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- News Release 2002-059 -

Annex to the Accountant's Report

Specified auditing procedures performed in connection with the Canada Customs and Revenue Agency’s (CCRA) assertion that there are unlikely to be other provincial income tax reporting omissions similar to the omission of provincial capital gains refunds earned by mutual fund trusts

Task 1: Test whether significant provincial line items in tax returns, forms and schedules are, in design and in practice, completely and accurately posted to general ledger accounts classified as provincial

a. Perform tests of the completeness of CCRA’s general ledger accounts by linking CCRA tax returns, forms and schedules to clearly labeled general ledger accounts for all provincial taxes and credits

Procedures i) to vii) completed by CCRA Internal Audit

i. Using CCRA website and other relevant information, compile lists of all T1 (Individual), T2 (Corporate), T3 (Trust), and T4 (Employer) returns and related forms and schedules, and obtain a copy of each.

ii. Test the completeness of the lists prepared in i) above by confirming each list with the appropriate functional area within CCRA.

iii. Review each return, form, and schedule obtained in i) above and determine which, if any, lines on that return, form, or schedule have financial reporting implications (Federal, Provincial, CPP, etc.).

iv. For each line identified in iii) above, determine which lines have provincial financial reporting implications.

v. For each line identified in iv) above, plus specific federal income tax lines that impact on the Statement of Income and Capital Taxes Payable to the Provinces and Territories, identify the appropriate Tax General Ledger account and the appropriate Revenue Ledger account to which these lines should be posted (The Tax General Ledger is being used for T1, T3 and T4 reporting, and was used for T2 reporting prior to the 2000 Tax Year, while the Revenue Ledger is being used for T2 reporting since the 2000 Tax Year).

vi. For each account identified in v) above, review the clarity of both the Tax G/L and Revenue Ledger account names to ensure the names will allow proper understanding of the account’s contents and allow proper accumulation for reporting purposes (For provincial tax accounts, for example, ensure that the account title clearly differentiates between provincial taxes and federal taxes split by province).

vii. Verify that there is a strong likelihood that each general ledger account identified in v) above is being populated properly, by reviewing systems or other documentation for each return, form or schedule line identified in v) above to ensure that each line is in fact mapping to the appropriate Tax General Ledger and Revenue Ledger accounts (documentation could include TOM (Taxation Operation Manuals), ITB (Information Technology Branch) mapping tables, etc.).

viii. The Office of the Auditor General (OAG) will, to the extent considered necessary:

1. review Internal Audit’s working papers, and

2. conduct any other tests deemed necessary to obtain reasonable assurance that Internal Audit conducted their work such that the OAG can rely on the results and work of Internal Audit.

i. In order to test that each line identified in a) iv) above is in fact populating the appropriate Tax General Ledger and Revenue Ledger accounts identified in a) v) above:

1. Obtain the following data files, relating to the 2001 calendar year (primarily the 2000 Tax Year), obtained as part of the Office of the Auditor General audit work related to the Statement of Income and Capital Taxes Payable to the Provinces and Territories:

a. Data files containing, among other things, detailed assessment transactions from the Automated Assessment Control (AAC) system,

b. Data files containing, among other things, detailed assessment transactions from the T1 assessing (DAS) system,

c. Data files containing, among other things, detailed assessment transactions from the T2 assessing (Cortax) system,

d. Data files containing the summary posting transactions recorded in the Tax General Ledger resulting from, among other things, the detailed assessment transactions from the AAC, DAS and Cortax systems.

2. Using the data files obtained in (1) (a) to (c) above, select a sample of assessed tax returns, and obtain from CCRA the specifically identified tax returns, related forms and schedules, and any other relevant documentation.

3. Using the tax returns, forms, schedules and documentation obtained in (2) above, for as many as possible provincial and selected other lines reviewed in a) v) above, trace one example to assessed amounts captured in the data files as follows:

a. For T1 samples, trace provincial and selected other lines from "Option C" (a summary of a tax return assessment as recorded in CCRA’s database enquiry system) to the data file; or if unable to do this (i.e. "Option C" may not provide enough details) trace the provincial and selected other lines from the actual tax return, form or schedule to the data file; or if unable to do this (i.e. tax return is no longer available), verify that CCRA’s inability to provide this documentation is consistent with relevant government retention of data policies.

b. For T2 and T3 samples, trace provincial and selected other lines from the tax return, form or schedule to the data file.

4. For the tracings done in (3) above, summarize individual postings and using the data file obtained in (1) (d) above, agree the resulting total to the appropriate entry in the appropriate Tax General Ledger or Revenue Ledger account.

5. Using CCRA website listings, by tax year for T1, and by change date for T2, T3 and T4 returns, and related forms and schedules, identify returns, forms and / or schedules that have been added / deleted between years, back as far as the 1995 Tax Year (the oldest tax year for which the Tax General Ledger master table (described in Task 3 a) i) below) is available).

6. For returns, forms and / or schedules identified in (5) above, obtain copies, and determine if any lines on the return, form or schedule could have provincial income tax reporting implications.

7. Select a tax year between 1993 and 1999 and obtain, using the CCRA website, and review all T1, T2 ,T3 and T4 returns and related forms and schedules and identify any lines that do not appear on the related 2000 tax year return, form or schedule.

8. For those lines identified in either (6) or (7) above, identify the appropriate Tax General Ledger account, and using the Tax General Ledger master table, ensure that the identified general ledger account existed during the appropriate tax year.

Task 2: Test whether provincial classified general ledger accounts are completely and accurately accumulated in each of the three key documents used in reporting to the provinces; 1) the Federal / Provincial Tax Sharing Statements prepared by CCRA, 2) the Final Determination of Payments prepared by the Department of Finance, and 3) the Statement of Income and Capital Taxes Payable to the Provinces and Territories prepared by the Department of Finance and previously tested as part of our tax collection agreement audit work

a. Perform tests of the completeness and accuracy of the accumulation of general ledger accounts with provincial reporting implications

Procedures i) to vii) completed by CCRA Internal Audit

i. Obtain:

1. the December 31, 2001 "Consolidated Trial Balance" used to prepare the December 31, 2001 Federal / Provincial Tax Sharing Statements.

2. the Tax General Ledger and Revenue Ledger trial balances used to prepare the "Consolidated Trial Balance".

3. the December 31, 2001 Federal / Provincial Tax Sharing Statements.

ii. Obtain from the Department of Finance:

1. The Final Determination of Payments under the Tax Collection Agreements Tables as at December 31, 2001.

2. The most recent version of the Statement of Income and Capital Taxes Payable to the Provinces and Territories for the 2000 and prior Taxation Years as at December 31, 2001.

iii. Confirm with CCRA that there is a process in place, based on general ledger account name and description, to identify which general ledger accounts (in both the Tax General Ledger and Revenue Ledger) should be classified as provincial accounts and therefore used for reporting provincial income tax revenues.

iv. Trace the general ledger accounts identified in Task 1 a) v) above, to the December 31, 2001 Federal / Provincial Tax Sharing Statements.

v. Upon the completion of iv) above, verify that there are no additional amounts included in the Federal / Provincial Tax Sharing Statements classified as provincial for reporting purposes.

vi. On a test basis, reperform CCRA’s transcription of account balances from the Consolidated Trial Balance to the Federal / Provincial Tax Sharing Statements to ensure each account balance has been accurately recorded on the Federal / Provincial Tax Sharing Statements.

vii. On a test basis, reperform the accumulation of the Federal / Provincial Tax Sharing Statements in the Department of Finance’s Final Determination of Payments Tables.

viii. The Office of the Auditor General (OAG) will, to the extent considered necessary:

1. review Internal Audit’s working papers, and

2. conduct any other tests deemed necessary to obtain reasonable assurance that Internal Audit conducted their work such that the OAG can rely on the results and work of Internal Audit.

ix. On a test basis, reperform the accumulation of the Department of Finance’s Final Determination of Payments Tables in the Statement of Income and Capital Taxes Payable to the Provinces and Territories.

x. On a test basis, trace amounts from the Tax General Ledger and Revenue Ledger trial balances to the "Consolidated Trial Balance".

i. Obtain copies of confirmations (and attached lists of accounts) sent by CCRA to the provincial and territorial Departments of Finance requesting confirmation of the completeness of provincial income tax general ledger accounts (both Taxation General Ledger and Revenue Ledger accounts) maintained on their behalf.

ii. Compare, on a test basis, the lists obtained in i) above to the provincial accounts identified by CCRA Internal Audit in Task 1 a) v) above, and to the Tax General Ledger Master Table in Task 3 a) i) (1) below.

iii. Obtain the responses that CCRA received from the provinces and territories, and ensure that each is in agreement, from a completeness perspective, with the list provided to them by CCRA.

The Tax General Ledger contains approximately 2,200 general ledger accounts, while the Revenue Ledger contains approximately 2,500 accounts. As noted previously, the Tax General Ledger is being used for T1, T3 and T4 reporting, and was used for T2 reporting prior to the 2000 Tax Year, while the Revenue Ledger is being used for T2 reporting since the 2000 Tax Year, and, since March 2002, is the sole source for T3 reporting.

i. Obtain the following, originally obtained as part of the Office of the Auditor General’s audit work related to the Statement of Income and Capital Taxes Payable to the Provinces and Territories:

1. Tax General Ledger master table as at December 31, 2001 (OAG maintained table listing all accounts in the Tax General Ledger, as well as the OAG’s understanding of each account’s classification for financial reporting purposes).

2. Data files containing the summary posting transactions recorded in the Tax General Ledger resulting from, among other things, the detailed assessment transactions recorded in the AAC, DAS and Cortax systems.

ii. To ensure the completeness and accuracy of the Tax General Ledger master table, agree the Tax General Ledger master table to the Tax General Ledger trial balance obtained previously in Task 2 a) i) above.

iii. Using the data files obtained in i) above, review each Tax General Ledger account to identify high risk (i.e., inaccurate reporting of provincial income tax revenues) accounts based on:

1. he dollar value of transactions posting to an account from a single assessing system (single assessing system > $4.5 million).

2. The dollar value (> $4.5 million) of a single non assessing system posting source (such as miscellaneous journal entry types) posting to federal or provincial tax revenue accounts.

3. The lack of clarity of the account name for large dollar accounts.

iv. Obtain the following data files, originally obtained as part of the Office of the Auditor General’s audit work related to the Statement of Income and Capital Taxes Payable to the Provinces and Territories, for the 2001 calendar year (consisting mainly of 2000 tax year assessments):

1. Data files containing, among other things, detailed assessment transactions from the Automated Assessment Control (AAC) system.

2. Data files containing, among other things, detailed assessment transactions from the T1 assessing (DAS) system.

3. Data files containing, among other things, detailed assessment transactions from the T2 assessing (Cortax) system.

v. For the high risk and / or high value Tax General Ledger accounts identified in iii) above, using the data files obtained in i) (2) above, select a sample of account postings.

vi. To ensure the completeness and accuracy of the data files containing the summary posting transactions recorded in the Tax General Ledger obtained in i) above, review reconciliations of provincial accounts performed as part of the audit of the Statement of Income and Capital Taxes Payable to the Provinces and Territories, and perform additional reconciliations as considered necessary.

vii. For each posting selected in v):

1. Using the data files obtained in iv) above, select an individual transaction for tracing back to source documentation.

2. Obtain from CCRA the source documentation for that transaction.

3. Review the source documentation to ensure that the originating transaction was posted to the correct Tax General Ledger account and therefore accurately reports federal and provincial income tax revenues.

viii. To ensure the completeness and accuracy of the data files containing the detailed assessment transactions obtained in iv) above, review reconciliations of provincial amounts performed as part of the audit of the Statement of Income and Capital Taxes Payable to the Provinces and Territories, and perform additional reconciliations as considered necessary.

i. Obtain a Revenue Ledger trial balance as of December 31, 2001, together with an analysis of posting sources for each account.

ii. Using the trial balance and analysis obtained in i) above, identify all accounts having Cortax (T2 assessing system) as a posting source of > $4.5 million.

iii. For the accounts identified in ii) above, excluding any accounts audited as part of the Statement of Income and Capital Taxes Payable to the Provinces and Territories for the 2000 and prior Tax Years audit, select a transaction, and obtain from CCRA the source documentation for that transaction.

iv. Review the source documentation to ensure that the originating transaction was posted to the correct Revenue Ledger account and therefore accurately reports federal and provincial income tax revenues.

i. Tax General Ledger

1. Using the Tax General Ledger master table obtained in a) i) (1) above, identify all control, suspense and clearing accounts.

2. Confirm the completeness of this list of control, suspense and clearing accounts with CCRA.

3. Select suspense and clearing accounts for follow up as follows:

i. All accounts with balances greater than $4.5 million as at December 31, 2001, and

ii. A sample of 10 accounts with balances less than $4.5 million as at December 31, 2001.

4. For all accounts selected, obtain from CCRA details of relevant account activity and:

i. ensure the account clears within 90 days of December 31, 2001; or

ii. if account clears after 90 days, ensure the account is on the "Over 90 day" list received from tax centres.

5. Select a random sample of 6 control accounts as at December 31, 2001, and obtain appropriate reconciliations.

i. Revenue Ledger

1. Obtain:

a. a Revenue Ledger trial balance as at December 31, 2001.

b. a list identifying all corporate assessment related control, suspense and clearing accounts.

2. Review the trial balance obtained in (1) (a) above for any corporate assessment related control, suspense or clearing account not included on the list obtained in (1) (b) above, and follow up with CCRA on the reasons for the discrepancy.

3. Using the list obtained in (1) (b) above (and including any adjustments from procedure (2) above), obtain appropriate reconciliations and ensure the account has been cleared.

i. Obtain, for the 1993 and 1994 tax years, a listing of all Tax General Ledger accounts added and deleted. Review this listing and identify any non-routine additions / deletions with potential federal / provincial allocation and revenue reporting implications and follow-up to the extent considered necessary.

ii. Obtain copies of the OAG Tax General Ledger master table listing as of the end of each tax year as far back as available (1995 tax year) retained from prior years’ Office of the Auditor General audit work related to the Statement of Income and Capital Taxes Payable to the Provinces and Territories.

iii. Analyze the master tables obtained in ii) above to identify general ledger accounts deleted or added. Routine changes such as adding or deleting tax years for federal and provincial accounts will not be followed up.

iv. Using the results of procedure iii) above, review all added or deleted accounts for any which may have federal / provincial allocation or revenue reporting implications and follow-up to the extent considered necessary.

Summarize the results of the above procedures and prepare the appropriate Accountant’s Report.

- News Release 2002-059 -