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Audit Assertion Overview

Audit Assertion Overview. Ms. Melissa Bradley, Esq. PERS/Pay Conference 20 September 2012. What is an Audit?. The dictionary defines an audit as “ a formal examination of an organization's or individual's accounts or financial situation.” Key aspects of a financial audit include:

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Audit Assertion Overview

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  1. Audit Assertion Overview Ms. Melissa Bradley, Esq. PERS/Pay Conference 20 September 2012

  2. What is an Audit? • The dictionary defines an audit as “a formal examination of an organization's or individual's accounts or financial situation.” • Key aspects of a financial audit include: • Determination of the reasonableness and reliability of information • Assessment of existing internal controls • An attestation that the results of the audit can be repeated and reproduced throughout future rounds of testing • Above all, an audit should provide a reasonable assurance that the organization’s financial statements are free from material errors • For the Department of Defense (DoD), the ultimate goal of an audit is to ensure funds are traceable, and each branch of the department is auditable on its own Changing the way DON does business

  3. What is an Audit Opinion? • At the conclusion of an audit, the independent party that performed the audit will issue an opinion regarding the agency’s financial health UNQUALIFIED • The highest level of Auditor confidence; also known as a “clean” audit opinion • Independent Public Account(IPA) is able to access all information in a timely manner • An organization’s information conforms with Generally Accepted Accounting Principles (GAAP) QUALIFIED • Auditors were not able to fully satisfy all aspects of the financial statement presentation • Also known as the “Except for…” opinion: “Everything in this financial statement is good, except for…” ADVERSE • A negative response that occurs only when the auditor finds the organization’s records, as a whole, are uninformative; not in line with GAAP • Also issued when the financial records have been falsified, or are in other ways erroneous DISCLAIMER OF OPINION • Auditors are unable to completely perform their work and the organization has difficulty providing the specifically requested information in a timely manner • Rarely issued DON is here

  4. What is Audit Readiness? • The state an organization is in when it is prepared to declare, with confidence, that it is ready for an independent evaluation of its financial statements • To be “audit ready,” an organization must be prepared to: • Demonstrate that proper documentation exists for all transactions • Show that the organization is adhering to all appropriate and generally accepted accounting policies, procedures, and standards • Utilize business processes that are sustainable, traceable, and repeatable

  5. October 2011 Secretary of Defense Audit Memo • Audit Readiness prepares the DoD for: • “…streamlining overhead, eliminating waste, and improving our business practices – ensuring that we are operating in a common sense, accountable, and modern business environment.” • “Auditable financial statements are needed to facilitate decision-making, to comply with the law, and to reassure the public that we are good stewards of their funds.” – Leon Panetta, US Secretary of Defense • SECDEF DoD Audit Readiness Milestones • SBR audit readiness by 2014 • Full audit readiness for all financial statements by 2017 • Full review of DoD financial controls over the next two years, with interim goals to assess progress • Mandatory training for audit and key financial efforts • Pilot certification program for financial managers by CY2012

  6. The History Behind Audit Readiness • Federal law requires financial accountability: • United States Constitution (1789) • Article 1, Section 9: “…all public Money shall be published from time to time.” • Federal Financial Management Improvement Act (1994) • Requires the production of financial statements for all agencies, covering all accounting activities, and consolidated government-wide statements for the executive branch • All financial statements produced must be audited in accordance with US Generally Accepted Government Auditing Standards (GAGAS) • Sarbanes Oxley (SOX) Act (2002) • Requires management and external auditors to report on the adequacy of internal controls • Enacted after numerous major corporate and accounting scandals (Enron, Adelphia, WorldCom, etc.) • Office of Management & Budget (OMB) A-123 (2004) • Requires management to establish and maintain internal controls • Provides for annual assurance statements regarding financial reporting and identification of material weaknesses and corrective actions • National Defense Authorization Act (2010) • Mandates that DoD financial statements are validated and ready for audit by 09/30/2017

  7. Financial Improvement Audit Readiness (FIAR) • Established by DoD to improve the processes, controls, and systems that support financial operations, and to assist the components with audit preparations • The Office of Financial Operations (FMO) serves as the DON’s lead for audit preparations/FIAR lead • The FIAR Strategy provides: • A roadmap to achieving the long-term goal of an unqualified audit opinion • Also creates short-term goals focused on DoD’s initial priorities of critical asset and budgetary information Completed by FY2017 Completed by FY2014 Wave 1 Appropriations Received Audit Wave 2 Statement of Budgetary Resources (SBR) Audit Wave 4 Full Audit Except for Existing Asset Value Wave 3 Mission Critical Asset Existence & Completeness (E&C) Examination Validate Funds Received, Obligated, and Spent Improve Asset and Transaction Data

  8. Financial Improvement Audit Readiness (FIAR) • Each wave of the FIAR Strategy has 6 different phases: The Six Phases of Each Audit Wave Phases Action Required Discovery Corrective Action Evaluation Assertion Validation Audit

  9. Audit Assertion Timeline • FMO has prescribed an assertion date for each individual business segment

  10. Section II Audit Readiness Roles and Responsibilities

  11. The Role of FMO and OPNAV N10 • FMO is responsible for providing all guidance and direction related to audit readiness. FMO functions include: • Provide the control and/or transactional samples to the budget submitting office (BSO) • Perform the actual audit testing and analysis of submitted KSDs • Create Corrective Action Plans (CAPs) for implementation at the Command level • Utilize subject matter experts across the business segment(s) to assist in understanding the business and financial processes • OPNAV N10 is responsible for: • Facilitating communications between FMO and the lower echelons • Providing assistance and information related to audit testing timelines and processes • Preparing the Commands for successful audit testing, now and in future rounds OPNAV N10 FMO Command Level

  12. The Role of the Commands • Commands serve as the information gatherers for the BSOs; they report through OPNAV N10 to FMO • After the FMO audit, Commands will receive CAPs and are responsible for implementing them down through the lower echelons • There is a 10-day testing window; Commands will have 5-days from when the transactions or control points are received to respond to the data call Phase 3 (Day 7) Receive and evaluate the submissions for completion and accuracy (OPNAV N10) Phase 1 (Day 1) Review the PBC request from the Auditor and distribute to the Commands (OPNAV N10) Phase 2 (Day 2) PBC request is distributed to the appropriate POC for testing (Commands) Phase 4 (Day 9) Provide PBC items to the Auditor (OPNAV N10) 5 Day Command Timeframe Day 10 Day 1

  13. Audit Readiness – How it all fits together • The path to Audit Readiness has multiple checkpoints that help us measure success FMO and the Commands will retest and analyze the results Audit Assertion Implement Changes FMO provides Corrective Action Plans for Command implementation FMO reviews the Command submissions and delivers the results OPNAV N10 submits the Command packages to FMO OPNAV N10 receives/reviews the Command packages Commands prepare audit packages for submission Commands gather the required key supporting document (KSD) information FMO releases the transactions; transactions are distributed to the appropriate Commands by OPNAV N10

  14. Section III Business Segment Involvement

  15. Types of Testing • Transactional testing focuses on the review of individualized payment records for any person or entity, depending on business segment • Control point testing focuses on verifying that a particular control is in existence uniformly across the network and can enable the determination of effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations • Sustainment testing focuses on ensuring that previously asserted segments are maintaining their compliance with existing controls and tests Transactional (Substantive) Testing Control Point Testing Assertion and Sustainment Testing

  16. Business Segments Tested • DON is working several business segments simultaneously CAP Implementation Audit Assertion / Sustainment Discovery Testing (Transactional / Control Point) PCS FBwT RWO-G CivPay ToT MilPay RWO-P ToP Straight to CAP SIK CVP

  17. Military Pay • Military Pay is currently still in active transactional and control point testing. Testing is aimed at confirming: • Personnel and Payroll records are maintained in accordance with established requirements • Payroll disbursements and Personnel file updates are made only upon proper authorization and to bona fide employees • Payroll disbursements/Personnel updates are properly recorded • A few examples of pertinent KSDs are: Enlistment Contract DD1966 DD577 Travel Voucher Letter of Appointment

  18. Business Segment Testing Submission • All audit readiness documents will be submitted to FMO via the ARC Tool, which is a SharePoint site created to increase functionality and information flow • The ARC Tool is the easiest way to communicate information down through the multitude of organizational layers within the DON, and designed to support BSO and Command accountability • Allows FMO to control access to testing information and prevent spillage of PII

  19. Evaluation of Supporting Documentation • How will the supporting documents be evaluated? • Each document will be evaluated based the attributes outlined • For testing, FMO considers each item listed on the checklist an attribute • A successful package will have all supporting documentation so that a pass or fail can be determined • What if you don’t pass? • Treat it as a “lessons learned” opportunity: • Identify corrective actions • Track the implementation of corrective actions • What is a Pass? • All KSDs are submitted • Submissions are accurate and timely • What is a Fail? • Missing KSD • Unsigned documentation • Inappropriate date range • Non-timely submission or compliance • One missing attribute creates an EXCEPTION. • One exception FAILS a sample

  20. Section IV Audit Readiness Lessons Learned

  21. Lessons Learned • Completed testing has shown the following: • Unavailability of key supporting documentation • Limited time for document collection and quality control review • Non-standardized processes are a threat to audit readiness • Leadership engagement is key to audit success: • Set an example by stressing the importance of audit readiness • Support efforts to standardize and improve processes and policies • Ensure CAPs are implemented and followed

  22. Where is the DON Going Now? • Multiple rounds of testing will be completed between now and the completion of the SBR Audit • We will be working to improve results through each iteration of testing and CAP Implementation • Audit readiness is not a one time occurrence, it is a culture of change management. The DON should be able to perform the right way, the first time and every time

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