http://secnavportal.donhq.navy.mil/navalauditservices

Agreed Upon Procedures and

Audit Evidence Requirements

ASMC-PDI2010

2 June 2010

Gregory N. Sinclitico

Assistant Auditor General

Financial Management and Comptroller

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Agreed Upon Procedures (AUP)

• What are they:– A type of accepted work recognized by the

auditing profession used to give a level of assurance that applies specific procedures to a specific subject area.

– An auditor is engaged by a client to issue a report of findings based on specific procedures performed.

– GAO Government Auditing Standards (Yellow Book) 1.23c and 6.13b/ Statement on Auditing Standards (SAS) AT 201.03

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Typical Agreed Upon Procedure Memo

• Memo exchanged and signed among all parties (activities and Audit Service)

• Memo details: – Objective– Criteria– Scope– Access requirements– Tests to perform– Sampling approach– Communication– Reporting/Distribution

photo by Sergeant Joseph R. Chenelly

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Agreed Upon Procedure Subject Areas

• Accuracy/reliability of performance measures

• Activity compliance with laws, instructions and policies

• Internal controls over financial reporting

• Quantity, condition and valuation of inventory or assets

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Typical Agreed Upon Procedures Objectives

• Verify if audit trails and internal controls exist for financial statement information

• Verify if corrective actions have been taken on deficiencies noted in the Financial Improvement Plan

photo by Mass Communication Specialist 3rd Class Michael Croft

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Examples of Typical AUP Tests

• Determine whether:– Audit trails exist for acquisitions, disposal or financial

reporting

– Equipment is properly monitored in the record system

– Inventories are performed and fully documented

– Perform partial book (records)-to-floor and floor-to-book inventories

– Reconciliations are performed and fully documented

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Agreed Upon Procedures

• Reporting details:– Criteria used – Tests performed– Results of specific tests– Related internal controls tested

• AUP is a “results-only” report• Report distribution is generally limited to the

parties involved in the agreement• Report can be released under the Freedom of

Information Act by the Auditor General

photo by Mass Communication Specialist3rd Class Josue L. Escobosa

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Agreed Upon Procedures Will Not…

• Provide negative assurance (“We found nothing…”)

• Address materiality/significance of results

• Report on any differences between the AUP and a full-scope audit

• Render an opinion or any level of assurance

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Completed AUP Engagements

• Navy Other Liabilities Account - General Fund (FY2005)• Navy Environmental Liabilities Account - GF (FY2005)• NRL Working Capital Fund F/S (FY2008)• MSC Working Capital Fund F/S (FY2009)• NAVFAC Working Capital Fund F/S (FY2010)

• Marine Corps FBWT Account (FY 2006)• Marine Corps Real Property Account (FY 2007)• Marine Corps Personal Property Account (FY 2008)

• TRICARE Management Activity Financial Improvement Initiative (FY 2007)

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Audit Evidence

Requirements

photo by Mass Communication Specialist 1st Class Geronimo Aquino

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Audit Evidence (GAO Yellow Book 7.55-7.67)

• Auditors:– Must obtain sufficient, appropriate evidence to

provide a “reasonable” basis for their findings and conclusions

• Sufficient = a judgmental measure– What is enough?

» Enough to persuade a knowledgeable person the conclusion is “reasonable”

• Appropriate = a qualitative measure that address relevancy, validity and reliability

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• Documentary – Existing information: contract records, receipts,

invoices, electronic data, etc.

• Physical– Inspection or observation of people, property or

events

• Analytical– Activity-based/auditor-based comparisons,

calculations, ratios and/or metric results, etc…

• Testimonial– Inquiries, interviews or questionnaires

4 Types of Audit Evidence

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Audit Trails and Source Documentation

• What are audit trails?– Records (either paper or electronic) that enable someone to

reconstruct a transaction– Should be able to clearly answer the “who”, “what”, “when”,

“where”, “why” and “how” questions

• What is source documentation? – Evidence of initial input into the accounting process, and serves

as transaction evidence – Serves as a part of the audit trail should validation of a

transaction be necessary– Describes the basic facts of a transaction, such as:

• Who authorized the event? • What was the event? • When did it occur? • Where did it occur? • Why did it occur? • How much was spent on the event?

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Management Assertions: 5 Categories

• Existence or Occurrence (do assets physically exist?)

• Completeness (are all transactions included?)

• Rights and Obligations (does the entity own the assets and/or owe the liabilities?)

• Valuation or Allocation (are values accurate?)

• Presentation and Disclosure (do the financial statements contain all required information?)

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How Types of Evidence Support Assertions

Evidence Existence &

Occurrence

Completeness Rights & Obligations

Valuation Presentation &

Disclosure PHYSICAL

Direct Inspection & Observation X X X X

TESTIMONIAL Inquiries, Interviews,

& Questionnaires X X X X X

DOCUMENTARY (Samples)

Relevant Laws & Agency Regulations X X X X

Documents of Public Record X X X X

Contracts, Agreements, Deeds,

& Leases X X X X

Certified Appraisals X X X Transfer & Shipping

Reports X X X X

Inventory Reports X X X X X Purchase Orders,

Receiving Reports, Invoices

X X X X

Payment Vouchers, Checks or EFT# X X X X

Maintenance Records X X Systems Reports &

Client Prepared Schedules

X X X

ANALYTICAL Comparisons,

Ratios, Expected Relationships

X X X

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Existence or Occurrence

• Assets and liabilities exist at a given date and recorded transactions have occurred during a given period.

– Audit Tests (Evidence Required):

• Observe inventories

• Test transactions between a preliminary physical inventory date and the balance sheet; reconcile results

• Obtain confirmation from third parties

• Other tests (i.e., receipts/transfers, disposal procedures and book-to-floor)

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Completeness

• All transactions and accounts that should be presented in the financial statements are included.

– Audit Tests (Evidence Required):

• Test transactions for proper recording and classification

• Test purchases to determine if they are properly recorded

• Other tests: sight-backs (floor-to-book); consumable and pilferable items

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Rights and Obligations

• Assets are the rights of the entity and liabilities are the obligations of the entity at a given date.

– Audit Tests (Evidence Required):

• Test records and determine if recorded property is owned by the entity as evidenced by contracts, invoices, receipt/transfer documents or other applicable records.

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Valuation or Allocation

• Asset, liability, equity, revenue and expense components have been included in the financial statements at appropriate amounts.

– Audit Tests (Evidence Required):

• Test records and determine if they are recorded in the proper category and at the right cost for the proper accounting period

• Test for actual, historical or depreciated costs

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Presentation and Disclosure

• Particular components of the financial statements are properly classified, described and disclosed.

– Audit Tests (Evidence Required):

• Test whether footnotes contain all information required to be disclosed

• Test categories (are they properly recorded as acquisitions, disposals, repairable, expendable, salvageable)

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Real and Personal Property Source Documentation

• Audit trails exist within iNFADS and DPAS

• Real and personal property source documentation to support “rights and obligations” is maintained (DD-1354 and DD-1348)

• Real and personal property transactions are capitalized at DON’s threshold

• Source documentation to support disposals is being maintained for real and personal property

• Real property capital improvements and repairs are categorized and reported

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Real and Personal Property Internal Control

• Monthly reconciliations of real and personal property are performed

• Resource Elevations Analysis (REAs) ensure that real and personal property inventories are performed, and that source documentation was maintained

• Perform existence and completeness testing of real and personal property

• Real and personal property financial information is input timely into DPAS/iNFADS

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The Goal: Sustainment

Maintaining an audit readiness condition through the execution of regular, consistent,

and well-controlled (internal controls) business processes

photo by Photographer’s Mate 1st Class David M. Tilton

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Contact Information

Thank you for your time and attention

Gregory Sinclitico 202-433-6401Gregory.Sinclitico@navy.mil

Barbara McCabe 202-433-6871Barbara.McCabe@navy.mil