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Review of the Atlantic Innovation Fund -
Post Payment Audit -
Period Ended March 31, 2004

Audit Directorate

Final Report

March 2006


POST PAYMENT AUDIT RESULTS .................................................................1

RESULTS - CONSULTING AND AUDIT CANADA...........................................3

Audit Directorate
Review of the Atlantic Innovation Fund -
Post Payment Audit -
Period Ended March 31, 2004

Under the Atlantic Innovation Fund (AIF), ACOA disburses project funds on a
timely basis following a pre-payment review of the claim. The payment process
is designed to maximize client service while minimizing the risk that the Agency
disburses funds inappropriately. The payment process relies upon the client’s
signed attestation that the expenses claimed are authentic, eligible costs of a
project and have already been incurred.

ACOA’s Post Payment Audit (PPA) function plays an important role as a
necessary check on the functioning of the payment process. The PPA provides
an ability to assess the adequacy of control being provided by the claim review
and payment process. The objective of the post payment audit process is to
reach a conclusion about the appropriateness of the general population of
payments made under the AIF Program during a fiscal year based upon
examination of a statistically reliable sample.

At present, the PPA function is conducted on a regional basis with oversight from
Audit Directorate on specific issues (i.e. sample design and Agency-wide

For the period ended March 31, 2004 (payments made in fiscal years 2002/2003
and 2003/2004), a sample of 34 claims was selected for post payment audit and
audits were performed by Consulting and Audit Canada (CAC). Results were
reported back to ACOA for roll-up and extrapolation.

Sample selection criteria for AIF were based on the total program funds of
$300 million. Materiality was selected at 2% of the population or $6 million for
the program. With reductions to allow for errors found during the audits, a
sampling interval of $1.3 million was employed to draw the sample for audit. A
95% confidence level was chosen.

Thirteen projects were found to have minor errors; the total of which was not
material as over 75% of the total value of the error for the population was related
to one project.


The rate of error for the years 2002/2003 and 2003/2004 is under the materiality
threshold noted above.

Page 1 Audit Directorate
The errors identified with the specific project have the potential of becoming a
significant issue in future years. However, these can be effectively mitigated if
specific action is taken to address the weakness. Since its completion, work
consultations have been undertaken with the principals of this project and
improvements have been implemented.

Page 2 Audit Directorate
Consulting and Audit Canada

Post Payment Audits for the AIF Program

In connection with our engagement outlined above, we have recently completed
30 post-payment audits for the Atlantic Innovation Fund (AIF), covering the fiscal
years ended March 31, 2003 and March 31, 2004. As agreed, it will be ACOA’s
responsibility to extrapolate the results of these audits, combined with the 4
performed by New Brunswick Region’s post-payment audit (PPA) staff. This
letter is meant to convey findings where we saw some commonality in audit
errors or where program procedures may not be clear or well understood, all of
which may help ACOA improve its payment process related to this program.

We are pleased to report that, for the most part, the program’s control system
appears to be operating as intended, with adequate assurance; recipients are
complying with the terms and objectives of contribution agreements, terms of the
AIF program and with Treasury Board (TB) policies. We noted most regions
have a process/checklist for pre-audit of claims which aims to address many of
the requirements of the AIF claiming guidelines, and this control system has
proven effective in capturing several client errors. Nevertheless, some items
have come to our attention that, if highlighted, may assist you further in
enhancing your control structure. For presentation purposes, these items have
been grouped according to topic and include: claiming and payment of ineligible
costs, non-cash item and overhead valuation and support, amendment
documentation, proponent record keeping, support for advances, and financing
requirements. Also, you will note other general observations stemming from our
review of positive control systems at the end of the letter.

Claiming / Payment of Ineligible Costs

During our review process, it was indicated to us by some clients that they were
unsure of certain aspects of the claiming process and/or related requirements
outlined in the AIF Agreements. In many of these instances, we also noted that
some items claimed and paid included holdbacks, foreign exchange gains,
accrued expenses and estimated costs, and that some items on the claim were
not fully supported with details (dates, invoice numbers) and, as such, appeared
to be of questionable eligibility at the time of claim submission. There were also
a number of errors detected that stemmed from not-for-profit entity claims related
to sales taxes and how to calculate the eligible portion of HST. Although the
details of these ineligible items are found in the various audit reports we issued,
there appears to be some commonality that can be summarized for purposes of
this letter, i.e. costs incurred dates the same as or close to the prior commitment
date, rounded invoice amounts, vague or missing invoice or supplier information,
or simply the wording of certain items appearing on claims. In all but one region,
these items amounted to relatively small audit adjustments. Nevertheless, to
mitigate any possible weaknesses in the control system, a training session for
Page 3 Audit Directorate
new clients or clients who have significant and recurring errors and/or an
enhanced quality assurance review procedure or training for Account
Managers/Payment Officers may prove beneficial. Furthermore, to mitigate the
risk associated with errors in the application of taxes, some special advice
related to HST for not-for-profit entities through Schedule 3 should be

Non-Cash Item / Overhead Valuation and Support

There were some eligible non-cash contributions that were very highly detailed
and supportable for an audit evidence perspective, while some others were not.
In accordance with standard practice for these types of transfer payments, AIF
guidelines require a certain amount of support for costs claimed to verify that the
amount is correct and that the costs was, in fact, incurred on the dates and for
the purposes outlined. Where non-cash transactions are concerned, the level of
support available for our audit staff varied considerably. In many cases, the
request for additional support caused some confusion with AIF proponents, many
of whom felt that the non-cash item’s eligibility was adequately addressed in their
proposal initially. We therefore recommend where there may be some question
as to how an item of this sort may be supported, that this be clarified with the
proponent during the initial evaluation phase.

AIF guidelines allow for the payment of overhead allocations to proponents
based on a pre-determined formula, i.e. square footage calculation or percentage
of salaries. Payment by this method can be a prudent practice for types of costs
that are low risk, and where high transaction volumes coupled with small dollar
amounts, make audit sampling inefficient and not cost-effective. As is also the
case for non-cash items, as outlined above, TB policy nevertheless requires that
some verification of these amounts be undertaken. To this end, it seems that AIF
general practice is to assess the reasonableness of the allocation during the
evaluation phase. We were able to assess that all overhead amounts were paid
appropriately in accordance with the contribution agreement, but we were not
always able to identify where ACOA had undertaken a review of the
appropriateness of the overhead allocation at the outset. In these cases, we
were able to satisfy ourselves that sufficient overhead costs were incurred to
support the amount claimed through inspection of general ledgers and financial
statements; however, there remains some risk that some of the costs incurred
may be in conflict with the eligibility criteria for costs outlined in Section 2313 –
Operating Guidelines for AIF, subsection 12.2 – Ineligible costs. As a result, we
would encourage ACOA to adopt a standard approach to documenting the
appropriateness of the overhead allocations at the time of project evaluation that
would specifically refer to the general items that are meant to be covered by the

Page 4 Audit Directorate
Amendment Documentation

CAC noted that many statements of work, costs schedules, financing/equity,
report types/frequencies and key collaborators may be in need of a formal
amendment to recognize changes in the proponent's plan. These were not
considered to be compliance issues for the purposes of our audit reports, as, in
many instances, ACOA has full latitude to determine the type and quantity of
documentation necessary to satisfy its conditions or, in other cases, has
effectively unilaterally amended the requirement by some notation in the file. In
any event, it was difficult in some instances to identify where the clause was
addressed within the payment file, and some standardized approach, even where
non-substantive amendments are concerned, may assist both ACOA staff and
auditors to more easily identify and address any relevant compliance issues.

Proponent Record Keeping

As may be expected, the quality of record keeping among proponents to support
their claims varied substantially, especially as it pertains to allocating wages to
AIF projects. It should also be noted that the proponents’ lack of understanding
of audit document requirements accounted for the majority of delay in finalizing
audits, the most significant delays occurring in one particular region with one
particular proponent. In this regard, there may be an opportunity to improve the
instructions or information given to clients prior to the claiming stage and prior to
post-payment audit that may assist in streamlining both processes.

Support for Advances

In all cases, we noted that AIF proponents adequately supported initial requests
for advances, and the amounts were paid in accordance with provisions in the
AIF Agreements. The amount claimed and paid, however, sometimes exceeded
the operational requirements for the period in question. ACOA’s practice in these
instances has been to reduce future claims by any overpayment. While effective
in resolving the monetary issue, it is possible under this scenario for unaccounted
advances to remain outstanding for a significant period of time. Also, the
practice does not actively deter proponents from overestimating their

We would recommend that there be an internal policy developed/communicated
to address this situation, requiring proponents to account for or repay advance
amounts not resolved within 90 days of the advance claimed period. AIF
Agreements would appear to have the appropriate provisions to collect
overpayments such as this as “Debts due to the Crown”, and enacting collection
procedures on this basis or issuing a written request for support of an advance
provides some discouragement for proponents to overclaim on advances,
obtaining these funds in advance of need, which is contrary to Treasury Board
Page 5 Audit Directorate
Financing Requirements

We noted that AIF agreements sometimes contained a requirement for financing
from an internal source, i.e. from the proponent’s working capital. In these
cases, it was difficult to support these amounts from an audit evidence
perspective, as the amount required was predicated on some future event such
as the materialization of sales or other financing. We would recommend that the
use of pre-disbursement financing clauses be limited to that financing that may
be generated from sources external to the proponent. Should it prove necessary
to verify the proponent’s contribution to the project after the ACOA’s evaluation
has been conducted, through such items as cash flow projections or the like,
these could be requested and monitored through the reporting requirements
under Schedule 5.

General Observations

During the course of our review, we noted some positive practices in certain
regions that should be noted for the consideration of all regions. As an example,
the file structure in certain regions, where lead sheets have been developed for
all major sections of the file including: claims, agreements, reports, amendments
and the like, facilitates easy review of the file. There is also evidence that some
regions have adopted a payment quality control review process that is performed
after the payment officer or account manager recommends a payment. This
secondary review can be quite effective and could be standardized in a checklist
format. Finally, it seems some regions are typically obtaining good amounts of
detail in progress and reports, which enables better tracking of progress of the
project toward its intended objectives. In all of these examples, we would
recommend that ACOA hold a discussion on best practices among the AIF
Coordinators so that ideas between regions can be shared.

We are available at any time to provide further details on the above, and would
encourage you to contact us should your Project Managers have any issues with
regard to discussing the results of our post payment audits with their clients.

Finally, we hope that our work has been of assistance to you, and thank you for
the chance to assist you in strengthening your control system over AIF

Page 6

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