Archived - Audit of the Control Framework for Foreign Debt
Final Report

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Prepared by
Internal Audit and Evaluation
Department of Finance Canada

Approved by the Deputy Minister of Finance Canada on the recommendation of the Audit and Evaluation Committee on December 9, 2013

Table of Contents

Executive Summary

Background

Audit Objective and Scope

Statement of Conformance and Audit Approach

Conclusion

Findings by Audit Criteria

Appendix A - Foreign Debt Net Book Value and Interest on Unmatured Debt

Appendix B – List of Departmental Employees Interviewed

Appendix C – Key Information Reviewed

Appendix D – Members of the Audit Team

Executive Summary

The Treasury Board Policy on Internal Control requires that a departmental system of internal control be established, maintained, monitored and reviewed in order to mitigate risks related to: compliance with legislation, regulations, policies and delegated authorities; effectiveness and efficiency of programs, operations and resource management, including safeguarding of assets; and, reliability of financial reporting.

The Financial Management Directorate within the Corporate Services Branch annually reviews and tests the effectiveness of all processes determined to have a high financial reporting risk. In the 2012–13 Statement of Management Responsibility the public debt process was identified as having a high financial reporting risk. This audit focuses on the control framework for the foreign debt process and its material financial transactions.

The audit objective was to provide reasonable assurance on the effectiveness of key controls related to the foreign debt process in support of the Department’s system of internal controls over financial reporting (ICFR). 

The audit concluded that the key controls related to the foreign debt process in support of the Department’s system of ICFR are effective. Specifically, the following good management practices were noted:

  • The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities.
  • The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system.
  • The Department has effective controls over financial reporting for foreign debt transactions.
  • The Department has an effective ongoing monitoring program in support of the foreign debt process.

There were no issues identified during the audit and therefore no recommendations are provided in this report.

Background

The Audit of the Control Framework for Foreign Debt was authorized as part of the Department of Finance’s 2013– 16 Internal Audit Plan, which was tabled and approved by the Deputy Minister at the departmental Audit and Evaluation Committee meeting of March 1, 2013.

The Treasury Board Policy on Internal Control requires that a departmental system of internal control be established, maintained, monitored and reviewed in order to mitigate risks related to: compliance with legislation, regulations, policies and delegated authorities; effectiveness and efficiency of programs, operations and resource management, including safeguarding of assets; and, reliability of financial reporting.

Periodic monitoring of the Department’s internal control system is performed by the Financial Management Directorate within the Corporate Services Branch. As such, the Financial Management Directorate annually reviews and tests the effectiveness of processes determined to have a high financial reporting risk. In the 2012–13 Statement of Management Responsibility the public debt process was identified as having a high financial reporting risk.

The Canadian public debt includes domestic debt, retail debt, and foreign debt. Foreign debt is issued by the Government of Canada under the government’s foreign currency borrowing program and consists of marketable bonds and Canada bills. The range of funding sources for its foreign currency assets include a short-term US-dollar paper program (Canada bills), a medium-term notes issuance (Canada and Euro), a global bond program, and purchases and sales of Canadian dollars in foreign exchange markets (cross-currency swaps). Details of the value of and interest on the foreign debt are provided in Appendix A.

The authority to borrow in financial markets is provided by the Financial Administration Act (FAA). The Department, acting on behalf of the Minister, raises the required funds on behalf of the Government through both the domestic and foreign markets.  Anticipated borrowing and planned uses of funds are set out in the Debt Management Strategy, an annex of the federal budget. The Bank of Canada is the fiscal agent in the payment of interest and principal in respect of the management of the public debt.  The Bank is also the registrar, which requires maintenance of financial records and accounts of public debt. There is a Memorandum of Understanding in place between the Department and the Bank covering the maintenance of the financial records and accounts of the public debt. 

The Financial Markets Division within the Financial Sector Policy Branch provides policy analysis and advice relating to the management of the Government’s market debt and cash balances; it directs and oversees the implementation of the borrowing program, and prepares official reports on debt management. The Debt Management Strategy is prepared by the Domestic Debt section within the Financial Markets Division, with input from the Reserves and Risk Management Section. The Financial Management Directorate records and reconciles foreign debt transactions in the departmental financial system, ensuring that the transactions are authorized, accurate, recorded in a timely fashion, and appropriately presented and disclosed in the Department’s unaudited financial statements.

Audit Objective and Scope

Audit Objective

The audit objective was to provide reasonable assurance on the effectiveness of key controls related to the foreign debt process in support of the Department’s system of internal controls over financial reporting (ICFR). 

Audit Scope

The audit scope was limited to the Department’s control framework for the foreign debt process, including Canada bills, swaps and matured global marketable bonds. The scope also included:

  • Reviewing the foreign debt process including the business process narrative and control matrix, as documented by the Corporate Services Branch;
  • Testing the key controls as identified in the documentation to validate their effectiveness for foreign debt transactions completed during fiscal year 2012–13;
  • Testing the effectiveness of key controls for foreign debt transactions for the first two quarters of fiscal year 2013–14, i.e. up to September 30, 2013. 

The audit scope did not include:

  • Bonds assumed by the Department on February 5, 2001 on the dissolution of Petro Canada Limited due to similarity with other audited processes and limited materiality.
  • New issuances of global marketable bonds, since there were none for the audit period.
  • Medium-term notes issuances, since there were none for the audit period.

Statement of Conformance and Audit Approach

Statement of Conformance

The audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada, as supported by the results of the Quality Assurance and Improvement Program.

Audit Approach

The audit was planned and performed so as to obtain reasonable assurance that the audit objective was achieved. During the audit, appropriate procedures were followed and sufficient evidence was obtained to support the accuracy of the findings and the overall audit opinion presented in this report. The findings are based on a comparison of the conditions, as they existed at the time of the audit, with the audit criteria identified in this report, which were accepted by management. The opinion applies only to the entities examined.

Audit procedures included, but were not limited to, interviews, walkthroughs, observations, reviews of supporting documents and analytical testing. The audit criteria were based on the departmental business process for foreign debt and relevant elements of (1) the Treasury Board Policy on Internal Control and (2) the Office of the Comptroller General’s Audit Criteria Related to the Management Accountability Framework.

Four individuals (listed in Appendix B) were interviewed for this audit. These individuals were consulted on one or more criteria, and with different levels of depth, depending on their role in the foreign debt process. The audit team also conducted a review and analysis of applicable legislation, authorities and delegations, as well as other financial and non-financial documents from various relevant sources. A list of key information reviewed is provided in Appendix C.

The audit approach allowed for the audit findings to be communicated so as to enable management to review and provide feedback on the findings and conclusions before they were finalized.

Conclusion

The audit concluded that the key controls related to the foreign debt process in support of the Department’s system of internal controls over financial reporting are effective.

Specifically, the following good management practices were noted:

  • The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities.
  • The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system.
  • The Department has effective controls over financial reporting for foreign debt transactions.
  • The Department has an effective ongoing monitoring program in support of the foreign debt process.

Findings by Audit Criteria

During the planning phase, the audit team confirmed the design effectiveness of key controls in place for the foreign debt process. As such, the audit focused on the operating effectiveness of key controls identified in the Department’s documented business process and control matrix for foreign debt. 

The following section presents the findings by audit criteria, based on the assessment of key controls tested as part of the audit. The assessment of operational effectiveness for each audit criterion is categorized as follows:

Effective
All key controls are operating as intended and objectives of the audited process are likely to be achieved.
Partially Effective
One or few key controls are not operating as intended. Objectives of the audited process may not be achieved. Timely action is required.
Ineffective
Several key controls are not operating as intended. Objectives of the audited process are unlikely to be achieved. Corrective action is required immediately.
Findings by Audit Criteria
Criteria Control Rating Assessment
1. Authorization and Delegation
The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities. Effective The Department has effective controls to ensure that foreign debt transactions are authorized in accordance with legislative requirements and delegated authorities.

The Currency Act and the Financial Administration Act (FAA) authorize the Minister of Finance to carry out foreign debt transactions. The FAA allows the Minister to delegate this authority to officers of the Department of Finance; it also governs the administration of financial transactions related to the disbursement of funds. Clear delegation of authority and authorization of foreign debt transactions is important to ensure compliance with legislative requirements.

The audit examined whether the Department’s foreign debt transactions were authorized in accordance with legislative requirements and delegated authorities. In addition to interviews with departmental officials, key documentation in the form of relevant acts, management plans and directives, as well as delegation instruments, were reviewed to determine whether authorities were in place and appropriately delegated. A sample of three transactions was tested to determine whether they were properly authorized as per the FAA.

The audit found that delegation of the Minister’s powers, duties and functions to positions within the Department is clearly documented. Based on the sample of transactions reviewed, payments were properly authorized in accordance with the FAA  and the delegated authorities.
2. Accurate and Timely Recording in the Departmental Financial System
The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system. Effective The Department has effective controls to ensure that foreign debt transactions are recorded accurately and in a timely manner in the departmental financial system.

Departments are expected to provide reliable financial reporting that supports transparency and accountability for the spending of public funds. The foundation of reliable financial reporting is the departmental system of internal controls over financial reporting. Within this control framework, the accurate and timely recording of transactions is paramount.

The audit tested the effectiveness of the controls in place to ensure accurate and timely recording of foreign debt transactions in the departmental financial system. The testing consisted of a process walkthrough and a detailed examination of a sample of 16 transactions.

The audit found that the controls in place to ensure accurate and timely recording of foreign debt transactions were operating effectively. These controls were operating consistently with the foreign debt control framework, including the processes to record foreign debt issuances, interest payments, debt maturities payments and collateral swaps and hedges. The transactions tested were properly reviewed and authorized to ensure accuracy and were supported by adequate documentation. All transactions tested were recorded into the departmental financial system in an accurate and timely manner.
3. Financial Reporting Controls
The Department has effective controls over financial reporting for foreign debt transactions. Effective The Department has effective controls over financial reporting for foreign debt transactions.

Departments are expected to provide reliable financial reporting that supports transparency and accountability for the spending of public funds. The foundation of reliable financial reporting is the departmental system of internal controls over financial reporting. Such a control framework consists of reconciliations on a periodic basis, as well as other key controls to ensure the integrity and reliability of the financial statements.

The audit conducted tests to assess whether the controls in place for the month-end process were operating effectively. In addition to a process walkthrough, a sample of 20 items was examined to assess whether reconciliations and other activities are conducted.

The audit found that internal controls over financial reporting for foreign debt transactions were operating effectively and in a manner consistent with the standard business process for foreign debt. The key controls tested for the monthly review processes were operating as intended. These controls are designed to ensure that departmental records used for financial reporting accurately reflect foreign debt transactions related to accrued Exchange Fund Account revenues, Canada bills, exchange funds transactions, interest accruals, amortization discounts, exchange funds re-evaluations, gain or loss on hedges, swap collaterals (US), cash reconciliations and trial balances.  
4. Ongoing Monitoring Program
The Department has an effective ongoing monitoring program in support of the foreign debt process. Effective The Department has an effective ongoing monitoring program in support of the foreign debt process.

Monitoring mechanisms help identify the occurrence of errors and irregularities, as well as flagging the existence of potential control deficiencies.  As such, ongoing monitoring is important in enabling adherence to controls, sound risk management and the identification of lessons learned related to the controls in place with respect to the foreign debt business process. 

The audit conducted interviews and examined documentation supporting the ongoing monitoring program in place, including the frequency and results of design and operational effectiveness tests, the risk assessment process, and related reporting. 

The audit found that the Department has a structured and systematic on-going monitoring program in place, led by a group dedicated to internal controls over financial reporting. Documents reviewed demonstrated: 1) management’s approach to assessing the level of financial reporting risk, for key departmental business processes; and 2) the frequency of design and operational effectiveness testing is based on the assessed risk level. The ongoing monitoring of the foreign debt process was completed as planned with no remedial actions required for fiscal year 2012–13, as reported in the annex to the unaudited financial statements.

Appendix A - Foreign Debt Net Book Value and Interest on Unmatured Debt

Foreign debt net book values
($ billions)
  As at March 31, 2013 As at March 31, 2012
Marketable bonds 8.7 8.7
Canada bills 2.1 2.0
Total 10.8 10.7

 

Interest on unmatured debt
($ millions)
  As at March 31, 2013 As at March 31, 2012
Marketable bonds 187.9 163.9
Canada bills 2.7 1.8
Total 190.6 165.7
Source: Departmental unaudited financial statements for fiscal 2012-13
Note: During 2012–13, Exchange Fund Account operations were financed primarily through cross-currency swaps of domestic obligations.

Appendix B – List of Departmental Employees Interviewed

Corporate Services Branch

  • Senior Director, Financial Management Directorate
  • Manager, Departmental and Public Debt Reporting
  • Senior Financial Analyst, Departmental and Public Debt Reporting

Financial Sector Policy Branch

  • Chief, Reserves and Risk Management Section, Financial Markets Division

Appendix C – Key Information Reviewed

Legislation, Policies and Guidelines

  • Financial Administration Act
  • Bank of Canada Act
  • Currency Act
  • Treasury Board Policy on Internal Control
  • Funds Management Governance Framework
  • Department of Finance Swap Management Policy (2008)

Documents Specific to the Department of Finance

  • Departmental unaudited financial statements for fiscal 2012–2013
  • Memorandum of Understanding between Finance Canada and the Bank of Canada on the Maintenance of the Financial Records and Accounts of the Public Debt
  • Business process narrative for foreign debt (Corporate Services Branch)
  • Financial Signing Authorities Manual and Delegation of Financial Signing Authorities Instrument
  • Debt Management Strategy for FY 2012-13 and FY 2013-14
  • Debt Management Report for FY 2011-12
  • Report on the Management of Canada’s Official International Reserves 2011-12

Other Documents

  • Office of the Comptroller General’s Audit Criteria Related to the Management Accountability Framework
  • Public Works and Government Services’ Receiver General Manual
  • OAG Public Accounts Audit - Department of Finance –  For the year ended March 31, 2013
  • OAG Follow-up Audit on Internal Control over Financial Reporting – Fall 2013

Information Systems

  • Integrated Financial and Material System (IFMS-SAP), Standard Payment System (SPS) and the Government Banking System Interface (GBSI) – data related to the transactions in the audit samples.

Appendix D – Members of the Audit Team

  • Abdillahi Roble, MBA, CGA, CIA, CRMA, Audit Manager, Internal Audit and Evaluation
  • Rim Ben Saad, B. Comm, Senior Financial Auditor, Internal Audit and Evaluation
  • Daniel Steeves, MPA, Senior Auditor, Internal Audit and Evaluation
  • Randa Kassis, B. Soc. Sc., Acting Senior Auditor, Internal Audit and Evaluation
  • Christian Kratchanov, MBA, CIA, CMC, CRMA, Chief Audit and Evaluation Executive