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1987 Report of the Auditor General of Canada

"The Work of his Office"

18.1 The Auditor General Act requires the Auditor General to report annually to the House of Commons on the work of his office. That work, of course, includes all that is reported in the previous chapters of this annual Report. But, increasingly, the work of his office includes much that is not reported in the Auditor General's annual Report.

18.2 For example, the duties of the Auditor General were greatly extended by the amendments to the Financial Administration Act which created a new accountability regime for Canada's Crown corporations. However, only in exceptional cases does the Auditor General report to Parliament on this dimension of his work in his annual Report. Nor does his annual Report attempt to include all the Auditor General's work relating to the departments of government.

18.3 The preceding chapters of this Report bring to the attention of Members of Parliament only matters of major significance. Many more items of lesser importance are referred directly to departments for their consideration and for appropriate remedial action. Neither does this annual Report contain much of the results of the Auditor General's traditional auditing work in examining the financial statements of the Government of Canada. For the Auditor General's audit opinion and observations in this area, Members of Parliament must consult the Public Accounts of Canada.

18.4 All of which is to say that while this annual Report presents the results of substantial segments of the Auditor General's activities, it is by no means the sole output of his office. And when, in accordance with the provisions of Part XII of the Financial Administration Act, the Auditor General becomes auditor or joint auditor of each parent Crown corporation named in Part I of Schedule C, even more of the resources will be devoted to activities that are not directly reported to Parliament.

18.5 Increasingly, therefore, the requirement in the Auditor General Act for the Auditor General to report annually to the House of Commons on the work of his office involves two distinct activities.

18.6 First, in the body of the annual Report the Auditor General continues to report the significant audit findings arising from audit work in departments and agencies. Second, he must employ other means to inform Members of Parliament about the work that is not reported directly to them.

18.7 Happily, such a means already exists. Today, the Part III of the Estimates for the Office of the Auditor General allows the Auditor General to provide Parliament with the details about all the Office's work, whether it is reported to the House or elsewhere.

18.8 The importance of the Office's Part III of the Estimates has been enhanced by the fact that beginning with fiscal year 1987-88, the Public Accounts Committee is now the body that examines and approves, on behalf of Parliament, the Estimates for the Office of the Auditor General.

18.9 In the words of the Auditor General when he appeared before the Public Accounts Committee on 12 March 1987:

I am pleased to be here this morning to review my Estimates with you. I think it is appropriate that this committee is now the one I appear before on my Estimates. This is the committee that reviews the culmination of my year's work - my annual Report - and therefore I believe it is appropriate that you know how I plan to put to work the money I am asking for - what my outputs are ... The most visible outputs of my Office are my annual Report to Parliament and my opinion on the financial statements of Canada. However, there are many other outputs. For example, we are required to provide separate opinions on about 100 other government entities including 40 Crown corporations. Furthermore, over a period of five years we are required to conduct special examinations in all Crown corporations for which I am the appointed auditor.
This is where the money goes and is, I think, the main reason we are here today - so that I can explain in more detail where it goes and why, as well as what our programs are about.
18.10 So any Member of Parliament - or any interested citizen - can gain a very full understanding of the work, organization, finances and outputs of the Office of the Auditor General by perusing the Auditor General's annual Report, his Opinion and Observations on the Financial Statements, and the Office's Estimates Part III.

Purpose of this Chapter

18.11 Traditionally, the Auditor General has had one additional means of giving information about the work of his office - this chapter which describes the current organization and programs of the Office. This chapter also predates the Part IIIs. Like the annual reports of other departments, it at one time provided MPs with essential information about the Office's work and programs that was not available elsewhere.

18.12 However, almost all that detail is now contained in Part IIIs, leaving departmental annual reports somewhat in limbo. In the words of the Financial Management and Control Study (Chapter 4 of this Report): "Since the introduction of Part III of the Estimates, most departmental annual reports no longer serve an identifiable purpose".

18.13 One option that does remain for a departmental annual report, and specifically for this chapter, is to highlight certain activities and new initiatives that may be of particular interest to Members of Parliament and to others wishing to know more about the work of the Auditor General and his Office. This is the thrust of this chapter. Readers, however, should be cautioned that the attention given here to a particular activity does not reflect its overall importance in the Office's work. For example, little is said here about ongoing audit work; more attention is given to international activities. But, in the larger picture, the resources used for international work are minimal compared to those devoted to fulfilling the Office's essential audit mandate.

Mandate, Auditing, Reporting, Organization, Financial Resources

Mandate

18.14 The legislative mandate for the activities of the Auditor General is in the Auditor General Act, 1977, and in the Financial Administration Act and its 1984 amendments.

Auditing

18.15 Each year the Office conducts audits in all departments and agencies to enable the Auditor General to express an opinion on the summary financial statements of the Government of Canada. Annual audits also assess departmental and agency compliance with legislative authority.

18.16 The Auditor General also conducts value-for-money audits in departments and agencies to fulfil the reporting requirements of section 7(2) of the Auditor General Act. Cases are reported where departments or agencies have made expenditures without due regard to economy and efficiency, or where satisfactory procedures have not been established to measure and report the effectiveness of programs. The Office carries out these audits in each major government entity at least once every five years. As well, the Office conducts government-wide audits when it is feasible and appropriate to examine issues common to a number of departments.

Reporting

18.17 Throughout the audit process, findings are discussed with managers in the entities being audited. At the conclusion of an audit, a detailed report is given to the management of the audited organization on the Office's findings, conclusions and recommendations. Finally, matters that the Auditor General identifies as being of concern to Members of Parliament are brought together in the annual Report. An opinion - together with any reservations the Auditor General may have - is given on the Public Accounts of Canada and included in Volume I of the Public Accounts. Audits and special examinations in Crown corporations are reported to the board of directors of the corporation.

Organization

18.18 Exhibit 18.1 is an overview of the organizational structure of the Office, showing the functions of its three branches.

Exhibit not available

18.19 Audit Operations is the largest branch. It consists of six Department and Agency Audit groups, a Crown Corporations group, five Functional and Special Audit groups, a Planning and Co-ordination Group, and five Regional Audit groups. The six audit groups for departments and agencies are each headed by an Assistant Auditor General and each is responsible for a mix of entities that have similar requirements in terms of audit skills and special expertise or that have strong program interrelationships. The largest concentration of auditors is in the National Capital Region; in addition, Audit Operations' work is carried out from regional offices in Halifax, Montreal, Winnipeg, Regina, Edmonton and Vancouver. Personnel also work more or less continuously in Yellowknife and Whitehorse. The work of the regional offices is currently being reorganized and strengthened by the nomination of Assistant Auditors General to have responsibility for the eastern and western regions.

18.20 Professional Services provides professional and technical support to Audit Operations. The Branch reviews, edits and publishes the annual Report and other reports. It is also responsible for providing career and professional development and for liaison with Parliament, public relations, communications, and the Office library. The Branch co-ordinates international activities and liaison with provincial Auditors General. It is responsible for professional practices, including the management of auditing methodology development.

18.21 Administrative Services is the Branch that provides central support in the areas of finance, personnel, contracting, official languages, records, facilities and materiel, EDP services, word processing, graphics and audio-visual services.

Financial Resources

18.22 As already indicated, Members of Parliament are now provided with the Office's detailed Resource Requirements in Part III of the Estimates. Exhibit 18.2 is an overview of appropriations and expenditures by activity and by object.

Exhibit not available

18.23 The balance of this chapter is devoted to a more detailed description of a number of activities of importance in the life of the Office of the Auditor General in the last year.

Study on the Cost Effectiveness of the Audit Work of the Office of the Auditor General

18.24 Comprehensive auditing and especially its value-for-money component have proved most valuable instruments in identifying the information about government activities that are of significance to Members of Parliament. But comprehensive auditing is a relatively new art and science. It is also costly. And while, by any measure, the comprehensive audits conducted by the Office of the Auditor General over the last decade have proved effective in identifying potential areas for improved economy and efficiency throughout the departments and agencies, the question can be asked whether the Office itself cannot fulfil its essential mandate at less cost. With the benefit of experience, can its auditing not be done with increasing effectiveness and reduced resources?

18.25 The present Auditor General has responded to this challenge in a variety of ways. Readers of this chapter in previous annual Reports will recall that there are two reasons that the Office finds itself at the cutting-edge of electronic audit technology. First, these skills are needed to audit the departments and agencies of government whose own financial, management and program information is increasingly stored electronically. However, the second reason is that this audit technology allows the Office to do its work better, faster and more economically. New electronic initiatives in 1986-87 are described in the next section of this chapter.

18.26 Readers will also recall that this chapter in last year's Report contained a full discussion of the Office's successful effort to find more cost-effective ways of performing the financial and authorities audits required under the Auditor General's mandate.

18.27 It was logical therefore to extend this examination of cost effectiveness to the whole range of audits the Office performs. This compelling piece of work has been undertaken by the Stevenson Kellogg Ernst & Whinney, Management Consultants, under the direction of Kenneth G. Belbeck, together with members of the Auditor General's senior staff. The report and recommendations of the study were to be available in September 1987 shortly after this Report went to press.

Background

18.28 This Office now has some 10 years of solid experience with the concept of comprehensive auditing. Over the decade there has been active development in methodology, techniques and training in the Auditor General's Office and in the other professional organizations involved with auditing in the public sector. The time has come to take inventory. There is a growing realization that value-for-money auditing is an expensive business. An audit in a major department or agency can cost upwards of a million dollars. Unlike financial auditing, there are no generally accepted auditing standards or criteria to be used consistently in every audit. The Canadian Institute of Chartered Accountants is working on this problem. However, there are some who believe that each audit is so unique that only very general standards can be developed. At best the creating of standards must be evolutionary and gradual, and it is still in the earliest stage of development. Nonetheless it is extremely important that all audit organizations involved in comprehensive auditing, and more particularly the Office of the Auditor General, periodically assess the cost effectiveness of audit work. The comprehensive audit concept will survive only if its cost effectiveness is readily apparent.

18.29 The special project on cost effectiveness began in December 1986. The purpose of the project is to improve the general performance of the Office, which has provided leadership in comprehensive and legislative auditing. The cost effectiveness project should provide project insights into areas that may need further improvement.

18.30 The scope of the project includes mainly the activities of the Audit Operations Branch and the activities in other branches that directly affect audit work. These include Career and Professional Development, Professional Practices, and Program Evaluation and Internal Audit.

Three Phases of the Project

18.31 The project has involved three main phases. The first two were of a diagnostic nature. The third was designed to gather information to develop recommendations for further improvement in areas identified by the study.

18.32 Phase I had two components. The first dealt with the Audit Philosophy, Policy and Goals of the Office. It provided an important reference for the rest of the project. The objective was to identify issues at the audit policy level that are perceived by our own senior managers as not fully resolved. The second component was an employee survey of attitudes and values across the Office. Its purpose was to solicit the views of all staff on a wide variety of subjects, such as job satisfaction, communications, management and working conditions. This exercise helped identify for senior management matters requiring attention and related opportunities to be explored during the rest of the project.

18.33 Phase II had three components. The first was most critical. It involved an independent review by Stevenson Kellogg Ernst & Whinney of a sample of recent audits in support of the Office's annual work on the Public Accounts, financial statement audits of Crown corporations and periodic value-for-money audits of departments and agencies. The second component of this phase involved examining the roles and relationships of functional groups with our line audit staff. This part of the project looked at the contribution functional groups make to the quality of audit work in relation to cost. The third component was a study of the annual reporting process. The annual Report is the Auditor General's most visible product. The special project provides feedback on the efficiency and effectiveness of the process the Office uses to review and present our audit findings.

18.34 Phase III of the project dealt with cause and effect relationships necessary to develop sound recommendations in areas identified for improvement by the study. This phase involved a careful examination of the career and professional development program which consumes six per cent of the Office's resources. The performance review and termination process and other significant human resource planning areas were also addressed. The objective of this phase was to identify how well the Office manages its key asset: people.

18.35 The third area for examination in this phase went to the heart of the corporate audit planning process in the Auditor General's Office. Included in the examination was strategic and operational planning including the process for setting priorities for audit work carried out in a range of departments and agencies, big and small. The main objective was to look at ways and means by which we could continue to audit matters that are of most significance to Parliament and to search for opportunities that will allow the Office to meet its expanding obligations in areas such as special examinations of Crown corporations without requiring a real increase in budget. This final phase also examined how the Office is organized and how it delivers its main products - the results of its attest, authority and value-for-money audits. Particular attention was directed to the setting of goals and direction for audit staff, to the management style of senior personnel, administration of audit teams, the size and nature of departmental teams, and the function and the reporting relationship of regional offices.

Overall Benefit

18.36 Although the results of the cost effectiveness study had not been finalized when this Report went to press, the Auditor General has expressed his confident view that the study will assist him in his ongoing commitment to achieve maximum economy, efficiency and effectiveness in fulfilling the mandate of his Office.

Information Technology and the Office of the Auditor General

18.37 Electronic data processing is having an enormous impact in our age. Because governments are largely in the business of information, advances in information technology are proving particularly important in all federal government activities. In its broader implication, this issue is touched on in Chapter 1 of this Report.

18.38 It is becoming apparent that the profession of accounting and auditing has been dramatically affected by the new developments in electronic technology. Accountants and auditors operate in a world of financial analysis and computation where virtually all financial records are now kept electronically.

18.39 The Office of the Auditor General has responded to the challenge of these new techniques and today is among the leaders in those employing electronic information technology in auditing.

18.40 Parallel progress has occurred in the use of new technology in the non-audit aspects of the Office's activities, especially in the area of improved communications.

Information Technology in Auditing

18.41 In 1985-86 the Office launched its three-year special EDP initiative. A major element was training the Office's auditors in computer auditing. The first two years of the initiative have more than fulfilled expectations, and the newest aspects of information technology are permeating all facets of our auditing. Each audit group now has at least one graduate from the Office's apprenticeship program which has up to 10 auditors spending a full year working in the Computer Audit group.

18.42 IDEA, the interactive software for microcomputers developed by the Office placed the Auditor General's Office in the forefront of audit technology innovation. IDEA is now used worldwide. It is being used in over 60 audits that the Office is conducting now.

18.43 Central Data Selection, another development of the Office, is a very large system that reads, balances and statistically samples every financial transaction underlying the Public Accounts of Canada. Because of the volume (some 52 million transactions each year) Central Data Selection is run continuously throughout the year generating samples, statistics, reports and data for down-loading to microcomputers for use with IDEA.

18.44 By combining mainframe and microcomputer technology in this way, the Office has been able to improve substantially the ease and efficiency with which auditors can query government financial records, while keeping costs the same.

18.45 Meanwhile the Office has moved increasingly into the use of the laptop computer which allows auditors to use this new technology on location in audited organizations and on travel assignments.

Toward the Office of the Future

18.46 Hand in hand with using electronic information processing for its audit work, the Office has been harnessing this technology to improve its internal capabilities. State-of-the-art word and information systems are used throughout the production phases of this Report. And today's software permits the Office to produce and integrate sophisticated flow charts, organization charts, data flow diagrams, presentation graphics and specialized text.

18.47 Good communications are a vital element in the work of the Office of the Auditor General. Its major product is the annual Report, and internal communications as well as communications with audited organizations are the key to the success of that endeavour. In the past year, the Office has significantly improved its ability to communicate through electronic means.

18.48 The first local area network dedicated to the use of an audit team was set up in the fall of 1986. The network provides a short-distance link between computers and improves the efficiency of automated tools by making them simpler to use.

18.49 Electronic mail has been another development. This service is available from any computer with a modem and is linked to communications systems that allow messages to be received throughout the world.

18.50 A graphics/text software package that can be used on a personal computer to create images and text for presentations is another form of communication used by auditors. This is quickly becoming the Office standard for effective presentations.

The International Scene

18.51 Because the Office of the Auditor General of Canada has been a pioneer in comprehensive auditing and legislative auditing, its skills and experience are in demand throughout the world, especially by developing nations and in other countries establishing or strengthening their own abilities in governmental auditing.

18.52 The International Audit Office Assistance Program. Announced in the United Nations in autumn 1979, this program is designed to help auditors from developing nations upgrade their public sector auditing skills and techniques, especially through the practice of value-for-money auditing. The program is a Canadian initiative, funded by the Canadian International Development Agency (CIDA) and administered by the Canadian Comprehensive Auditing Foundation. There is a training component and a fellowship program. Fellows in 1986-87 were from Colombia, Gambia, India, Malaysia, Morocco, Pakistan, People's Republic of China, and Tanzania. They were joined by two Fellows sponsored by the Audit Office of Saudi Arabia. During their year, the Fellows add an interesting dimension to the life of the Office, assisting in a variety of audit areas. More important, on returning to their own countries, they apply the formal training and on-the-job experience to their home situations where they continue to be guided by visits from Canadian advisers. Former fellows are today making significant contributions to auditing in nations around the world.

18.53 St. Lucia benefited from the legislative auditing training project started last year and continuing into 1986-87. Classroom training was supplemented by on-the-job training provided throughout the comprehensive audit of the Island's Department of Customs and Excise - the first comprehensive audit to be carried out exclusively by St. Lucia's own audit staff. Funded by CIDA, the Office's involvement in St. Lucia has contributed to a greatly strengthened audit function for that young, self-governing nation.

18.54 Under the auspices of the United Nations, the Office is sharing its knowledge and skills with the Office of the Auditor General of Cyprus. The objective is to foster the development of performance audit in the Republic of Cyprus.

18.55 Three other international projects were of special significance in 1986-87: The Sino-Canadian auditing training project; the INTOSAI development initiative; the review of the audit system at NATO.

18.56 The Sino-Canadian Auditing Training Project. Since 1982, the Office has been involved in an international effort with CIDA, the United Nations and the People's Republic of China to assist the Peoples' Republic in developing the legislative audit function called for in its new constitution.

18.57 Eventually the Chinese Audit Office will have some 40,000 staff auditors. With that number - and 100,000 internal auditors in various audited organizations across the vast country - training is essential. The Canadian Audit Office's role has been to undertake the task of training those who will train the Chinese auditors. This focus on training audit teachers ensures the most efficient use of limited Canadian resources. The objective of this approach is to develop a core of qualified audit teachers and to provide them with the necessary professional, technical, and administrative support to help establish an appropriate training capability in the Audit Administration of the People's Republic of China. The project has five components: teacher training, audio-visual training, professional and technical support, administrative support, and project management.

18.58 This project has provided an attractive dimension to the life and culture of the Office of the Auditor General. A number of staff members - including senior auditors - have now visited China. The six-day Chinese work week is long, but the experience of living and working in such a different environment is at once rewarding and stimulating. The project has also brought a steady stream of scholars and prospective trainers from China to the Canadian Audit Office. The whole enterprise is serving as a text book illustration of a creative, co-operative program between two nations.

18.59 The INTOSAI Development Initiative. The idea of international training for auditors has emerged a number of times in recent years. For example, the concept of an international centre for public accounting and auditing surfaced in 1980 at the United Nations. But although a majority of member nations supported the idea, the United Nations Secretary General could not raise sufficient funds for the project.

18.60 In March 1985, at a meeting of the Governing Board of the International Organization of Supreme Audit Institutions (INTOSAI), the Auditor General of Canada proposed that INTOSAI take on the development and implementation of what has come to be called the INTOSAI Development Initiative (IDI). The idea was that the project would be operated within the organizational structure of INTOSAI, without the "bricks and mortars" envisaged in the United Nations proposal, and funded mainly by international development organizations and national aid agencies, together with the co-operation and contributions of the national audit offices of donor countries.

18.61 At INTOSAI's twelfth congress held in Sydney, Australia, in April 1986, the proposal for the formal establishment of IDI was adopted " ... to foster the advancement of public accounting and auditing, especially in developing nations, through information exchange and training for audit practitioners and trainers of SAIs." It was also decided that during the start-up period IDI Secretariat would be attached to the Office of the Auditor General of Canada. The United States General Accounting Office has provided very significant support throughout the initial stages of IDI.

18.62 Much has been accomplished since the adoption of the IDI proposal. A small Secretariat of two permanent staff is supported by professionals seconded to it by member SAIs for short-term IDI projects. Thus the Secretariat remains small, overhead costs are kept to a minimum and SAIs have the opportunity to participate in IDI projects. The Board of Directors of IDI is advised by an Advisory Committee which consists of SAIs from 13 countries.

18.63 The work of IDI is proceeding on three fronts: the completion of a regional needs assessment, the dissemination of information through different publications including the International Directory and Audit Training Information, and offering workshops, seminars and other forms of training assistance.

18.64 Review of the North Atlantic Treaty Organization (NATO) Audit System. During the summer of 1986, the Office of the Auditor General of Canada was a key player in a major review of the NATO Audit System. Together with representatives from the audit offices of West Germany, Denmark, the United Kingdom and the United States, the Deputy Auditor responsible for Professional Services and the Principal in charge of Professional Practices participated in the review. Its overall objective was to ascertain where the NATO Audit System could be improved. Significant inadequacies identified by the review are being addressed.

18.65 Also on the international scene, the Office of the Auditor General of Canada continues as external auditor of the International Civil Aviation Organization. This audit is conducted from the regional office in Montreal.

"Sed Quis Custodiet Ipsos Custodes"

18.66 Juvenal's question as to who guards the guards themselves is eminently relevant to the Office of the Auditor General. If the Auditor General is the 'watchdog over the public purse', who watches the watchdog?

18.67 There is a three part answer. First, the Audit Office is externally audited. Second, it is subject to extensive internal audit, program review and evaluation. Third, periodic additional evaluating of its work is undertaken.

External Auditors

18.68 Financial Audit. Section 22 of the Auditor General Act provides that the Treasury Board shall nominate a qualified auditor to examine the receipts and disbursements of the Office of the Auditor General. Each audit report is to be submitted annually to the President of the Treasury Board on or before 31 December, and the President of the Treasury Board shall table the audit report in the House of Commons within 15 days after receipt. In October 1979, the Treasury Board approved the appointment of the associated firms of George A. Welch Company and Levesque, Marchand, Boulanger et Cie, as auditors of the Office of the Auditor General for a five-year period which started with the 1978-79 fiscal year. The appointment has been renewed for one-year periods since 1984.

18.69 At the time of this Report going to press, the audit report and management letter for 1986-87 had not been received. In the three previous years the auditors have given the Office a clean bill of health for all its financial activities including the Office's system of internal controls.

18.70 Commissioner of Official Languages. The Commissioner reports annually to Parliament on his assessment of the performance of government departments and agencies in applying the provisions of the Official Languages Act. Page 74 of the 1986 report refers to the Office of the Auditor General.

18.71 In July 1987 the Executive Committee approved a comprehensive Official Languages Plan primarily designed to respond to the Office's internal evaluation of its ongoing responsibilities in regard to Canada's two official languages. The plan also addresses issues raised by the Commissioner.

18.72 Public Service Commission - Staffing. Section 15(1) of the Auditor General Act specifies that all employees of the Office shall be appointed in accordance with the Public Service Employment Act. Section 15(3) also specifies that the Auditor General may exercise and perform the powers, duties and functions of the Public Service Commission, other than appeals under sections 21 and 31 and inquiries under section 32 of the Public Service Employment Act, in such a manner and subject to such terms and conditions as the Public Service Commission directs. To describe and clarify the terms and conditions under which staffing will be carried out in the Office, both parties agreed to a letter of understanding on the terms and conditions of staffing in the Auditor General's Office. The current agreement, effective February 1986, is to be reviewed and amended, if necessary, every two years at the anniversary date. One of the terms and conditions agreed to in the letter of understanding is that "the Public Service Commission will conduct on a mutually agreed basis, an audit of staffing in the Office as well as a follow-up to the audit to ensure that merit and current policies are being followed and that corrective actions have been taken if and where required". The Commission conducted its most recent audit in January 1986.

Program Evaluation and Internal Audit

18.73 This group has three ongoing objectives. Through program evaluation, it attempts to assess the effectiveness with which the Office's audit activities support the scrutiny role of the House of Commons. Through post-audit quality review, it assesses whether the quality of the Office's audit work is such that only matters of significance are selected for audit, and whether these are audited in a professional and cost-effective manner. Through internal audit, it assesses whether important management practices and procedures throughout the Office reflect due regard for value for money.

18.74 Following is a summary of the work carried out by the Program Evaluation and Internal Audit group during the past year.

18.75 Evaluation of Professional Development . The findings and recommendations of this study were in the 1986 annual Report. During the past year the Career and Professional Development group examined the recommendations in detail and began implementing a plan of action to address them. A major initiative was the development of a proposed curriculum of courses for the different responsibility levels in the Office. This was in response not only to a recommendation of the evaluation study, but also to the findings of an Audit Operations Branch Task Force on Knowledge and Skills Requirements for auditors.

18.76 Survey of deputy ministers. During the year we interviewed deputy ministers, or their representatives, of the departments with chapters in the 1985 annual Report. The purpose of the survey was to obtain their views on how their departments were represented in the Report and to invite their comments on any other matters relating to the Office's work.

    These specific questions were asked of the deputies:
    - Did the chapter present a fair and balanced view of your organization?
    - Did the chapter display an understanding of the activities/areas covered?
    - Did the chapter address matters that you consider significant? Were there matters of significance that, in your opinion, should have been addressed but were not?
    - Were the recommendations practical and cost effective?
    - Can you suggest ways in which the audit could have been of more benefit to you?
18.77 An analysis of the responses to the questions, along with related discussions, suggests that five of the seven chapters were reviewed positively by the deputies; two were not. The deputies' responses are being taken seriously. Continuing effort is being made to better our understanding of the audit entities, to maintain effective communication throughout the audit and to strive for the proper balance and tone in the chapters at their initial drafting.

Post-audit Quality Review

18.78 A post-audit quality review is carried out annually on a representative portion of the Office's audit work.

18.79 Departmental comprehensive audits. During the past year an assessment was made of the shift from systems-based audit approaches, which tend to focus on the deficiencies of management processes, to more program results-based audit approaches, which place more emphasis on program and results and less on administrative systems and controls.

18.80 There was some variation among the audits, but a general shift toward more results-based auditing was evident. This shift would have been even more pronounced had the methodology now being field tested been available 18 months ago.

18.81 Those audits that were most results-based were marked by certain characteristics:

    - they addressed primary program objectives and not just secondary ones;
    - they analysed information on program results and assessed systems and controls only when necessary to account for results shortfalls, or when information on program results was unavailable;
    - they determined the cause and effect of any identified systems and controls deficiencies; and
    - they examined corrective actions taken by program management.
18.82 The review of the comprehensive auditing manual now under way will consider fully the recommendations made by post-audit quality review during the past two years concerning the scope and conduct of departmental comprehensive audits.

18.83 Crown corporations, other entities and the Public Accounts of Canada. Last year, we developed standardized post-audit quality review assessment methods for reviewing the audits of Crown corporations, other entities and the Public Accounts. Through questionnaires, we compared audit practices to generally accepted auditing standards and to standards of the Office. An evaluation summary was then used to indicate the degree of compliance with those standards.

18.84 The review method was used on a sample of eight Crown corporations and other entities and nine Public Accounts audits. It produced useful and informative results. Quality comparisons can be made across audits and for individual audits from year to year.

18.85 The post-audit quality review examinations of this attest and authority work revealed compliance with generally accepted auditing standards and with those of the Office.

18.86 Contracting for professional services - follow-up audit. The findings of the original study, reported in the 1985 annual Report, recognized significant improvements in controls over contracting, but identified a number of opportunities for further improvement. This underscores the continuing need to optimize the mix of permanent staff and consultants and to ensure effective direction, control and evaluation of contracted resources.

Internal Audit

18.87 Internal Audit of Administrative Services Branch. The objective of this audit was to assess the reasonableness of the nature, level and costs of services provided by the Administrative Services Branch.

18.88 In our 1986 annual Report we presented our findings on the Personnel and Corporate EDP Services within the Branch. This year we are presenting our findings on our review of the Administration section, the Word and Information Systems section and the Financial Administration function.

18.89 The audit examined how the need for the various services is established and how they are delivered and controlled. Wherever feasible, we made comparisons with other legislative auditing bodies and public accounting firms, with allowances for differences in size and environment. We surveyed and interviewed users to determine their satisfaction with the services and to elicit any suggestions or comments about how they could and should be improved.

18.90 The Administration section provides the services of Records, Mail, Facilities Management, Telecommunications and Materiel Management. Our survey of users indicates a high level of satisfaction with the services provided. The major exception is with the present telecommunications system which has not performed satisfactorily in the view of those surveyed. The problems are well on the way to being overcome. As to the Materiel Management area, there is general satisfaction with the level of service, but there are some opportunities for improving operating procedures.

18.91 The Word and Information System section provides the Office with a level of service that is at least equal to that of the other departments and private sector firms we contacted. At the same time, the increased use of microcomputers within the Office has altered the pattern of workload of the section. The Office intends to undertake a study of its continuing word processing needs.

18.92 The Financial Administration function is satisfactorily managed. The role, responsibilities and authority of the financial function, as defined in the Office Financial Manual, and its organization and staffing, enable it to carry out its controllership role effectively. As well as being managed at reasonable cost, the Financial Administration function is also quite responsive to the users of its services. We made some suggestions relating to cost accounting, performance reporting and the format of Part III of the Estimates. These are being considered by Branch management.

18.93 The only part of the Administrative Services Branch yet to be audited is the Office Languages group. This will be covered in the coming year.

Additional Evaluating

18.94 Part III of the Estimates. As indicated earlier, the Main Estimates of the Office were referred to and reviewed by the Public Accounts Committee for the first time in 1987. The Auditor General, in commenting on this move, said: "Members were able to challenge us on a number of continuing issues - how we choose what we are going to audit in a particular year; how we determine what is of sufficient significance to report to Parliament; how we define materiality for our attest work and significance for our value-for-money auditing; above all, how we measure the cost effectiveness of our auditing and control our own expenditures... The two hearings also gave me the opportunity of letting the Committee know about our work that is not reported in the annual Report - for example, our extensive auditing in Crown corporations and our international activities. The overall thrust of the members' questions, which ranged over virtually all my Office's activities, will be most valuable as we establish priorities for the coming year. The questioning was informed and penetrating. In our answers, we attempted to match the indepth quality of the questions."

18.95 Cost Effectiveness Study. It would be wrong to characterize the study on cost effectiveness of audit work, described earlier in this chapter, as a comprehensive audit. Nonetheless, its searching quality has probed the programs and activities of the Office in a manner that is not dissimilar to a value-for-money audit or a special examination.

18.96 In summary, then, the Office of the Auditor General is open to high levels of scrutiny; and the one who is vigilant in examining others is vigilantly examined.

Other Initiatives

18.97 This chapter has discussed several especially noteworthy activities of the Office of the Auditor General in 1986-87. There are other matters of interest that can be reported more briefly.

Audit Office Wins International Award

18.98 In the fall of 1985, the United Kingdom's Chartered Institute of Public Finance and Accountancy (CIPFA) and Arthur Andersen & Co. Management Consultants announced the inauguration of the CIPFA-Arthur Andersen Financial Management Reports Award. Designed to foster better control of costs and achievements in the public sector, the annual competition was launched to seek the best examples of current financial management practices. The 1986 entries were expected to demonstrate how clear, regular and economically presented internal reports contribute to good financial management. Such reports were to cover not only spending but also achievements and recommendations for action.

18.99 In October 1986, at the CIPFA Conference held in Birmingham, England, Sir Roy Griffiths, chairman of the judging panel, announced that the Office of the Auditor General of Canada was the 1986 winner of the Award.

18.100 He described the Office's financial management reporting system as "well planned and well designed. The reports are timely and used as a vital part of management control .... It quite definitely illustrates management professionalism of a high order. I emphasize that reports of this standard are a pleasure to see and to use.... Congratulations to the Office of the Auditor General of Canada".

Federal Court Case

18.101 The matter of the Auditor General's free access to information in the matter of the Petrofina acquisition was brought to the Federal Court of Canada on 5 June 1984. The decision of Mr. Justice Jerome was received on 5 December 1985. Mr. Justice Jerome declared that the meaning of section 13(1) of the Auditor General Act was clear and unequivocal and that it entitled this Office to free access to all information it required to fulfil its responsibilities.

18.102 On 30 December 1985, the government announced that it would appeal the decision of Mr. Justice Jerome to the Federal Court of Appeal. The appeal was heard by three judges on 6, 7 and 8 October 1986, and a judgement was rendered on 22 January 1987. For different reasons two of the judges of the Federal Court of Appeal ruled against the Auditor General. One of the judges ruled in favour. The Auditor General then sought leave to appeal his decision to the Supreme Court of Canada. Arguments for leave to appeal were presented to the Supreme Court on 7 April 1987.

18.103 On 25 June 1987 the Supreme Court granted the Auditor General leave to appeal.

Video Presentation of the Annual Report

18.104 One of the continuing concerns of the Auditor General is to communicate effectively the results of the work of his office. An audit is valueless unless its findings are communicated. Over the last six years a great deal of attention has been given to the presentation of the annual Report - to its structure, to the clarity of the writing, to improved graphics, to the use of photographs.

18.105 A logical next step was to consider making visual presentations of the Report's main messages. A pilot project in 1986 saw the production of a 10-minute videotape of one annual Report chapter - the Veterans Affairs Portfolio. This got a positive response from the members of the Public Accounts Committee and the other Members of Parliament who saw it.

18.106 Four chapters of this Report are to be made available on video. The goal is to present the highlights of these Report Chapters in a way that will help Members of Parliament find out quickly what the audits are saying and where they can get more details. The videos are placed on the Parliamentary OASIS computer system allowing Members immediate access. The chapters taped this year are the Financial Management and Control Study (Chapter 4), the Department of National Health and Welfare (12), the Department of National Defence - Materiel Support (Chapter 10), and three of the Special Audits in Chapter 15.

Task Force on Knowledge and Skills

18.107 Over the past few years Audit Groups have reviewed their human resource complement and assessed their requirements for staff. Each Group is continuing to work toward ensuring that the Office has a sufficient number and quality of staff to continue to meet audit responsibilities. A task force was created by the Deputy Auditors General of Audit Operations in May 1985. The report of the Task Force on Knowledge and Skills was published in May 1987. It will become an important instrument in reviewing standards, promotion criteria and performance appraisals, all of which are integral to the Audit Groups human resource planning.

Comprehensive Auditing Manual

18.108 Part 2 of the Office's Comprehensive Auditing Manual was issued for field testing in 1986. This part of the Manual outlines the policies, approaches and procedures applicable to auditing departments and agencies in order to fulfil the Office's responsibilities set out in the Auditor General Act, primarily sections 5, 6 and 7. Part 2 also contains certain guidelines and indicators for use by staff in carrying out specific aspects of the audit work. It was prepared with the involvement of many of the audit staff and co-ordinated by the Professional Practices group in collaboration with the Public Accounts Audit group. Successive drafts were reviewed by the Methodology Development Committee, an advisory group, and the Auditor General's Independent Advisory Committee on Government Accounting and Auditing Standards. Part 2, together with the previously issued Part 1 (outlining the Auditor General's mandate and the Office's organization, role and audit responsibilities) and Part 3 ("Crown Corporations and Other Entities"), has been approved by the Executive Committee for field testing.

Costs Incurred in Preparing Reports of Audits and Special Examinations in Crown Corporations

18.109 Section 149(2) of Part XII of the Financial Administration Act (FAA) requires that where the Auditor General of Canada is the auditor or examiner of a Crown corporation, the costs incurred in preparing any report under sections 139 and 143 shall be disclosed in his next annual Report and be paid out of the moneys appropriated for his Office.

18.110 The costs reported here pursuant to section 149(2) represent the full costs incurred by the Office in carrying out the audit and special examination work and preparing particular reports under section 139 or 143 of the FAA. These costs are reported here only if the work has been completed.

18.111 The total costs of Crown corporations work include costs incurred on work not specifically required under section 139 or 143. This includes, for example, work in relation to issuing prospectuses, advising on information and internal control systems, and helping to resolve accounting issues and to prepare financial statements. The costs incurred for this work are not reported in this chapter.

Annual Audits

18.112 Under section 139 of the FAA, each parent Crown corporation is required to have an annual auditor's report prepared, in respect of itself and its wholly-owned subsidiaries, on the financial statements and on any quantitative information that the Treasury Board requires to be audited. Also, the auditor must prepare such other reports as the Governor in Council may require.

18.113 Exhibit 18.3 shows the costs incurred in performing the completed audits and preparing the annual auditor's reports required by section 139 for those corporations and subsidiaries audited solely or jointly by the Auditor General of Canada. The costs refer to the completed annual audits for fiscal years ending on or before 31 March 1987.

Exhibit not available

18.114 The costs reported do not include any costs for the audit of quantitative performance information, because no such audits have been requested by the Treasury Board for any of the corporations the Office audited. Similarly, there were no other reports required by the Governor in Council under section 139.

Special Examinations

18.115 Section 143 of the Financial Administration Act requires each parent Crown corporation named in Schedule C of the Act to cause a special examination to be carried out in respect of itself and, if applicable, its wholly-owned subsidiaries, at least once every five years. As the legislation came into effect on 1 September 1984, the first cycle of special examinations is to be completed by 1 September 1989.

18.116 The aim of these examinations is to determine whether, in the period under examination, the financial and management control and information systems and management practices of the corporation were maintained in a manner that provided reasonable assurance that:

    - assets were safeguarded and controlled;
    - financial, human and physical resources were managed economically and efficiently; and
    - operations were carried out effectively.
18.117 At the completion of a special examination, a report on the findings is submitted to the board of directors of the corporation. In the case of corporations named in Part I of Schedule C or their wholly-owned subsidiaries, the legislation provides for the examiner to draw matters to the attention of Parliament if necessary.

18.118 Where, in the examiner's opinion, the special examination report contains information that should be brought to the attention of Parliament, the examiner must, after consulting the board of directors and the appropriate minister, prepare a report on the information for inclusion in the corporation's next annual report. Where an auditor other than the Auditor General of Canada is the examiner, he or she must also consult with the Auditor General and furnish him with a copy of the report on these matters.

18.119 As of 31 July 1987, one special examination of the Northern Canada Power Commission had been completed at a cost to the Office of $484,066. A further 12 special examinations were in progress in Crown corporations that are audited by this Office. Costs of these will be reported in future years, as they are completed.

Advisers to the Auditor General

Membership of the Panel of Senior Advisers

Kenneth G. Belbeck, F.M.C., Thorne Stevenson & Kellogg

H. Marcel Caron, F.C.A., Clarkson Gordon

Gordon H. Cowperthwaite, F.C.A., Canadian Comprehensive Auditing Foundation

Kenneth S. Gunning, F.C.A., Pannell Kerr MacGillivray

Ralph W. Karthein, CA, IBM Canada Ltd.

Giles R. Meikle, F.C.A., Deloitte Haskins & Sells

Edward W. Netten, F.C.A., Price Waterhouse Associates

Donald H. Page F.C.G.A., Midland Doherty Ltd.

Robert M. Rennie, F.C.A., Touche Ross & Co.

Donald C. Scott, F.C.A., Clarkson Gordon

Kenneth R. Stevenson, C.A., Coopers & Lybrand

T. Robert Turnbull, F.C.A., Thorne, Ernst & Whinney

W. Ross Walker, F.C.A., Peat, Marwick, Mitchell & Co.

Membership of the Independent Advisory Committee to the Auditor General on Government Accounting and Auditing Standards

L. Denis Desautels, C.A., Clarkson Gordon

Kenneth M. Dye, F.C.A. (Chairman), Auditor General of Canada

James L. Goodfellow, F.C.A., Touche Ross & Co.

Douglas D. Graham, C.A., Pannell Kerr MacGillivray

John J. Kelly, C.A., Canadian Institute of Chartered Accountants

Ronald E. Kiggins, C.A., Peat Marwick

Gérald Langlois, C.A., Raymond, Chabot, Martin, Paré & Associé

Claude LeBon, Ph.D., C.A., Simon Fraser University

P. Howard Lyons, F.C.A., Deloitte Haskins & Sells

Henry E. McCandless, C.A. (Secretary), Office of the Auditor General of Canada

Ronald B. Robinson, F.M.C., Abt Associates of Canada

Lawrence S. Rosen, F.C.A., Ph.D., York University

Edward R. Rowe, C.A. (Vice-Chairman), Office of the Auditor General of Canada

Leonard Rutman, Ph.D., Price Waterhouse

William R. Sloan, F.C.A., Arthur Andersen & Co.

George F. Windsor, B. Eng., LL.B., Weir & Foulds