THE STANDING COMMITTEE ON AUDIT AND OVERSIGHT
EVIDENCE
OTTAWA, Wednesday, February 15, 2023
The Standing Committee on Audit and Oversight met with videoconference this day at 1:32 p.m. [ET], in camera, to supervise and report on the Senate’s internal and external audits and related matters; and, in public, to supervise and report on the Senate’s internal and external audits and related matters.
Senator Marty Klyne (Chair) in the chair.
(The committee continued in camera.)
(The committee resumed in public.)
The Chair: I’m Marty Klyne, senator from Saskatchewan and Chair of the Standing Committee on Audit and Oversight. Participating in this meeting are Senator Renée Dupuis, deputy chair from Quebec; Senator David Wells, deputy chair from Newfoundland and Labrador; Senator Percy Downe from Prince Edward Island; Madam Hélène Fortin, external member from Quebec; and Mr. Robert Plamondon, external member from Ontario.
Senators, external members, we have before us a budget application for travel to London, U.K., for a fact-finding mission for the fiscal year ending March 31, 2024. Is it agreed that we approve this budget for submission to the Standing Committee on Internal Economy, Budgets and Administration? Agreed? All in agreement? Thank you. This budget will be submitted to the Committee on Internal Economy, Budgets and Administration to be reviewed by the Subcommittee on Senate Estimates and Committee Budgets.
The next item on the agenda and our next item of business is a presentation from the independent external auditors of the audit plan for the Senate for the year 2023-24. From Ernst & Young LLP, we welcome Suzanne Gignac, Partner, Assurance Services; and Niguel Givogue, Senior Manager, Assurance Services. Thank you both for being with us today. From the Senate Finance and Procurement Directorate, we also welcome Pierre Lanctôt, Chief Financial Officer; and Nathalie Charpentier, Comptroller and Deputy Chief Financial Officer.
Ms. Gignac, the floor is yours.
Suzanne Gignac, Partner, Assurance Services, Ernst & Young LLP: Thank you very much, senator. We’ll very quickly walk you through our audit plan at a high level and then answer any questions you might have on the plan.
Page 2 of our document, which is the executive summary, is where I’ll put most of my focus. On the left-hand side, we have the 2023 audit plan. It identifies that we’re engaged to perform an audit in particular to express an opinion on the financial statements that will be in accordance with Public Sector Accounting Standards for the March 31, 2023 year end. In doing that, our audit opinion is fairly stated in all material respects. Materiality becomes a key concept from an audit perspective. It is essentially the level at which an error or omission would be considered to impact the user of a financial statements decision.
There are some very set industry standards, usually in the 1% to 3% range. As in the prior year, we’re using 2.5% of forecasted expenses for the Senate, which is a materiality of $2.7 million.
Down on the left-hand side, we have our audit approach. Our approach will be a substantive approach as the most efficient and effective audit for the financial statements. We will do analytics, confirmations, and actual tests of transactions and details to support the financial statement information.
Under it are areas of emphasis, which are in line with the prior year for the first five of them. With those, we will do walk-throughs to understand the processes and the controls, although we won’t be doing detailed testing of the controls. Again, we will do confirmations, substantive analytics and other tests of details.
The last bit on that list is the revised auditing standard on risk assessment, which is Canadian Auditing Standard 315. This standard has existed for many years, but it was revised to change with the environment and the fact that IT is a very significant component of an audit and a risk assessment at this point. So we will do additional work on IT, in particular, from a risk-assessment perspective, to see if we identify any new or changes to risk as a result. At this point, based on the work we’ve done, we don’t anticipate and have not identified any new risks as a result of the revised standard.
Underneath that, on the left, we have fraud considerations and risk of management override. This is something we’re required to also consider as part of the audit. There is always a presumed risk of management override, and we do specific procedures to deal with that. We use our general ledger analyzer, we extract all of the journal entries, we look for specific unusual items and then we look at those transactions in particular.
In the middle, we have our digital commitment. We will continue to use our EY Canvas and portal to share information with Senate management and staff, and to keep track of how the audit is progressing. For the last few years, we have done our audits entirely virtually, which has not impeded the audit, but we will be able to be in person if that is what the Senate would like us to do. We will really move with the management of the Senate. If they are in person, then we will be in person as well, but we’re not concerned if we do have to do the audit virtually.
Then, on the right-hand side, you have additional points to consider. We do anticipate doing the audit in June/July of this year. Our team includes me as well as Niguel, who has been on it for a number of years, and we will be supported by the staff on the engagement.
Then, in the appendices, which I won’t go through in detail, we have our fees, which are in line with our contract. We have required communications. At this stage, we are required to communicate to you our plan and approach, as well as the fact that we haven’t found any independence issues, so we consider EY to be independent of the Senate.
We have our thought leadership, so we have included a few links to support you in your oversight role that might be of interest to you. Then we have our engagement letter, which contains the terms and conditions under which we are engaged to perform the audit.
At a high level, that’s what I was going to summarize, but we’re happy to answer any questions you might have.
The Chair: Thank you very much for that.
Senator Downe: Thanks for the overview. I particularly appreciate you not reading every word of it since we’ve already done that. That was a good overview.
On your chart on the 2023 audit plan, I have a few questions in trying to educate myself. Under the audit approach, it says that “we expect to take a substantial audit approach testing accounts.” How does that work? What percentage do you test? Do you go to the highest-spending area? Do you look for random imperfections in the recording? How does that work?
Ms. Gignac: It’s a mixture. When we’re actually doing test of details, we do key items that are over a certain threshold. Then we also do random testing where we can pick any transaction.
We sometimes do substantive analytics. That could be that we know how many people there were last year and how many this year. We look at changes in salaries, and then we determine where we think the payroll should actually be. We do analytics like that to make sure it is reasonable.
Then when we’re doing journal and entry testing, we take all of the data and look for other unusual items, such as something that is entered by someone that we wouldn’t expect to have entered a transaction, something entered on a day we wouldn’t expect — like a holiday — or unusual phrases that might indicate something we might want to look at. There are varying ways, and it can get picked for different reasons based on them.
Senator Downe: Thank you. You say at the end of that same statement, “confirmation and test of details.” Explain “test of details.”
Ms. Gignac: A test of details, at a high level, is what I was just explaining. It’s where we’re actually picking a transaction and looking at the underlying support for that transaction. So we might pick an expense and want to see the invoice and the payment details so we can actually determine that, yes, that expense did actually occur, it occurred within a period and was actually paid. So we will sometimes look at whether it was approved by someone, as well.
Senator Downe: So it’s hard to give a percentage of these test details you’re doing, I assume. You’re only drawn to what looks different in effect.
Ms. Gignac: It depends on what the composition of the expense is in a year. We will randomly or judgmentally decide the number that we will test that are random. For key items, it depends on how many significant transactions there actually are. In a year when you spend a lot of money in a lot of big transactions, they might all get picked from key items, and then you might do fewer random samplings in a year with only a few large items. So it is a bit judgmental.
Senator Downe: This is the last question. On salaries and benefits, what areas do you look at?
Ms. Gignac: We usually do substantial analytics. That is where we look at what payroll was last year and this year, and what has changed. Does the change make sense based on what we know happened within the organization? It’s the number of people who are there and the salary changes that took place. Then we will do some test of detail as well, where we actually tie out to a payroll ledger.
Senator Downe: Great.
The Chair: Before we go to our next question, I remind committee members that we are in public. We will keep some time at the end of the meeting to go in camera for some questions of a more sensitive matter, if need be.
[Translation]
Ms. H. Fortin: Thank you for presenting your plan, Ms. Gignac. We are both in the same field. We conduct audits every day and I have a keen interest in that. I also find that your plans are always well prepared, well done and properly adapted to the situation.
I have two questions for you.
First, you set your materiality threshold at 2.5% of the planned expenditures. I am curious as to why you chose 2.5%. Why not 2% or why not increase it to 3% if you have gained a lot of confidence in recent years?
Second, given that a lot of positions in the organization are vacant, in your procedures, are you going to more closely examine the impact on the system of internal control over financial reporting, or ICFR, which is designed to protect the integrity of financial information? We know very well that key controls can be affected by vacancies and it is important to consider that.
Those are my two questions about your plan, which is very well done by the way.
[English]
Ms. Gignac: Thank you. From a materiality perspective, we will be at the higher end of the range — if the business is viable, if we feel that there isn’t debt and that the entity is not going public, then we will be at the higher end of the range. The Senate itself could probably be at the higher end of the range, and we would not generally expect it to be the low end of the range. We could have chosen 2, 2.75 or we could have chosen 3. I like to not be at the very high end of the range in this instance, because it gives us breathing room if numbers change year over year. We have to manage that from an audit perspective. We are quite comfortable in the current year and in prior years being at the higher end of the materiality range, but not at the top of it.
With respect to ICFR and vacant positions, we aren’t relying on controls from an audit perspective. We will walk through the processes and if we identify concerns, we will raise them with management, and we would certainly raise them with you as well. We won’t necessarily see specific impacts on ICFR as a result of vacancies. At a high level, I wouldn’t expect that there will be any impact from our audit plan perspective as a result of that, but if we identify any issues, we will bring them to your attention.
Senator Wells: On the audits, what kind of access do you have to source documents? Do you have automatic access, or do you request the documents? What is the time frame in which you would typically expect them to be provided?
And finally, is there any analysis done using artificial intelligence, or is it all by hand and paper?
Niguel Givogue, Senior Manager, Assurance Services, Ernst & Young LLP: With regard to the first part of your question, senator, we do provide a list of all requests to Senate management, and then we are provided with supporting documentation in a very timely fashion. We also have access to Unit4, so when we get into testing of invoices, it is easier for us to pull the information directly.
For example, with payroll documentation, we won’t have direct access to that, but if we do need access, we’ll request it from management and we’ll get that in a timely fashion.
In regard to AI, we do not employ AI on this audit, just given the extent of our testing. It would be inefficient.
Senator Wells: Mr. Lanctôt, do you assign a point person for the audit period to respond to the auditor, or is it done through general inquiries to your office? How does the Senate handle that during the audit period?
Pierre Lanctôt, Chief Financial Officer, Finance and Procurement Directorate, Senate of Canada: Thank you for the question. Essentially, we have one person that is the point person on a daily basis, but everybody else in finance or procurement or the entire organization support — so we have one person who, if there is a request, will find the right person to address the information.
Senator Wells: That person is pulled into that position for the period of the audit? After that and before that, they are in their regular job?
Mr. Lanctôt: Part of that person’s job is to work on the financial statements. It’s one of our analysts who worked on the preparation of financial statements as well as other financial reports, but during a period of a couple of months, that person is the point of contact —
Senator Wells: Their responsibility.
Mr. Lanctôt: — but also works on some other things.
Senator Wells: Okay. Thank you.
Mr. Plamondon: Ms. Gignac, thank you very much for the plan and the report. I think it’s quite appropriate. I wanted to ask a question and give some context. You have noted that your approach is essentially analytical review and substantive test of details, which contrasts with a compliance audit in which you would be evaluating the system of internal control and the framework for internal controls. If the internal controls work, great; then you wouldn’t expect there to be a problem with the details. It’s very intensive and expensive and time-consuming to go in and evaluate the whole system of internal controls.
However, you did mention when you were looking at the test of details, you would look at the source documents, as the senator would say, and make sure that it lines up with how that transaction is posted and shows up in the general ledger and, ultimately, in the financial statements. You also mentioned that you would ensure that the appropriate approvals were attached to that particular expenditure, which would suggest, depending on the amount of an expense, who would be required as the approving authority, which, in effect, is part of the system of internal control.
In the circumstance where you found that an approval was missing, that there was a gap in the internal controls, what would be your general response to that sort of finding?
Ms. Gignac: We will sometimes look at the approvals as well; that’s true. If we identified something that we clearly felt was a deficiency or an issue from a control perspective, we would have a discussion with management about it. Our first step would be to understand what the actual impact is. Is there a concern here? Is there something that we should raise with them? So we would have a discussion.
Mr. Plamondon: As a follow-up question, would that be something that you would ordinarily include in a management letter that would be presented to the Audit and Oversight Committee, which we could discuss either in a session like this or even in an in camera session?
Ms. Gignac: We will sometimes issue a management letter, if we feel it’s significant enough to bring to those charged with governance attention. Sometimes having a discussion with management, they will address it then and there or explain to us what the issue is. We do use judgment in determining whether we will bring a management letter.
If we don’t bring a management letter, we will at least document the issue in our audit results so that it’s still available to the committee to discuss and so that they are aware of whatever we discuss with management.
Mr. Plamondon: As a final point to forecast, when you come back with your final audit, it’s the type of question I would likely ask. Thank you.
[Translation]
Senator Dupuis: There are two points on page 5 of your document that I would like to clarify with you.
Can you help me to better understand the matter of services provided without charge in priority sectors? Why are you interested in the fact that some services provided by other organizations, namely certain departments, are not charged to the Senate’s budget?
What are you looking at there?
[English]
Ms. Gignac: In the financial statements, services provided without charge are actually valued and put into the financial statements for certain services. That’s why, because they show up in the financial statements as a line item, we are interested as the auditor to make sure those are accurately reflected.
As far as what we do, we confirm with other departments as to what services were provided and the value they have attributed to that, and make sure that it feels reasonable.
[Translation]
Senator Dupuis: Thank you. That answers my question. My second question has to do with client accounts. First, what do the client accounts represent? Second, on what basis do you choose to review them? Do you carefully review all client accounts or do you just choose a certain number from year to year?
[English]
Mr. Givogue: Accounts receivable, senator, will depend on whether there are any key items, then we will pick those based on just a dollar amount — them exceeding a certain dollar amount — and then we would do representative testing through direct confirmations.
[Translation]
Senator Dupuis: If I understand you correctly, you will verify whether the payment that was made by the Senate Administration for an expenditure made by a senator in the context of managing their office budget, for example, corresponds with what was billed. Is that it or do you go further?
[English]
Ms. Gignac: This doesn’t specifically relate to senators’ expenses. In the accounts receivable would be amounts that are receivable that are owing to the Senate, and we would go and look at who owes it to the Senate, do they agree that they owe it to the Senate. Then we will look at subsequent receipts as well and support that they actually did receive it after year end. That’s how we look at that.
[Translation]
Senator Dupuis: Thank you. That answers my question.
How closely do you look at senators’ office expenditures whether for this year or another year, or how closely do you need to look at them as part of your audit? Is that something you even look at?
[English]
Mr. Givogue: For expenses or anything that is hitting the expense line item on the financial statements, again we will take a key item approach and then we will perform tests of details. Some of the senators’ expenses are subject to being picked up randomly.
[Translation]
Senator Dupuis: Great. Thank you. That answers my question.
[English]
The Chair: Are there any other questions for the team?
We will move to in camera questions.
(The committee continued in camera.)