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Audit of the revenue control framework

Departmental Audit Committee
December 12, 2019

Executive summary

The Audit of the Revenue Control Framework was included in the 2019–20 Integrated Audit and Evaluation Plan due to the risk that decentralization of revenue generation and management in various branches and locations across Canada may hamper the Department's ability to collect and monitor revenues.

The objective of this audit was to provide assurance that Agriculture and Agri-Food Canada's (AAFC) control framework for revenues was adequate and functioning as intended. The audit focused on the revenues generated from the sales of goods and services (in other words, royalties, rentals, and sales of surplus goods) and disposal of capital assets.

The Treasury Board Policy on Financial Management expects that financial resources of the Government of Canada are well managed, through establishing effective controls and oversight over financial management. To this end, the audit examined whether policies in support of revenue management were in place and supported by processes and staff training. The audit also examined whether controls were in place and operating effectively for revenue management to support compliance with applicable acts and policies.

Overall, the audit found that AAFC had an adequate revenue control framework in place, however, there was ineffective implementation of controls in certain areas. Implementation of the revenue control framework could be improved by

Several strong practices were noted:

1.0 Introduction

1.1 About the audit

1.2 Overview of revenue management at AAFC

2.0 Detailed observations, recommendations and management responses

The following sections present the key audit observations. Recommendations for improvement are provided after the detailed observations. Management responded to each recommendation and provided

2.1 Policies and processes

Managing revenues

Table 1 License and rental agreement sampling results
Sampling result Background Impact

The contract type was incorrectly recorded to a different contract type for:

  • 3/24 (13%) of sampled license agreements; and
  • 3/24 (13%) of sampled rental license agreements.
There are a number of contract types in SAP, and depending on which one is selected, there are different subsequent inputs required, as outlined in AAFC's Trade Accounts Receivable Process. If a contract type and related inputs are entered incorrectly in SAP, it may result in certain required actions not being taken (see next sampling result sections on billing plans, action dates, and sales orders).

Billing plans were not established in SAP or, if included, the billing dates did not align with agreements for:

  • 18/24 (75%) of sampled license agreements; and
  • 7/24 (29%) of sampled rental agreements.
Billing plans and action dates are to be entered in SAP according to AAFC's Trade Accounts Receivable Process. These help to identify activities that need to be taken over the term of the agreement. A billing plan lists payment due dates, while an action date represents the date on which the next action  should be taken based on the agreement provisions (for example, send sales order or invoice to customer). Both serve as reminders for upcoming payments due.

Without accurate billing plans and action dates input into SAP, Local Financial Officers may not be aware of upcoming payments due, and in turn, may not issue sales orders or invoices to request payments from customers, which could result in late or no payments.

It also limits the ability of the Accounts Receivable and Revenue Management unit to determine whether collection actions are required.

Action dates did not align with agreements for:

  • 17/24 (71%) of sampled licensed agreements; and
  • 7/24 (29%) of sampled rental agreements.

Sales orders were not issued to customers for

  • 7/24 (29%) of sampled license agreements.

Sales orders were not required for rental agreements.

In accordance with AAFC's Trade Accounts Receivable Process, sales orders are to be sent to remind customers of upcoming royalty payments due. Royalty payments are based on a percentage of sales.

Monitoring revenues

Recommendation 1 – Improve the trade accounts receivable process for royalty license and rental agreements

The Assistant Deputy Minister (ADM), Corporate Management Branch (CMB) should review and improve the Trade Accounts Receivable Process for royalty license and rental agreements to ensure that SAP information is complete and accurate and that revenues owed are invoiced and received.

Management response and action plan

Agreed. The Finance and Resource Management Services (FRMS) Directorate will collaborate closely with Integrated Services (IS) Local Financial Officers (LFOs) by implementing the following action plan:

  1. Provide ongoing monthly (short-term, starting in January, 2020) and quarterly (long-term) training sessions for all LFOs to discuss their questions and educate them on the negative implications of incomplete, inaccurate and untimely SAP agreement information and communicate expectations for input;
  2. Collaborate with IS's LFOs to ensure front-end controls are in place for complete and accurate SAP agreement information by:
    • Ensuring issues identified during the monitoring process are actioned by LFOs within 10 business days and reporting any delays to the Director General – Integrated Services (DG-IS) to take action; and
    • Ensuring an appropriate authority conducts quarterly quality control reviews of random agreements and reporting the results to the DG-IS to take any necessary action.
  3. Investigate the feasibility of centralizing certain revenue generation functions/activities.

Lead(s) responsible: ADM CMB, DG ISM, and DG FRMS

Target date for completion: June 30, 2020

2.2 Training

Recommendation 2 – Improve training

Management response and action plan

Agreed

Refer to the Management Response and Action Plan for Recommendation #1. Training would be starting in January 2020.

Lead(s) responsible: ADM CMB, DG ISM, and DG FRMS

Target date for completion: January 31, 2020

2.3 Approving sales by appropriate authority

2.4 Processing payment

Recommendation 3 – Ensure appropriate authority and segregation of duties

The Assistant Deputy Minister, Corporate Management Branch should establish clear processes and accountabilities for the approval of the sales of surplus goods and review and confirm segregation of duties or alternative controls in the processing of money receipts.

Management response and action plan

Agreed. The Finance and Resource Management Services (FRMS) Directorate will work with Integrated Services (IS) Directorate to provide training and communication to ensure IS managers are aware of their responsibilities and accountabilities to ensure appropriate approval of the sales of surplus goods and segregation of duties (or alternative controls) in the processing of money receipts.

2.5  Royalty payments

Recommendation 4 – Provide Additional Assurance on Royalty License Revenues

The Assistant Deputy Minister, Science and Technology Branch (STB), in collaboration with the Assistant Deputy Minister, Corporate Management Branch, should explore options and implement a solution to provide additional assurance that the Department is receiving the royalties it is owed, including considering whether to conduct royalty audits.

Management response and action plan

Agreed.

  1. A 5 year plan for royalty examination of AAFC's crop licenses will be established using existing documentation and data. Contractually, license agreements will continue to include the possibility for AAFC to audit licensees when royalties are lower than expected.

    A study will be conducted to examine the possibility of imposing audit obligations on licensees when royalty payments are expected to be relatively significant.

    A report including recommendations on options will be submitted to the Assistant Deputy Minister, Science and Technology Branch and to the Assistant Deputy Minister, Corporate Management Branch for decision.

  2. Monitoring of licensees' web sites will be implemented for licensed technologies. AAFC license agreements will include the possibility to audit licensees at AAFC's cost when analysis show unreported licensed products for technologies.

Lead(s) responsible: ADM STB and ADM CMB

Target date for completion: September 30, 2020

3.0 Conclusion

Annex: About the audit

Statement of conformance

The audit conforms to the Institute of Internal Auditors'International Professional Practices Framework, as supported by the results of Agriculture and Agri-Food Canada's (AAFC) internal audit quality assurance and improvement program. Sufficient and appropriate evidence was gathered in accordance with the Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing to provide a reasonable level of assurance over the findings and conclusion in this report. The findings and conclusion expressed in this report are based on conditions as they existed at the time of the audit and apply only to the areas included in the audit scope.

Audit objective

To provide assurance that AAFC's control framework for revenues was adequate and functioning as intended.

Audit scope

Based on the work performed in the planning phase, the audit team developed a risk assessment and identified scoping considerations. The areas identified as being of greatest risks were used to confirm the audit objective, scope, and audit criteria.

In the conduct phase, the audit examined revenue transactions that were included in the scope, for the fiscal year 2018-19 and the controls and management practices in place up to October 2019.

The audit focused on the following revenues that were generated from:

The audit team did not assess the following revenue sources:

Audit criteria

The audit examined the following criteria of an effective revenue control framework during the audit's conduct phase:

Audit approach

The audit approach and methodology were risk-based and consistent with the International Standards for the Professional Practice of Internal Auditing, as required under the Treasury Board Policy on Internal Audit. These standards require that the audit be planned and performed so as to conclude against the objective. The audit was conducted in accordance with an audit program that defined audit tasks to be performed in the assessment of each audit criterion.

Audit evidence was gathered through various methods. The audit team interviewed 47 key stakeholders from different branches, completed site visits to four research centres, and included analysis of documentation. In addition, the audit reviewed a judgmental sample of revenue transactions (and associated agreements, if applicable), to assess whether sales were approved by appropriate delegation of authority and whether invoicing and payments were processed in accordance with Treasury Board and AAFC requirements. A total of 96 revenue transactions (and associated agreements, where applicable) were sampled, with 24 from each revenue source included in the scope for the fiscal year 2018-19:

Table 2. Audit of revenue sources
Revenue source Number of sampled transactions Sampled revenue ($) Total revenue ($) Total revenue sampled (%)
Royalties from license agreements 24 412,877 5,592,455 7
Rentals 24 88,857 2,544,222 3
Sales of surplus goods 24 453,678 4,659,822 10
Disposal of capital assets 24 160,762 1,126,470 14
Total 96 1,116,174 13,922,9701 8
1. Numbers may not add up due to rounding.
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