Auditor General of Canada—Independent Auditor's Report

Public Accounts of Canada 2023 Volume I—Top of the page Navigation

Independent Auditor's Report

To the House of Commons

Report on the Audit of the Consolidated Financial Statements

Opinion

We have audited the consolidated financial statements of the Government of Canada and its controlled entities (the Group), which comprise the consolidated statement of financial position as at 31 March 2023, and the consolidated statement of operations and accumulated operating deficit, consolidated statement of remeasurement gains and losses, consolidated statement of change in net debt and consolidated statement of cash flow for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 March 2023, and the consolidated results of its operations, its consolidated remeasurement gains and losses, consolidated changes in its net debt, and its consolidated cash flows for the year then ended in accordance with the stated accounting policies of the Government of Canada set out in Note 1 to the consolidated financial statements, which conform with Canadian public sector accounting standards.

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Measurement of tax revenues

Refer to Note 4: Revenues

The Group recognized $379,228 million in tax revenues for the year ended 31 March 2023.

A significant amount of tax revenues from individuals and corporations requires estimation because the final income tax owed for the year is known only when a tax return is filed. In some cases, filing could happen more than a year after the applicable tax year.

Estimating tax revenues is a key audit matter because the estimation process and models are complex, require consistent application, are not fully automated, and require management to make significant judgments and assumptions.

The key assumption used in estimating tax revenues is that tax instalments, source deductions withheld and historical information on refund rates, payments received upon filing tax returns, and amounts receivable assessed are all indicators of the amount of tax revenues earned for the year but not yet assessed.

How the matter was addressed by our audit

We tested the design, implementation, and operating effectiveness of relevant controls related to the revenue general ledger system used to record tax-related transactions.

We evaluated the effectiveness of management’s estimation process and models by obtaining management’s review of the reasonableness of prior periods’ accounting estimates of tax revenues compared with actual filings.

We assessed the validity and consistent application of the estimation process and models, and verified that required changes to the models were made when necessary.

We assessed the reasonableness of the significant management judgments and key assumptions used in the estimates. We also evaluated the sensitivity of the estimates to changes in the key assumptions.

We evaluated the completeness of and performed sample testing on the underlying data used in the estimation models. We also assessed the accuracy of management’s calculations supporting the estimates.

Accuracy of personnel expenses

Refer to Note 5(i): Total expenses by type of resource used in operations

The Group recognized $67,356 million in personnel expenses for the year ended 31 March 2023.

The accuracy of personnel expenses relies on complex information technology systems that process a high volume of payments and the application of complex pay rules reflecting the collective agreements, and terms and conditions of employment of many different public sector employee groups.

The accuracy of personnel expenses is a key audit matter because of

  • the internal control deficiencies in the process that links information between the human resources systems and the pay system. As a result of these deficiencies, the risk of errors in the consolidated financial statements arising from inaccurate payments to personnel is heightened
  • the various pay rules in complex collective agreements that require a common understanding and consistent application from the compensation advisors employed by the Public Service Pay Centre, and those in the departments and agencies

How the matter was addressed by our audit

We recalculated a sample of employees’ basic and acting pay for the year ended 31 March 2023 by tracing the pay to supporting documentation that included letters of offer, acting requests, terms of collective agreements and/or terms and conditions of employment.

We evaluated whether the personnel expense payments sampled were properly approved in accordance with the relevant sections of the Financial Administration Act.

We tested the accuracy of year-end estimates for personnel expense accruals for regular pay, vacation pay, and employer’s contributions by verifying that these amounts were within a range of reasonableness we determined for these balances using the personnel data held by management.

Valuation of public sector pensions and other future benefits

Refer to Note 11: Public sector pensions and other employee and veteran future benefits

The Group recognized public sector pensions and other future benefits liabilities of $344,374 million and public sector pension assets of $12,996 million as at 31 March 2023.

Pension assets and liabilities are recognized for defined benefit pension plans. Other future benefits include benefits such as veteran benefits and health and dental benefits.

The valuation of pension assets and liabilities and other future benefits is a key audit matter because of the complex methodologies and significant assumptions used in their measurement. Management engages actuarial experts to measure these assets and liabilities.

The assets and liabilities relating to pensions and other future benefits are subject to high measurement uncertainty because they are highly sensitive to changes in long term assumptions and given the magnitude of these estimates, the impact of any changes could be material. These assumptions include economic assumptions, such as discount rates, long-term rate of inflation and long-term general wage increase, and demographic assumptions such as mortality rates. Selecting long-term assumptions requires significant management judgment.

How the matter was addressed by our audit

We assessed the work undertaken by management’s actuarial experts by evaluating the appropriateness of the valuation methodologies used, the reasonableness of management’s economic and demographic assumptions applied in estimating the liabilities, and the determination of the market-related value of the pension assets.

We tested on a sample basis the completeness and accuracy of certain plans’ underlying data that was updated during the year and used in the valuations. We also tested on a sample basis the calculation of the pension obligation for some pension and future benefit plans. In addition, we tested the reasonableness of pension contributions and tested a sample of benefit payments for significant plans.

We evaluated the completeness and accuracy of the consolidated financial statement note disclosures in respect of the sensitivity of the pension liabilities and other future benefits to changes in management’s assumptions.

We engaged an auditor’s actuarial expert to assist with the audit of these complex estimates.

Recognition and valuation of contingent liabilities

Refer to Note 8: Provision for contingent liabilities

The Group recognized a provision for contingent liabilities of $75,999 million as at 31 March 2023.

Contingent liabilities are potential liabilities that may become actual liabilities depending on the outcome of future events that are not wholly within the Group’s control.

The recognition of contingent liabilities is a key audit matter because of the extensive judgment required in assessing the likelihood of the future confirming event occurring or not, and the inherent complexity of the estimation methodologies that require a consistent application.

The valuation of contingent liabilities is a key audit matter because of

  • the uncertainty related to the potential settlement costs used in the estimates and the inherent subjectivity when using a range of costs to determine the best estimate
  • the continuous revisions and refinements of the estimates required in light of ongoing negotiations, recent and prior settlements or agreements, and decisions made by the courts and administrative tribunals

How the matter was addressed by our audit

We assessed the appropriateness of the recognition criteria used and the methods applied to calculate the provision.

We evaluated the consistent application of the estimation methodologies. We verified on a sample basis the accuracy and completeness of the data used in the estimates, such as populations of claimants and results of prior settlements, including compensation paid.

We assessed the reasonableness of the significant judgments that management made in determining the provision for contingent liabilities. We also tested on a sample basis the accuracy of calculations supporting management’s best estimate of the provision, which included in some cases the determination of a range of reasonably possible amounts.

We obtained confirmations from the Group’s legal counsel to assess the completeness and the valuation of claims against the Group. In addition, we examined press releases, and verified payments processed after 31 March 2023.

Completeness and valuation of asset retirement obligations

Refer to Note 2(a): Adoption of new accounting standards – Asset Retirement Obligations, and Note 9: Environmental liabilities and asset retirement obligations

Effective 1 April 2022, the Group adopted the new accounting standard PS 3280 Asset retirement obligations, retroactively. This standard establishes how to account for and report a liability for the retirement of tangible capital assets.

As a result of the adoption of PS 3280, the Group restated the 31 March 2022 provision for asset retirement obligations to $13,722 million. The provision for asset retirement obligations is $12,880 million as at 31 March 2023.

The completeness of asset retirement obligations is a key audit matter because of challenges in identifying all legal obligations, as defined in the standard, related to the retirement of tangible capital assets in a decentralized operating environment with diverse asset portfolios.

The valuation of asset retirement obligations is a key audit matter because of the inherent complexity and significant judgments required by management in estimating the long-term retirement costs. The key complexities and judgments in the estimate include the selection of appropriate valuation techniques and assumptions, such as discount and inflation rates.

Management engaged engineering and legal experts to assist in estimating the asset retirement obligations as at 31 March 2022 and as at 31 March 2023.

How was matter was addressed by our audit

We tested management’s processes for identifying asset retirement obligations related to tangible capital assets.

We evaluated the completeness of management’s identification of legal obligations by evaluating the different sources which established the obligations, including legislation, agreements, contracts, and promissory estoppels. In addition, we obtained legal confirmations, on a sample basis, to verify the completeness and the existence of these legal obligations.

We assessed the work undertaken by management’s experts by evaluating the appropriateness of the valuation techniques used. We also assessed the reasonableness of the assumptions and significant management judgments made in estimating the obligations, including the appropriateness of the discount and inflation rates applied, and the adequacy of the long-term retirement costs.

We tested on a sample basis the underlying data and the calculation of the provision for asset retirement obligations as at 31 March 2022 and as at 31 March 2023. In addition, we evaluated the completeness and appropriateness of the consolidated financial statement note disclosures related to asset retirement obligations.

We engaged an auditor’s engineering expert to assist with the audit of this complex estimate.

Accounting transition for financial instruments

Refer to Note 2(b): Adoption of new accounting standards – Financial instruments suite of standards, Note 12: Derivatives, and Note 21: Financial instruments.

Effective 1 April 2022, the Group adopted prospectively the new accounting standards: PS 3450 Financial instruments, and PS 1201 Financial statement presentation.

The adoption of these new standards is a key audit matter because of the significant impacts on the consolidated financial statements and note disclosures.

The significant impacts of the new standards include

  • the addition of a consolidated statement of remeasurement gains and losses
  • the change in the basis of measurement for derivative assets and liabilities to fair value (previously measured at cost)
  • the change in amortization from straight-line to effective interest method for certain financial instruments
  • inclusion of note disclosure regarding the transitional provisions
  • amendments to the quantitative and qualitative information disclosed in the notes to the consolidated financial statements on the nature and extent of different types of financial instrument risks

How the matter was addressed by our audit

We examined the balances of the new consolidated statement of remeasurement gains and losses and the new and revised consolidated financial statement note disclosures (including transitional provisions) to verify completeness, reasonableness, accuracy, and compliance with the standards.

We tested the design, implementation, and operating effectiveness of relevant controls related to the systems used to automate calculations using the effective interest method for the amortized cost of market debt, including interest recognition and the amortization of premiums and discounts.

We evaluated management’s judgments and processes for determining the fair value measurement of derivatives. We tested on a sample basis the measurement, recognition, and classification of financial instruments in the consolidated financial statements. We assessed the appropriateness of the fair values assigned to these financial instruments.

Valuation, classification, and existence of military related inventory and asset pooled items

Refer to Note 20: Tangible capital assets and inventories

The Group’s non-financial assets include assets that support the military. As at 31 March 2023, these assets include $4,841 million of inventory. They also include asset pooled items that are recorded in tangible capital assets.

The valuation and existence of these assets are key audit matters because of the continued weaknesses in internal controls within the Group’s processes and the challenges in managing and accounting for these types of assets.

Assets that support the military are managed in a decentralized manner and across various locations, making it difficult to accurately quantify balances as at 31 March 2023. The classification of inventory and asset pooled items is also subject to significant management judgment, which affects how these assets are valued.

Significant management judgment is also required in determining the appropriate valuation because of the complex costing methods, the identification of indicators of impairment, and the determination of appropriate useful life.

How the matter was addressed by our audit

We performed counts on a sample basis of inventory and asset pooled items to test the accuracy of the quantity on hand against the system of record.

We tested the classification between inventory, expenses, and asset pooled items by assessing the appropriateness of management judgments applied in the capitalization of assets.

We tested on a sample basis the pricing accuracy of inventory and asset pooled items by tracing to evidence supporting the recorded costs.

We evaluated management’s impairment assessments for any obsolete assets identified in our sampled items.

We tested on a sample basis the amortization rates applied to asset pooled items to evaluate the reasonableness of amortization expenses related to these assets.

Other Information

Management is responsible for the other information. The other information comprises the information included in the Public Accounts of Canada – 2023 – Volume I, but does not include the consolidated financial statements and our auditor's report thereon.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with the stated accounting policies of the Government of Canada set out in Note 1 to the consolidated financial statements, which are based on 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.

In preparing the consolidated financial statements, management is responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless an intention exists to liquidate the Group or to cease operations, or there is no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Group's financial reporting process.

Auditor's Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

Opinion

As required by Section 6 of the Auditor General Act, we report that, in our opinion, the stated accounting policies of the Government of Canada have been applied, after giving retroactive effect to the change in the method of accounting for asset retirement obligations as explained in Note 2(a) to the consolidated financial statements and except for the change in the method of accounting for financial instruments as explained in Note 2(b) to the consolidated financial statements, on a basis consistent with that of the preceding year.

Original signed by

Karen Hogan, FCPA
Auditor General of Canada

Ottawa, Canada
7 September 2023

Public Accounts of Canada 2023 Volume I—Bottom of the page Navigation

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