT amount reported at year-end by the CBSA.

1.2 Risk Assessment

During the planning phase of the audit, a key risk was identified around the accuracy of the date recorded as the cash receipt date for transactions processed at year-end. If ports of entry and regional offices do not correctly identify the proper fiscal year in which cash was received, then cash may be recorded in the wrong fiscal year and the CIT amount reported may be incorrect.

1.3 Audit Objective

The objective of the audit was to provide assurance that year-end cash cut-off procedures were appropriate to ensure that CIT is recorded in the proper fiscal year.  

1.4 Audit Scope, Methodology and Audit Criteria

Appendix A includes the audit scope, approach and methodology, and audit line of enquiry and criteria.

1.5 Statement of Assurance

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

2.0 Audit Opinion

The audit found that year-end cash cut-off procedures were appropriate and in place to record cash in transit for the fiscal year ended March 31, 2011.

3.0 Findings, Recommendations and Action Plans

The CIT amount for fiscal year 2010–2011 should include all K10 revenue reports received on or before March 31, 2011, that have not yet been deposited to the Bank of Canada or any other financial institution, before the pre-established accrual cut-off date. Adequate monitoring and a sampling methodology should be in place to ensure the accuracy and completeness of the CIT amount at the year-end.

Comptrollership Branch monitoring process

In order to assess the adequacy of the monitoring and sampling methodology used by the Comptrollership Branch, an interview and a review of the methodology were conducted with the Revenue Accounts and Reporting Division (RARD) employee responsible for monitoring and sampling activities. The monitoring and sampling methodology was found to be consistent with the previous year's methodology and adequate to identify CIT discrepancies prior to the accrual cut-off date. The Branch monitored all transactions over $150,000 from March 31 to April 14, 2011, which represented over $1.5 billion in revenues. Any errors found in those transactions were corrected by the Branch. A review of those errors revealed that they were attributed to the fiscal year recorded on the K10 supporting documents not agreeing to the fiscal year recorded in the CCS G11 system or to the date on which the payments were received being incorrectly entered into the system.

CIT calculation

The audit reviewed the CIT calculation performed by the Comptrollership Branch and reconciled the CIT transactions with the information contained in the CCS G11 system. The audit found that the CIT calculation was performed in accordance with the Branch's documented methodology and that all high-value CIT transactions were correctly recorded in the proper fiscal year. During the review of the final CIT amount calculated by the Accrual Accounting Engine[ 3 ], no significant manual adjustments were required to reconcile the amount to the CIT calculation performed by the Comptrollership Branch.

Recording of ‘K' documents in appropriate fiscal year

In order to provide assurance that cash receipts are recorded in the correct fiscal year at year end, all high-value K10 revenue reports with amounts greater than $100,000 for the period of April 1 to 11, 2011 were selected for testing. A total of 17 items amounting to $6,286,894 and representing 43% of the total value ($14,672,312) over the period fell into this category. The sample covered six of the eight CBSA regions.

The audit found that the K10 amounts were identified and recorded in the proper fiscal year with the exception of one K10 revenue report, which represented $1,292,694 or 21% of the total 17 items tested. Also included in the sample were two exceptions which had originally been recorded in the wrong fiscal year. Both exceptions had already been identified by the Comptrollership Branch during their internal monitoring work and had been appropriately adjusted.

The error for $1,292,694 was also identified within the sample selected by the Comptrollership Branch as part of their monitoring process but was adjusted incorrectly. It was recorded as ‘new year' when it should have been an ‘old year' transaction. No further correction was made for this exception since the accounting period for fiscal 2010–2011 had already been closed and the Comptrollership Branch concluded that the exception was not significant enough to reopen the accounting period as the amount would not materially impact the CBSA accounts or the Public Accounts of Canada.

As a result of above, further testing was performed. No significant errors were identified in those samples.

Cheques over $25 million

The Comptrollership Manual, Finance Volume, Chapter 10 states:

"3.3 Acceptance of Cheques

3.3.1 The $25 Million Cap Imposed by the Canadian Payments Association

1. The CBSA shall not accept an uncertified cheque whose amount exceeds $25 million (CDN). This policy applies to all clients including those who have made security deposits with the CBSA for uncertified cheque privileges, and is in compliance with the $25‑million cap imposed by the Canadian Payments Association (CPA).
2. A single payment transaction in which multiple cheques are presented with each amount less than $25 million in order to circumvent the $25‑million cap shall not be acceptable to the CBSA.
3. Note: Clients who are required to make payment to the CBSA in an amount greater than $25 million will present the cheque and a remittance voucher to their financial institution for the payment to be made to the CBSA through the financial institutions Large Value Transfer System, LVTS (see Customs Notice N-503**)."
4. ** Note that Customs Notice N-503 has been replaced by Memorandum D17-1-5, Registration, Accounting and Payment for Commercial Goods.

The purpose of the above noted policy is to enhance the safety and stability of the Canadian payment system. Payments over $25 million are required to be settled via wire transfer. The potential for default risk associated with these high value payments is eliminated when a wire transfer is used as the transaction, or payment, is instant, compared to a cheque which does not clear automatically and thus exposes the CBSA to default risk.

The audit tested all transactions recorded in the G11 subsystem for the period from April 1 to April 11, 2011, that were greater than $25 million to provide audit assurance that no cheques greater than $25 million were accepted for processing at the ports of entry or regional offices. The audit also performed procedures to ensure that multiple cheques were not being presented for single payment transactions in order to circumvent the $25 million cap (i.e. cheque splitting).

For the period under review, the audit identified from the G11 subsystem, twelve deposit line items over $25 million. For each line item, we obtained supporting documents, such as the K10s and associated cheque listings, from the ports of entry or regional offices. We found three errors in the sample tested.

The audit noted two instances within the period where cheques over the threshold limit of $25 million had been accepted at two different port offices. These amounted to $28,195,865 and $64,402,033.

Upon further investigation, it was discovered that the acceptance of these cheques was due to ambiguous policy around the acceptance of cheques over $25 million from clients who bank at the same financial institution as the customs office which the client uses for deposits of paper‑based payments (i.e. physical cheques). The audit found that some ports of entry and regional offices were accepting cheques over the $25-million threshold, from clients if those clients banked at the same financial institution as the CBSA offices. Upon further review, the audit noted that neither the Comptrollership Manual nor Memorandum D17-1-5 provides any clear guidance in this area and specifically whether or not CBSA offices may accept cheques over $25 million, under certain circumstances.

Through our sample testing, the auditors also noted that one of the ports of entry had accepted multiple cheques which were all under $25 million from a broker, in settlement for a valid transaction that amounted to greater than $25 million. This is non-compliant with policy and exposes the Agency to risk of default. The remaining items were processed correctly by the ports.

Recommendation 1

The Vice-President of the Comptrollership Branch should clarify and communicate the policy around the acceptance of payments greater than $25 million, and particularly from clients who bank at the same financial institution as the customs office. Also, the policy around cheque splitting should be reinforced and communicated. Monitoring to ensure compliance with these policies should be implemented.

Management Action Plan	Completion Date
1. The Revenue Accounting and Reporting Division (RARD) of the Comptrollership Branch sent memo to the regions clarifying the policy and exception on the acceptance of payments greater than $25 million. The memo also reinforced the policy on cheque splitting.	July 2011
2. The RARD will also update Chapter 10 of the Finance Volume of the Comptrollership Manual.	October 2011
3. The RARD will follow-up with Programs Branch to have Memorandum D17-1-5 updated to clarify the policy and exception on the $25-million limit imposed by the Canadian Payments Association.	November 2011
4. The RARD will update the Cash Management Review checklist, which is used to monitor and ensures compliance with both policies.	October 2011

Appendix A: Audit Scope, Methodology and Audit Line of Enquiry and Criteria

Scope

The audit was conducted between April and June 2011 and consisted of a review of 2010–2011 fiscal year-end procedures and processes in the Comptrollership Branch, relating to tracking, monitoring and recording of CIT at year-end. The scope focused on reviewing the Customs Revenue Reports (K10 revenue reports) that are entered into the CCS G11 subsystem to test the completeness of the CIT calculation. K10 revenue reports with values greater than $100,000 from April 1 to April 11, 2011, were selected from all CBSA ports of entry and regional offices. The $100,000 threshold was set in consultation with the OAG, in order to meet their audit coverage requirements for the Audit of Public Accounts of Canada. The crucial period after fiscal year-end was considered to represent the transactions at high risk; meaning the "Date of Receipt"[ 4 ] field in the G11 subsystem, for cash receipts may have been recorded in the "new year" when the payments were in fact received in the "old year". This would impact the CIT calculation as these transactions could be incorrectly identified as non-CIT.

K10 revenue reports with receipt dates for old fiscal year transactions (March 29 to March 31, 2011) were not selected as this period was considered to be low risk. Furthermore, previous year-end cash cut-off audits have identified no errors in this area.

The scope of the audit also included reviewing all line items recorded in the G11 subsystem with a value greater than $25 million from April 1 to April 11, 2011, to ensure that no payments greater than $25 million were accepted for processing at the ports of entry or regional offices contrary to the policy[ 5 ].

Approach and Methodology

The audit used the following approach to gather evidence:

• Reviewed revenue ledger reports from Custom Commercial System (CCS) downloads for accuracy of G11 screen fields and analyzed a sample of Customs Revenue Report Form (K10) packages to determine date received and compare with the "Date of Receipt" field. The sample size was selected during the examination phase of the audit and was dependent on the population of the high dollar value transaction items that had been processed. Minimum coverage of 40% of the value of cash receipts between April 1 and 11, 2011 was obtained, as required by the OAG[ 6 ].
• Reviewed the process that was followed by the Comptrollership Branch regarding directive on year-end cash procedures provided to the Regions and subsequent follow-up and monitoring work carried out by the Branch.
• Reviewed the monitoring and K10 sampling process that was used by the Comptrollership Branch as part of their year-end cash cut-off finalization process.
• Reviewed the CIT calculation performed by the Comptrollership Branch to ensure that it reconciled with the CIT transactions information contained in the CCS G11 system.
• Obtained the CCS revenue reports for April 1 through April 11 and ensure that no individual cheque over $25 million had been accepted for processing at the ports of entry or regional offices.

Lines of Enquiry and Audit Criteria

Line of Enquiry	Audit Criterion	Met/Partially Met/ Not Met
Recording of cash receipts	1.1 The "Date of Receipt" field in the G11 screen of CCS equals the date that the payments were actually received as indicated on the appropriate ‘K' document.	Partially Met
	1.2 Consistent monitoring and follow-up processes were used by the Comptrollership Branch to ensure that regions were informed in a timely manner on year-end cash cut-off procedures and that G11 and K10 information was sampled and reviewed appropriately.	Met
	1.3 The CIT calculation performed by the Comptrollership Branch reconciles with the information contained in the CCS G11 system.	Met
	1.4 No individual cheques over $25 million are accepted for processing.	Not Met

Appendix B: Acronyms

Acronym	Definition
CBSA	Canada Border Services Agency
CCS	Customs Commercial System
CIT	Cash in Transit
CPA	Canadian Payments Association
IAPED	Internal Audit and Program Evaluation Directorate
LVTS	Large Value Transfer System
OAG	Office of the Auditor General
RARD	Revenue Accounting and Reporting Division

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Notes

1. The CCS G11 Sub-System is a CBSA management information system for capturing CBSA revenue receipts deposited to the credit of the Receiver General for Canada. [Return to text]
2. The K10 Revenue Worksheet is a paper form used to accurately record all deposits, losses and adjustments. This information is entered daily into the CCS G11 by ports or regional offices receiving the funds. [Return to text]
3. The Accrual Accounting Engine is a tool used by the Comptrollership Branch to calculate the adjustments required to current revenue amounts in the revenue ledger in order to obtain the appropriate accrual balances at year end. [Return to text]
4. Actual date when cash is received at the Agency. [Return to text]
5. Comptrollership Manual, Finance Volume, Chapter 10, Section 3.3 "Acceptance of Cheques"; Memorandum D17-1-5, Registration, Accounting and Payment for Commercial Goods. [Return to text]
6. Note that the OAG required CBSA IAPED to examine all transactions over $1 million and obtain audit coverage of between 40% and 55% of the value of transactions from April 1 to 11, 2011, in order to place reliance on work completed by CBSA IAPED for the Audit of the Public Accounts of Canada. [Return to text]