Transcript Slide 1

Bureau of Medicine and Surgery
2012 Navy Medicine Audit Readiness Training Symposium
Contract Administration: Path to Audit Readiness
June 5th – 6th, 2012
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.
FOR OFFICIAL USE ONLY
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Contracts Administration
Scope/Definition
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 Poindexter
Bert Hovermale
Assessable Unit Support
Kevin Norman – [email protected]
Kim Mackey – [email protected]
Q1 FY12 Obligations
$ 729.8M
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Audit Readiness Timeline
FY12
Assessable Units – Wave 2
Max Assertion
Date
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 2013
Control Testing Time Period
Q1
Q2
Interim Progress Milestones (90
Days, 50 %, 75 %)
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Q3
FY13
Q4
Q1
Q2
Q3
FY14
Q4
Q1
Q2
Assessable Unit Assertion
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Audit Readiness Process
Tasks
Work Products
Completed
Document Assessable Units
1
Determine which key business processes are Assessable Units
2 Document Assessable Units through site interviews and observation
• Process Narrative
• Process Flowchart
Mar. 1st
Assess Internal Controls
3 Determine control objectives for each Assessable Unit
4 Highlight internal controls in process documentation
• Control Assessment
Mar. 1st
• Key Supporting
Document Matrix
Apr. 16th
• Deficiencies Listing
Apr. 30th
5 Assess whether controls are effective in meeting control objectives
Assess Supporting Documentation
6 Determine what supporting documents exist for each transaction type
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
9 Prioritize deficiency list based on audit criteria
FOR OFFICIAL USE ONLY
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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
Requested amounts do not exceed the funds available
Source Goods
2
All contracts/purchase orders are recorded in the proper period
3a
All contracts/purchase orders are recorded in the correct amount
and line of accounting
3b
All contracts/purchase orders represent a valid need that is
authorized and approved
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Key Control Objectives (KCOs)
KCO #
KCO Description
Receipt/Acceptance
4a
All invoices are recorded in the proper period
4b
All invoices represent valid transactions that are authorized and
approved
4c
All 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
6b
All 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
7b
All excess funds are recorded in the correct amount and line
of accounting
7c
All excess funds 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
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Key Supporting
Documentation(KSDs)
KSDs – Documentation retained to support individual financial transactions and
accounting events.
Execution
Code
Description of Transaction
Key Supporting
Documentation
915
To record Commitments
• NC2276
540
To record Contract/purchase order and • Contract
reduce Commitments
• 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
FOR OFFICIAL USE ONLY
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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 Administration
Material 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
FOR OFFICIAL USE ONLY
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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 Forward

A 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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FOR OFFICIAL USE ONLY
Inadequate documentation
to support Closed Contracts
Path Forward

A 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
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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
FOR OFFICIAL USE ONLY
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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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Questions?
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