Recipient Financial Audit Requirements For First Nations and Inuit Health Branch Contribution Agreements

Revised: September 2007
Original: June 2000

• Introduction
• Purpose
• Scope
• Definitions
• Types of Audit
• The Auditors' Opinion
• Audited Financial Report and Statements
• Audit Requirements
• Roles and Responsibilities
• Additional Information
• Contact Information
• Appendices
  • Appendix 1 - Sample Schedule - Statement of Revenue, Expenditure and Accumulated Surplus/Deficit 
  • Appendix 2 - Sample Schedule - Statement of Moveable Assets Reserve

Introduction

In its accountability to Parliament, Health Canada must report on all health related activities that it has funded, and on the results achieved. Similarly, in its accountability to its members, a recipient is required to report on where funds have been spent and what members and/or beneficiaries are getting in return.

Depending on the type of agreement signed, the Recipient of a First Nations and Inuit Health Branch (FNIHB) funding arrangement may also need to provide an Audited Financial Report and Statements to meet their accountability requirements to Health Canada.

This policy covers only financial audit requirements.  A separate document relating to reporting requirements is available. (Refer to Reporting Requirements for FNIHB Contribution Agreements.)

Purpose

The purpose of this document is to describe  financial audit requirements with respect to FNIHB contribution agreements.  It is intended to help Health Canada employees and recipients understand the audit requirements and obligations.  In addition, it  will serve as a reference document for the auditor.

Scope

These requirements apply to a recipient's independent audited financial statements of programs and services funded under FNIHB contribution agreements.

Definitions

In the context of this document, relevant terms are defined as follows:

Audit

means an audit conducted by an independent accredited auditor, with an opinion expressed on:
• fairness of the financial statements;
• adequacy of financial controls in place; and
• compliance with the financial terms and conditions as stated in the agreement.

Contribution Agreement

is an agreement containing terms and conditions by which a transfer payment is made to a recipient by the Minister for the delivery of health programs and services.

Financial Statements

are statements which are prepared to provide the Minister with reliable information concerning the funding arrangement of a recipient. Financial statements should demonstrate the accountability of a recipient for the financial affairs and resources entrusted to it.

Fiscal Year

means a one year period for which the audited financial statements are prepared for the Recipient.

Funding Arrangement

is the type of mechanism by which a transfer payment is made to a recipient (for example; contributions, grants, etc).

Independent Auditor

means an auditor who is independent from the Recipient and is a member of an accounting body that is recognized by the Province /Territory in which the Recipient has its administrative offices.

Minister

means the Federal Minister of Health or his/her delegated authority.

Moveable Assets Reserve (MAR)

means a financial reserve containing a one-time lump sum representing the accumulated depreciation of all moveable assets and an amount representing the annual depreciation of all moveable assets.

Recipient

means an organization that is in receipt of a transfer payment.

Types of Audit

There are two types of audit; Independent Audit and Ministerial Audit.

An Independent Audit is recipient initiated. This means the Recipient will contract an independent auditor to perform the audit.

The auditor will examine:

• the financial processes that the Recipient has in place to manage its financial operations
• the controls that the Recipient has in place to ensure that they accurately capture financial transactions and to safeguard financial assets 
• the accounts to determine whether  transactions have been properly recorded
• the records to determine whether there is appropriate documentation to support financial transactions, such as payment and receipt of funds. 

Upon completion, the auditor will prepare a report that will express an opinion as to the audit findings.

Generally, when the auditor has cited weaknesses in the areas examined, the Recipient should develop an action plan to implement corrective measures.

A Ministerial Audit is Health Canada initiated. This audit is conducted to ensure compliance with the terms and conditions of the agreement.

Ministerial Audits are not addressed in this document. For additional information on this subject, refer to the FNIHB Ministerial Audit Guidelines.

The Auditors' Opinion

The expression of an auditor's opinion takes one of three forms; an Unqualified Opinion, a Qualified Opinion, or a Denial of Opinion (Adverse Audit Opinion). 

Unqualified Opinion

An auditor will provide an unqualified opinion, when, based on the examination it has been determined that the financial reports fairly represent the financial position and activity of the organization in accordance with Generally Accepted Accounting Principles (GAAP).

Qualified Opinion

This is a statement written on the front page of an audit done by a professional auditor. A qualified opinion suggests that the information provided was limited in scope and/or the entity being audited has not maintained GAAP standards.

An auditor will provide a qualified opinion, when, based on the examination it has been determined, that the financial reports, subject to exceptions noted, are a fair reflection of financial position and results of operations.

Denial of Opinion

This is a professional opinion made by an auditor indicating that an organization's financial statements are misrepresented,  misstated, and do not accurately reflect its financial performance and health.

An auditor will in some cases, deny an opinion, if, based on the review, it was not possible to determine with any confidence the fairness of the organization's financial reports.  Events such as the organization failing to maintain adequate accounts, and significant lack of records to support transactions would be cause for a denial of opinion.

Audited Financial Report and Statements

Funds received by a recipient must be accounted for through an annual audit report  by an independent auditor whose services are secured by the Recipient.  A financial audit of the health programs and services reports on the adequacy of financial controls and certifies that generally accepted  accounting principles have been followed, and that the  financial "Terms and Conditions" of the Agreement have been met.

The financial audit includes at a minimum:

• the auditor's  opinion on the fairness of  the Recipient's financial statements
• a balance sheet
• a statement of revenue, expenditures and accumulated surplus/deficit (Appendix 1)
• a cash flow statement
• notes to Financial Statements
• other schedules as required (Appendix 2)

Audit Requirements

The Recipient may:

• provide a consolidated audit report for its entire operation and highlight Health Canada's revenue and expenditures and the Moveable Assets Reserve as a separate schedule
  
  or
• provide a full audit report solely for Health Canada's funding with the appropriate details.

The decision to adopt one of the above options depends on cost, timeliness and nature of the Recipient's operations.  Recipients include Bands, Tribal Councils, Health Authorities, Treatment Centre and not-for-profit organisations.  Some Recipients were established solely to administer health programs.   In these cases their audit reports reflect solely Health Canada's funding.

Annually, Health Canada reviews the Recipient's financial audit in conjunction with program information to determine whether the Recipient is in compliance with its contribution agreement, funds were used for the purposes intended, and programs and services were delivered in accordance with the terms and conditions of the contribution agreement. Following the review, the Recipient is notified of all findings and actions to resolve any issues or concerns raised in the review. Actions may include recovery of program funds.

Health Canada applies the following criteria in assessing the need for a further review of a recipient:

• strength of administrative and financial controls as reported by the auditor
• financial health of the Recipient as demonstrated by the annual financial statements
  overall performance of the Recipient in submitting timely, complete and accurate reports (financial and program)
• general management concerns based on observations during Health Canada visits to the community or recipients, issues identified in the Audit Management Letter, or information emerging from contacts with the Recipient's administrative officers.   (The management letter prepared by the auditor highlights weaknesses in accounting and financial management processes. The auditor can assist management, i.e., the Recipient, in developing an action plan to correct any weaknesses.)

Multi-Departmental Audit

To facilitate streamlining and reduce costs, Recipients are encouraged to prepare an Audit Report of the health program in conjunction with other funding organisations.  A Consolidated Audit Report is for a Recipient's entire operations including funding from all sources (i.e., other federal departments). To ensure that the report reflects sufficient details to provide adequate disclosure on the financial situation of FNIH programs, the auditor must provide two pieces of supplementary information to the Consolidated Audit Report:

• a Statement of Revenue, Expenditure and Accumulated Surplus/Deficit, broken down by program (Appendix 1)
• a Statement of Moveable Assets Reserve,  where applicable (Appendix 2)

These supplementary schedules provide disclosure and visibility to identify any surplus or deficit in relation to health programs funded by Health Canada.

NOTE:  Normally a Consolidated Audit Report is prepared by the Recipient and is made available to the appropriate federal departments which are part of a CFNFA.  However, Consolidated Audit Reports can be prepared to meet the requirements of multiple federal government departments irrespective of whether a joint federal funding arrangement, such as a CFNFA, is in place.

The Auditor's Contract

The Recipient will engage an individual or a firm for auditing services.  The terms of the engagement will include:

• the purpose and nature of the audit
• the limitation of the audit
• the scope of the audit, including specifics to be addressed and financial reports to be produced
• the conditions for additional audit or financial services to be provided.

A copy of this document will be provided to the auditor.

Qualifications of the Auditor

The Recipient's auditor must be:

• independent and must not be an employee of the Recipient
• a qualified member of a recognized accounting body in the appropriate province or territory.

Audit Default

In cases where the Recipient defaults in its obligation to provide the Minister with an audit report, the Minister may appoint, or require the Recipient to appoint an independent auditor as set out in the agreement.

Audit Requirements Specific to FNIHB

The reporting format used in the Statement of Revenue, Expenditure and Accumulated Surplus/Deficit is consistent with Schedule 2 of the contribution agreement.  Using this format combines the statement of revenue and accumulated surpluses/deficits.  It also discloses the funds received from other organizations and governments for health related purposes.

Where applicable, the Statement of Moveable Assets Reserve (MAR) describes the financial transactions which have affected the Moveable Assets Reserve for the period audited.  The following details are to be shown in this statement:

• opening balance
• annual amount included in the  Agreement for the Moveable Assets Reserve
• interest or other revenues generated
• expenditures for new acquisitions and replacement of moveable assets during the year
• closing balance.

NOTE: If applicable, resources for the replacement of moveable assets that have been allocated to a recipient and which have the replacement value greater than $1,000, will be funded from the MAR.

The MAR is used for the sole purpose of replacing the moveable assets greater than $1,000, and the funds therein cannot be moved  to the operating base for the delivery of programs.            

Roles and Responsibilities 

Auditor's Responsibilities

The auditor will be responsible for conducting the audit and preparing a report in accordance with generally accepted auditing standards of the Canadian Institute of Chartered Accountants  Handbook (CICA). 

In addition, the auditor will provide an opinion on the Recipient's compliance with the financial Terms and Conditions of the Agreement and to certify based on attested audits that:

• financial records and financial  reports required under the Terms and Conditions of the Agreement were completed and were accurate
• all resources expended were used in accordance with the financial terms and conditions of the agreement
• the Moveable Asset Reserve, if  applicable, has been used only for the purpose stated in the Agreement.      

Recipient Responsibilities

The Recipient will be responsible for:

• accurately recording financial transactions and preparing all financial reports and statements described above, in accordance with these requirements and the agreement
• making financial and administrative records and reports available to the auditor and providing assistance to the auditor, as necessary
• avoiding duplication of effort and resources, by coordinating and planning this audit with all other audits being conducted for other federal departments, e.g.: Indian and Northern Affairs Canada
• forwarding a copy of the audit report to the appropriate Health Canada Office within one hundred and twenty (120) days following the end of the fiscal year or as stipulated in the agreement
• making available to Recipient's members  the financial audit report, as required.

Health Canada's Responsibilities

Health Canada is responsible for answering any questions concerning these requirements, and ensuring that the auditing requirements are well understood by Recipients and their auditors.  Once an audit report is received, Health Canada is responsible for:

• acknowledging, in writing to the Recipient,  the receipt of the audit report within 30 days of its receipt
• reviewing it, and communicating with the Recipient with respect to the auditor's opinion and observations by providing feedback to the Recipient within 120 days of its receipt
• ensuring that proper follow-up action is taken with respect to the opinion and observations expressed by the auditor
• developing a plan for improvement, if required, to address any issues or observations with the Recipient
• monitoring on a regular basis, and through subsequent audits, determining if appropriate action has been taken by the Recipient.

Additional Information

Inventory of Moveable Assets

An inventory of moveable assets does not need to be provided to the Minister. For accounting and asset management purposes, Recipients must maintain an inventory of its moveable assets.  The format and the system used to maintain an inventory of moveable assets and to track the assets is at the discretion of the Recipient.

To be consistent with sound financial management practices, the moveable assets inventory must  be kept current by the Recipient.

Information from the Inventory of Moveable Assets will be made available by the Recipient to the auditor for audit purposes.

Contact Information

For information or advice on this subject matter please contact:

Health Canada
First Nations and Inuit Health Branch
Business Planning and Management Directorate
Health Funding Arrangements Division
Telephone (613) 941-3757
Facsimile (613) 941-5270

Appendix 1 - Sample Schedule - Statement of Revenue, Expenditure and Accumulated Surplus/Deficit   

Sun First Nation - Statement of Revenue,  Expenditure and Accumulated Surplus/Deficit - For the Period Ending  March 31, 2007

	2007	2006
REVENUE
FNIHB Funding Arrangement;	$770,000	$730,000
Other	$10,000	$4,500
	$780,000	$734,500
EXPENDITURE
Flexible Funding Model:
Health Plan Management	$267,000	$248,000
Health Plan Evaluation	$25,000
Building Health Communities	$131,000	$120,000
Aboriginal Diabetes	$113,000	$110,000
First Nations & Inuit Home & Community Care (FNIHCC)	$137,000	$146,000
Transitional Funding Model:
Aboriginal Head Start	$53,000	$61,500
Set Funding Model:
Non-Insured Health Benefits - Medical Transportation	$67,500	$64,000
	$793,500	$749,500
EXCESS REVENUE (EXPENDITURE)	-13,500	-15,000
ACCUMULATED SURPLUS AT BEGINNING OF YEAR	$223,500	$238,500
ACCUMULATED SURPLUS AT END OF YEAR	$210,000	$223,500

Appendix 2 - Sample Schedule - Statement of Moveable Assets Reserve

Sun First Nation - Statement of Moveable Assets Reserve - For the Period Ending  March 31, 2007

	2007	2006
BALANCE AT BEGINNING OF YEAR	$73,500	$50,500
AMOUNT PROVIDED IN AGREEMENT FOR MAR	$16,000	$17,000
	$89,500	$67,500
REVENUES GENERATED	$3,000
EXPENDITURES (ACQUISITIONS  and REPLACEMENTS)	$5,000	$6,000
BALANCE AT  END OF YEAR	$87,500	$73,500