Auditor General of Canada—Independent Auditor's Report

Measurement of tax revenues

Refer to Note 4: Tax revenues

The Group recognized $382,120 million in tax revenues for the year ended 31 March 2024.

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 significant assumption used in estimating tax revenues is that tax instalments, source deductions withheld and historical information on refund rates, and payments received upon filing tax returns 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 evaluated the design and implementation and tested the operating effectiveness of selected 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 assumptions used in the estimates. We also evaluated the sensitivity of the estimates to changes in the significant 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, excluding net actuarial losses

Refer to Note 6(i): Expenses by object

The Group recognized $71,902 million in personnel expenses, excluding net actuarial losses for the year ended 31 March 2024.

The accuracy of personnel expenses, excluding net actuarial losses relies on complex information technology systems that process a high volume of payments, 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, excluding net actuarial losses 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 selected pay period. We traced relevant pay information to supporting documentation that included letters of offer, acting requests, terms of collective agreements, and 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 that we determined for these balances using the personnel data held by management.

Recognition and valuation of contingent liabilities

Refer to Note 9: Provision for contingent liabilities

The Group recognized a provision for contingent liabilities of $56,588 million as at 31 March 2024.

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 2024.

Completeness and valuation of asset retirement obligations

Refer to Note 10: Environmental liabilities and asset retirement obligations

The Group recognized a provision for asset retirement obligations of $12,486 million as at 31 March 2024.

The completeness of asset retirement obligations is a key audit matter because of the challenges in identifying all legal obligations, as defined in PS 3280 Asset retirement obligations, 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 experts to assist in estimating the asset retirement obligations as at 31 March 2024.

How the matter was addressed by our audit

We tested management’s processes for identifying changes to asset retirement obligations related to the tangible capital assets’ acquisition, construction or development, use, and removal from service.

We evaluated the completeness of management’s identification of legal obligations by evaluating the different sources that established the obligations, including legislation, agreements, contracts, and promissory estoppels.

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 underlying data and the calculation of the provision for asset retirement obligations as at 31 March 2024. In addition, we evaluated the completeness and appropriateness of the consolidated financial statement note disclosures related to asset retirement obligations.

Valuation of public sector pensions and other future benefits

Refer to Note 12: Public sector pensions and other employee and veteran future benefits

The Group recognized public sector pension and other future benefit liabilities of $361,704 million and public sector pension assets of $20,055 million as at 31 March 2024.

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

The valuation of pension assets and liabilities and other future benefit liabilities 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 was 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 and other future benefit liabilities to changes in management’s assumptions.

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

Valuation of loans and advances

Refer to Note 20: Other loans, investments and advances

The Group recognized a valuation allowance of $23,044 million on the carrying amount of $57,120 million of loans and advances as at 31 March 2024. These balances include the valuation allowances and carrying amounts of Canada Emergency Business Account (CEBA) loans, Canada Student Loans and Canada Apprentice Loans (student loans), and other loans and advances. A valuation allowance reduces the carrying amount of outstanding loans and advances to an amount that reflects the estimated net recoverable value.

The valuation of loans and advances is a key audit matter because of the significant judgments made by management in selecting the significant assumptions applied in management’s methodologies to estimate the valuation allowances and the cost of any concessionary terms. For student loans, management engages an actuarial expert to estimate the valuation allowance and the cost of the concessionary terms of the loans.

The estimation of valuation allowances includes significant assumptions such as loan loss rates and the assessment of other qualitative factors, including credit risk rating and economic conditions. As well, for certain categories of loans and advances there is increased measurement uncertainty given the limited historical experience available to assist in estimating the net recoverable value.

The estimation of the cost of any concessionary terms includes significant assumptions involving projected cash flows and discount rates.

How the matter was addressed by our audit

For CEBA loans

• we evaluated the design and implementation and tested the operating effectiveness of selected controls related to the loan management system used to record the carrying amount of the loans
• we reconciled loan data from the loan management system to information from financial institutions to verify the completeness and accuracy of the carrying amount of the outstanding loans and the categorization of the loans based on their risk profile

For CEBA loans and other loans and advances

• we assessed the reasonableness of the significant assumptions used in management’s methodologies to estimate the valuation allowances, including review of supporting documentation for the loan loss rates applied
• we reviewed external sources of evidence to evaluate the reasonableness of the loan loss rates applied and management’s assessment of other qualitative factors, such as credit risk rating and economic conditions
• we verified, on a sample basis, the accuracy of the loan data used in the estimates
• we recalculated the valuation allowance using management’s methodologies to verify accuracy

For student loans

• we assessed the work undertaken by management’s actuarial expert by evaluating the appropriateness of the methodology used and the reasonableness of the assumptions applied in estimating the valuation allowance and the cost of the concessionary terms of the loans
• we reviewed the process used by management’s actuarial expert to validate the underlying source data and reconciled the loan data used in the valuations to verify the completeness and accuracy of the outstanding carrying amount of the loans
• we assessed the reasonableness of the calculation of the cost of the concessionary terms performed by management’s actuarial expert

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

Refer to Note 21: Tangible capital assets and inventories

The Group’s non-financial assets include assets that support the military, including inventory and asset pooled items that are recognized 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 2024. 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 recognized 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.