Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training

Symposium

Consumables: Path to Audit Readiness

June 5th – 6th, 2012

FOR OFFICIAL USE ONLY

Audit Readiness

Context DoD is required to assert audit readiness for the Statement of

Budgetary Resources (SBR) by the end of Fiscal Year 2014. As part of Navy Medicine’s audit readiness effort, the Consumables business process has been identified as an assessable unit for which assertion must take place.

Purpose To discuss the Key Control Objectives (KCOs), Key Supporting

Documents (KSDs), identified gaps and potential corrective actions for Consumables.

Outcome An understanding of the status of the Consumables assessable

unit, including major deficiencies and what can be done now at the field level to facilitate a successful financial statement audit. Some assessable units may not require field action at this time.

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Consumables Scope/Definition

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Definition Consumables includes the request, acquisition (including purchase cards), receipt, maintenance and invoicing of Operating Materials & Supplies. Major business processes include: •Requisition Execution / Commitment•Source of Goods/Obligations•Receipt/Acceptance•Expenditure / Disbursement•De-obligations

Assessable Unit Lead/Team

CAPT James PoindexterDavid Hamblett

Assessable Unit Support

Kevin Norman – knorman@deloitte.comKim Mackey – kimackey@deloitte.com

Q1 FY12 Obligations $ 223M

Audit Readiness Timeline

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FY12 FY13 FY14

Assessable Units – Wave 2 Max Assertion Date

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Travel 4 SEP 2012

Consumables 3 DEC 2012

Reimbursable Work Orders – Grantor

3 DEC 2012

Reimbursable Work Orders – Performer (Non-UBO)

1 APR 2013

Military Payroll (including RPN) 1 APR 2013

Contract Administration 1 JUL 2013

Non-Federal Receivables (UBO/Medical Treatment)

1 JUL 2013

Federal Receivables (UBO/Medical Treatment)

3 SEP 2013

Civilian Payroll 2 DEC 2013

Financial Reporting 2 DEC 2013

Funds Management (FBWT) 2 DEC 2013Assessable Unit AssertionInterim Progress

Milestones (90 Days, 50 %, 75 %)

Control Testing Time Period

Audit Readiness Process

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Tasks Work ProductsComplet

ed

Document Assessable Units

1Determine which key business processes are Assessable Units

• Process Narrative

• Process Flowchart

Mar. 1st

2Document Assessable Units through interviews and observation

Assess Internal Controls3 Determine control objectives for each Assessable Unit

• Control Assessment

Mar. 1st

4 Highlight internal controls in process documentation

5Assess whether controls are effective in meeting control objectives

Assess Supporting Documentation

6Determine what supporting documents exist for each transaction type • Key Supporting

Document Matrix

Apr. 16th

7Assess whether there are any unsupported transactions

Identify and Prioritize Deficiencies

8Create list of deficiencies for any objectives that are not met or transactions that are not supported • Deficiencies

ListingApr. 30th

9 Prioritize deficiency list based on audit criteria

Key Control Objectives (KCOs)

KCO #

KCO Description

Execute Requisition (Need for Contract)

1 Amounts do not exceed funding authority

Source Goods

2 All obligations are recorded in the proper period

3aAll obligations are recorded in the correct amount and line of accounting

3bAll obligations represent a valid need that is authorized and approved

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KCOs – Represent outcomes needed to achieve proper financial reporting and are a basis by which the effectiveness of control activities can be evaluated.

Key Control Objectives (KCOs)

KCO #

KCO Description

Receipt/Acceptance

4aAll accruals and payables are recorded in the proper period

4bAll accruals and payables represent valid transactions that are authorized and approved

4cAll accruals and payables are recorded in the correct amount and line of accounting

Disbursement

5 All disbursements are recorded in the proper period

6a All disbursements are recorded in the correct amount and line of accounting

6bAll disbursements represent valid transactions that are authorized and approved

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Key Control Objectives (KCOs)

KCO #

KCO Description

De-obligation

7a All de-obligations are recorded in the proper period

7bAll de-obligations are recorded in the correct amount and line of accounting

7cAll de-obligations represent a valid need that is authorized and approved

Information Technology

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User access is consistent with assigned rights and privileges in accordance with Federal Information System Controls Audit Manual (FISCAM) requirements

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Key Supporting Documentation - DMLSS

Execution Code

Description of Transaction

Key Supporting Documentation

540 To record direct obligation

•DD 1155 (Order for Supplies or Services)• Local Procurement Document

510 To record the payable and reduce the outstanding obligation

•DD 250 (Material Inspection and Receiving Report) •Packing Slip

610 To record the fund disbursement and reduce the payable

•Certified Invoice

WRT To record deobligation of unexpended balances

•Final InvoiceFOR OFFICIAL USE ONLY

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KSDs – Documentation retained to support individual financial transactions and accounting events.

Key Supporting Documentation – Purchase

Card

Execution Code

Description of Transaction

Key Supporting Documentation

540 To record bulk obligation

• Locally Prepared Procurement Document

510 To record the payable and reduce the outstanding obligation

• DD 250 (Material Inspection and Receiving Report)

• Packing Slip or Shipping documentation

610 To record the fund disbursement and reduce the payable

• Certified Citibank Statement; Invoice

• Packing Slip/Shipping documentation

WRT To record deobligation of unexpended balances

• Final InvoiceFOR OFFICIAL USE ONLY

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Deficiency Types

Material Weakness: A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected timely.

Significant Deficiency: A deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.

Control Deficiency: A deficiency that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements in a timely manner.

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Considerations For Deficiency Type

Quantitative Materiality - Dollar impact or potential impact to the financial statements

Qualitative Materiality - Non-quantitative factors such as complexity of transactions, legal or regulatory concern or system deficiencies

Pervasiveness - Number of activities or transactions affected by the deficiency

Audit Dealbreaker - Issues that prevent an audit from occurring

Existing Guidance - Determining whether current policy or SOP is in place that meet financial reporting requirement

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Consumables Material Weaknesses

Material Weakness 1: Inconsistent use of the Disbursement Reconciliation Tool (DRT) in DMLSS

General Causes: Uniform Compliance Reliance on Systems Controls

Material Weakness 2: Inadequate proof of receipt

General Causes: Lack of standardized documentation & process Multiple control points

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FOR OFFICIAL USE ONLY

Inconsistent Use of the DRT in DMLSS

Issue Detail The Audit Readiness team identified transactions where the

Disbursement Reconciliation Tool (DRT) was not used. The DRT is an enhanced business process within DMLSS that

compares the dollar amount of goods received in DMLSS to the dollar amount disbursed in STARS-FL (EC610).

If the DRT is not used, amounts disbursed in STARS-FL may differ from the receipt amount recorded in DMLSS and will not be reviewed/reconciled.

Impact on Audit Readiness The DRT is considered a critical control activity as it provides

management with a systematic monitoring tool to identify and resolve errors between the logistics system and the system of record. Inconsistent use may cause misstatements in ‘Gross Outlays’ on the Statement of Budgetary Resources to go undetected. 14

FOR OFFICIAL USE ONLY

Inconsistent Use of the DRT in DMLSS

Path ForwardA Corrective Action Plan will be Developed for implementation by the Activities. It must include:

A three way reconciliation of disbursements between DMLSS, STARS-FL and Treasury disbursement information (CHOOSE)

A review of any documents that do not pass the ‘DRT Check’ Documentation that supports the review that occurred,

including: Standardized process for reconciling items that do not pass

‘DRT Check’.

Potential Activity Actions Require users to complete DRT eLearning course at

https://jml149.dmlss.detrick.army.mil/resourcecenter/ Implement review and approval process for DRT

reconciliations once developed.15

FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt

Issue Detail The Assessable Unit team noted several Activities that do not keep

packing slips or other similar shipping documentation on file. Packing slips/shipping documentation should be maintained in

order to validate that items received are correctly entered into DMLSS.

Impact on Audit Readiness If packing slips/shipping documents are not retained on file, there

is no proof of receipt of consumable goods. Accuracy of the transactions in the general ledger can not be

validated without this proof of receipt. Could result in incorrect amounts being recorded to accounts

payable or disbursed to vendors, which could potentially lead to over- or understatement of either amount on the Statement of Budgetary resources

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FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt

Path ForwardA Corrective Action Plan will be Developed for implementation by the Activities. It must include:

A method for standardizing the collection and filing of packing slips Electronic data retention is optimal, but not ultimately required A reconciliation/review of amounts listed on packing slips, or other

receiving documents, to ensure that they agree to amounts entered in DMLSS and documented on the DD250.

Optimally, Mechanism built into payment process that doesn’t allow for payment unless reconciliation/review has been performed.

Potential Activity Actions Work to maintain packing slips in a standard way for

purchased consumables. Participate in development of retention strategy in relevant

SOPs via actively submitting change requests and feedback when possible.

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Other Consumables Deficiencies

Significant Deficiency 1: Inadequate Segregation of Duties for the Purchasing and Receipt functions

Control Deficiency 1: Inconsistent execution of the purchase card reconciliation process

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FOR OFFICIAL USE ONLY

Inadequate Segregation of Duties

Issue Detail The Assessment Team identified instances among Activities

where it appears that the person who ordered goods was the same as the person who acknowledged receipt of the items in DMLSS

Impact on Audit Readiness If the person ordering goods is the same as the person

acknowledging receipt of the goods ordered, there is potential risk of fraud, waste and abuse violations which may impact the accuracy of financial statements

Path Forward / Potential Activity Actions Review DMLSS user access roles and responsibilities

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FOR OFFICIAL USE ONLY

Inconsistent execution of the purchase card

reconciliation process

Issue Detail The Assessment Team identified inconsistencies in the

execution of the purchase card reconciliation process where Activities did not properly reconcile and/or properly record adjustments in STARS-FL

Impact on Audit Readiness If purchase card reconciliations are not performed routinely in

accordance with Navy Medicine policy, required adjustments may not be recorded in STARS-FL, which may impact the accuracy and reliability of financial statements

Path Forward / Potential Activity Actions Execute reconciliations in accordance with the Purchase Card

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FOR OFFICIAL USE ONLY

Questions?

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