1. 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

2. 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 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

3. 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 –
Kim Mackey –
Q1 FY12 Obligations
$ 223M
FOR OFFICIAL USE ONLY

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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
Implement review and approval process for DRT reconciliations once developed.
FOR OFFICIAL USE ONLY

16. 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

17. 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

18. 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

19. 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

20. 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

21. Questions?
FOR OFFICIAL USE ONLY