Audit of Accounts Receivable



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Audit of

Accounts Receivable

June 22, 2009



Audit Key Steps


Planning completed

August 2008

Field work completed

February 2009

Draft report completed and sent for management response

February 2009

Management response received

March 2009

Final report completed

April 2009

Report presented to the External Audit Advisory Committee

April 2009

Approved by the Deputy Minister

June 2009


Prepared by the Audit and Evaluation Team
Acknowledgments
The team responsible for this audit, comprised of Julie Clavet-Drolet, under the supervision of Bruno Pilotte and 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 i

1 INTRODUCTION 1

1.1 Context 1

1.2 Analysis of Risks 3

1.3 Objectives and Scope 4

1.4 Methodology 4

1.5 Statement of Assurance 4

2 FINDINGS AND RECOMMENDATIONS 5

2.1 Recovery of Debts 5

2.1.1 Collection actions 5

2.1.2 Value of Sums to be Recovered 6

2.2 Administrative Charges and Interest 7

2.2.1 Administrative Charges 7

2.2.2 Interest 8

2.3 Writing off Accounts Receivable 9

2.3.1 Approval and Monitoring of Write-offs 9

2.3.2 Authorization for Writing off of Interest 10

2.3.3 Financial Coding Used for Write-offs 10

2.4 Financial System 11

2.4.1 Accessibility to the Accounts Receivable Module 11

2.4.2 Reconciliation of the Accounts Receivable Module with the General Ledger 12

2.5 Segregation of Duties 13

2.6 Recording Revenue in the Appropriate Fiscal Period 14

2.7 Departmental Policies and Procedures 15

3 CONCLUSION 15

Annex 1 Audit Criteria 17



Annex 2 Authority Description 19

EXECUTIVE SUMMARY



Context
In accordance with Environment Canada’s Risk-Based Audit and Evaluation Plan for 2008–2011, the Audit and Evaluation Branch conducted an audit the accounts receivable.
The purpose of the audit was to ensure that Environment Canada’s accounts receivable are managed fairly, efficiently and effectively in order to recover such receivables and minimize the risk of loss. With this in mind, the specific objectives of the audit were to evaluate the adequacy of the management control framework of accounts receivable as well as the degree to which the Department is in compliance with the applicable accounting regulations, policies and standards.
During the initial planning of the audit, a risk analysis was conducted in order to identify, evaluate and prioritize the risks associated with the management of accounts receivable. The analysis was based upon an examination of the accounting regulations, policies, manuals and standards that govern the management of accounts receivable, on data analysis, and on the results of preliminary interviews with personnel considered key in the management of accounts receivable. The criteria and methods used in the audit were based on the identified risks.
Accounts receivable are divided into two categories: internal accounts (created for transactions with other federal departments or organizations) and external accounts (created for other types of clients). The audit dealt with both internal and external accounts receivable created during the 2007–2008 fiscal year and with accounts receivable as at April 1, 2008.1 On March 31, 2008, the balance of accounts receivable was $7.6 million, $3.3 million (43.4%) of which were with external parties.
The methodology used included data analysis, review of the relevant documentation, and interviews with specialists in accounts receivable.
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 were completed and evidence gathered to support the accuracy of the conclusions reached and contained in this report. The conclusions are based on a comparison of the situations as they existed at the time of the audit with the established criteria.
Summary of Findings
The main findings of the audit show that, in general, the Department’s accounts receivable are managed in accordance with the principles of due diligence and in compliance with the main requirements that govern them.
However, certain processes could benefit from further review in order to improve their efficiency, fairness and consistency. For example, the Delegation of Financial Signing Authorities could be modified in order to reduce the level of approval required for the writing off of interest. Currently, the approval of the Director of Financial Policy and Operations is required to write off interest amounts that are often less than a dollar.

Guidelines should also be communicated to accounting offices across the Department in order to standardize the accounts receivable management process. This subject is dealt with in greater detail in various sections of the report.


Certain controls should also be reviewed or reinstituted. For example, the definition of the roles and responsibilities of key personnel should be reviewed and documented, segregation of duties should be reintroduced in certain accounting offices, and regular monitoring at the end of fiscal periods and the fiscal year should be reinstituted.
Most of these items could be resolved with a reasonable amount of effort, commensurate with the anticipated benefits.
The review of the accounts receivable management process should be integrated into other initiatives in the Department, such as the evaluation of the state of preparedness of audit-ready departmental financial statements.
The following eight recommendations have been made to the Assistant Deputy Minister, Finance and Corporate Branch.



  1. The Assistant Deputy Minister, Finance and Corporate Branch, should:

  • take the actions necessary to recover or write off the amounts over 365 days past due; and

  • ensure that guidelines are sent to the Department’s accounting offices concerning the management of amounts to be collected. Those guidelines should set out items such as:

    • the roles and responsibilities of the main personnel responsible for collections (managers, accounting offices, Departmental Accounting); and

    • the methods of collection that are available and the when to use them (standardize the process).

  1. In order to recoup the costs arising from the processing of Not Sufficient Funds (NSF) cheques, the Assistant Deputy Minister, Finance and Corporate Branch, should ensure that all of the Department’s accounting offices invoice the administrative charges stipulated in the Treasury Board of Canada Interest and Administrative Charges Regulations.

  2. The Assistant Deputy Minister, Finance and Corporate Branch, should ensure that guidelines concerning the management of interest (charging and writing off) are sent to the Department’s accounting offices.

  3. The Assistant Deputy Minister, Finance and Corporate Branch, should:

  • ensure that the guidelines concerning the writing off of debts, including the writing off of interest, are sent to the Department’s accounting offices;

  • ensure that regular monitoring of the many adjustments and of credit notes is carried out to ensure that the write-offs are approved in accordance with the Environment Canada delegation instrument; and

  • suggest a modification to the Environment Canada Delegation of Financial Signing Authorities in order to change the level of authorization required for the writing off of interest so that the efficiency of the process may be improved.

  1. The Assistant Deputy Minister, Finance and Corporate Branch, should ensure that access to the accounts receivable module is limited to employees who require access to it during the normal course of their duties. Access should be reviewed regularly. The managers of the financial system should be promptly notified of the departure of any employee so that accounts can be deactivated in a timely manner.

  2. In order to ensure that all the information contained in the accounts receivable module is posted correctly to the general ledger accounts, the Assistant Deputy Minister, Finance and Corporate Branch, should ensure that the information from the accounts receivable module is reconciled with the general ledger regularly and that all differences are documented, explained and corrected.

  3. The Assistant Deputy Minister, Finance and Corporate Branch, should address the deficiencies in the segregation of duties in the accounting offices as soon as possible and ensure that all the managers responsible for accounts receivable are informed of this.

  4. In order to comply with generally accepted accounting principles, the Assistant Deputy Minister, Finance and Corporate Branch, should ensure that all revenues are accounted for during the period in which they are earned.



Management agreed with all of the recommendations and provided a detailed action plan to address them.

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