Bureau of Medicine and Surgery2012 Navy Medicine Audit Readiness Training SymposiumContract Administration: Path to Audit Readiness

June 5th 6th, 2012

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FOR OFFICIAL USE ONLYAudit ReadinessContextDoD is required to assert audit readiness for the Statement of Budgetary Resources (SBR) by the end of Fiscal Year 2014. As part of Navy Medicines audit readiness effort, the Contracts Administration business process has been identified as an assessable unit for which assertion must take place.PurposeTo discuss the Key Control Objectives (KCOs), Key Supporting Documents (KSDs), identified gaps and potential corrective actions for Contracts Administration.OutcomeAn 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/DefinitionFOR OFFICIAL USE ONLY*

DefinitionInvolves managing the establishment, maintenance and modification, vendor pay, and closeout of contracts. Major business processes include:Execute requisition / CommitmentSource of goods Contract Award / ObligationReceipt and acceptanceExpenditure / DisbursementContract Close-out / De-obligationAssessable Unit Lead/TeamCAPT James PoindexterBert HovermaleAssessable Unit SupportKevin Norman knorman@deloitte.comKim Mackey kimackey@deloitte.comQ1 FY12 Obligations$ 390M

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Audit Readiness TimelineFOR OFFICIAL USE ONLY*Assessable Unit AssertionInterim Progress Milestones (90 Days, 50 %, 75 %)Control Testing Time Period

FY12FY13FY14Assessable Units Wave 2Max Assertion DateQ1Q2Q3Q4Q1Q2Q3Q4Q1Q2Travel4 SEP 2012Consumables3 DEC 2012Reimbursable Work Orders Grantor3 DEC 2012Reimbursable Work Orders Performer (Non-UBO)1 APR 2013Military Payroll (including RPN)1 APR 2013Contract Administration1 JUL 2013Non-Federal Receivables (UBO/Medical Treatment)1 JUL 2013Federal Receivables (UBO/Medical Treatment)3 SEP 2013Civilian Payroll2 DEC 2013Financial Reporting2 DEC 2013Funds Management (FBWT)2 DEC 2013

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Audit Readiness ProcessFOR OFFICIAL USE ONLY*

TasksWork ProductsCompletedDocument Assessable Units1Determine which key business processes are Assessable UnitsProcess NarrativeProcess Flowchart Mar. 1st2Document Assessable Units through site interviews and observationAssess Internal Controls3Determine control objectives for each Assessable UnitControl Assessment Mar. 1st4Highlight internal controls in process documentation5Assess whether controls are effective in meeting control objectivesAssess Supporting Documentation6Determine what supporting documents exist for each transaction typeKey Supporting Document MatrixApr. 16th7Assess whether there are any unsupported transactionsIdentify and Prioritize Deficiencies8Create list of deficiencies for any objectives that are not met or transactions that are not supportedDeficiencies ListingApr. 30th9Prioritize deficiency list based on audit criteria

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Key Control Objectives (KCOs)FOR OFFICIAL USE ONLY*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)1Requested amounts do not exceed the funds availableSource Goods2All contracts/purchase orders are recorded in the proper period3aAll contracts/purchase orders are recorded in the correct amount and line of accounting3bAll contracts/purchase orders represent a valid need that is authorized and approved

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Key Control Objectives (KCOs)FOR OFFICIAL USE ONLY*

KCO #KCO Description Receipt/Acceptance4aAll invoices are recorded in the proper period4bAll invoices represent valid transactions that are authorized and approved4cAll invoices are recorded in the correct amount and line of accountingDisbursement5All payments are recorded in the proper period6a 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)FOR OFFICIAL USE ONLY*

KCO #KCO Description De-obligation7a All excess funds are recorded in the proper period7bAll excess funds are recorded in the correct amount and line of accounting7cAll excess funds represent a valid need that is authorized and approvedInformation Technology8User 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)FOR OFFICIAL USE ONLY*KSDs Documentation retained to support individual financial transactions and accounting events.

Execution CodeDescription of TransactionKey Supporting Documentation915To record CommitmentsNC2276540DTo record Contract/purchase order and reduce CommitmentsContract Purchase Order530To record Contract/purchase order with advance payment and reduce Commitments Contract Purchase Order510To record the invoice amount and reduce the funds from the contract/purchase orderShipping documentsTimesheetsInvoice

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Key Supporting Documentation(KSDs)FOR OFFICIAL USE ONLY*

Execution CodeDescription of TransactionKey Supporting Documentation610To record the payment of the invoiceInvoice611To record an unmatched disbursementCertified Invoice540CTo record a de-obligation of excess funds of the closed contractFinal Certified Invoice DD1594

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Deficiency TypesMaterial Weakness: A deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entitys 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 TypeQuantitative 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 WeaknessesMaterial 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 SOPAccess to Documentation

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FOR OFFICIAL USE ONLYInadequate Proof of ReceiptIssue DetailThe 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 ReadinessProof of receipt documents are key supporting documents used to ensure that accounts payable are recorded properly and for the correct amount. 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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FOR OFFICIAL USE ONLYInadequate Proof of ReceiptPath 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 paymentOptimally, a built in segregation of duties between invoice receptor and invoice certifier (LPO) in WAWFClearly defined document retention policy for Proof of receipt support, consistent with Navy Medicine policies.*

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FOR OFFICIAL USE ONLYInadequate documentation to support Closed ContractsIssue DetailBased on prior testing, many contracts lacked evidence of communication by the vendor that the final invoice had been delivered prior to closing contracts.Also, there were contracts closed that lacked the required DD1594 or other similar required forms. Additionally, the process is designed so that 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 ReadinessLack of sufficient documentation for closed contracts means that de-obligations could be posted incorrectly, causing an understatement of the Unobligated Balances Available line item. *

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FOR OFFICIAL USE ONLYInadequate documentation to support Closed ContractsPath ForwardThe Contracts Administration Assessable Unit Team will document a formal Corrective Action Plan to address this issue. Any potential solutions 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.Optimally, 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, Fleet Logistics Command (FLC)) to ensure that adequate documentation is provided in a timely manner for potential contract close-out opportunities.Continued implementation of Contract Closeout SOP.*

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Other Contracts DeficienciesSignificant 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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FOR OFFICIAL USE ONLYInconsistent Use and lack of approvals for NC2276sIssue DetailThe 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 ReadinessIncomplete or unapproved forms for Commitments could potentially lead to the risk of Anti-Deficiency Act violations

Path Forward / Potential Activity ActionsComplete NC2276 forms in accordance to the Contract Establishment SOP*

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FOR OFFICIAL USE ONLYSignificant delays in resolving rejected paymentsIssue DetailThe Assessment Team identified some Activities with attempted payments that failed pre-validation, and were listed on the IDA 128/129 report, that were over 30 days old.

Impact on Audit ReadinessUntimely resolutions to rejected payments could potentially lead to the risk of Prompt Pay Act violations resulting in interest payment penalties.

Path Forward / Potential Activity ActionsResolve 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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