Consumables: Path to Audit Readiness June 5th – 6th, 2012 Bureau of Medicine and Surgery 2012 Navy Medicine Audit Readiness Training Symposium Consumables: Path to Audit Readiness June 5th – 6th, 2012

Audit Readiness Context Purpose Outcome 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. FOR OFFICIAL USE ONLY

Consumables Scope/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 Poindexter David Hamblett Assessable Unit Support Kevin Norman – knorman@deloitte.com Kim Mackey – kimackey@deloitte.com Q1 FY12 Obligations $ 223M FOR OFFICIAL USE ONLY

Audit Readiness Timeline FY12 FY13 FY14 Assessable Units – Wave 2 Max Assertion Date Q1 Q2 Q3 Q4 Travel 4 SEP 2012 Consumables 3 DEC 2012 Reimbursable Work Orders – Grantor Reimbursable Work Orders – Performer (Non-UBO) 1 APR 2013 Military Payroll (including RPN) Contract Administration 1 JUL 2013 Non-Federal Receivables (UBO/Medical Treatment) Federal Receivables (UBO/Medical Treatment) 3 SEP 2013 Civilian Payroll 2 DEC 2013 Financial Reporting Funds Management (FBWT) Control Testing Time Period Interim Progress Milestones (90 Days, 50 %, 75 %) Assessable Unit Assertion FOR OFFICIAL USE ONLY

Audit Readiness Process Tasks Work Products Completed Document Assessable Units 1 Determine which key business processes are Assessable Units Process Narrative Process Flowchart Mar. 1st 2 Document Assessable Units through interviews and observation Assess Internal Controls 3 Determine control objectives for each Assessable Unit Control Assessment 4 Highlight internal controls in process documentation 5 Assess whether controls are effective in meeting control objectives Assess Supporting Documentation 6 Determine what supporting documents exist for each transaction type Key Supporting Document Matrix Apr. 16th 7 Assess whether there are any unsupported transactions Identify and Prioritize Deficiencies 8 Create list of deficiencies for any objectives that are not met or transactions that are not supported Deficiencies Listing Apr. 30th 9 Prioritize deficiency list based on audit criteria FOR OFFICIAL USE ONLY

Key Control Objectives (KCOs) KCOs – Represent outcomes needed to achieve proper financial reporting and are a basis by which the effectiveness of control activities can be evaluated. 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 3a All obligations are recorded in the correct amount and line of accounting 3b All obligations represent a valid need that is authorized and approved FOR OFFICIAL USE ONLY

Key Control Objectives (KCOs) KCO Description Receipt/Acceptance 4a All accruals and payables are recorded in the proper period 4b All accruals and payables represent valid transactions that are authorized and approved 4c All 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 6b All disbursements represent valid transactions that are authorized and approved FOR OFFICIAL USE ONLY

Key Control Objectives (KCOs) KCO Description De-obligation 7a All de-obligations are recorded in the proper period 7b All de-obligations are recorded in the correct amount and line of accounting 7c All de-obligations represent a valid need that is authorized and approved Information Technology 8 User access is consistent with assigned rights and privileges in accordance with Federal Information System Controls Audit Manual (FISCAM) requirements FOR OFFICIAL USE ONLY

Key Supporting Documentation - DMLSS KSDs – Documentation retained to support individual financial transactions and accounting events. 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 Invoice FOR OFFICIAL USE ONLY

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 Invoice FOR OFFICIAL USE ONLY

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. FOR OFFICIAL USE ONLY

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 FOR OFFICIAL USE ONLY

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 Lack of standardized documentation & process Multiple control points 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. FOR OFFICIAL USE ONLY

Inconsistent Use of the DRT in DMLSS Path Forward A 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. 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 FOR OFFICIAL USE ONLY

Inadequate Proof of Receipt Path Forward A 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. FOR OFFICIAL USE ONLY

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 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 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 SOP FOR OFFICIAL USE ONLY

Questions? FOR OFFICIAL USE ONLY