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Audit of Accounts Receivable

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1 Introduction

1.1 Context

Accounts receivable are classified as current assets of the Department and are generally created and recovered during the same fiscal period. They include trade accounts receivable (amounts owed by customers for goods or services rendered as part of normal business operations) and non-trade accounts receivable (amounts related to various transactions, such as interest income, refund of overpayments and recoveries).2

As shown in Table 1, on March 31, 2008, the balance of Environment Canada’s accounts receivable was $7.6 million. Accounts receivable from external parties (excluding those with other federal departments and organizations) accounted for $3.3 million of that amount. 

Table 1 – Breakdown of accounts receivable as at March 31, 2008
  Amount
(thousands of dollars)
%
External
Cash in Hands of Departments Awaiting Deposit to the Receiver General 420 5.6
Other revenue 2,917 38.6
Internal
Goods and Services Tax and Harmonized Sales Tax 2,459 32.5
Other Government Department 1,762 23.3
Total 7,558 100.0

Source: Departmental financial system

Close to $80 million were generated in revenue during the 2007–2008 fiscal year. Approximately half of that amount was generated by the Ontario Region. Table 2 shows the types of revenue.

Table 2 – Types of revenue for the 2007-2008 fiscal year
  Amount
(thousands of dollars)
%
Sales of Goods and Information Products 43,561 54.40
Services of a Non-Regulatory Nature 17,749 22.17
Services of a Regulatory Nature 5,141 6.42
Lease and Use of Public Property 4,615 5.76
Other revenues 3,811 4.76
Revenue from Joint Project and Cost Sharing Agreements 2,988 3.73
Environmental Damages Fund 649 0.81
Rights and Privileges 616 0.77
Gain on Disposal of Assets and Foreign Exchange Valuations 485 0.61
Found Assets Credited to Revenue 411 0.51
Interest on Overdue Accounts Receivable (net of write offs and cancellations) 33 0.04
Other Fees and Charges 9 0.01
Fines 3 0.00
Total 79,794 100.00

Source: Departmental financial system

Departmental Requirements

The roles and responsibilities of Environment Canada as they pertain to the management of accounts receivable are defined by the Treasury Board of Canada Secretariat Policy on Receivables Management. That policy stipulates that:

  • departments must ensure that all of the government’s receivables are managed fairly, efficiently and effectively to recover such receivables and minimize the loss of risk;
  • departments must charge interest on overdue accounts;
  • departments must take progressive collection actions, which include legal proceedings, if necessary; and
  • departments must take action on a timely basis with respect to any write-off of debts when they are not settled in full.

In situations where the Department determines that a debt is uncollectible, it is responsible for writing off that debt, and it must comply with the levels of approval required by the Delegation of Financial Signing Authorities that it has set up. The write-offs must appear in the financial statements as expenses in the statement of operations.

Financial Information Strategy

Since the implementation of the Financial Information Strategy in 2001, departments are required to record their revenues on an accrual accounting basis, i.e., when the sale of goods or the provision of services takes place. Previously, departments recorded revenues on a cash basis, i.e., when the deposit was made.

Financial System

Accounts receivable are recorded in the accounts receivable module in the MERLIN financial system. The system is used for invoicing, monitoring suspense accounts, entering payments, adjustments and interest, and also for writing off debts, when necessary.

1.2 Analysis of Risks

During the planning of the audit, a risk analysis was carried out to identify, evaluate and prioritize the risks associated with the management of accounts receivable. This analysis was based upon an examination of the accounting policies, manuals and standards that govern the management of accounts receivable and on an analysis of the data contained in the Department’s financial system. Key personnel in the management of accounts receivable were also interviewed.

The identified risks were then evaluated in terms of the probability of their becoming a reality and of their impact on the Department’s activities. As shown in Table 3, the risk evaluation activity did not reveal any high-level risks associated with the management of accounts receivable.

Table 3. Matrix of risks associated with the management of accounts receivable

 

 

Low

Medium

High

Impact

High

  • Problems with invoicing (delays, amounts)
  • Inadequate controls

 

Medium

 

  • Unjustified or unauthorized write-offs
  • Ineffective collection measures

 

Low

  • Inefficient management of deposits (delays, protection of assets)
  • Failure to comply with year-end procedures
  • Failure to charge interest on overdue accounts
  • Uncollectible debts not written off
  • Incorrect amounts for the allowance for uncollectible debts ($)

 

 

Probability

Annex 1 sets out the auditing criteria that were developed following the risk analysis.

1.3 Objectives and Scope

The purpose of this audit was to ensure that Environment Canada’s accounts receivable are managed fairly, efficiently and effectively to recover such receivables and minimize the risk of loss. The audit objectives were to assess:

  • whether the framework of controls for the management of accounts receivable is appropriate; and
  • the degree of the Department’s compliance with the applicable accounting regulations, policies and standards.

The audit dealt with internal accounts receivable (with other federal departments and organizations) and external accounts receivable created during the 2007–2008 fiscal year and with accounts receivable as at April 1, 2008. Other analyses were carried out on subsequent dates for specific requirements, as certain reports could not be produced retroactively.

1.4 Methodology

In order to meet its objectives, this audit combined data analysis with a review of relevant documentation and interviews with various accounts receivable specialists.

Review of the Documentation

Although the management of accounts receivable is largely governed by the Treasury Board of Canada Secretariat Policy on Receivables Management, other regulations and policies are also directly involved. The list of documents that were consulted during the audit is attached in Annex 2

Interviews

Interviews with specialists from Departmental Accounting, the regional accounting offices, and financial systems were conducted in order to identify and evaluate current practices, the controls that are in place, and the difficulties that are being encountered. 

Data Analysis

The conclusions of the audit are also based on an analysis of data contained in the Department’s financial system. No review of files was conducted at the accounting offices. All of the transactions concerning accounts receivable for the 2007–2008 fiscal year were downloaded from the financial system so that an analysis using computer-assisted techniques and tools could be completed.

1.5 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.


2 Financial Information Strategy Accounting Manual, Treasury Board of Canada Secretariat, section 3.2.

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