The Accountability Cycle - Audit

Description:
The audit is a formal, independent review of all Band revenues and expenditures for the fiscal year. It is conducted in accordance with generally accepted accounting principles. Essentially, the audit is a "report card" of the financial management and fiscal health of the First Nation.

Purpose:
The annual audit is meant to illustrate to Band members and funding agencies that all revenues received by the Band are accounted for, and that expenditures were made following conditions of funding agreements. It also tells the Band members how their local government used Band funds. It is important to note that the audit does not speak to the quality of the decisions made (see Annual Report), only the compliance and record keeping of the Band's finances.

The significance of the audit is the fact that it is an independent, third-party review conducted by accounting professionals. Because these professionals use generally accepted accounting principles, the community and the funding agencies are assured that the results of the audit are objective and reliable.

The auditor's job is to determine the completeness and fairness of the financial statements in all material respects. Material means that the auditor does not review each and every financial transaction; it means an adequate review is done to provide a written professional opinion on the financial statements.

In conducting the assessment, auditors will use much of the documented financial information available to them. This information includes the funding agreement, fiscal policy, fiscal plan, and final program budgets, revenue forecasts, cash management reports, expenditure and variance reports, and the mid-year and year-end reports.

Process:
The auditor makes sure that the First Nations Financial Statement presents a fair picture of the Band's operations and financial position. In conducting the audit, the auditor verifies accounting records by cross-referencing them to supporting documents, or by receiving confirmation from a third party (e.g., a bank). The auditor reviews the financial system and internal controls during the audit, and makes recommendations for improvements, where applicable.

There are important issues to consider when undertaking the audit.

These include:

  • Appointing the auditor
  • Timely completion
  • Providing information
  • Completed audit requirements

1) Appointing an Auditor

To be qualified, an auditor must have completed special training. As well, s/he must be a member in good standing with a professional accounting association that is recognized by the province or territory where the First Nation or organization is located.

Some Bands may use a tendering process to choose an auditor. The purpose of tendering is to ensure that the Band obtains the services it requires, at the best possible price. While it is not necessary to tender every year; it should be considered every three to four years. When choosing an auditor, the Band Council should consider price, services offered, and conditions of acceptance, as well as the auditor's reliability. Another important consideration is an auditor's experience with First Nations operating environments. The "learning curve" for auditors unfamiliar with Band operations and with the various and changing conditions of funding agreements, significantly impacts on the amount of time (which equates to fees charged) that an auditor will require to spend completing the audit. We have included a sample invitation to tender letter for your use (see Sample Audit Letters).

When the Band has selected an auditor, a letter of appointment should be sent. In response, the auditor normally prepares a "letter of engagement." This letter should outline the needs of the Band, the Band's commitments to the auditor, and the auditor's commitments to the Band. Samples of these letters have been provided.

It is important the Band's management team has an interim meeting with the auditor to discuss what the auditor's information needs will be at year-end. In order to negotiate costs and time commitments with the auditor, the Band is required to make a commitment regarding timing and types of information that needs to be made available to the auditor. There are year-end working papers that staff may need to prepare for the auditor. The Band should receive a letter from the auditor which summarizes information requirements.

It is important to remember that if records are incomplete, the auditor and his staff will be forced to complete or attempt to reconstruct missing information. This will add significantly to the costs incurred by the Band.

2) Timely Completion of Audit

The audit must be completed within a reasonable period of time following the March 31 year-end. Indian and Northern Affairs Canada has established that a reasonable period of time is 90 days (June 30). Funding for the new year can be restricted or withheld until the completed audit is submitted.

Completing the audit by June 30 means the Band must engage the auditor early (and not wait until the last minute), gain the auditor's commitment to begin work at year-end, and have the proper records and staff available to the auditor when required.

3) Checklist of Information Requirements for the Audit

  • receipts and payment journals
  • detailed general ledger and year-end final balance
  • book of meeting minutes with signed copies
  • Band Council resolutions
  • canceled cheques, bank statements and cheque stubs/duplicates, deposit book for fiscal year
  • band reconciliations
  • bank confirmation
  • receipt books
  • copies of all contracts, i.e., funding agreements, etc.
  • payroll sheets and T4s issued
  • all applications for grants
  • letters approving grant applications
  • list of accounts receivable
  • list of accounts payable
  • list of inventory
  • schedules of salaries, honoraria, and travel of elected officials and senior, unelected officials
  • all journal entries
  • pension plan information
  • list of assets purchased during the year and copies of supporting documentation
  • schedule of long-term debt
  • updated organization chart
  • client-prepared financial statements
  • listing of related party accounts receivable
  • listing of prepaid expenses
  • continuity schedule of fixed assets
  • listing of related party accounts payable
  • analysis of deferred revenue account
  • copy of approved budget for fiscal year

4) Completed Audit Requirements

  • balance sheets
  • statements of revenue and expenses for all activities
  • schedules of surpluses or deficits for each activity, detailing transfers and prior year balances
  • consolidated balance sheet and statement of revenue and expenses, and surpluses or deficits, if a Band is in debt
  • statement of changes in financial position
  • special reports required by the Band or Funding Agency

Included in the audited statements will be the auditor's opinion. This opinion is an assessment about the validity of the financial statements as a reflection of the Band's financial position (i.e., how well do they present the Band's situation?). The auditor must present a draft of the audit to Chief and Council, provide an explanation of the statements, and be available to answer any questions regarding the audit report before it is finalized. Included in the audited statements will be the auditor's opinion.

The Auditor should also provide a "Management Letter" which identifies areas for improvement in the First Nations financial systems. The Financial Controller should be tasked with ensuring such matters are dealt with in order to avoid future problems.

Timing and Responsibilities:
The Band Manager is the primary contact for official correspondence with the auditor. The Financial Controller works in cooperation with the auditor to answer questions or collect information as required.

  • The letter to invite tenders (if required) from potential auditors should be distributed in November or December.
  • The selection of an auditor should be confirmed by the end of January.
  • The engagement letter from the auditor should be received by February.
  • The Financial Controller should have draft Year-End Statements by April 15.
  • The auditor should begin work as soon after year-end as possible.
  • The audit should be completed in draft form for review and approval by Council by June 15.
  • The audit is then reviewed and eventually approved by Band Council.
  • The finalized audit is to be made available to the Band members and submit ted to appropriate funding agencies and financial institutions by June 30.
  • The Band should receive a record of acceptance by Canada around the first of August and may subsequently receive further comments following review by INAC's audit review committee (see Sample Audit Letters).