Contribution Funds for Non-governmental Organizations - a Handbook
7.0 Compliance audits
According to Treasury Board’s Policy on Transfer Payments, the Government may audit any contribution to ensure that public funds have been used in accordance with the agreement signed between the Crown and the recipient. As a result, the Department of Justice Canada’s agreements include a clause stating that it has the right to audit the recipient’s accounts and records to ensure compliance with the terms and conditions of the agreement.
7.1 Audit Objectives
Accountants in Canada can do several types of audit, but most contribution agreements are audited through compliance audits. These audits are usually conducted to assess the extent to which the recipient has complied with the different clauses of the agreement, to certify that the costs incurred by the recipient are eligible according to the agreement and that they have respected Treasury Board standards.
Compliance audits usually put an emphasis on the financial clauses of the agreement and on the assessment of the eligibility and accuracy of the costs claimed during the period covered by the agreement. These audits also include project revenues whenever they are included in the agreement.
7.2 Preparing for an Audit
Planning for the audit is always important. As a first step, the recipient will be contacted and asked to provide the auditor with information on the organization, its personnel, its accounting system, internal controls, and any other useful information that will assist the auditor. A date will be set for the audit, in consultation with the recipient, and an estimate of the duration of the on-site audit will be provided.
Before the audit, it is helpful to gather all the documents that the auditor will likely need to see. The following is a non-exhaustive list of documents that should be made available to the auditor working on a compliance audit:
- audited financial statements (if any)
- interim statements of revenues and expenditures (if any)
- chart of accounts
- general ledger accounts printout
- trial balances
- bank statements (and cancelled cheques when available)
- previous audit reports (if any)
- original invoices
- purchase orders
- purchasing contracts
- subcontracts
- employee contracts
- time sheets for employees
- payroll register
- copies of e-mails (especially those sent from and received by the Department of Justice Canada)
- bank reconciliations
- minutes of meetings of the board or advisory committees
- supporting documents for the selection of subcontractors or suppliers in case of important purchases
- invoices to clients
- inventory lists (if any)
7.3 Initial Meeting
Before the audit begins, there is usually an initial meeting of representatives of the Department of Justice Canada, the recipient, and the auditors. The person responsible for the NGO should be present at the meeting, together with the accountant and/or whoever is in charge of the financial management of the agreement.
During that meeting, the auditor explains the objectives of the audit, and inquires about the most effective way to access the necessary documents. The participants establish procedures for retrieving the documents the auditors will need as the audit progresses, and they also discuss access to files and photocopiers.
At this meeting, the responsibilities of the recipient’s staff with regard to financial matters would also be discussed, and the auditors introduced formally to them, to facilitate interaction during the audit.
In some cases, a pre-audit visit by a Department of Justice Canada Financial Officer and Auditor may take place several weeks prior to the audit to review the scope of the audit and internal control procedures, to select samples in advance, and to ensure that all documents will be available when the audit begins.
7.4 Audit Procedures
Audits are usually conducted by independent qualified professional accountants, and are done in accordance with Canada’s generally accepted auditing standards (GAAS), as defined by the Canadian Institute of Chartered Accountants (CICA). The Department of Justice Canada may decide to have its own personnel do the audit.
The purpose of an audit is to issue an opinion on the eligibility, the accuracy, and the reasonableness of the amounts claimed against the agreement, and to determine whether the recipient has complied with the terms and conditions of that agreement. Audit procedures usually include interviews, reviews of documents and files, an assessment of the accounting system, an assessment of the quality of the internal controls, and tests on a sample of transactions. Cheques issued in payment of the project expenses may also be examined.
The auditor may assess the quality of management and control processes related to such issues as purchases, invoice review and approval, subcontracting, payments, payroll management, billing, account coding, and data entry. The auditor will note any recommendations in the audit report.
In order to conduct an audit, the auditor will have to rely on the internal control measures implemented by the recipient. Therefore, the auditor will usually begin by asking the recipient questions about the organization’s internal control mechanisms, which can help reduce the risk of errors.
The auditor’s goal is to provide an opinion on the accuracy of the costs claimed and on the degree of compliance with the financial clauses of the agreement. The more reliable the system and its internal controls*, the easier it will be for the auditor to do so with confidence. Audit tests can be done at random or in accordance with criteria chosen by the auditor. In all cases, the auditor will provide the recipient with a list of transactions to be tested, and will request original documents that support those transactions.
7.5 Audit Trail
For the auditor to be able to conduct an audit that will lead to an opinion on the amounts claimed by the recipient, there must be an audit trail. The audit trail should make it possible for the auditor to trace the information from the financial reports back to the original supporting documents. It should link the information from the financial reports to the organization’s accounting system (GL accounts), and from the GL accounts to the original supporting documentation. This is usually done through reference numbers or codes accompanying each transaction entered in the system.
The recipient should also periodically do “reconciliations” to make sure the amounts reported in the claims balance with the GL accounts, and those reconciliations should be kept on file.
The filing system of an organization is another element that has a direct impact on the quality of the audit trail, and hence on the auditor’s capacity to follow this trail. The better the filing system is (and the easier it is to understand), the clearer the audit trail is and the faster the information can be found and retrieved during the audit.
A good filing system should have the following characteristics:
- Documents in the files should be kept in chronological order and the files themselves in alphabetical or numerical order.
- Files should be kept in one place.
- Documents should be protected from deterioration, loss and theft.
- Only one person should be responsible for maintaining the filing system.
- There should be a system to track documents taken from files.
If documents pertaining to a project have already been archived before the audit, they should be retrieved from the archives by the recipient and made readily available to the auditors. All elements from the audit trail leading to those documents should be kept intact.
7.6 Assistance from the Recipient
Usually, the auditor will require the assistance of members of the recipient’s personnel to help locate and retrieve any specific documents and to make photocopies whenever needed. Personnel should therefore plan to be available during the audit. Also, the auditors will need space to work, preferably a room that can be locked at night to guarantee the security and confidentiality of the documents.
During an audit, some staff members will be interviewed to inquire about their duties, controls applied, systems, methodology and other topics. It is therefore important that staff members be made aware of the audit and know they may be required to contribute.
7.7 Debriefing with the Recipient
Once the audit is complete, there is usually a debriefing with the recipient’s representatives to present the audit’s general findings verbally and to provide a list of pending questions or documents that were requested but not yet provided by the recipient. The purpose of the debriefing is merely to inform the organization of the overall findings before they receive the draft audit report.
Generally accepted auditing standards in Canada require that the audited party receive a draft copy of the audit report and indicate that they concur with the audit results, and to provide comments in writing.
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