Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training

Symposium

Contract Administration: 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 Contracts Administration 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 Contracts Administration.

Outcome An understanding of the status of the Contracts Administration

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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Contracts Administration Scope/Definition

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Definition Involves managing the establishment, maintenance and modification, vendor pay, and closeout of contracts. Major business processes include:•Execute requisition / Commitment•Source of goods •Contract Award / Obligation•Receipt and acceptance•Expenditure / Disbursement•Contract Close-out / De-obligation

Assessable Unit Lead/Team

CAPT James PoindexterBert Hovermale

Assessable Unit Support

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

Q1 FY12 Obligations $ 729.8M

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 site 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)

1Requested amounts do not exceed the funds available

Source Goods

2All contracts/purchase orders are recorded in the proper period

3aAll contracts/purchase orders are recorded in the correct amount and line of accounting

3bAll contracts/purchase orders 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

4a All invoices are recorded in the proper period

4bAll invoices represent valid transactions that are authorized and approved

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

Disbursement

5 All payments are recorded in the proper period

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

6bAll payments represent valid transactions that are authorized and approved

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Key Control Objectives (KCOs)

KCO # KCO Description

De-obligation

7a All excess funds are recorded in the proper period

7bAll excess funds are recorded in the correct amount and line of accounting

7cAll excess funds 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(KSDs)

Execution Code

Description of Transaction Key Supporting Documentation

915 To record Commitments • NC2276

540 To record Contract/purchase order and reduce Commitments

• Contract • Purchase

Order

530 To record Contract/purchase order with advance payment and reduce Commitments

• Contract • Purchase

Order

510 To record the invoice amount and reduce the funds from the contract/purchase order

• Shipping documents

• Timesheets• Invoice

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

Key Supporting Documentation(KSDs)

Execution Code

Description of Transaction

Key Supporting Documentation

511 To record the invoice amount and reduce the funds from the contract/purchase order with advance payment

• Contract (Advance Payment Terms)

610 To record the payment of the invoice

• Invoice

611 To record the advance payment of the invoice

• Certified Invoice

WRT To record excess funds of the closed contract

• Final Certified Invoice

• DD1594

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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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Contracts AdministrationMaterial Weaknesses

Material Weakness 1: Inadequate proof of receipt

General Causes: Lack of Compliance with Established Guidance for

Receipt & Disbursement

Material Weakness 2: Inadequate documentation to support Closed Contracts

General Causes: Full Implementation of Contract Closeout SOP Access to Documentation

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Inadequate Proof of Receipt

Issue Detail The Assessable Unit Team identified transactions of purchased

goods, where the proof of receipt was insufficient, not retained for recordkeeping, or was not generated at time of delivery. Without proof of receipt, it is difficult to determine whether goods have been received in accordance with the contracted statement of work. Additionally, the proof of receipt is required to verify the quantity or services invoiced to the quantity or services actually received.

Impact on Audit Readiness Proof of receipt documents are key supporting documents used

to ensure that accounts payable are recorded properly and for the correct amount. A lack of the appropriate type of receipt document could cause disbursements to be made for which no actual goods were received, overstating Gross Outlays.

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Inadequate Proof of Receipt

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

Proper guidance via SOP or other Navy Medicine policy that designates what proof of receipt is required for different types of purchases (i.e., DD250 for goods, timesheets for personal services, etc.)

Optimally, an auditor vetted checklist for the certifier of invoices to review and sign-off on prior to certification of invoices for payment

Optimally, a built in segregation of duties between invoice receptor and invoice certifier (LPO) in WAWF

Clearly defined document retention policy for Proof of receipt support, consistent with Navy Medicine policies.

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Inadequate documentation to support Closed Contracts

Issue Detail Among the activities, there were many contracts that lacked

evidence of communication by the vendor that the final invoice had been delivered prior to closing contracts, in accordance with the Contract Closeout SOP. In addition, there were contracts closed that lacked the required DD1594 or other similar contract completion form. This form or other contract completion forms have not been consistently used for all contracts. Additionally, these forms are completed prior to de-obligations being posted to STARS-FL, and there is no check that these transactions are posted accurately.

Impact on Audit Readiness Lack of sufficient documentation for closed contracts means that

accounting transactions could be posted incorrectly, and this error might not be identified during a financial statement audit.

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Inadequate documentation to support Closed Contracts

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

A process that includes additional controls, after authorization of the de-obligaton via DD1594, that ensures that accounting transactions are recorded accurately in STARS-FL.

A method for ensuring that transactions are not recorded in STARS-FL until a valid & authorized DD1594 is provided. This may require coordination with accounting services provider DFAS.

Optimally, coordination with other contracting agencies (NAVFAC, FISC) to ensure that adequate documentation is provided in a timely manner for potential contract close-out opportunities.

Potential Activity Actions Continued implementation of Contract Closeout SOP 17

Other Contracts Deficiencies

Significant Deficiency 1: Inconsistent use and lack of required approvals of the Request for Contractual Procurement form (NC 2276)

Control Deficiency 1: Significant delays in resolving rejected payments

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Inconsistent Use and lack of approvals for NC2276s

Issue Detail The Assessment Team identified some Activities that are

using locally prepared forms instead of the NC2276 form. The NC2276s are not always filled out completely/accurately or contain required approvals

Impact on Audit Readiness Incomplete or unapproved forms for Commitments could

potentially lead to the risk of Anti-Deficiency Act violations

Path Forward / Potential Activity Actions Complete NC2276 forms in accordance to the Contract

Establishment SOP

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Significant delays in resolving

rejected payments

Issue Detail The Assessment Team identified some Activities with

rejected payments listed on the IDA 128/129 report that were over 30 days old

Impact on Audit Readiness Untimely resolutions to rejected payments could potentially

lead to the risk of Prompt Pay Act violations resulting in interest payment penalties

Path Forward / Potential Activity Actions Resolve all rejected payments on the IDA 128/129 report

within 30 days or less Follow the Daily/Non-Daily Accounting SOP

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FOR OFFICIAL USE ONLY

Questions?

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