ROAD TO AUDITABILITY: AUDITOR’S PERSPECTIVE DOD Status of Audit Readiness Lorin Venable Assistant Inspector General for Financial Management and Reporting

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

FOR OFFICIAL USE ONLY

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Agenda

THE ROAD TO AUDITABILITY CURRENT STATUS OF AUDIT READINESS ROLES AND RESPONSIBILITIES OF STAKEHOLDERS AUDIT EVIDENCE LESSONS LEARNED DOD PREPARATION QUESTIONS AND ANSWERS


The Road to Auditability

1990

1996

2000

2011

20173FOR OFFICIAL USE ONLY

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Complexity of DoD

FY 2014 DoD General Fund (GF):– Assets $ 338.8 billion

– Liabilities $ 70.1 billion

– Earned Revenue $ 12.4 billion

– Gross Costs $ 218.8 billion

– Net Cost of Operations $ 206.4 billion

– Total Budgetary Resources $ 320.5 billion

FY 2014 DoD Working Capital Fund (WCF): – Assets $ 27.1 billion

– Liabilities $ 2.3 billion

– Earned Revenue $ 29.6 billion

– Gross Costs $ 30.2 billion

– Net Cost of Operations $ 0.7 billion

– Total Budgetary Resources $ 18.7 billionFOR OFFICIAL USE ONLY

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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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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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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:

MATERIAL WEAKNESS

GF WCF Financial Management Systems X X Fund Balance with Treasury X Accounts Receivable X Inventory X Operating Materials and Supplies X General Property, Plant, and Equipment X X Environmental Liabilities X Accounts Payable X X Statement of Net Cost X X Intragovernmental Eliminations X X Other Accounting Entries X X Abnormal Balances X X Reconciliation of Net Cost of Operations to Budget (Formerly Statement of Financing)

X X

Statement of Budgetary Resources X X Contingency Payment Audit Trials X


Timeline of Requirements

December 28, 2001 – FY 2002 NDAA, P.L. 101-576, 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, 2003 - 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. 111-84 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. 111-383, requires DoD to establish and report on interim milestones to achieve audit readiness for each major element of the SBR


Timeline of Requirements

December 31, 2011 – FY 2012 NDAA, P.L. 112-81 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. 112-239 requires the Statement of Budgetary Resources to be validated as audit ready by September 30, 2014

December 26, 2013 – FY 2014 NDAA, P.L. 113-66 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


BUT WHAT ABOUT THE REST OF THE DEPARTMENT?

Current Status of Audit Readiness

“It will take longer than we thought to become audit-ready.” 10FOR OFFICIAL USE ONLY

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


Financial Statement Audit Opinions


Schedule of Budgetary Activity


US Marine Corps FY 2014

Army General Fund FY 2015

Navy General Fund FY 2015

Air Force General Fund FY 2015

November 2014 FIAR Plan Status Report

By January 2015, 91% of FY 2015 DoD appropriations under audit


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


DoD Financial Statement Audit Strategy

Category Entity TypePercent 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%


Roles and Responsibilities of Stakeholders

DoD Entity

Contractor\Support

DoD OIG

Service Providers

FIAR Office

IPAs

GAO


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 7600.07-M and DoD Instruction 7600.02. 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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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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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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Lessons Learned

Financial Reporting ProcessManagement must be properly prepared to facilitate the audit process:

business processes completely documented detail explanation of controls in place, risks, and systems usedReadiness efforts need to follow the audit process from the financial statements back to the transactionsIT 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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Lessons Learned


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Lessons Learned


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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

. FOR OFFICIAL USE ONLY

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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).

.FOR OFFICIAL USE ONLY

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Lessons Learned

Internal Control Deficiencies and Material Weaknesses

Corrective ActionsComplete implementation of the corrective actionsPerform test and validation that actions corrected known deficienciesImplement corrective actions at ALL locationsRecognize that new weaknesses may be identified and require immediate actions to correct during audit

.


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Lessons Learned


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Lessons Learned

Impact to Prior Audit EngagementsUnable to complete reconciliations resulted in a disclaimer of opinionIncreased testingContract modifications - $$$$$$

.


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.


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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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


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


[email protected]

(703) 601-5945


Documents

ROAD TO AUDITABILITY: AUDITOR’S PERSPECTIVE DOD Status of Audit Readiness Lorin Venable Assistant Inspector General for Financial Management and Reporting