Audit 101 Guide - U.S. Coast Guard

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Auditing 101

RDML K. Taylor | DHS CFO Brief | 25 JAN 2010

Assistant Commandant

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Assistant Commandant

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1

Overview

Auditing


Background


Laws


Financial Assertions

Auditing Phases and Opinions


4 phases


4 opinions

CG financial state and progress

Assistant Commandant

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2

Audit Purpose

The purpose of an audit is to provide
assurance

that:


Financial statements, footnotes, disclosures are reliable


Internal Controls are
effective


Organization in
compliance

with Laws and
Regs


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3

Laws and Guidance

Federal Financial Management Improvement Act 1982


FFMIA


Improving info for decisions and accountability

CFO Act of 1990


Requires CFO’s in all Executive agencies

Sarbanes
-
Oxley and OMB Circular A
-
123


Enron


Commandant reports to DHS Secretary on financial reporting


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4

Effective Auditor Communication


It is imperative that:


-

Auditors have interaction with all levels of an organization
to increase understanding of detailed processes and
situations.


-

The message being sent to auditors is
consistent
, whether
they receive it from a Subject Matter Expert or a Project
Manager.

4

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5

Stakeholders

Government Accountability Office

S
upports the Congress in meeting its constitutional responsibilities and helps
improve the performance and accountability of the federal government for the
benefit of the American people.

Office of the Inspector General


DHS

Responsible for conducting and supervising audits, investigations, and
inspections relating to the programs and operations of the Department. The OIG
is to examine, evaluate and, where necessary, critique these operations and
activities, recommending ways for the Department to carry out its
responsibilities in the most effective, efficient, and economical manner possible.

KPMG

External audit firm hired by OIG to conduct financial audits.

Audit Coordination

Liaison between KPMG and USCG personnel to facilitate a smooth audit.

5

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6

Financial Statement Assertions

Purpose:


To pass a financial statement audit, the Coast Guard must be able to
support the below assertions for each applicable line item on the
financial statements.

Financial statement assertions:


Presentation / disclosure


Rights / obligations


Completeness


Existence / occurrence


Valuation

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7

Financial Statement Assertions

Presentation and Disclosure


Proper presentation, disclosures are present

Rights and Obligations


Legal ownership

Completeness


All necessary assets reported, nothing unauthorized

Existence and Occurrence


Assets exist, transactions occurred.

Valuation


Assets are properly valued, documentation exists

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8

Tools

Notice of Findings and Recommendations (NFR)


A formal notification from an auditor of an
identified deficiency
and
recommended
step(s) to resolve
the deficiency.

Provided By Client (PBC)


A document or file provided by the USCG to the auditor, for audit purposes.

Statement of Assurance


Managements assertion that provides an adequate and timely assessment of the
USCG's internal controls and disclosures as well as any known material
weaknesses that have been identified during the previous 12
-
month period.

8

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9

Internal Controls Assurance Statement

Purpose:
To provide assurance that internal controls over financial reporting
(ICOFR) for key processes are properly designed and operating effectively.

Examples where internal control assurances apply:


Information Technology System Security


Fund Balance with Treasury


HR & Payroll


Payment Management


Property Management


General Ledger Management


Risk Management


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10

The Four Auditing Phases

Planning

Internal Controls

Testing

Reporting


Audit Opinions


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11

Planning



Understanding and Preparing


Understand operations, organization, factors


SOP’s, PBC’s, prior year NFR’s


ID major accounts and systems, applicable laws, regulations
and restrictions


Assess risk factors


What are the major accounts?


What had previous deficiencies? (past NFR’s)


Plan location visit

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12

Internal Controls



Preparing Basic Tests


Identify control objectives


Decide on nature, timing and extent of tests


Perform control tests and test compliance with laws,
regulations


Assess controls on a preliminary basis

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13

Testing



Test the Internal Controls


Consider nature, timing and extent of tests


Design tests


Test of Design (TOD)



Performing a walk through of the procedure
from source documentation to the recordation in the general ledger to
verify the controls in place are designed appropriately to prevent or
detect incorrect instances of material misstatement.


Test of Effectiveness (TOE)



Testing of the control to verify it is
implemented and operating effectively for its intended purpose.


Perform testing


Control Testing (50 samples)


Aimed at evaluating control procedures
and effectiveness.


Substantive Testing (1000’s of samples)


More specific and detailed
testing if auditor is unsure of controls currently in place.

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14

Reporting

-

Results and Opinions


Determine adequacy of audit procedures and scope


Look at Assertions


Look at Applicable Federal Rate


Evaluate misstatements


Draft report with audit opinion


Audit Report (by the DHS OIG)

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15

Four Types of Audit Opinions


Unqualified:
Financial statements are presented
fairly, within regulations, and can be relied upon



Qualified:
Except for X, Y & Z, financial statements
are presented fairly, within regulations, and can be
relied upon



Disclaimer:
Auditor does not provide an opinion


Examination of accounts not complete


Scope of Examination not broad enough


Adverse:
Financial statements are not trustworthy and
dependable (illegal activity)

Best

Worst

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16

Coast Guard Audit History

16

Year

Dept

Auditor

Opinion

1999

DOT

DOT IG

Unqualified

2000

DOT

DOT IG

Unqualified

2001

DOT

DOT IG

Unqualified

2002

DOT

DOT IG

Unqualified

2003

DHS

KPMG

Qualified

2004

DHS

KPMG

Disclaimer

2005

DHS

KPMG

Disclaimer

2006

DHS

KPMG

Disclaimer

2007

DHS

KPMG

Disclaimer

2008

DHS

KPMG

Disclaimer

2009

DHS

KPMG

Disclaimer

2010

DHS

KPMG

Disclaimer

2011

DHS

KPMG

Qualified

What
happened
here?

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17

Current State


Qualified Opinion

Internal Control Assurance:
Commandant cannot provide
assurance to DHS Secretary that the internal controls are properly
designed and operating effectively for any of its business
processes.

Documentation and testing: Several key processes is
incomplete.

Control deficiencies: Not all are identified and incorporated
into the remediation plans.

Financial Statement Assertions:
USCG cannot make and
support key financial statement assertions at this time.

Balance Sheet:
Real Property and Environmental Liabilities
balances remain.


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18

Desired State


Unqualified Opinion

USCG will provide assurance that internal controls over financial
reporting are properly designed and operating effectively.

USCG will make and be able to support financial statement assertions
over key financial statement line items.

The desired state will improve USCG’s ability to:


Comply with laws & regulations


Produce financial statements that are accurate and complete


Defend budget requests


Allocate funds according to mission priority


Reduce the waste money, resources, and time


Increase operational effectiveness & efficiency