UNDERSTANDING AND PREPARING FOR AUDITS February 11, 2014 – Winnipeg

Information About the Speaker

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SPEAKER’S BIOGRAPHY

Russ Paradoski, CA CFE Senior Consulting Partner Russ is the Senior Consulting Partner in the Winnipeg Aboriginal Financial Services business line. He is involved with third party management, co-management and financial advisory services working throughout Canada with first nations and their related entities where part of his duties are to hire and work in cooperation with various audit firms. He has a wealth of experience working in this area as well as an auditor himself of first nations, municipalities, universities, non-profit organizations and federal government funded agencies since 1985. Russ has over 30 years professional experience and is a member of the Certified Fraud Examiners and in the past was an advisor on forensic investigations with the RCMP “D” Division Commercial Crime Section as a RCMP Federal Auxiliary Constable. He holds Secret Security status with Public Works and Government Services Canada and continues to take on specialty audit engagements with various federal government departments.

rparadoski@bdo.ca Direct: 204 926 7214 800 – 200 Graham Ave Winnipeg MB R3C 4L5 Tel: 204 956 7200 Fax: 204 926 7206 www.bdo.ca

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BDO MYPDR

Disclaimer This material is for educational purposes only. As it deals with technical matters which have broad applications, it is not practical to include all possible situations. For this reason a particular fact situation should be reviewed by a qualified professional. Although every effort has been taken to prepare this material, no organization or person involved with this material accepts any legal responsibility for its contents or any consequences from its use.

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ACRONYMS AANDC Aboriginal Affairs and Northern Development Canada BCR Band Council Resolution CA Chartered Accountant CAS Canadian Audit Standards CGA Certified General Accountant CICA Canadian Institute of Chartered Accountants CMA Certified Management Accountant CMHC Canada Mortgage and Housing Corporation CPA Certified Public Accountant CRA Canada Revenue Agency EFT Electronic Funds Transfer FNIH First Nations Inuit Health FS Financial Statement GAAP Generally Accepted Accounting Principles GST Goods and Services Tax HC Health Canada PSAB Public Sector Accounting Board ROE Record of Employment SA Sufficient Appropriate YERH Year End Reporting Handbook

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UNDERSTANDING & PREPARING FOR AUDITS Presentation Outline: Part 1 – Understanding the Audit Part 2 – Effective Practices for Preparing for Audits

LEARNING OBJECTIVES TODAY

After completing this session, you will be able to:

• Understand why we have audits and the various audit reports that can result at the conclusion of the audit;

• Gain an enhanced perspective of the audit process and what the audit firm’s procedures and requirements involve;

• Prepare better for the annual audit to quicken the audit process and promote lower audit and professional fees

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UNDERSTANDING AND PREPARING FOR AUDITS WHY DO WE HAVE AUDITS

• Required by the funding agreements of AANDC, HC and CMHC • Provides accountability and transparency from the Chief and Council and First

Nation Management to the members of the community • Independent Auditor’s opinion adds credibility to the financial statements • The audited financial statements report on whether the funds provided by the

various funding agents were expended for the intended purposes • Measurement tool to determine of the entity is in a position to continue

delivery the funded programs and services as a viable going concern • Audited financial statements prepared in accordance with a set of standardized

rules and standards provide the readers with the ability to compare, assess and make informed decisions

• Audits and audit management letters can lead to improving accountability

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UNDERSTANDING AND PREPARING FOR AUDITS ACCOUNTING, REPORTING AND AUDIT STANDARDS • The CICA set’s the accounting and audit standards in Canada • The accounting and reporting standards that first nations are required to

adhere to and be in accordance with are the PSAB standards • PSAB applies to all forms of governments in Canada and first nations are

considered governments from an accounting and reporting perspective • Audit firms in Canada are required to follow CAS when conducting audits of

first nation financial statements • Audit firms must be qualified and independent from the first nation • First nations must also adhere to further annual industry specific reporting

requirements of AANDC and HC as indicated in their YERH

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UNDERSTANDING AND PREPARING FOR AUDITS WHO CAN CONDUCT AUDITS • CA’s and CMA’s (CPA’s) and CGA’s • The audit firm and/or individual(s) working on the audit must be independent • Both in fact and in appearance • To ensure that the opinions and decisions made by the audit firm and/or

individual(s) working on the audit are based on unbiased judgment • All circumstances and activities, past and present must be assessed to

determine independence • Such as, financial interests, loans, guarantees, business relationships, family

and personal relationships, recent employment, serving as a board member, as an advisor or part of management

• “Cooling Off” period would apply to those threats to independence that can be eliminated or removed – 2 years is generally the standard

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UNDERSTANDING AND PREPARING FOR AUDITS INDEPENDENT AUDITOR’S REPORT

1. Addressed to the members of the First Nation, explaining what financial statements and information has been subject

to audit

2. Management’s Responsibility for

the Financial Statements

3. Auditor’s Responsibility – to express an opinion

based on an audit that follows CAS

4. Audit Opinion

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UNDERSTANDING AND PREPARING FOR AUDITS MANAGEMENT’S RESPONSIBILITY Management's Responsibility for Financial Reporting The accompanying consolidated financial statements of THE FIRST NATION and all the information in this annual report are the responsibility of management and have been approved by the Chief and Council of THE FIRST NATION. The preparation of consolidated financial statements involves the use of estimates and approximations because the precise determination of financial information frequently depend on future events. The consolidated financial statements have been prepared by management within reasonable limits of materiality and within the framework of Canadian public sector accounting standards. The First Nation maintains systems of internal accounting and administrative controls of high quality, consistent with reasonable cost. Such systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and the First Nation's assets are appropriately accounted for and adequately safeguarded. The FIRST NATION Council is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements. THE AUDIT FIRM, Chartered Accountants, as the First Nation's appointed external auditor, has audited the consolidated financial statements. The Auditor's Report is addressed to the Members and appears on the following page. The opinion is based upon an examination conducted in accordance with Canadian auditing standards, performing such tests and other procedures as they consider necessary to obtain reasonable assurance that the consolidated financial statements are free of material misstatement and present fairly the financial position and results of operations of the First Nation in accordance with Canadian public sector accounting standards. THE AUDIT FIRM has full and free access to the Council. Chief and Council of THE FIRST NATION

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UNDERSTANDING AND PREPARING FOR AUDITS INDEPENDENT AUDITOR’S REPORT To the Members of THE FIRST NATION We have audited the accompanying consolidated financial statements of THE FIRST NATION, which comprise the consolidated statement of financial position as at March 31, 2013 and the consolidated statements of operations, changes in net surplus, changes in accumulated surplus, tangible capital assets, and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of THE FIRST NATION as at March 31, 2013 and the results of its operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

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THE FOLLOWING AUDIT OPINIONS CAN BE ISSUED BY THE AUDIT FIRM:

1. Unqualified – clear opinion, FS’s are fairly presented

2. Qualified – qualified based on a material misstatement but overall FS’s are still presented fairly not misleading on a whole

3. Adverse - qualified based on a material misstatement or unable to obtain sufficient appropriate audit evidence and overall FS’s are not presented fairly and are misleading on a whole

4. Disclaimer – also referred to a denial of opinion, where the Auditor can not express an opinion on the FS’s because of the significance of the matter described

UNDERSTANDING AND PREPARING FOR AUDITS TYPES OF AUDIT OPINIONS

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UNDERSTANDING AND PREPARING FOR AUDITS THE AUDIT PROCESS – PRE-ENGAGEMENT

• Call for audit proposals, assess and select Audit firm • Chief and Council appoint Audit firm and notify AANDC and HC (annually) • Auditor ensures and verifies to the Chief and Council its independence for the

engagement • Auditor communicates with previous Auditor (if required) • Engagement Letter between the Audit firm and the Chief and Council is

prepared and signed which details the audit scope and limitations, management and the audit firms’ responsibilities during the audit and the basis for audit fees and charges

• Formal written request to the client of items required to prepared in advance of the audit fieldwork to be available to the audit firm

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UNDERSTANDING AND PREPARING FOR AUDITS THE AUDIT PROCESS – PLANNING/RISK ASSESSMENT

• Making enquiries of management and key employees to identify potential risk factors, transactions and reporting areas

• Review of prior year and current year financial reports as well as past management letters and AANDC and HC annual reporting letters

• Obtain an overall knowledge of the client, funding sources, programs, management and key employee roles and responsibilities, ratified policies and procedures, internal controls and authorities in place, significant creditors, suppliers and contracts, bank accounts, loans and mortgages and accounting and reporting systems in place

• Obtain and review all Band Council Resolutions and Program Committee/Board meeting minutes

• Perform walkthroughs on each transaction stream, revenues and deposits; purchases, payables and payments; payroll; month end procedures and adjustments

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UNDERSTANDING AND PREPARING FOR AUDITS THE AUDIT PROCESS – DESIGN AUDIT PROCEDURES

Objective is to Obtain Sufficient Appropriate Audit Evidence • To obtain reasonable assurance that the financial statements are free from

material misstatement • We obtain SA audit evidence to reduce audit risk to an acceptable low level to

enable us to draw reasonable conclusions and issue our audit opinion • Professional judgment is used in planning and performing the audit • Audit procedures are designed and performed that are appropriate in the

circumstances, assessing risks, using profession judgment as well as applying knowledge of the client

• The auditor also assesses the reliability, the source and the accuracy of the audit evidence obtained when determining if SA has been obtained or if further tests and procedures are required

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UNDERSTANDING AND PREPARING FOR AUDITS THE AUDIT PROCESS – AUDIT DOCUMENTATION

Characteristics of Good Audit Documentation:

• Supports all significant numbers presented in the FS’s and attached notes

• Prepared on a planned and timely basis during the course of the audit

• Provides SA as a basis to support the type of audit opinion being given

• It includes schedules and reports that tie all the client accounts systematically to the FS’s to ensure completeness and consistent comparative reporting

• Sufficient detail that an experienced auditor not associated with the audit could understand what tests and procedures were carried out, the results of those tests and procedures as well as any significant matters, decisions, professional judgment and resulting conclusions that were made to result in the audit opinion

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UNDERSTANDING AND PREPARING FOR AUDITS EFFECTIVE PRACTICES FOR PREPARING FOR AUDITS

THE AUDITOR’S OVER-RIDING GOAL AND OBJECTIVE DURING THE AUDIT PROCESS ARE TO:

GOAL: To obtain sufficient appropriate audit evidence and document the audit working paper file

OBJECTIVE: To issue an audit opinion on the First Nations financial statements

“How can the First Nation assist in this process”

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UNDERSTANDING AND PREPARING FOR AUDITS EFFECTIVE PRACTICES FOR PREPARING FOR AUDITS

The Basic Fundamentals to Assist the Audit Process:

• Preparing items requested by the Auditor – see detailed checklist – plus: • Coordinating an Interim Audit to be carried out by the Auditor • Maintain a budget file that includes budgets for ALL programs and revenues • Ensure all bank accounts are recorded and reconciled • Ensure all inter-fund balances between departments and entities are balanced • Ensure all receivable and payable control accounts balance to lists

In addition: A Clear & Organized Filing System for:

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UNDERSTANDING AND PREPARING FOR AUDITS EFFECTIVE PRACTICES FOR PREPARING FOR AUDITS

• Payroll runs, Remittances to CRA, Pension and Benefit Plans, ROE’s • Paid Supplier Invoices and Supporting Documentation and Travel Claims • Funding Agreements , Amendments, Proposals and Correspondence • Contracts, Leases and Bank A/C, Loan and Signing Authority Documents • Employee Personnel Files, Contracts, Job Descriptions, Correspondence • Capital Asset Additions, Projects Files, Contracts, Quotes, Correspondence • Legal Correspondence and Bills • Monthly and Quarterly Reports filed with AANDC and FNIH • BCR’s, By-Laws and Policies and Procedures

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UNDERSTANDING AND PREPARING FOR AUDITS ITEMS TO BE PREPARED BY THE FIRST NATION

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UNDERSTANDING AND PREPARING FOR AUDITS ITEMS TO BE PREPARED BY THE FIRST NATION

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UNDERSTANDING AND PREPARING FOR AUDITS ITEMS TO BE PREPARED BY THE FIRST NATION

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UNDERSTANDING AND PREPARING FOR AUDITS ITEMS TO BE PREPARED BY THE FIRST NATION

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UNDERSTANDING AND PREPARING FOR AUDITS THE SUCCESSFUL AUDIT PROCESS

QUESTIONS?

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