1. Auditing 101 RDML K. Taylor | DHS CFO Brief | 25 JAN 2010 Assistant Commandant For Resources

2. 1 Overview Auditing – Background –Laws –Financial Assertions Auditing Phases and Opinions –4 phases –4 opinions CG financial state and progress

3. Assistant Commandant For Resources 2 Audit Purpose The purpose of an audit is to provide assurance that: –Financial statements, footnotes, disclosures are reliable –Internal Controls are effective –Organization in compliance with Laws and Regs

4. Assistant Commandant For Resources 3 Laws and Guidance Federal Financial Management Improvement Act 1982 –FFMIA – Improving info for decisions and accountability CFO Act of 1990 –Requires CFOs in all Executive agencies Sarbanes-Oxley and OMB Circular A-123 –Enron –Commandant reports to DHS Secretary on financial reporting

5. Assistant Commandant For Resources 4 Effective Auditor Communication It is imperative that: - Auditors have interaction with all levels of an organization to increase understanding of detailed processes and situations. - The message being sent to auditors is consistent, whether they receive it from a Subject Matter Expert or a Project Manager. 4

6. Assistant Commandant For Resources 5 Stakeholders Government Accountability Office Supports the Congress in meeting its constitutional responsibilities and helps improve the performance and accountability of the federal government for the benefit of the American people. Office of the Inspector General – DHS Responsible for conducting and supervising audits, investigations, and inspections relating to the programs and operations of the Department. The OIG is to examine, evaluate and, where necessary, critique these operations and activities, recommending ways for the Department to carry out its responsibilities in the most effective, efficient, and economical manner possible. KPMG External audit firm hired by OIG to conduct financial audits. Audit Coordination Liaison between KPMG and USCG personnel to facilitate a smooth audit. 5

7. Assistant Commandant For Resources 6 Financial Statement Assertions Purpose: –To pass a financial statement audit, the Coast Guard must be able to support the below assertions for each applicable line item on the financial statements. Financial statement assertions: –Presentation / disclosure –Rights / obligations –Completeness –Existence / occurrence –Valuation

8. Assistant Commandant For Resources 7 Financial Statement Assertions Presentation and Disclosure –Proper presentation, disclosures are present Rights and Obligations –Legal ownership Completeness –All necessary assets reported, nothing unauthorized Existence and Occurrence –Assets exist, transactions occurred. Valuation –Assets are properly valued, documentation exists

9. Assistant Commandant For Resources 8 Tools Notice of Findings and Recommendations (NFR) –A formal notification from an auditor of an identified deficiency and recommended step(s) to resolve the deficiency. Provided By Client (PBC) –A document or file provided by the USCG to the auditor, for audit purposes. Statement of Assurance –Managements assertion that provides an adequate and timely assessment of the USCG's internal controls and disclosures as well as any known material weaknesses that have been identified during the previous 12-month period. 8

10. Assistant Commandant For Resources 9 Internal Controls Assurance Statement Purpose: To provide assurance that internal controls over financial reporting (ICOFR) for key processes are properly designed and operating effectively. Examples where internal control assurances apply: –Information Technology System Security –Fund Balance with Treasury –HR & Payroll –Payment Management –Property Management –General Ledger Management –Risk Management

11. Assistant Commandant For Resources 10 The Four Auditing Phases Planning Internal Controls Testing Reporting –Audit Opinions

12. Assistant Commandant For Resources 11 Planning – Understanding and Preparing Understand operations, organization, factors SOPs, PBCs, prior year NFRs ID major accounts and systems, applicable laws, regulations and restrictions Assess risk factors What are the major accounts? What had previous deficiencies? (past NFRs) Plan location visit

13. Assistant Commandant For Resources 12 Internal Controls – Preparing Basic Tests Identify control objectives Decide on nature, timing and extent of tests Perform control tests and test compliance with laws, regulations Assess controls on a preliminary basis

14. Assistant Commandant For Resources 13 Testing – Test the Internal Controls Consider nature, timing and extent of tests Design tests –Test of Design (TOD) – Performing a walk through of the procedure from source documentation to the recordation in the general ledger to verify the controls in place are designed appropriately to prevent or detect incorrect instances of material misstatement. –Test of Effectiveness (TOE) – Testing of the control to verify it is implemented and operating effectively for its intended purpose. Perform testing –Control Testing (50 samples) – Aimed at evaluating control procedures and effectiveness. –Substantive Testing (1000s of samples) – More specific and detailed testing if auditor is unsure of controls currently in place.

15. Assistant Commandant For Resources 14 Reporting - Results and Opinions Determine adequacy of audit procedures and scope Look at Assertions –Look at Applicable Federal Rate Evaluate misstatements Draft report with audit opinion –Audit Report (by the DHS OIG)

16. Assistant Commandant For Resources 15 Four Types of Audit Opinions Unqualified: Financial statements are presented fairly, within regulations, and can be relied upon Qualified: Except for X, Y & Z, financial statements are presented fairly, within regulations, and can be relied upon Disclaimer: Auditor does not provide an opinion Examination of accounts not complete Scope of Examination not broad enough Adverse: Financial statements are not trustworthy and dependable (illegal activity) Best Worst

17. Assistant Commandant For Resources 16 Coast Guard Audit History 16 YearDeptAuditorOpinion 1999DOTDOT IGUnqualified 2000DOTDOT IGUnqualified 2001DOTDOT IGUnqualified 2002DOTDOT IGUnqualified 2003DHSKPMGQualified 2004DHSKPMGDisclaimer 2005DHSKPMGDisclaimer 2006DHSKPMGDisclaimer 2007DHSKPMGDisclaimer 2008DHSKPMGDisclaimer 2009DHSKPMGDisclaimer 2010DHSKPMGDisclaimer 2011DHSKPMGQualified What happened here?

18. Assistant Commandant For Resources 17 Current State – Qualified Opinion Internal Control Assurance: Commandant cannot provide assurance to DHS Secretary that the internal controls are properly designed and operating effectively for any of its business processes. Documentation and testing: Several key processes is incomplete. Control deficiencies: Not all are identified and incorporated into the remediation plans. Financial Statement Assertions: USCG cannot make and support key financial statement assertions at this time. Balance Sheet: Real Property and Environmental Liabilities balances remain.

19. Assistant Commandant For Resources 18 Desired State – Unqualified Opinion USCG will provide assurance that internal controls over financial reporting are properly designed and operating effectively. USCG will make and be able to support financial statement assertions over key financial statement line items. The desired state will improve USCGs ability to: –Comply with laws & regulations –Produce financial statements that are accurate and complete –Defend budget requests –Allocate funds according to mission priority –Reduce the waste money, resources, and time –Increase operational effectiveness & efficiency