1. ROAD TO AUDITABILITY: AUDITOR’S PERSPECTIVE
DOD Status of Audit Readiness
Lorin Venable
Assistant Inspector General for Financial Management and Reporting
DoD Office of the Inspector General
January 27, 2015
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2. Agenda THE ROAD TO AUDITABILITY CURRENT STATUS OF AUDIT READINESS
ROLES AND RESPONSIBILITIES OF STAKEHOLDERS
AUDIT EVIDENCE
LESSONS LEARNED
DOD PREPARATION
QUESTIONS AND ANSWERS
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3. The Road to Auditability
1990
1996
2000
2011
2017
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4. Complexity of DoD FY 2014 DoD General Fund (GF):
Assets $ billion
Liabilities $ billion
Earned Revenue $ billion
Gross Costs $ billion
Net Cost of Operations $ billion
Total Budgetary Resources $ billion
FY 2014 DoD Working Capital Fund (WCF):
Assets $ billion
Liabilities $ billion
Earned Revenue $ billion
Gross Costs $ billion
Net Cost of Operations $ billion
Total Budgetary Resources $ billion
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5. DoD Financial Management Issues
Long-standing and pervasive problems continue to exist today
Problems relate to internal controls, compliance with laws and regulations, and systems
Problems impact all DoD business areas
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6. DoD Financial Management Issues (cont’d)
These problems raise concerns regarding DoD’s ability to:
Produce complete, reliable, accurate, and timely data used by management for:
decision-making (e.g., budget, costs, re-ordering supplies, replacing equipment—or even locating equipment)
reporting to Congress and OMB
Prevent and detect fraud, waste, and abuse
Support the war fighter
Report on new and time-sensitive initiatives
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7. OIG Financial Statement Audits
Management represented that the FY 2014 financial statements were unreliable because the following 15 previously identified material weaknesses continued to exist:
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8. Timeline of Requirements
December 28, 2001 – FY 2002 NDAA, P.L , Section 1008(d) authorizes DoDOIG to only perform audit procedures required by generally accepted government auditing standards consistent with management’s representation regarding financial statement reliability.
January 15, DoDOIG issued first disclaimer audit reports on the FY02 DoD financial statements based on the provisions of Section 1008(d).
December 2005 – DoD published the first Financial Improvement and Audit Readiness Plan
October 28, 2009 – FY 2010 NDAA, P.L requires DoD to:
Prepare a “Financial Improvement and Audit Readiness Plan” and a semi-annual report on the status of the FIAR Plan implementation and deliver it to Congress by May 15 and November 15
Ensure DoD financial statements are validated as ready for audit by September 30, 2017
January 7, 2011 – FY 2011 NDAA, P.L , requires DoD to establish and report on interim milestones to achieve audit readiness for each major element of the SBR
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9. Timeline of Requirements
December 31, 2011 – FY 2012 NDAA, P.L requires the FIAR Plan Status Report to include interim objectives and a schedule of milestones to support he goal established by the Secretary of Defense that the SBR is validated for audit by September 30, 3014
August 2012 – DoD modified the FIAR methodology to limit the scope of the first year FY 2015 audits to address only the current year appropriation activity and transactions (i.e., a Schedule of Budgetary Activity (SBA))
January 2, 2013 – FY 2013 NDAA, P.L requires the Statement of Budgetary Resources to be validated as audit ready by September 30, 2014
December 26, 2013 – FY 2014 NDAA, P.L requires DoD to ensure a full audit of the FY 2018 financial statements and the audit results must be submitted to Congress by March 31, 2019
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10. BUT WHAT ABOUT THE REST OF THE DEPARTMENT?
Current Status of Audit Readiness
“It will take longer than we thought to become audit-ready.”
BUT WHAT ABOUT THE REST OF THE DEPARTMENT?
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11. Current Status of Audit Readiness
Financial Statement Audit Opinions
Unmodified Audit Opinions US Army Corps of Engineers – Civil Works Defense Commissary Agency Defense Contract Audit Agency Defense Finance and Accounting Service Defense Health Agency – Contract Resource Management Military Retirement Fund Modified Audit Opinions Medicare-Eligible Retiree Health Care Fund
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12. Schedule of Budgetary Activity
Current Status of Audit Readiness
November FIAR Plan Status Report By January 2015, 91% of FY 2015 DoD appropriations under audit
Schedule of Budgetary Activity
US Marine Corps FY Army General Fund FY Navy General Fund FY Air Force General Fund FY 2015
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13. DoD Financial Statement Audit Strategy
DoD reported in the November 2014 FIAR Plan Status Report:
DoD is developing a strategy for moving from individual Component audits and examinations to the audit in FY 2018 of the DoD Consolidated Financial Statements
The strategy will include 4 categories
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14. DoD Financial Statement Audit Strategy
Category
Entity Type
Percent of Budgetary Resources
OMB Designated Audits
Components required to prepare stand-alone audited financial statements
74%
DoD Designated Audits
Material Other Defense Organizations (ODOs) and funds
22%
DoD Designated Examinations
Other material ODOs and funds 4%
Defense Agencies and Funds Not Material
ODOs not included in the above categories 1%
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15. Roles and Responsibilities of Stakeholders
GAO
DoD OIG
DoD Entity
FIAR Office
IPAs
Contractor\Support
Service Providers
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16. Roles and Responsibilities – DoD OIG Role
OMB Designated Audits
The DoD OIG will conduct or have an IPA conduct all financial statements opinion audits related to the 9 required OMB entities, DoD Medicare Eligible Retiree Health Care Fund, and TRICARE Management Activity Contract Resource Management (Hire and Oversee IPAs).
DoD Designated Audits or Examinations
Other Defense Organizations Financial Statement audits or examinations will be contracted by entity.
The FIAR and entity will coordinate the Statement of Work with the DoD OIG in accordance with DoD Manual M and DoD Instruction
Entity will be responsible to oversee (COTR responsibilities) the contract.
DoD OIG will receive periodic status briefings (i.e. audit committee meetings)
DoD OIG will have access to all work papers and reports associated with the audit or examination.
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17. Audit Evidence
Competent evidential matter must be sufficient to enable an auditor to test management’s assertions (Existence or occurrence, Completeness, Rights and Obligations, Accuracy/valuation or allocation, Presentation and disclosure).
Auditor must decide, exercising professional judgment, whether the evidential matter available within the limits of time and cost is sufficient to justify the expression of an opinion.
For an auditor’s opinion to be useful, it must be formed within a reasonable amount of time and at a reasonable cost.
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18. Lessons Learned Adequate entity preparation for the audit is vital.
Financial Reporting Process
Reconciliations
Beginning balances reconciling the unadjusted trial balance to the adjusted trial balance
Audit Trails
Internal control deficiencies or material weaknesses
Internal Control Testing and Substantive Testing
“Tone at the Top”
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19. Lessons Learned Financial Reporting Process
Management must be properly prepared to facilitate the audit process:
business processes completely documented
detail explanation of controls in place, risks, and systems used
Readiness efforts need to follow the audit process from the financial statements back to the transactions
IT systems should be included in audit readiness efforts
3rd party service providers need to be included in audit readiness efforts such as DFAS, DISA, and BTA (SSAE 16s)
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20. Lessons Learned Reconciliations
Beginning balances for statement(s) under audit must be reconciled.
The client must be able to provide the general ledger transaction detail, accounting adjustments, and supporting information from feeder systems for the transactions that make up the balance(s) or the financial statements being asserted.
Adjusted trial balance ties to quarterly financial statements.
Unadjusted trial balance ties to Adjusted trial balance
Lead schedules tie to supporting schedules and details tie to control totals.
Must include and classified transactions and/or supporting documentation .
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21. Lessons Learned Reconciliations (Continued)
For FBWT, entities must complete reconciliations for all appropriations for the life of the appropriation.
Life of the appropriations means the period of availability plus 5 years after it expires.
Must complete for shared appropriations
Multiple submissions of data files to support reconciliations result in delays and more testing.
May require separate existence and completeness testing for the financial assertions.
Raises questions as to whether or not the correct data is used to prepare the financial statements. .
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22. Lessons Learned Audit Trails
Audit trails and audit evidence that is readily available and supports amounts reported in the financial statements.
the audit trail should be easily followed from the account balance in the financial statements to source documents
supporting individual transactions from source documents to the financial statements
the entity is well prepared for the audit in terms of logistics and availability of staff
Data transfer mechanisms for files to auditors
Includes service providers such as DFAS .
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23. Lessons Learned Source Documentation
Establish clear data retention policies.
Obtain buy-in of outside entities to provide source documentation.
Establish ability to fill data requests in a timely manner.
Disclose the availability of detailed transaction records (how far back) and supporting documentation (such as invoices, receiving documents). .
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24. Lessons Learned Internal Control Deficiencies and Material Weaknesses
Corrective Actions
Complete implementation of the corrective actions
Perform test and validation that actions corrected known deficiencies
Implement corrective actions at ALL locations
Recognize that new weaknesses may be identified and require immediate actions to correct during audit .
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25. Lessons Learned Internal Control and Substantive Testing
First time audit will have limited reliance on internal controls
Predominately substantive testing
Large samples (USACE 1st year – 16,848 items)
Include all types of transactions
Demands of multiple work streams on workforce
Understand that a first year audit requires large sample size and significant entity resources (including service providers) to support the audit within short timeframes (2-10 business days)
Discuss methodologies used by management in preparing financial statements - such as estimates (this includes the baselining of PP&E and inventory) .
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26. Lessons Learned Impact to Prior Audit Engagements
Unable to complete reconciliations resulted in a disclaimer of opinion
Increased testing
Contract modifications - $$$$$$ .
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27. DoD Component Preparation
Be Familiar With Your Own Financial Data
Analyze your data.
Know your control environment.
Document the data flow.
Identify controls and systems.
Prepare an auditable universe.
Ensure that sufficient knowledgeable staff is available.
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28. DoD Component Preparation (cont’d)
Financial systems/ERPs must be developed to substantially comply with all three portions of the FFMIA
Federal Financial Management system requirements
GAAP
USSGL at the transaction level
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29. DoD Component Preparation (cont’d)
Don’t forget to test internal controls!!!
Prior to submitting assertion packages, test and verify that you implemented corrective actions
Validate known deficiencies or weaknesses.
Recognize that new weaknesses may be identified.
Ability to support examination and audit
Identify universe of transactions – inability to provide a complete universe of transactions will limit the auditors ability to select an audit sample
Understand that a first time audit will require large sample size and significant entity resources to support the audit within short timeframes
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30. Tone at the Top Leadership buy-in is key
Audit Readiness = Effective Management
A clean audit opinion is a good by-product that results when management implements appropriate internal controls and efficient processes that are well-documented to ensure repeatability and sustainability
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31. QUESTIONS
(703)
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