DOD Financial Management: Actions Are Needed on Audit Issues Related to the Marine Corps' 2012 Schedule of Budgetary Activity
Published: 2015-07-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: After being identified in August 2009 as the pilot military service for an audit of its SBR, the Marine Corps received disclaimers of opinion on its fiscal year 2010 and 2011 SBRs. Because of difficulties in locating supporting documents for prior fiscal years, in June 2012, DOD leadership decided that the Marine Corps would prepare and subject to audit a Schedule of Budgetary Activity that would include only current year activity on fiscal year 2012 appropriations. In December 2013, the DOD OIG issued an unqualified opinion on the Schedule.
GAO was asked to assess the 2012 audit results. GAO (1) determined the extent to which the OIG's audit met professional standards, (2) analyzed the status of Marine Corps actions on recommendations, and (3) identified any DOD-wide implications from the audit. GAO reviewed auditor documentation, re-performed certain tests, evaluated Marine Corps corrective action plans and statuses, and determined whether other military services and DOD would likely encounter similar issues. GAO met with DOD OIG auditors and Marine Corps and DOD Comptroller officials.
section_title: What GAO Found
paragraphs: GAO found that in certain key audit areas, the Department of Defense (DOD) Office of Inspector General (OIG) did not perform sufficient procedures, under professional standards, and consequently did not obtain sufficient, appropriate audit evidence to support the audit opinion on the Marine Corps' Fiscal Year 2012 Schedule of Budgetary Activity (Schedule). GAO found that the OIG did not perform sufficient procedures to determine (1) the completeness of transactions reported on the Schedule, (2) the reliability of certain evidence used to support transactions included on the Schedule, (3) whether budgetary activity was recorded in the proper period and shipment obligations were properly recorded. In addition, the OIG did not properly consider and evaluate the audit evidence in concluding and reporting on the results of the audit.
For example, about half of the Marine Corps' reported fiscal year 2012 budgetary activity originated in non-payroll feeder systems. However, the OIG did not perform sufficient procedures to determine the completeness of the data transferred to the general ledger from the non-payroll feeder systems, although the OIG had reported control weaknesses over feeder system transfers in the 2 prior year audits that the Marine Corps had not yet fully addressed. Also, the OIG did not perform sufficient procedures to determine the reliability of data in certain feeder systems that were used as support when the Marine Corps could not locate or provide original support for some of the OIG's sampled transactions. The OIG stated that certain audit testing in subsequent audits was expanded to address GAO's concerns.
On March 23, 2015, the OIG withdrew its fiscal year 2012 audit report, stating that facts identified in the audit of the Marine Corps' fiscal year 2014 Schedule raised questions about the completeness of information on which the 2012 opinion was based. The OIG has indicated that once additional information has been gathered and analyzed, it will revisit its fiscal year 2012 audit opinion in light of its analysis and determine whether the report should be reissued.
GAO also found that the Marine Corps had made limited progress in addressing auditor recommendations since the audit of its fiscal year 2010 Statement of Budgetary Resources (SBR). For example, as of December 2013, the Marine Corps had not completed action on 130 of the 177 OIG recommendations. In commenting on GAO's report, the Marine Corps noted that it has subsequently remediated numerous recommendations. GAO has not assessed these subsequent corrective actions.
GAO identified DOD-wide implications from the Marine Corps audit related to challenges in assuring the (1) completeness of budgetary transactions, (2) reliability of data generated by DOD agencies' business processes and systems, and (3) proper fiscal year recording of obligations and outlays. Actions to address these challenges will help ensure the reliability of DOD component agencies' financial information; however, until such actions are complete, DOD and its component agencies likely will continue to face significant challenges in having reliable budgetary information for decision making on DOD missions and operations and achieving auditability of their budgetary information.
section_title: What GAO Recommends
paragraphs: GAO makes three recommendations related to the quality of DOD OIG audits. The OIG agreed with GAO's recommendations, but disagreed with many of its findings; the Marine Corps disagreed with certain findings; and the Office of the DOD Comptroller generally agreed with GAO's findings on the DOD-wide audit readiness implications from GAO's work. GAO acknowledges DOD's continuing efforts to become audit ready. GAO maintains that its findings are accurate.

section_title: Letter
paragraphs: In August 2009, the Under Secretary of Defense (Comptroller)/Chief  Financial Officer (hereafter referred to as the DOD Comptroller)  designated the General Fund Statement of Budgetary Resources (SBR)  as a major financial audit priority for the Department of Defense (DOD)  and announced the selection of the Marine Corps as the pilot military  service for an audit of the SBR. The Marine Corps was selected because  it is the smallest military service, has a single standard general ledger  system, and has an integrated military personnel and payroll system. The  SBR is a required financial statement for federal government entities, and  is the only financial statement predominately derived from an entity’s  budgetary accounts in accordance with budgetary accounting rules, which  are incorporated into generally accepted accounting principles (GAAP) for  federal government entities. The SBR and related disclosures are  designed to provide information on authorized budgeted spending  authority reported in the Budget of the United States Government  (hereafter referred to as the President’s Budget), including budgetary  resources, availability of budgetary resources, and how obligated  resources have been used. In concert with the analysis of other  budgetary data, the SBR’s linkage to the President’s Budget helps assess  the reliability of budgetary data reported in the President’s Budget. The  proper preparation and audit of the SBR is key to this assessment.
After assessing its ability to locate documentation supporting its  budgetary transactions, the Marine Corps asserted that it was audit ready  (i.e., prepared to undergo an audit of its fiscal year 2010 SBR). The DOD  Office of Inspector General (OIG) contracted with a public accounting firm  (audit firm) for assistance in conducting the audits of the Marine Corps’  SBRs for fiscal years 2010, 2011, and 2012. The DOD OIG issued  disclaimers of opinion on the Marine Corps’ fiscal year 2010 and fiscal  year 2011 SBRs. The disclaimers were the result of a scope limitation  caused by the Marine Corps’ inability to provide timely, sufficient audit  documentation for recorded transactions, particularly with regard to prior  year transactions that supported beginning balances of obligations. As a  result of the difficulty in locating supporting documentation for an SBR  audit, in June 2012, with the approval of the DOD Comptroller, the Marine  Corps reduced the scope of its fiscal year 2012 audit to include only  current year transaction activity on fiscal year 2012 appropriations  presented in a General Fund Schedule of Budgetary Activity (General  Fund Schedule). The Marine Corps intended this effort to be a building  block toward a complete SBR audit covering all open appropriation years,  as subsequent fiscal year budgetary activity was audited. For fiscal year  2012, the Marine Corps reported $28.7 billion in General Fund  appropriations and $21.1 billion in net outlays (spending, net of offsetting  collections and receipts). On December 20, 2013, the DOD OIG issued  an unqualified (“clean”) opinion on the Marine Corps’ Fiscal Year 2012  General Fund Schedule.
You asked us to assess the results of the Marine Corps’ fiscal year 2012  audit. Our objectives were to (1) determine the extent to which the audit  was performed in accordance with professional auditing standards;   (2) analyze the status of the Marine Corps’ actions to address identified  accounting, financial reporting, and information technology system control  weaknesses; and (3) identify any DOD-wide implications from the Marine  Corps’ fiscal year 2012 audit results.
To address our first objective, we analyzed the auditor’s documentation  on all aspects of the audit to determine the extent to which (1) the audit  was performed in accordance with professional auditing standards and  (2) the auditor’s reported conclusions were supported by the documented  audit evidence. To address our second objective, we analyzed pertinent  documentation on the status of the Marine Corps’ corrective actions on  auditor recommendations from its fiscal years 2010 through 2012 audits.  We identified closed recommendations and determined whether   (1) corrective actions had been appropriately designed to address  reported weaknesses and (2) documentation on closed recommendations  confirmed that actions to address them had been completed. For our third  objective, we analyzed issues identified in our work and considered  whether DOD and the other military services relied on many of the same  systems, processes, and controls as the Marine Corps and would be  likely to experience similar issues in their audits. During our work, we met  with DOD OIG auditors and the audit firm to discuss the performance of  the audit. We met with Marine Corps officials to discuss the status of  corrective actions on recommendations from its fiscal year 2010 through  2012 audits and the status of actions on our previous recommendations.  We also had periodic discussions with DOD Comptroller and Financial  Improvement and Audit Readiness (FIAR) Directorate officials to discuss  DOD FIAR Plan Status Reports and FIAR Guidance related to military  service and service-provider audit readiness.
We conducted this performance audit from July 2012 through July 2015 in  accordance with generally accepted government auditing standards  (GAGAS). Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives. Further details of our  scope and methodology are presented in appendix I.
subsections: section_title: Background
paragraphs: The Marine Corps was established on November 10, 1775, to provide  security to naval vessels and boarding parties and to conduct limited land  engagements in support of naval operations. In fiscal year 2012, the  Marine Corps reported that it had about 198,000 active duty marines,  39,000 reservists, and 22,000 civilian employees. At any given time,  approximately 30,000 marines are deployed in operations supporting the  nation’s defense or military operations other than war. The Commandant  of the Marine Corps has overall responsibility for Marine Corps  operations, including the operating forces and supporting bases, air  stations, and installations. To support its core mission, the Marine Corps  received $28.7 billion in General Fund appropriations for fiscal year  2012—or 16.6 percent of the Department of the Navy’s appropriations.  Figure 1 shows the amounts of the Marine Corps’ appropriations,  including allocations of funds from appropriations shared with the Navy.
subsections: section_title: Long-standing DOD Financial Management Weaknesses and Marine Corps SBR Audit Readiness History
paragraphs: The Marine Corps’ efforts to achieve audit readiness for its budgetary  data were conducted within DOD’s overall high-risk environment. GAO’s  High-Risk Series includes DOD risks related to weaknesses in financial  management operations, business transformation, and business system  modernization.
subsections: section_title: Long-standing DOD Financial Management Weaknesses
paragraphs: DOD has acknowledged that long-standing weaknesses in its internal  controls, business systems, and processes have prevented it from  demonstrating that its financial statements are reliable, including  information on budgeted spending reported in its SBR. Our February  2015 High-Risk Series updates on DOD financial management, business  transformation, and systems modernization reported that the department  had made limited progress in resolving long-standing weaknesses in  these areas. DOD has undertaken several financial management  improvement initiatives over the years to address weaknesses in  business systems, processes, and controls through its FIAR strategy,  semiannual FIAR Plan Status Reports, and financial management reform  methodology contained in the FIAR Guidance. DOD also spends billions  of dollars annually to maintain key business processes and operations  and acquire modern systems that are fundamental to achieving its  business transformation goals, including systems that support key  functions, such as personnel, financial management, health care, contract  management, acquisition, supply chain, and logistics. However,  progress in making system and process improvements has been slow,  and weaknesses in these areas have adversely affected the efficiency  and effectiveness of DOD operations and hindered DOD’s ability to  achieve financial audit readiness.
While the department has made some progress toward demonstrating  leadership commitment and developing capacity and action plans in all  three areas, DOD continues to face challenges in monitoring corrective  actions and demonstrating progress. In August 2013, we reported that  DOD risk management policies associated with preparing auditable  financial statements through the FIAR Plan are not in accordance with  widely recognized guiding principles for effective risk management. For  example, DOD has not addressed key risks associated with its  component agencies’ reliance on service providers for significant aspects  of their financial operations and their inability to maintain documentation  to support transactions. In addition, DOD has continued to identify a  department-wide need for qualified and experienced personnel—not only  at working levels, but also in senior leadership positions—as a risk to  achieving its financial management improvement and audit readiness  goals. Because our related reports include numerous recommendations  to DOD for addressing these and other financial management and audit  readiness weaknesses, we are not making additional recommendations  related to these matters in this report.
section_title: Marine Corps SBR Audit Readiness History
paragraphs: The Marine Corps initially asserted that it was ready to undergo an audit  of its fiscal year 2009 General Fund SBR on September 15, 2008.  However, after reviewing the status of the Marine Corps audit readiness  efforts, on April 10, 2009, the DOD OIG reported that the Marine Corps’  assertion of audit readiness was not accurate and that the documentation  supporting its assertion was not complete. Although the Marine Corps  made progress toward audit readiness during fiscal year 2009, the DOD  OIG reported that a number of issues led auditors to conclude that an  audit of the Marine Corps’ fiscal year 2009 SBR would not have positive  results. For example, the OIG stated that after 3 months of extensive  effort by the Marine Corps, adequate supporting documentation was  received for only 74 percent of the sampled budgetary transactions. The  DOD OIG reported that unless the issues were resolved, the risk of a  disclaimer of opinion would be high. The DOD OIG also reported that the  Marine Corps had identified remediation activities that needed to be  accomplished before an audit of its SBR was undertaken. The DOD OIG  suggested that the Marine Corps consider requesting an audit of its fiscal  year 2010 SBR. The OIG subsequently contracted for assistance from an  audit firm in performing an audit of the Marine Corps’ fiscal year 2010  SBR. Because the Marine Corps asserted SBR audit readiness at the  beginning of fiscal year 2010, it was not subject to DOD’s May 2010 FIAR  Guidance, which required each DOD component to review its processes  and controls to identify needed corrective actions and develop a financial  improvement plan with roles, responsibilities, and milestone dates for  completing actions on assessable units as part of a component-level,  overall financial improvement and audit readiness plan.
In September 2011, we reported that the DOD OIG issued a disclaimer of  opinion on the Marine Corps’ fiscal year 2010 SBR because the Marine  Corps could not provide documentary support for transactions in a timely  manner, and support for transactions was missing or incomplete. We  also reported that the Marine Corps experienced difficulty identifying and  providing complete populations of transactions that the auditors could  confirm and use as a basis for substantive testing. In addition, the DOD  OIG reported that the Marine Corps did not have adequate processes,  systems, and controls over accounting for and reporting on the use of  budgetary resources. Further, the Marine Corps could not provide  evidence that reconciliations for key accounts and processes, such as the  reconciliation (or matching) of payments (outlays) to bulk (estimated)  obligations for shipments of household goods recorded in its Military  Personnel appropriation account, were being performed. The OIG  reported that Marine Corps management had not asserted that all  corrective actions from eight previously identified material weaknesses  had been completed. These weaknesses included, among others,  deficiencies in financial management systems and deficiencies in controls  over Fund Balance with Treasury and unobligated balances.
During its fiscal year 2011 SBR audit effort, the Marine Corps again  experienced difficulty in identifying complete populations and providing  supporting documentation for samples of transactions selected by the  auditors for testing. In November 2011, the DOD OIG issued a disclaimer  of opinion on the Marine Corps’ fiscal year 2011 SBR, basically for the  same reasons as the fiscal year 2010 disclaimer. However, based on  discussions with DOD Comptroller, Navy, and Marine Corps officials after  the audit report was issued, the OIG decided to give the Marine Corps  additional time to provide audit documentation that had not been obtained  during the original time frame of the audit. Consequently, on   December 29, 2011, the OIG extended the audit of the Marine Corps’  fiscal year 2011 SBR to March 31, 2012. Despite the extended testing  period, the Marine Corps was still unable to provide timely and relevant  supporting documentation necessary for completing audit procedures to  determine whether the Marine Corps’ fiscal year 2011 SBR was  presented fairly. As a result, the DOD OIG’s November 2011 disclaimer of  opinion on the Marine Corps’ fiscal year 2011 SBR was not amended. For  fiscal year 2012, the DOD OIG continued as the auditor with responsibility  for issuing the audit opinion and contracted with an audit firm for  assistance in performing an audit of the Marine Corps’ budgetary activity  reported on a current year General Fund schedule, beginning with fiscal  year 2012 appropriations.
section_title: Relationship of the Schedule of Budgetary Activity to the Statement of Budgetary Resources
paragraphs: The Marine Corps’ fiscal year 2012 General Fund Schedule is an interim,  DOD component-level special report intended to provide a building block  to an SBR audit through audits of consecutive fiscal year schedules of  budgetary activity. The schedule of budgetary activity, like the SBR, is  designed to provide information on budgeted spending authority as  outlined in the President’s Budget, including budgetary resources,  availability of budgetary resources, and how obligated resources have  been used. The SBR and the schedule of budgetary activity aggregate  account-level information reported in the Standard Form (SF)-133, Report  on Budget Execution and Budgetary Resources, and summarize  budgetary data reported in the Program and Financing schedules in the  subsequent President’s Budget. Both the SBR and the schedule of  budgetary activity consist of four separate, but related, sections that  provide information about budgetary resources, the status of budgetary  resources, changes in obligated balances, and outlays for major  budgetary accounts. However, instead of covering the full range of SBR  activity on current and expired appropriations that have not canceled, the  first-year Schedule of Budgetary Activity covers only activity on current  fiscal year appropriations. Subsequent fiscal year Schedules of Budgetary  Activity would include activity in subsequent years’ appropriations,  building toward an SBR. For example, in the second year, the fiscal year  2013 Schedule of Budgetary Activity would include fiscal year 2013  budgetary activity related to fiscal year 2012 and 2013 appropriations.
Budgetary Resources. This section of a first-year schedule of budgetary  activity shows total budgetary resources made available to the agency for  obligation during the current fiscal year only. It consists of new budget  authority, reimbursements, and other income. The first-year schedule of  budgetary activity does not include unobligated amounts from prior  periods, commonly referred to as beginning balances. In contrast, the  SBR includes unobligated amounts available from prior reporting periods;  transfers available from prior year balances; and adjustments, such as  recoveries of prior year obligations. In addition, the SBR includes all other  information provided in this section of the schedule of budgetary activity.
Status of Budgetary Resources. This section of the schedule of  budgetary activity and the SBR displays the status of budgetary  resources at the end of the period and consists of obligations incurred  and the unobligated balances at the end of the period that are available  for future use. For the schedule of budgetary activity and the SBR, the  total for this section must agree with the total for the Budgetary  Resources section described above, as this section describes the status  of total budgetary resources. In addition to the current year activity, the  SBR includes obligations that are unavailable except to adjust or liquidate  obligations chargeable to prior period appropriations.
Change in Obligated Balance. This section of the schedule of budgetary  activity consists of obligations incurred in the current year, less current  year outlays. In addition to current year activity, the SBR would also  include unpaid obligations brought forward from the prior years and  recoveries of prior year unpaid obligations.
Outlays. This section shows the relationship between obligations and  outlays (also referred to as disbursements or expenditures) and discloses  the payments made to liquidate obligations. Obligations are usually  liquidated by means of cash payments (outlays), such as currency,  checks, or electronic fund transfers. This section reconciles outlays with  obligations incurred and the change in obligated balances during the  year. The content of this section is the same for the SBR and the  schedule of budgetary activity.
section_title: Basis of Accounting
paragraphs: The Office of Management and Budget (OMB) requires federal  government financial statements, including the SBR, to be presented in  accordance with GAAP for the federal government. The Federal  Accounting Standards Advisory Board (FASAB) establishes GAAP for  federal governmental entities. Federal government entities also are  required to follow the U.S. Standard General Ledger (USSGL) Chart of  Accounts, established by the Department of the Treasury (Treasury) for  budgetary and proprietary accounting. Budgetary accounts related to  the SBR and schedule of budgetary activity are used to recognize and  track budget approval and execution, whereas proprietary accounts are  used to recognize and track assets and liabilities reported on the Balance  Sheet and revenue and expenses reported on the Statement of Net Cost.
The USSGL accounts with the most significance to the Marine Corps’  General Fund Schedule are those accounts related to budget authority,  including Appropriations and Collections; Obligations for orders of goods  and services; and Outlays, or cash payments for goods and services that  have been delivered (received and accepted by the agency). Figure 2  shows the flow of budgetary resources from receipt of appropriations and  collections through apportionment and allotment of funds, obligation of  funds for orders of goods and services, and receipt and acceptance of  goods and services to cash outlay or payment for the items received.
section_title: Purpose, Objectives, and Conduct of a Financial Statement Audit
paragraphs: Audits provide essential accountability and transparency over government  programs. The purpose of a financial statement audit is to provide  financial statement users with an opinion by the auditor on whether the  financial statements are presented fairly, in all material respects, in  accordance with an applicable financial reporting framework, which would  include GAAP for the reporting entity. An audit conducted in accordance  with GAGAS enables the auditor to form that opinion, which enhances the  degree of confidence that intended users can place on the financial  statements. OMB requires that audits of federal financial statements be  performed in accordance with GAGAS and OMB Bulletin 07-04. For the  federal government, OMB issues financial reporting requirements that are  incorporated into GAAP and audit requirements for audits of federal  financial statements that supplement GAGAS. OMB guidance is  particularly important because of the unique requirements related to the  preparation of the SBR and the consolidation of the federal government’s  financial statements.
GAGAS provide a framework for performing high-quality audits with  competence, integrity, objectivity, and independence to provide  accountability and to help improve government operations and services.  For financial audits, GAGAS incorporate the American Institute of  Certified Public Accountants (AICPA) fieldwork and reporting standards  and the related Statements on Auditing Standards (SAS), unless  specifically excluded or modified by GAGAS. The SAS are codified into  audit sections, referred to as AUs.
For this report, we generally refer to GAGAS and the specific, underlying  AICPA standards, where appropriate. We also refer to the Financial Audit  Manual, which is jointly approved and issued by GAO and federal agency  inspectors general, for applicable audit guidance. The Financial Audit  Manual presents a methodology for performing financial statement audits  of federal entities in accordance with professional standards.
As the basis for the auditor’s opinion, GAGAS require the auditor to  obtain reasonable assurance about whether the financial statements as a  whole, or an element of the financial statements being audited in a  Special Report, such as the Marine Corps’ Fiscal Year 2012 General  Fund Schedule, are free from material misstatement, whether due to  fraud or error. Reasonable assurance is a high, but not absolute, level of  assurance that is reached when the auditor has obtained sufficient,  appropriate audit evidence to reduce audit risk (that is, the risk that the  auditor expresses an inappropriate opinion when the financial statements  are materially misstated) to an acceptably low level. In general,  misstatements, including omissions, are considered to be material if,  individually or in the aggregate, they could reasonably be expected to  influence the economic decisions that users make based on the financial  statements. Judgments about materiality are made in light of surrounding  circumstances and involve both qualitative and quantitative  considerations. These judgments are affected by the auditor’s  perception of the financial information needs of users of the financial  statements, by the size or nature of a misstatement, or both. The auditor  has no responsibility to obtain reasonable assurance that misstatements  that are not material to the statements as a whole, whether caused by  fraud or error, are detected.
Management is responsible for the fair presentation of financial  statements that reflect the nature and operations of the entity. When  undergoing an audit, management represents that the financial  statements are fairly presented in conformity with GAAP. By doing so,  management implicitly and explicitly makes assertions regarding the  recognition, measurement, presentation, and disclosure of the information  in the financial statements and related disclosures as a whole. In  accordance with auditing standards, the auditor should assess the risk of  material misstatement at the financial statement and relevant assertion  levels, and design and perform audit procedures to reduce the risk of  material misstatement to an acceptably low level. Auditing standards  state that financial statement assertions used by the auditor about  classes of transactions and events for the period under audit fall into the  following categories.
Occurrence. Transactions and events that have been recorded have  occurred and pertain to the entity.
Completeness. All transactions that should have been recorded were  recorded.
Accuracy. Amounts and other data relating to recorded transactions  and events have been recorded appropriately.
Cutoff. Transactions and events have been recorded in the correct  accounting period.
Classification. Transactions and events have been recorded in the  proper accounts. For the schedule of budgetary activity, this includes  ensuring that transactions are recorded to the proper appropriation or  fund.
In addition, federal agency management is responsible for establishing  and maintaining internal controls to achieve the objectives of effective and  efficient operations, reliable financial reporting, and compliance with laws  and regulations under the law commonly known as the Federal  Managers’ Financial Integrity Act (FMFIA). FMFIA and OMB Circular  No. A-123 require the head of each executive agency to annually report  to the President and the Congress assurance statements, including  assurance regarding the effectiveness of internal controls over financial  reporting and, for designated large federal agencies like DOD, whether  financial management systems conform to government-wide  requirements mandated by the Federal Financial Management  Improvement Act of 1996 (FFMIA).
In conducting a financial audit, the auditor develops the audit plan;  assesses internal controls; performs testing; forms conclusions based on  the audit evidence obtained; and based on that evidence, issues an  opinion or a disclaimer. These four areas of work are referred to as the  four phases of an audit.
In the planning phase, the auditor obtains an understanding of the  audited entity’s operating environment, including business processes  and the related systems and controls; reviews financial activity related  to significant financial statement line items and accounts; assesses  the risk of material misstatement; and develops an audit strategy.  Planning continues throughout the audit as decisions are made about  the risk of material misstatement and whether to perform additional  procedures.
During the internal control phase, the auditor identifies and tests key  internal controls and information technology system controls as a  basis for determining the extent to which the auditor will be able to  rely on controls in conducting the audit. Based on the information  obtained during the planning and internal control phases, the auditor  determines the nature, extent, and timing of substantive testing.  Depending on the extent to which controls can be relied on for  assurance of fair presentation of the financial statements, the auditor  will perform more or less substantive testing.
In the testing phase, the auditor performs substantive testing of detail  support for transactions and may also perform analytical procedures.  In accordance with AU Section 318, these substantive procedures are  performed to detect material misstatements at the relevant assertion  level and include tests of classes of transactions, account balances,  and disclosures.
During the reporting phase, the auditor reviews the body of evidence  obtained, reviews the conclusions reached about that evidence, and  determines the materiality of uncorrected misstatements and untested  amounts as a basis for forming an opinion. Depending on issues  identified during the audit, the auditor may decide to perform  additional procedures to support a conclusion on the audit results.
section_title: The Audit of the Marine Corps’ Fiscal Year 2012 Schedule of Budgetary Activity Did Not Obtain Sufficient, Appropriate Evidence to Support the Audit Opinion
paragraphs: Our review of the audit documentation supporting the audit of the Marine  Corps’ Fiscal Year 2012 General Fund Schedule identified key areas  where sufficient audit procedures were not performed, under professional  auditing standards, and consequently sufficient, appropriate evidence  was not obtained to support the reported audit opinion. Specifically, the  audit documentation does not provide evidence that the auditors had   (1) performed sufficient procedures to determine the completeness of  budgetary transactions reported on the Marine Corps’ Fiscal Year 2012  General Fund Schedule, (2) performed sufficient procedures to determine  the reliability of certain evidence used to support transactions included on  the Marine Corps’ Schedule, (3) performed sufficient procedures to  determine whether budget activity was recorded in the proper period and  shipment obligations were properly recorded, and (4) properly considered  and evaluated the audit evidence in concluding and reporting on the audit  results.
On March 23, 2015, the DOD OIG announced the withdrawal of its  Auditor’s Report on the Marine Corps’ Fiscal Year 2012 General Fund  Schedule. In a memorandum to DOD and Marine Corps leadership, the  OIG’s Deputy Inspector General for Auditing stated that subsequently  discovered facts identified during the audit of the Marine Corps’ Fiscal  Year 2014 General Fund Schedule caused the OIG to question the  completeness of the information on which the OIG based its opinion.  More specifically, the OIG reported that (1) suspense accounts, which the  U.S. Treasury maintains and which are used to temporarily hold  transactions that could not be posted to a valid appropriation, contained  Marine Corps transactions; (2) it believes that this condition existed in  fiscal year 2012; and (3) it was unable to determine whether such  transactions were material in relation to the Marine Corps’ Fiscal Year  2012 General Fund Schedule. Marine Corps transactions recorded to  suspense accounts would not have been recorded in the Marine Corps’  Fiscal Year 2012 Schedule. At that time, the OIG indicated that once  additional information has been gathered and analyzed, the fiscal year  2012 audit opinion will be revised in light of its analysis and reissued. In  commenting on our report, the OIG stated that it would consider all  relevant information, including the findings and recommendations in our  report, the findings of the four ongoing audits of suspense accounts, and  a report from the OIG’s Quality and Standards Office before deciding  whether to reissue an opinion on the Marine Corps’ Fiscal year 2012  General Fund Schedule.
subsections: section_title: The OIG’s Procedures to Determine Completeness of Budgetary Transactions Were Insufficient
paragraphs: Auditing standards require, among other things, that the auditor   (1) assess the risk of material misstatement at the relevant assertion  level and (2) perform substantive procedures for all relevant assertions  related to material classes of transactions, account balances and  disclosures. Auditing standards further state that existence and  completeness are always relevant assertions. Testing for completeness  may be performed in a number of ways, including the following:
Tests of detail transactions. When testing detail transactions for the  completeness assertion, the auditor should select from audit evidence  indicating that an item should be included in the relevant financial  statement amount and should investigate whether the item is so  included. For example, the auditor would select from data sources  outside or independent of the amounts being tested.
Reconciliations. In performing a reconciliation, the auditor reconciles  two populations and tests reconciling items to determine whether the  two populations are consistent. For example, reconciliation would  provide evidence that the transactions recorded in one population, in  the aggregate, were also recorded in the other population.
We noted several areas where there is a high risk of material  misstatement related to the completeness of outlays and obligations  reported on the Marine Corps’ Fiscal Year 2012 General Fund Schedule,  for which the auditor either did not perform any testing procedures or did  not perform sufficient procedures to determine whether there were  material misstatements. Specifically, there is a high risk of material  misstatement that nonpayroll transactions recorded in feeder systems  may not be reported in the Marine Corps’ general ledger system—the  Standard Accounting, Budgeting, and Reporting System (SABRS)—and  transactions recorded in the current year may be improperly recorded to  appropriations not included in the Marine Corps’ Fiscal Year 2012  General Fund Schedule.
Figure 3 shows the business system data flow from the feeder systems  through the Defense Cash and Accountability System (DCAS) to the  Marine Corps’ SABRS general ledger system and through the Defense  Departmental Reporting Systems (DDRS) to financial statements and the  schedules of budgetary activity.
The Marine Corps has reported that over 90 percent of the financial  transactions in SABRS originate in feeder systems and that it has 25  primary feeder systems. Typical tests for completeness might include  (1) tracing of samples of transactions from significant feeder systems to  ensure that the transactions were recorded in SABRS; (2) reconciling  feeder system data to transactions in SABRS; and (3) confirming that  rejected feeder system transactions were properly identified, isolated, and  corrected in a timely manner. The audit documentation shows that the  audit team reconciled the transfer of fiscal year 2012 civilian and military  payroll data from the related payroll systems to SABRS and concluded  that the military and civilian payroll populations in SABRS were  sufficiently complete. However, the audit documentation does not  include audit procedures to test the completeness of fiscal year 2012  nonpayroll feeder system data recorded in SABRS.
The risk of material misstatement in the Marine Corps’ Fiscal Year 2012  General Fund Schedule related to the transfer of transactions from  nonpayroll feeder systems is high, we believe, based on the following  conditions:
Nonpayroll feeder system transactions were material, accounting for  about half of the Marine Corps’ reported fiscal year 2012 budgetary  activity.
We identified examples of feeder system transactions that were not  included in SABRS or were not included in SABRS on a timely basis.
The Marine Corps did not have adequate processes for determining  whether all transactions in the nonpayroll feeder systems were  included in SABRS.
There were reported internal control weaknesses that prevented the  Marine Corps from reasonably assuring that all transactions in  nonpayroll feeder systems were recorded in SABRS. For example, 11  of the Marine Corps’ open recommendations were related to  weaknesses in controls over transfers of feeder system data to  SABRS. Open Marine Corps’ recommendations, discussed later in  this report, addressed actions to (1) assure the completeness of  populations of transactions and account balances, (2) test interface  controls between various feeder systems and the Marine Corps’  SABRS general ledger system, and (3) perform reconciliations of  feeder system data to SABRS.
There were a significant number of rejected transactions. For  example, the audit documentation related to the Marine Corps’  corrective actions on data transfers to SABRS included examples of  daily reports of rejected feeder system transactions covering the  months of April through July of 2012, each of which listed thousands  of transactions that were rejected by SABRS. Our analysis of the  rejected transactions determined that 70 percent of these transactions  related to significant Marine Corps nonpayroll-related feeder systems  involved with supply order and shipment transactions. In addition, the  Marine Corps did not have a formal policy and control procedure for  correcting errors that occur during data interface processing.
DOD’s November 2013 FIAR Status Report, issued 1 month prior to  the OIG’s audit report on the Marine Corps’ Fiscal Year 2012 General  Fund Schedule, showed that most Statement on Standards for  Attestation Engagements (SSAE) No. 16 examinations of the  effectiveness of controls over key DOD business feeder systems had  not been completed, raising questions about the completeness and  the integrity of the processes and underlying data residing in these  systems.
With regard to the completeness of transaction data in SABRS, members  of the audit team told us that they had performed certain other tests. First,  the team indicated, and the audit documentation showed, that it traced  data from SABRS through the financial reporting process to the Marine  Corps’ Fiscal Year 2012 General Fund Schedule. As described in the  audit documentation, this procedure would help confirm that data were  not lost in processing from the general ledger to the Marine Corps’ Fiscal  Year 2012 General Fund Schedule. However, it does not provide  evidence concerning the completeness of the data residing in SABRS,  most of which originate in business systems outside of SABRS.
Second, members of the audit team told us that they traced the Marine  Corps’ SABRS general ledger system transaction data to transactions  included in the Marine Corps’ Fund Balance with Treasury reconciliation  process and did not identify any missing transactions. However, these  procedures would not be effective for testing completeness of  transactions recorded in SABRS because they begin with items that are  already recorded in SABRS. Further, the audit documentation does not  include evidence of a complete comparison of fiscal year 2012 SABRS  transaction activity to fiscal year 2012 Fund Balance with Treasury  reconciliations. For example, the audit documentation did not include a  review of Marine Corps transactions submitted to Treasury by other  federal agencies and other DOD components, such as the Army and U.S.  Transportation Command, to determine whether they were properly  recorded in SABRS.
subsections: section_title: Transactions Rejected during Transfers to SABRS
paragraphs: One reason that feeder system transactions may not be recorded in  SABRS relates to rejected transactions. According to Defense Finance  and Accounting Service (DFAS) officials, transactions originating in  feeder and other systems that cannot be posted to a valid appropriation  are rejected and temporarily held by the Marine Corps for research, and if  not resolved within the month, are recorded to suspense accounts until  they are investigated, resolved, and correctly recorded. Any Marine Corps  budgetary transactions that were included in suspense accounts at the  end of fiscal year 2012 were not included in the Marine Corps’ Fiscal Year  2012 General Fund Schedule. As noted earlier, in late March 2015, the  OIG withdrew its opinion on the Marine Corps’ Fiscal Year 2012 General  Fund Schedule because it was unable to determine whether transactions  recorded in suspense accounts maintained by Treasury that were not  included in the Marine Corps’ Schedule were material to the Schedule.
As discussed later in this report, the Marine Corps had not yet addressed  all information technology system recommendations from its fiscal years  2010 and 2011 SBR audits related to control weaknesses over data  transfers between feeder systems and SABRS. One such  recommendation relates to the lack of a formal policy and control  procedure for correcting errors that occur during data interface  processing, in which transactions flow from feeder systems through  DCAS and ultimately into SABRS. Such a policy would help assure that  identified errors and rejected transactions are reviewed by management,  resolved, and resubmitted for processing. The audit documentation on the  Marine Corps’ corrective actions for this recommendation shows that the  Marine Corps took action to develop a report to monitor system rejects.  However, the audit documentation used to support closing this  recommendation does not include evidence that the auditors, in closing  the recommendation, had performed procedures to (1) determine the  causes of the rejected transactions as a basis for determining if  appropriate corrective actions had been designed and implemented or   (2) confirm that rejected feeder system transactions were properly  resolved.
If audit procedures to confirm the completeness of transfers of nonpayroll  feeder system data to SABRS are not sufficient, there may be undetected  material amounts of transactions that are not properly included in the  Marine Corps’ Fiscal Year 2012 General Fund Schedule. Further,   (1) populations used for substantive testing throughout the audit may not  be complete, (2) sample sizes may not be appropriate, and (3) statistical  tests may not be reliable for concluding on the results of the audit.
section_title: Transactions Recorded in Fiscal Year 2012 to Prior Year Appropriations
paragraphs: Another risk related to completeness is the risk that transactions recorded  in fiscal year 2012 to prior year appropriations, which are excluded from  the Marine Corps’ Fiscal Year 2012 General Fund Schedule, should have  been charged to 2012 appropriations included in the Schedule. The  Marine Corps’ Fiscal Year 2012 General Fund Schedule is represented to  include only budgetary transactions recorded to fiscal year 2012 current  appropriations. Typical tests for completeness of the general ledger with  respect to such transactions would include examining appropriate  evidence that samples of fiscal year 2012 budgetary transactions charged  to prior year appropriations were properly charged to such prior year  appropriations.
The audit documentation and discussions with the audit team did not  disclose any testing of transactions related to fiscal year 2012 activity  recorded to fiscal year 2011 and prior appropriations to determine  whether there was evidence that such transactions should have been  recorded to fiscal year 2012 appropriations. However, we believe the risk  of material misstatement to the Marine Corps’ Fiscal Year 2012 General  Fund Schedule related to transactions recorded in fiscal year 2012 to  prior year appropriations that should have been charged to fiscal year  2012 appropriations is high based on numerous reported Marine Corps’  weaknesses in controls over accounting and financial reporting and the  magnitude of fiscal year 2012 Marine Corps’ outlays that were recorded  to prior fiscal year appropriations. For example, Treasury’s Combined  Statement of Receipts, Outlays, and Balances, Fiscal Year 2012 includes  data on federal agency fiscal year 2012 outlays that were recorded to  prior fiscal year appropriation accounts. Our review of the reported  Marine Corps’ fiscal year 2012 outlay activity determined that over $3.8  billion in such outlay activity was recorded to fiscal year 2011  appropriations.
Despite these reported conditions, there was no evidence in the audit  documentation that the OIG assessed the risk of material misstatement  associated with fiscal year 2012 appropriation activity being improperly  recorded in a prior fiscal year appropriation account, and no evidence that  the OIG performed tests for completeness with respect to fiscal year 2012  appropriation transactions that may be improperly recorded in prior year  appropriations. In response to our concern, the OIG stated that the scope  of its audit only covered fiscal year 2012 current activity. As such, fiscal  year 2011 or prior activity would not be in the scope of the audit.  However, absent testing to identify fiscal year 2012 transactions  improperly recorded to fiscal year 2011 and prior appropriations, there  may be material budgetary transactions that were improperly excluded  from the Marine Corps’ Fiscal Year 2012 General Fund Schedule.
section_title: The OIG Did Not Perform Sufficient Procedures to Determine the Reliability of Certain Evidence Used in Transaction Testing
paragraphs: Testing of detail transactions is a basic audit test designed to determine  whether the recorded transactions are supported by sufficient,  appropriate evidence. It involves comparing recorded information to  supporting documents to determine whether the transaction is valid  (authorized and approved) and is recorded in the proper period, to the  proper appropriation, and at the proper amount. For example, if the  sampled transaction is an outlay for an item purchased, the auditor would  review documents, such as the original purchase order, invoice, receiving  report, and payment voucher, to substantiate the validity and amount of  the sampled transaction.
In some instances, the auditor may be unable to obtain sufficient,  appropriate evidence to support a selected transaction. In such cases, the  auditor should perform alternative procedures to determine whether the  transaction was properly supported. For example, the auditor may confirm  the details of the transaction with a third party. If the auditor is unable to  obtain sufficient, appropriate evidence from alternative procedures, such  items are generally treated as misstatements and are accumulated to  determine whether such unsupported amounts are material in the  aggregate.
In examining evidence supporting a transaction, the auditor should  consider the reliability of the information to be used as audit evidence,  such as electronic documents, including consideration of controls over  their preparation and maintenance where relevant. Such consideration  would normally include any information that raises doubts about the  reliability of the evidence. Also, when the auditor uses information  produced by the entity to perform audit procedures, the auditor should  obtain audit evidence about the accuracy and completeness of the  information, for example, by performing procedures to determine whether  the related controls over the data are effective.
Auditing standards also state that the reliability of audit evidence is  influenced by its source and by its nature and is dependent on the  individual circumstances under which it is obtained. Even when audit  evidence is obtained from sources external to the entity, circumstances  may exist that could affect the reliability of the information obtained. For  example, audit evidence obtained from an independent external source  may not be reliable if the source is not knowledgeable. This means that  regardless of the source of the information, if the auditor has doubts  about the reliability of information to be used as audit evidence or is  aware of problems with the reliability of the data, the auditor should  determine what modifications or additions to audit procedures are  necessary to resolve the issues.
The audit documentation shows that the auditors had requested  appropriate transaction documents from the Marine Corps, including  orders, receiving reports, and invoices. However, the audit documentation  also shows that when the Marine Corps was unable to provide the  requested documents for a selected transaction, the auditors relied on  data generated from other DOD agencies that provided goods or services  as evidence to support the transaction. However, the auditors did not  document their consideration of the reliability of the evidence provided  from these other DOD agencies, although there was evidence that should  have raised doubts about its reliability. In addition, the auditors relied on  support produced from certain Marine Corps systems without obtaining  sufficient evidence about the accuracy and completeness of the  information.
The following examples describe well-known, documented issues related  to certain DOD systems that, in our view, raise significant doubts about  the reliability of data from those processes and systems that the OIG  relied on in its transaction testing.
DOD reported the Defense Logistics Agency’s (DLA) Military  Standard Requisitioning and Issues Procedures (MILSTRIP) as a  department-wide material weakness in its fiscal year 2012 agency  financial report, stating that the department could not effectively  account for transactions and balances in the MILSTRIP orders  process. DOD’s reported target date for completing corrective actions  was 2014.
U.S. Transportation Command had not yet asserted audit readiness,  and it had not undergone an SSAE No. 16 examination as of the end  of fiscal year 2012. Further, U.S. Transportation Command uses the  Defense Enterprise Accounting and Management System (DEAMS)  as its official billing system, and DEAMS had not yet undergone  testing of its financial reporting controls. However, the DOD OIG had  previously reported that DEAMS managers did not maintain an  adequate general ledger chart of accounts and that DEAMS  managers did not take the steps needed to ensure that DEAMS had  the capability to record and track transaction data. As a result,  instead of properly recording transactions, such as budget authority,  obligations, collections, and disbursements (outlays) at the time of the  related events, DEAMS managers relied on DFAS to record journal  vouchers (adjusting entries) in DDRS and used other offline electronic  processes, such as spreadsheets, to record accounting entries.  According to the DOD OIG, because funds control accounting was not  being managed in DEAMS, budget execution reports and SBRs were  developed using budgetary status data that could not be traced to  actual transaction data within the official accounting system. These  weaknesses increase the risk of accounting, billing, and financial  reporting errors.  In disclaiming an opinion on DOD’s department-wide financial  statements for fiscal year 2012, the OIG reported that DOD financial  management and business feeder systems were unable to adequately  support material amounts on the financial statements as of   September 30, 2012. The OIG also reported that financial systems  did not comply with FFMIA. DOD continued to report that the vast  majority of the information needed to prepare the department’s  financial statements originates in feeder systems that input data into  its financial systems and that the effectiveness of controls over most  feeder systems has not been tested to determine whether information  in such systems is reliable.
These data integrity issues should have raised significant doubts about  the reliability of the information used as evidence to support some of the  Marine Corps’ transactions, and should have triggered an assessment of  the evidence to determine if it was sufficiently reliable to support the  selected transactions. In addition, the auditors should obtain evidence of  the accuracy and completeness of audit evidence produced by Marine  Corps systems that they rely on for audit testing. If the evidence is not  sufficiently reliable, the related amounts recorded in the Marine Corps’  Fiscal Year 2012 General Fund Schedule should be considered  misstatements and evaluated to determine whether such inadequately  supported transactions are material.
Our review of the audit documentation for sample outlay transactions that  the auditors indicated were properly supported by sufficient, appropriate  evidence identified numerous instances where the auditors relied on data  from certain Marine Corps and other DOD agency business systems and  processes with data reliability issues. We were unable to determine the  full extent of transactions supported by such evidence because the  support for transaction samples that passed the auditor’s tests (i.e., were  not identified as exceptions) was not always readily available. However,  our review of the audit documentation identified the following examples of  outlay transactions selected for substantive detail testing that were  supported solely by data generated from these DOD business systems  and processes.
When the Marine Corps could not provide original support for sample  military supply order transactions, the audit firm relied on data from  feeder systems and business processes with data reliability issues.  These systems included the Marine Corps’ Supported Activities  Supply System (SASSY) and other Defense agency business  systems, including systems involved with DLA’s MILSTRIP business  process. Our review of the OIG’s audit documentation for 257 outlay  sample items that were retested by the OIG as part of its oversight of  the audit firm’s substantive tests of Marine Corps outlays found that at  least 42 of the 257 supply order outlay sample items (16 percent)  shown as tested without exception were supported solely by data  generated directly from such DOD systems and processes. As  discussed later, OIG management accepted the same type of feeder  systems data as sole support for 13 DLA MILSTRIP transactions and  1 U.S. Transportation Command shipment transaction in control tests  for proper cutoff on fiscal year 2012 outlays.
Audit documentation on the results of substantive testing of 94 outlay  sample items related to U.S. Transportation Command shipments of  military supplies and equipment and shipments of household goods  showed that 72 of the 94 shipment outlay sample items (77 percent)  were supported solely by consolidated Interfund billings generated by  U.S. Transportation Command systems. Interfund billings are  transfers of funds between federal agency appropriations that are  processed through Treasury’s Intergovernmental Payment and  Collection (IPAC) system. Marine Corps Interfund billings included  coded accounting lines for multiple transactions, generally without any  of the original supporting documentation for the individual  transactions. According to the audit documentation, the auditors  concluded that 71 of the 72 outlay sample items were tested without  exception. The one exception was a sample item for a fiscal year  2011 shipment that the auditors believed was outside the scope of the  Marine Corps’ fiscal year 2012 audit and thus recorded an exception.
Figure 4 shows examples of source documents used in DLA’s MILSTRIP  and U.S. Transportation Command’s shipment processes compared with  the types of DOD system-generated data that the auditors relied on when  the Marine Corps could not locate and provide the original transaction  documentation to the auditors.
The data reliability issues related to these systems should have been  identified in the auditor’s assessment of the risk of material misstatement,  and appropriate audit procedures should have been performed to assess  the reliability of such evidence and to determine the accuracy and  completeness of evidence produced by Marine Corps’ systems. Absent  performing sufficient procedures to assess the reliability of such  information, there is insufficient evidence to support the accuracy and  completeness of transactions that are based solely on this evidence.
section_title: Audit Procedures Were Not Sufficient to Determine Whether Budget Activity Was Recorded in the Proper Period and Whether Shipment Obligations Were Properly Recorded
paragraphs: The OIG’s audit documentation did not contain evidence of sufficient  procedures for fiscal year 2012 cutoff testing and testing of shipment  obligations.
subsections: section_title: Scope of Cutoff Testing Was Not Adequate to Assure Obligations and Outlays Were Recorded in the Proper Period
paragraphs: As noted previously, cutoff is one of the financial statement assertions  that the auditor considers during a financial statement audit. The cutoff  assertion relates to whether transactions and events have been recorded  in the correct accounting period. Cutoff includes consideration of two  aspects. The first aspect, which relates to the existence or occurrence  assertion, is that all transactions recorded in the current period relate to  the current period. The second aspect, which relates to the completeness  assertion, is that all transactions that should have been recorded in the  current period have been recorded in the current period and are properly  included in the financial statements.
Although the OIG performed certain cutoff testing, our review of the audit  documentation and discussions with the OIG determined that certain risks  of material misstatement related to cutoff were not identified and  addressed. The length of the cutoff period tested was not based on a  complete assessment of the risk of material misstatement. Further, the  auditors did not consider the lengthy transaction cycle for certain  transactions that pose a higher risk of transactions being recorded to the  wrong fiscal year appropriation. Specifically:
No cutoff testing procedures were performed related to the risk that  fiscal year 2012 transactions may have been recorded improperly as  fiscal year 2011 activity.
Given the lag time in properly recording certain types of transactions,  risk exists that fiscal year 2012 transactions that were recorded after  the cutoff period, or that certain types of transactions recorded during  the end-of-year cutoff period, could be improperly charged to fiscal  year 2013 appropriations.
Because of these risks and uncorrected Marine Corps accounting and  financial reporting weaknesses, the risk of material misstatement was  high and additional procedures should have been performed to determine  whether budgetary activity related to fiscal year 2012 appropriations was  recorded in the proper period. Further, because such additional cutoff  procedures were not performed, there may be material transactions  related to fiscal year 2012 appropriations that were not properly recorded  in the Marine Corps’ Fiscal Year 2012 General Fund Schedule.
The objective of cutoff testing is to obtain evidence about whether  transactions were recorded in the proper accounting period. Cutoff tests,  intended to test for completeness, determine whether transactions  recorded prior to the fiscal year or after the end of the fiscal year should  have been included in the year being audited. As previously discussed,  the Marine Corps’ Fiscal Year 2012 General Fund Schedule was intended  to cover current year activity on fiscal year 2012 appropriations. Typical  cutoff tests for completeness include testing transactions recorded before  the beginning of the reporting period and after the end of the reporting  period to determine whether there are material amounts of transactions  that should have been recorded in the current reporting period. Obtaining  sufficient evidence of proper cutoff may also necessitate that the auditor  perform other procedures. For example, if there is a risk that transactions  may be recorded after the cutoff testing period or the audit completion  date, such procedures may include examining open purchase orders,  unpaid invoices, and contracts as of a date near the audit completion  date, or estimating amounts that should be recorded in the current year  based on appropriate evidence.
To assess the risk of material misstatement related to cutoff and  determine the scope of cutoff testing with respect to budgetary activity,  auditors would generally determine the length of transaction cycles from  when a transaction occurs to when the transaction is properly recorded  for significant business processes. Certain business processes may  have short cycle times. For example, the transaction cycle for payroll is  typically fairly short. For business processes with long cycle times, such  as certain types of shipment transactions, obligations made in the last  quarter of a fiscal year may not be recorded until the first month or the  first quarter in the next fiscal year, or until the outlay is made, which could  be several months into the next fiscal year. In such instances, obligations  and outlays may not be recorded to the proper accounting period,  particularly if subsequent adjustments were not recorded timely.  Accordingly, as shown in figure 5, depending on the entity’s transaction  cycle times and level of assessed risk of material misstatement, the  auditor would plan cutoff testing that considers the length of significant  transaction cycles with regard to the beginning and end of the accounting  period audited.
Auditing standards provide detailed guidance on obtaining an  understanding of the entity and its environment to (1) assess the risks of  material misstatement at the financial statement and relevant assertion  levels and identify risks by classes of transactions; account balances,  and disclosures in the financial statements; (2) relate the risks to what  could go wrong at the relevant assertion level; and (3) consider the  significance and likelihood of material misstatement for each identified  risk in order to design appropriate substantive tests.
section_title: Assessment of Risks of Material Misstatement Related to Cutoff Was Not Sufficiently Documented
paragraphs: As noted above, the auditor should assess the risk of material  misstatement related to relevant assertions. In this case, the OIG  identified proper cutoff as a risk of material misstatement. We agree with  the OIG’s identification of cutoff as having a risk of material misstatement.  Our assessment included consideration of the following factors that we  believe result in a high risk of material misstatement related to cutoff.
There are identified examples of transactions being recorded in the  wrong period—DOD reports of Antideficiency Act violations provided  to GAO identified numerous DOD-wide instances of transactions that  were recorded to the wrong period. DOD has also reported a  violation of the act related to a late U.S. Transportation Command  shipment billing that was recorded in the subsequent fiscal year.  When the need for an adjustment was identified, funds allocated for  shipments in the previous fiscal year had been exhausted. In addition,  we previously reported that the Marine Corps’ use of bulk estimated  obligations for shipments of household goods related to permanent  change-of-station moves that generally take 2 or more fiscal years to  fully liquidate (i.e., for the final payment or outlays to be made) poses  a risk of Antideficiency Act violations if the estimated obligations are  too low and outlays exceed the bulk obligation. The Army, the Navy,  and the Air Force have each reported violations related to the use of  bulk estimated obligations.
For certain types of transactions, such as certain U.S. Transportation  Command billings, obligations sometimes may not be recorded until  the outlay is made, which can be from a few days or weeks to several  months or several years after the obligation should have been  recorded.
For certain types of transactions, there may be an extended period  between when the transaction occurred and when the transaction is  recorded. For example, U.S. Transportation Command shipment  billings that cover multiple fiscal years are initially charged to current  fiscal year appropriations, and may not be analyzed and, for  shipments related to prior year obligations, may not be properly  charged to such prior year appropriations until several months after  the end of the fiscal year.
There are reported internal control weaknesses related to reasonably  assuring that all transactions are recorded in the proper period,  particularly with regard to liquidations of estimated bulk obligations  related to permanent change-of-station moves and U.S.  Transportation Command billings.
AU Section 326 states that the auditor should obtain audit evidence to  draw reasonable conclusions on which to base the audit opinion,  including performing procedures to detect material misstatements at the  relevant assertion level. As part of these procedures, the auditors must  perform procedures to assess the risk of material misstatement at the  financial statement and relevant assertion levels. AU Section 339  requires documentation of significant findings and issues, actions to  address them, and conclusions reached. Although the above risks were  known at the time of the audit, and the audit documentation includes a  discussion of these risks, the documentation does not include evidence  that the auditors appropriately considered these risks as a basis for  designing and performing sufficient audit procedures to address these  risks. For example, the audit documentation does not contain evidence  that DOD OIG auditors performed procedures to assess the risk of proper  cutoff and determine the nature, extent, and timing of substantive testing  related to (1) the length of transaction cycles for significant volumes of  transactions and (2) certain significant general ledger accounts.
section_title: The Length of the Fiscal Year- End Cutoff Period Tested Was Not Based on the Risk of Material Misstatement
paragraphs: Our review of the audit documentation determined that the OIG only  performed testing of transactions recorded in October 2012 (the first  month of fiscal year 2013) for cutoff purposes, based on the assumption  noted in the audit documentation that there was a low risk that material  amounts recorded in periods subsequent to October could relate to fiscal  year 2012. However, there was no documented basis for this judgment.  For example, during our discussions with OIG auditors, they told us that  based on their experience and auditor judgment, they considered this risk  to be low. The auditors did not document their understanding of the length  of transaction cycles for significant categories of transactions and the  pattern and volume of those transactions at fiscal year-end.
In addition, the audit documentation noted the process whereby U.S.  Transportation Command submits summary Interfund billings through  IPAC to the Marine Corps that are initially charged to the Marine Corps’  fiscal year 2012 appropriations and the Marine Corps’ subsequent  analysis to determine the allocations of the underlying transactions to the  appropriate fiscal year appropriations. However, the audit documentation  did not include evidence that the auditors performed any procedures to  (1) test the accuracy of the Marine Corps’ allocation of fiscal year 2012  shipment billings to previous fiscal year appropriations or (2) confirm that  the related adjustments were recorded to ensure that the portion of the  outlays that pertained to previous fiscal year appropriations, and in some  cases, other military services, were excluded from the outlays reported on  the Marine Corps’ Fiscal Year 2012 General Fund Schedule. Our analysis  of U.S. Transportation Command billings and discussions with the  auditors and the Marine Corps determined that the OIG was aware that  the Marine Corps was performing analysis of approximately $21 million of  fiscal year 2012 shipment billings in January 2013—4 months after the  end of fiscal year 2012—to determine the extent of adjustments needed  to record the related outlay transactions to fiscal year 2012 and prior  appropriations.
Further, for an audit of budgetary transactions, auditors should test for  proper classification to assure that transactions are recorded to the  proper fiscal year appropriation or fund account. The OIG told us that  testing performed for the audit of the Marine Corps’ Fiscal Year 2013  General Fund Schedule would identify any fiscal year 2013 transactions  that should have been recorded to fiscal year 2012. The OIG stated that if  any cut-off errors were identified during the fiscal year 2013 audit, it would  then determine if a restatement of the Marine Corps’ Fiscal Year 2012  General Fund Schedule was needed. However, audit evidence obtained  in the current year audit should be sufficient to support the auditor’s  opinion.
The OIG auditors also stated that a normal audit reporting schedule in the  federal environment requires issuance of the financial statements and the  associated opinion 45 days after the fiscal year ends and this does not  allow time for more testing. However, the OIG was not required to meet  this reporting time frame for its audit of the Marine Corps’ Fiscal Year  2012 General Fund Schedule and had already significantly exceeded it.  Given that this was a first-year audit of a 1-year schedule of budgetary  activity, additional testing could either have confirmed that a 30-day  window was appropriate and thus set a baseline, or would have shown  that further efforts were needed by the Marine Corps to address  processing delays so that the future 45-day reporting cycle could be met  without increasing audit risk.
The audit documentation shows that the OIG tested only the transactions  recorded in October 2013 that the Marine Corps applied against fiscal  year 2012 appropriations to determine whether they should have been  recorded to fiscal year 2012. The OIG did not test transactions recorded  in October that were recorded against fiscal year 2013 appropriations to  determine if these transactions were properly recorded. As a result, there  is a risk that transactions posted to 2013 appropriations should have been  recorded in fiscal year 2012 to fiscal year 2012 appropriations. For  example, U.S. Transportation Command shipment billings initially  recorded to fiscal year 2013 may not have been adjusted and may affect  fiscal year 2012 appropriations.
Figure 6 shows a high-level illustration of the scope issue posed by the  outlays that actually related to multiple fiscal year appropriations being  recorded to fiscal year 2012 appropriations. The audit documentation on  substantive testing results for shipment outlays showed that the auditors  concluded that the recording of all shipment outlays that were made  during fiscal year 2012 to fiscal year 2012 appropriations was accurate,  even though the sample shipment outlay transaction documents generally  identified allocations that needed to be made to various previous fiscal  year appropriations. Support for some sampled shipment outlay  transactions initially recorded to fiscal year 2012 appropriations included  receiving reports that were dated in August 2011 and September 2011,  indicating that they pertained to fiscal year 2011 or earlier appropriations.  Further, the documentation on testing results did not include auditor  comments that refer to additional procedures performed to ensure that  necessary adjustments had been identified by the Marine Corps and that  these adjustments were recorded by the close of the fiscal year 2012  accounting period.
The audit documentation also shows that the auditors did not perform any  substantive cutoff testing for two general ledger accounts: the obligation  account for delivered orders and the outlay account. The OIG told us that  it did not test for proper cutoff of the obligation account for delivered  orders because any errors identified would result in an adjustment to the  obligation account for undelivered orders and would have no net effect on  the Marine Corps’ Fiscal Year 2012 General Fund Schedule because the  two obligation accounts are both reported on the “Obligations Incurred”  line item of the Schedule. However, the OIG’s testing of the obligation  account for delivered orders during fiscal year 2012 substantive testing  identified 11 errors for which the corresponding adjustments were  recorded to other general ledger accounts and were reported on different  line items of the Marine Corps’ Fiscal Year 2012 Schedule. Thus, without  testing obligations related to delivered orders for proper cutoff, there may  be misstatements related to delivered orders that would not be detected  by the audit.
With regard to cutoff testing of outlay transactions, the audit  documentation showed that after the OIG’s tests of internal controls over  proper cutoff for outlay transactions resulted in an unacceptably high error  rate, the OIG requested that the Marine Corps provide documentation for  a sample of 334 outlay transactions for substantive testing of end-of- period cutoff. According to OIG auditors, the Marine Corps responded  that it was not able to provide support for this large substantive sample  because it was responding to requests for support on sampled  transactions that related to the audit of its Fiscal Year 2013 General Fund  Schedule at that time. As a result, the OIG attempted to rely on its initial  tests of the Marine Corps’ internal controls over proper cutoff and  extended the time frame for completing its control tests to attempt to  resolve the initial exceptions. The audit documentation included  statements that the Marine Corps provided additional documentation and  that the OIG determined that the documentation was sufficient to resolve  all 21 transactions that were initially tested with exception (errors). Our  review of Marine Corps documentation identified available support for 18  of the 21 transactions, and we determined that the support was sufficient  to resolve only 6 of them. Given that we were unable to find adequate  support for 12 transactions, we believe that controls were not effective.  Further, even when control tests are effective, they do not eliminate the  need for substantive testing.
section_title: The OIG Did Not Perform Sufficient Procedures to Reasonably Assure the Reliability of Reported Shipment Obligations
paragraphs: Shipment obligations pertain to shipments of military supplies and  equipment and household goods related to permanent change-of-station  relocations and related personnel mobilization and permanent change-of- station travel. The Marine Corps reported that it had $529.5 million in  fiscal year 2012 shipment obligations. Depending on the type of  shipment, the time between obligation and outlay varies. Obligations for  shipments of household goods for military members and civilians who are  deployed or relocated include amounts for storage costs and reshipment  of the items when the personnel return. These obligations, which are  funded by Military Personnel appropriations, typically liquidate over a  period of 2 or more years. Obligations for shipments of military supplies  and equipment, funded by Operation and Maintenance appropriations,  and obligations for shipments funded by Procurement appropriations  generally are liquidated within several days or a few weeks.
The audit documentation showed that the OIG had identified several audit  risks associated with shipment transactions. For example, the OIG had  determined that the Marine Corps (1) did not have sufficient  documentation available to support its multiple obligation processes for  shipment transactions and (2) was unable to match the liquidations  (outlays) with corresponding obligations. The audit documentation also  showed that the OIG had attempted to perform substantive testing of the  Marine Corps’ shipment obligations; however, the Marine Corps was  unable to provide support for $231.5 million of its reported $529.5 million  in fiscal year 2012 shipment obligations. The audit documentation noted  that the lack of supporting documentation related to the Marine Corps’  practice of recording (1) bulk estimated obligations for U.S.  Transportation Command shipments and (2) obligations for commercial  shipments either at the same time or after the associated payments were  made. Further, because the Marine Corps was unable to match outlays  for specific shipments to its bulk estimated obligations, the auditors could  not determine the reliability of obligated balances through detail testing of  transactions.
Given the identified issues related to the reliability of recorded  transportation obligations, the Marine Corps developed a model to  estimate the unliquidated obligations as of the end of the fiscal year. The  model was based on historical outlay patterns, using outlay data for fiscal  years 2008 through 2012. To illustrate, if historically 75 percent of the  outlays relating to an appropriation were expended at the end of the first  year, the model would estimate that the remaining 25 percent would be  unliquidated obligations for the appropriation. The reliability of the model  depends on several factors, including the reliability of the outlay data  used in the model; the appropriateness of assumptions used in the  model; and the consideration of factors that may affect historical patterns,  such as the different outlay patterns for the different types of shipments.
The audit documentation stated that the OIG relied on the auditing  standards in testing the Marine Corps’ estimated liquidations of shipment  obligations. In auditing estimates, auditing standards state that the  auditor’s objective is to obtain sufficient, appropriate evidence to provide  reasonable assurance that the accounting estimates are reasonable in  the circumstances. In assessing the reasonableness of the estimate,  auditing standards state that the auditor normally concentrates on key  factors and assumptions that include sensitivity to variations, deviations  from historical patterns, susceptibility to misstatements and bias, and the  entity’s historical experience related to the reliability of prior year  estimates. The auditing standards also identify procedures that the  auditor may consider when reviewing and testing the process used to  develop management’s estimates, including controls over the process,  and the relevance, reliability, and sufficiency of historical data used in the  estimate.
The audit documentation showed that the OIG performed some review  and analysis of the Marine Corps’ model for estimating obligated  balances related to shipments and made minor adjustments to the model.  However, the audit documentation did not contain evidence that the OIG  sufficiently performed certain other procedures in AU Section 342 that we  believe are important related to (1) identifying whether there were controls  over the preparation of the Marine Corps’ accounting estimates and the  testing of such controls and (2) considering whether sources of data and  factors that management used in forming the assumptions were relevant,  reliable, and sufficient for the purpose of the estimates based on  information gathered in other audit tests. For example, the audit  documentation did not contain evidence that the audit team validated the  factors management used to form the accounting estimate or performed  procedures to test controls over preparation of management’s estimates.  The audit documentation stated that the auditors performed procedures to  assure that the sources and data used in the estimating methodology  were relevant, reliable, and sufficient. However, the documentation did  not include evidence of sufficient audit procedures performed to provide  assurance of the reliability of outlay transaction data used for determining  obligation liquidation rates (referred to as the historical burn rates) as a  basis for estimating the Marine Corps’ obligated balance for shipment  transactions at the end of fiscal year 2012. The following examples  summarize our concerns with respect to the sources and reliability of the  data the OIG used to validate the Marine Corps’ model for estimating  obligated balances related to shipments at the end of fiscal year 2012.
The audit documentation showed that the OIG could not validate the  completeness of the population of the Marine Corps’ reported  shipment obligations as a basis for estimating the balance of shipment  obligations at the end of fiscal year 2012 because (1) about   $213 million related to bulk estimated obligations for which specific  supporting documentation was not available and (2) about $19 million  related to obligations that were based on billings and payment  amounts and it was not possible to determine additional obligation  amounts for shipments that had been made but had not yet been  billed. Further, the audit documentation stated that the Marine Corps  was unable to match liquidations (outlays) to reported obligations.
The audit team did not perform procedures to confirm the reliability of  U.S. Transportation Command system-generated Interfund billing  data reported through IPAC, even though the DOD OIG had  previously reported issues with the reliability of budgetary transactions  reported by DEAMS and the OIG was aware that controls over other  U.S. Transportation Command systems had not been tested.
The OIG performed limited internal control tests over shipment outlays  for a 5-year period covering fiscal years 2008 through 2012. The audit  documentation showed that the audit procedures relied on (1) Marine  Corps fiscal year 2008 and 2009 outlay data that had not been  audited, (2) fiscal year 2010 and 2011 outlay data included in SBRs  for which the OIG disclaimed an opinion, and (3) fiscal year 2012  outlay data that were tested by comparing SABRS shipment outlay  transactions to the dates and amounts on disbursement vouchers  instead of original transaction support and concluded that there were  no errors. However, these disbursement vouchers are used to record  shipment outlay transactions in SABRS and thus do not provide  independent assurance of the accuracy of the outlay transactions.
The audit documentation for internal control tests on outlays for each  fiscal year used in the model consistently noted that the auditors were  unable to determine the completeness of the shipment outlay  populations used for testing. Further, the issues discussed in this  report, such as those related to completeness and cutoff, may affect  assurance of the reliability of outlay data used in the model.
The audit documentation did not show that the OIG sufficiently  considered the effect that different types of shipment transactions  liquidated at different rates might have on estimated obligation  balances because the OIG could not determine the populations for the  various shipment processes. Members of the audit team told us that  they generalized their tests and did not separately test liquidations for  different types of shipments.
Based on its audit of the Marine Corps’ accounting estimate of its fiscal  year-end 2012 balance of shipment obligations, the OIG determined that  the Marine Corps’ reported balance of obligations at the end of fiscal year  2012 was overstated, and the audit documentation indicated that the OIG  proposed a downward adjustment of $53.7 million, which was recorded  by the Marine Corps. However, the reliability of the estimated fiscal year- end obligated balance reported in the Marine Corps’ Fiscal Year 2012  General Fund Schedule is uncertain because of (1) the lack of assurance  over the completeness and reliability of the shipment obligation and  outlay data used to estimate the ending balance of obligations and (2) the  application of a generalized liquidation rate for shipments that had  significant differences in liquidation periods. As a result, obligations  related to shipments reported in the Marine Corps’ Fiscal Year 2012  General Fund Schedule may not be complete and reliable.
As discussed later in this report, because of the significance of U.S.  Transportation Command activity to DOD-wide audit readiness, in  September 2013, the department initiated a DOD-wide Transportation  Financial Auditability working group to document and test transportation  processes, systems, and controls. The OIG is aware of this initiative.  Accordingly, the OIG should have appropriately considered the risk  associated with the Marine Corps’ shipment outlay transactions and  performed sufficient procedures to assure the reliability of shipment outlay  amounts reported in the Marine Corps’ Fiscal Year 2012 General Fund  Schedule.
section_title: The OIG Did Not Properly Consider and Evaluate Audit Evidence in Concluding on the Audit
paragraphs: The OIG’s conclusion on the results of the audit of the Marine Corps’  Fiscal Year 2012 General Fund Schedule did not consider all known  misstatements and untested amounts; explain the basis for certain  significant assumptions and auditor judgments; or properly resolve  disagreements among the audit team, statisticians, and OIG  management.
subsections: section_title: The OIG’s Evaluation of Test Results Did Not Include All Known Misstatements or Consideration of Other Known Risk Factors
paragraphs: As discussed in the auditing standards, in evaluating whether the financial  statements are presented fairly, in all material respects, in conformity with  GAAP, the auditor must consider the effects, both individually and in the  aggregate, of misstatements (both known and likely) that are not  corrected by the entity. At the conclusion of the audit, the auditor  accumulates identified misstatements and considers whether such  misstatements are material to the entity’s financial statements. In addition  to quantitative measures, the auditor is also required to consider  qualitative factors when assessing the materiality of misstatements.  Auditing standards further state that as the aggregate misstatement  identified in testing approaches materiality, the risk that the financial  statements could be materially misstated also increases; consequently,  the auditor should consider the effect of undetected misstatements in  concluding on whether the financial statements are fairly stated.
As previously discussed, in concluding on the audit, the auditor makes  judgments about materiality in light of surrounding circumstances and  qualitative and quantitative considerations. These judgments are affected  by the auditor’s perception of the financial information needs of users of  the financial statements by the size or nature of a misstatement, or both.  As a basis for quantitative considerations on the results of testing, the  auditor establishes a materiality level, or the maximum level of  misstatement the auditor is willing to accept in concluding on the audit  without the amount of misstatement being misleading to the users of the  financial information. Federal government auditors generally set  materiality for reporting on audit results at 3 percent of the materiality  base. The materiality base is the element of the financial statement(s)  that the auditor judges as most significant to the primary users of the  statements. For the audit of the Marine Corps’ Fiscal Year 2012 General  Fund Schedule, the OIG used the reported Obligations Incurred line item  amount of $27.5 billion as the materiality base. Accordingly, the OIG set  materiality at 3 percent of the materiality base for the audit of the Marine  Corps’ Fiscal Year 2012 General Fund Schedule, which was $826 million.
The audit documentation showed that the OIG calculated the level of  identified misstatement related to errors and untested amounts identified  in its audit as approximately $773 million. Based on this evaluation, the  auditors concluded that the aggregate of identified misstatements and  untested amounts was not material to the Marine Corps’ Fiscal Year 2012  General Fund Schedule.
Our review of the audit documentation found that the OIG’s analysis of its  test results omitted certain known errors and untested amounts.  Specifically, the OIG’s audit calculation of identified misstatements  omitted $18.3 million in contract progress payment errors identified in  tests of obligations and another $17.5 million related to insufficient  documentation to conclude on tests of contract outlays—a total of   $35.8 million. The audit documentation showed that the audit team had  initially determined that it could not conclude on the accuracy of sampled  contract outlay transactions for which there was no support that the goods  and services paid for were received. Accordingly, the OIG audit team  counted the related transaction amounts as untested and planned to  include them in the calculation of identified misstatements. The audit  documentation showed that OIG management made an assumption that  the unsupported outlay transactions could be adjusted and reported as  advance payments to avoid counting the amounts as untested. The audit  documentation stated that because outlays and advances are reported on  the same line item of the General Fund Schedule, the adjustment would  have no net effect on the Schedule. However, advances typically require  authorization in law or in contract and without documentation of such  authorization the advance should be considered untested. Had the  auditors included the contract progress payment errors as untested  amounts, the identified misstatement would have totaled over   $808 million. The OIG’s handling of differences of opinion between the  audit team and OIG management is discussed further below.
Additionally, the audit documentation did not include evidence that the  OIG considered potential undetected misstatements in concluding on the  fair presentation of the Marine Corp’s Fiscal Year 2012 General Fund  Schedule. Also, the audit documentation did not include evidence that the  OIG considered qualitative factors in concluding on the effect of identified  and potential undetected misstatements.
As noted above, the OIG’s identified misstatements and untested  amounts are quantitatively near the calculated materiality. Based on the  issues discussed above and other issues discussed previously in this  report—including those related to (1) completeness of transactions  reported in the Marine Corps’ Fiscal Year 2012 General Fund Schedule,  (2) transaction cutoff, (3) estimation of obligations, and (4) reliance on  information in other DOD systems—additional misstatements may exist  that may have been identified had additional audit procedures been  performed. Such further misstatements, when aggregated with identified  misstatements, could be material. Consequently, sufficient, appropriate  evidence was not obtained to support the conclusion that the Marine  Corps’ Fiscal Year 2012 General Fund Schedule is presented fairly.
section_title: The OIG Did Not Follow Guidance in Its Audit Handbook for Statistician Review and Certification of Sample Results
paragraphs: The OIG’s Audit Handbook describes roles and responsibilities of its  Quantitative Methods Division’s (QMD) technical support of DOD audits.  QMD’s roles in support of financial audits include technical assistance in  determining the appropriate population as a basis for ensuring defensible  results, guidance on statistical sampling methods, design of a sampling  plan, and analysis of sample results. The OIG’s Audit Handbook states  that the QMD analyst will attend project debriefs and exit conferences and  answer any questions about the quantitative (statistical) sampling  approach and the uses and limits of the quantitative results. In addition,  the QMD analyst will help the audit team correctly present quantitative  results in the audit report and will certify the defensibility of the significant  quantitative methods used in the audit report. However, the audit  documentation showed that QMD did not sign off as certifying the  auditors’ projections of sample results because of concerns about the  auditors mixing two methods for making statistical estimates. Instead,  QMD added a note to the certification form, stating that it expressed no  opinion as to the application (i.e., projection) of results with respect to the  evaluation of sample results against materiality. QMD officials told us that  the reason they did not sign off on the auditors’ materiality assessment is  that they were not included in the materiality assessment process and did  not know the basis for the auditor judgments made. QMD officials  explained that this was unusual and stated that they are generally  included in auditor assessments of materiality.
section_title: Significant Auditor Judgments Made in Determining the Audit Opinion Were Not Documented
paragraphs: Auditing standards recognize that auditors must use professional  judgment in concluding on an audit. Auditors also are required to  document significant decisions in their audit documentation. The audit  documentation for the audit of the Marine Corps’ Fiscal Year 2012  General Fund Schedule showed inconsistencies and conflicting  conclusions between the audit team and OIG management regarding the  scope of audit testing and the OIG’s conclusions on the results of audit  testing, including testing for cutoff, shipment obligations and outlays, and  acceptance of unaudited system-generated data for substantive testing of  transactions. These conflicting conclusions indicate that significant auditor  judgments had been made regarding the audit results and audit  conclusion, but the audit documentation did not include a reconciliation or  explanation for the conflicting statements. Further, these undocumented  auditor judgments related to decisions made by OIG management that  overturned the audit team’s test results and conclusions. The following  examples illustrate this issue.
The audit team’s conclusions on cutoff testing stated that because the  Marine Corps did not have controls for assuring that obligations were  recorded in the proper period, the team was unable to gain assurance  of the completeness of populations used for this testing and, as a  result, was unable to conclude on the completeness of the Obligations  Incurred and the Outlays line items or the fair presentation of the  Obligations Incurred line item in the Marine Corps’ Fiscal Year 2012  General Fund Schedule. The audit documentation did not contain any  further audit procedures that were performed or auditor explanations  that indicated that this issue had been resolved. Further, because the  Obligations Incurred line item, reported at nearly $27.5 billion,  represents all but about $1.9 billion of the Marine Corps’ fiscal year  2012 budgetary resources, the inability to conclude on the fair  presentation of this line item would mean that the extent of fair  presentation of the Marine Corps’ Fiscal Year 2012 General Fund  Schedule also could not be determined. Further, the audit  documentation did not show OIG management’s basis for determining  that cutoff testing was sufficient.
The audit documentation related to the OIG’s application of the  Marine Corps’ model for estimating the year-end balance of shipment  obligations included at least six individual workpapers in which the  audit team had concluded that it was unable to gain assurance as to  the completeness of populations used for testing historical (fiscal year  2008 through 2011) shipment liquidation transactions (outlays). In  concluding on the testing for this category of transactions, the audit  team stated that this issue posed a scope limitation. However, as  previously discussed, the OIG ultimately relied on historical  liquidations data for determining a “burn rate” (liquidation or outlay  rate) for fiscal year 2012 as a basis for assessing the reasonableness  of reported fiscal year-end 2012 obligated balances. We found no  documentation of the basis for the OIG management decision that the  limited procedures performed were reliable for use in estimating year- end obligated balances. This is a significant issue because shipment  obligations reported by the Marine Corps as totaling over $529 million  represent two-thirds of the materiality threshold used by the OIG to  conclude on the audit. As previously discussed, identified  misstatements and untested amounts were quantitatively near the  calculated materiality without considering this amount.
In addition, our review of the audit documentation identified numerous e- mail communications during the months of November and December  2013, shortly before the audit report was issued, that indicate there was a  disagreement between the audit team and OIG management regarding  whether there was sufficient, appropriate audit evidence to support an  unqualified (“clean”) audit opinion. The e-mails showed that the audit  team did not believe it had the evidentiary support for the clean opinion  and was asking for OIG management guidance regarding the basis for  issuing an unqualified opinion. The e-mails also showed that OIG  management instructed the audit team that a decision was made that the  Marine Corps had “earned” an unqualified opinion and that the audit  documentation needed to be updated to support the clean opinion. The  audit documentation did not include an explanation of the basis for the  OIG management judgment related to the opinion. Consequently, the  audit documentation showed a gap between the audit team’s conclusions  relating to a disclaimer and the clean opinion that was reported by the  OIG in December 2013.
Audit quality control standards (designated QC by the AICPA) state that  audit organizations should establish policies and procedures for  addressing and resolving differences of opinion within the engagement  team; with those consulted; and, when applicable, between the  engagement partner and the engagement quality control reviewer.  Such policies and procedures should enable a member of the  engagement team to document his or her disagreement with the  conclusions reached after appropriate consultation. Such policies and  procedures should require that (1) conclusions reached be documented  and implemented and (2) the audit report not be released until the matter  is resolved. Our review of the OIG’s Audit Handbook and the DOD  Audit Manual, and discussions with the OIG Audit Policy and Oversight  officials, determined that the OIG does not have policies and procedures  for resolving disagreements between the audit team and OIG  management.
section_title: The Marine Corps Has Not Taken Timely Actions to Address Identified Accounting, Reporting, and System-Related Internal Control Weaknesses
paragraphs: The OIG issued 177 recommendations to address deficiencies in internal  controls over Marine Corps’ accounting and financial reporting and  information technology system general operating controls as a result of its  audits of the Marine Corps’ fiscal year 2010 and 2011 SBRs and the  Marine Corps’ Fiscal Year 2012 General Fund Schedule. Based on our  review of OIG documentation, 130 (73 percent) of these  recommendations had not been fully addressed by the end of the fiscal  year 2012 Marine Corps audit. This includes 22 recommendations that we  determined the OIG closed prior to verifying and documenting that  implementation of the recommended controls was complete and fully  addressed the recommendations. In addition, we made 3  recommendations to the Marine Corps in our September 2011 report on  the Marine Corps’ fiscal year 2010 SBR audit results, all of which  remained open as of March 2015. The Marine Corps has improved its  remediation plan and strengthened its monitoring process and is taking a  more risk-based approach to corrective actions. However, significant  uncorrected control weaknesses continue to impair the Marine Corps’  ability to produce consistent, reliable, and sustainable financial  information for day-to-day decision making on its missions and  operations. The lack of reliable financial information and systems,  processes, and controls also impedes the Marine Corps’ ability to achieve  sustainable, cost-effective audit efforts.
subsections: section_title: The Marine Corps Has Made Limited Progress in Addressing Internal Control Weaknesses Identified by the OIG
paragraphs: Our review of the OIG’s documentation on the status of actions to  address its recommendations to Marine Corps management resulting  from its fiscal years 2010 through 2012 audits of the Marine Corps  budgetary activity showed that as of the end of its audit of the Marine  Corps’ Fiscal Year 2012 General Fund Schedule, 130 of the 177  recommendations issued had not been fully addressed. The 130 open  recommendations included 16 recommendations that were issued from  August 2012 through February 2013 to address deficiencies identified in  the audit of the Marine Corps’ Fiscal Year 2012 General Fund Schedule.  The majority of the 130 open recommendations related to the Marine  Corps’ fiscal year 2010 first-year SBR audit. In addition to presenting  impediments to the Marine Corps’ financial management operations, the  weaknesses that gave rise to these recommendations also impede the  Marine Corps’ ability to respond to audits and the auditors’ ability rely on  the Marine Corps’ internal controls in planning and conducting audits.  This results in the auditors having to perform labor-intensive substantive  tests of larger samples of transactions that consume more time and  resources than would be required if the Marine Corps’ internal controls  were effective. While it is important for the Marine Corps to address these  recommendations timely, Marine Corps officials told us that progress has  been limited because Remediation Team staff are used to support  financial audits and the Marine Corps has experienced difficulty hiring  additional qualified staff. Table 1 summarizes our analysis of the OIG’s  documentation on the status of Marine Corps actions taken to address  the OIG recommendations from the fiscal year 2010 through 2012 audits.
OIG managers told us that their policy is to evaluate corrective actions on  OIG and GAO recommendations and close them as appropriate.  However, as noted in table 1, we determined that 22 recommendations  that the OIG had closed should have remained open. Our analysis of the  audit documentation on the Marine Corps’ corrective actions determined  that support was not sufficient for closing these recommendations for the  following reasons.
Four recommendations called for development of written policy and  procedures and the implementation of the related control procedures.  The documentation on the Marine Corps’ actions only supported the  development of the written policy and procedures. There was no  documented evidence that the policy and procedures as designed had  been effectively implemented.
Six recommendations related to the completeness and accuracy of  data transfers from DOD business systems to the Marine Corps’  SABRS general ledger system were closed without any evidence of  procedures being performed to confirm that the data transferred to  SABRS were complete.
Four recommendations were closed because the auditors’ substantive  testing did not identify any related exceptions, even though there was  no documentary evidence that the Marine Corps had designed and  implemented corrective actions.
The remaining eight recommendations were closed without sufficient  documentation that actions were completed and verified as effective.
The auditors told us that they planned to test implementation of several  controls in a subsequent audit. However, absent evidence that the new  controls had been effectively implemented, closing these  recommendations creates a risk that corrective actions needed may not  be completed and that the related weaknesses will continue to exist.
section_title: Significant Uncorrected Internal Control Weaknesses Pose a Risk to Sound Financial Management Processes and Sustainable Audit Efforts
paragraphs: Our review of the Marine Corps’ open recommendations identified  numerous uncorrected financial reporting and information system control  weaknesses that if effectively resolved, would significantly improve the  Marine Corps’ ability to achieve reliable financial reporting and more  efficient audit efforts. The following examples summarize  recommendations related to significant weaknesses that had not yet been  corrected and thus impair the Marine Corps’ ability to generate reliable  financial management information on an ongoing basis for decision  making and achieve and sustain auditable budgetary information.
Sixteen of the Marine Corps’ open recommendations related to  weaknesses in controls for assuring completeness, including transfers  of feeder system data to its SABRS general ledger system and timely  recording of transactions. These open recommendations addressed  actions to (1) assure completeness of populations of transactions and  account balances, (2) test interface controls between various feeder  systems and the Marine Corps’ SABRS general ledger system, and  (3) perform reconciliations of feeder system data to SABRS.
Thirty-five open recommendations related to weaknesses in controls  over the reliability of feeder system data, including systems security,  access controls, and data processing controls. Open  recommendations related to data reliability include recommendations  to (1) implement periodic review of input processing and edit checks  that could produce exception reports; (2) ensure timely, accurate  recording of transactions; and (3) strengthen information system data  integrity and access controls.
Forty-three open recommendations related to weaknesses in controls  for assuring proper support for obligations and outlays. These  weaknesses affect the support for MILSTRIP, shipment, and contract  transactions. Open recommendations related to the reliability of  reported obligations and outlays include actions to (1) ensure proper  recording of obligation and outlay transactions; (2) reconcile shipment  outlays to obligation transactions; (3) periodically review accrued  delivered orders and identify amounts that should be deobligated;   (4) review support for existing bulk estimated obligation documents  and adjust the beginning obligated balance, as appropriate; (5) ensure  supporting documentation traces to and supports amounts recorded in  SABRS; and (6) improve monitoring controls over IPAC transactions.
In addition to achieving improvements in the overall integrity and reliability  of its financial operations and information, the Marine Corps would benefit  from resolving these significant control weaknesses because   (1) strengthened processes and controls would provide a basis for the  auditors to reduce sample sizes and (2) strengthening controls for  assuring the reliability of feeder system data would reduce efforts to  locate original support for transactions, thereby reducing the Marine  Corps’ efforts to respond to requests for large samples and auditor efforts  to perform labor-intensive substantive tests of larger samples of  transactions that consume more time and resources than would be  required if the Marine Corps’ internal controls were effective. Further,  developing audit support agreements with other DOD components that  support the Marine Corps’ mission by providing services and supplies as  well as the related obligation and outlay data would help support the  Marine Corps’ efforts to respond to its financial audits. For example, such  agreements could assist the Marine Corps in documenting mission- related processes, systems, and controls and taking appropriate actions  to address any weaknesses identified in such efforts. The overall benefit  from these efforts would be financial management improvement.
In August 2014, we followed up with Marine Corps officials to discuss  their progress on addressing open recommendations from the Marine  Corps’ fiscal years 2010 through 2012 audits. Of the 75 open accounting  and financial reporting recommendations, our analysis showed that in  February 2014, the auditors closed 48 recommendations and  consolidated and reopened 22 of them as new recommendations  associated with performance of the audit of the Marine Corps’ Fiscal Year  2013 General Fund Schedule. The officials told us that the purpose of this  effort was to clarify finding and recommendation language to help the  Marine Corps identify underlying control weaknesses and develop  appropriate corrective actions to resolve the causes of the weaknesses.  In reissuing the consolidated recommendations, the auditors grouped  findings with similar causes and remediation steps into an overall  recommendation. However, our analysis determined that the other 27  recommendations were closed by the auditors. Documentation that the  Marine Corps provided us in August 2014 stated that the weaknesses  remained, including those related to 6 recommendations for correcting  weaknesses associated with use of bulk estimated obligations; 10  recommendations for timely fund manager reviews, including review of  “stale” obligations (obligations without activity for more than 120 days) to  see if they are needed or should be deobligated; and 6 recommendations  related to timely correction of DDRS financial reporting errors and  monthly management reviews of all journal vouchers for proper recording.  The auditors did not consolidate or close any of the previously issued  information technology system recommendations during this period.
The auditors told us that their decision to close these 27  recommendations was based on the results of substantive testing  performed for the audit of the Marine Corps’ Fiscal Year 2013 General  Fund Schedule. The auditors explained that nothing related to the  previously identified weaknesses came to their attention during their  substantive testing for the Marine Corps’ fiscal year 2013 audit. However,  the absence of identified misstatements alone is not sufficient for  determining whether internal control weaknesses have been remediated.
Regardless of whether the number of recommendations to address  control weaknesses has been reduced, for example, because the auditors  consolidated them, timely and effective actions to resolve underlying  causes of control deficiencies related to (1) completeness of data  transferred from DOD feeder systems to the Marine Corps’ SABRS  general ledger system, (2) reliability of financial data and information  generated by DOD feeder systems, and (3) ensuring availability of  supporting documentation for obligations and outlays will be critical to  achieving sustainable financial management improvement and financial  audit efforts.
section_title: The Marine Corps Has Made Progress in Addressing Previous GAO Audit Recommendations
paragraphs: Our September 2011 report on the Marine Corps’ fiscal year 2010 SBR  audit results included three recommendations to the Marine Corps.  While the Marine Corps has made progress in addressing our  recommendations, all three recommendations remain open.
The Marine Corps has not yet fully addressed our recommendations that  it (1) use the results of its fiscal year 2010 and 2011 SBR audits to  develop a comprehensive, risk-based plan for designing and  implementing corrective actions that provide sustainable solutions for  SBR auditor recommendations; (2) review Marine Corps SBR remediation  actions under way and confirm that the actions are fully responsive to the  auditor recommendations; and (3) develop and implement timely and  effective agreements for audit support with the appropriate DOD  components in accordance with the FIAR Guidance where remediation  actions require a coordinated effort.
The Marine Corps has established the Risk and Compliance Branch to  support its audit readiness efforts. The Marine Corps also assigned new  leadership to its Remediation Team and moved the team under the Risk  and Compliance Branch to provide more focus on remediation of  identified weaknesses. The Remediation Team is responsible for  coordinating, monitoring, and validating the design and effectiveness of  corrective actions to address audit recommendations and findings from  management and internal reviews.
DOD stated that the Marine Corps disagreed with our recommendation to  develop a comprehensive, risk-based corrective action plan, stating that it  was too prescriptive with regard to identifying roles and responsibilities  and including performance indicators to measure performance against  action plan objectives. However, under its new Risk and Compliance  Branch, the Marine Corps subsequently developed a detailed remediation  process that includes elements of a comprehensive, risk-based plan as  called for in our recommendation. For example, according to the Marine  Corps, it now identifies weaknesses associated with audit findings that  the auditors grouped by categories and works with process owners and  stakeholders to understand the causes of the weaknesses and develop  corrective action plans that will be effective in resolving them. Our review  of the Marine Corps’ new remediation process found that Marine Corps  officials also had assigned a high, medium, or low priority to each  recommendation based on risk; however, they had not yet developed  written criteria or guidance for determining how to apply these priorities in  order to focus corrective actions on the most significant areas of  weakness.
In response to our second recommendation, as part of the new  remediation process, the Marine Corps also incorporated an independent  stakeholder review and monitoring role with responsibility for ensuring  that corrective actions fully address auditor recommendations as well as  any recommendations resulting from internal management reviews.  However, the Marine Corps has not yet provided documentation of the  stakeholder reviews to demonstrate that this action is fully implemented  and operating as intended.
With regard to our third recommendation, Marine Corps officials told us  that they have initiated efforts to develop agreements for audit readiness  support with the appropriate DOD components. For example, they have a  draft audit support agreement with DLA that covers audit support related  to DLA-performed business processes that generate financial information  that the Marine Corps will rely on for financial statement reporting and  audit purposes. These DLA business processes include (1) receiving and  accepting goods, (2) storing material, (3) issuing and distributing material,  (4) disposing of material, and (5) updating accountability records. Marine  Corps officials told us that where audit support depends on DOD-wide  systems, processes, and controls related to MILSTRIP and U.S.  Transportation Command shipments, they believe the DOD Comptroller  and FIAR Directorate should take the lead in developing the service-level  agreements.
section_title: The Marine Corps Audit Identified Significant Challenges for DOD- Wide Financial Improvement and Audit Readiness Efforts
paragraphs: Our review of the audit of the Marine Corps’ Fiscal Year 2012 General  Fund Schedule identified major areas where key Marine Corps business  processes depended on other DOD agencies’ business processes and  feeder systems with data reliability issues that transferred financial data  and information to its general ledger system. Because other DOD  components also rely on many of those same DOD agencies’ business  processes and feeder systems, these issues will likely present DOD-wide  challenges related to (1) ensuring the completeness of populations used  for transaction testing and the proper cutoff of transactions for the  accounting period, (2) determining the reliability of feeder system data  transferred to the general ledger system, and (3) determining the  reliability of reported obligations and outlays. These DOD-wide  challenges have been known for many years. Since December 2011,  DOD’s FIAR Guidance has included these challenges in a list of  “dealbreakers” that if not effectively resolved, would pose a significant  challenge to achieving financial management improvement as well as  audit readiness. To the extent that these challenges are not resolved,  they will pose serious obstacles to the military services, which are  currently undergoing first-time audits of their fiscal year 2015 General  Fund schedules of budgetary activity, and could also pose obstacles to  DOD’s efforts to achieve audit readiness on a full set of financial  statements for fiscal year 2018.
subsections: section_title: Completeness of Populations and Proper Cutoff Are Critical to DOD- Wide Audit Readiness
paragraphs: In May 2014, we reported that DOD had an inventory of 2,329 business  systems, including 286 financial management systems; 702 logistics  systems; 730 human resources management systems (including payroll  systems); and numerous acquisition, logistics, and other business  systems. The vast majority of the department’s financial transactions  originate in these business systems that then feed financial transaction  data—including data for military and civilian payroll, supplies and  procurements, travel, work orders, and shipments—to DOD general  ledger systems. As identified in our review of the Marine Corps’ fiscal  year 2012 audit, performing tests to assure the completeness and  reliability of DOD business systems data and performing periodic  reconciliations of business system data to general ledger systems are  necessary to provide reasonable assurance that military service and  defense agency financial statements include all transactions and  balances that should have been recorded for the period. This will be a  challenge across DOD given the large number of feeder systems and the  fact that the controls over most systems have not yet been tested.  Without assurance of completeness of populations used for audit testing,  auditor sampling and testing results will not provide the reasonable  assurance necessary for concluding on an audit and forming an opinion.  DOD’s FIAR Guidance continues to identify the inability to provide  assurance of complete populations (i.e., reconcile the general ledger to  transaction detail, including feeder system detail) as an audit readiness  dealbreaker.
As a subset of completeness, proper fiscal year-end cutoff of transaction  activity and assurance that appropriation data are recorded to the proper  fiscal year are essential to ensuring that the financial statements and the  schedules of budgetary activity include all data for the accounting period  audited. As previously discussed, the population of transactions for  shipments of household goods and military items used in the Marine  Corps’ fiscal year 2012 audit contained liquidations (outlays) related to  one or more previous fiscal year appropriations. Because the Marine  Corps was unable to reconcile its fiscal year 2012 bulk estimated  obligations to the related outlays, and outlays recorded to fiscal year 2012  included outlays that were properly chargeable to prior fiscal year  appropriations, the populations of obligations and outlays provided to the  auditors for sampling and testing were not consistent with the reported  scope of its Fiscal Year 2012 General Fund Schedule. Since the other  military services also use bulk estimated obligations to fund their business  processes whose transaction cycles cover multiple fiscal years, the  inability to segregate outlays by appropriation fiscal year poses a  significant risk to the integrity of their schedules of budgetary activity,  particularly with regard to first-year schedules. For example, when bulk  estimated obligations liquidate over several fiscal years, identifying a  population of transactions that relates to a first- or even a second-year  schedule of budgetary activity is problematic. This issue poses a  significant audit readiness challenge for the other military services’ first- time audits of their schedules of budgetary activity, which have been  initiated for fiscal year 2015.
section_title: The Reliability of DOD System-Generated Data Has Not Been Validated
paragraphs: The Marine Corps’ fiscal year 2012 audit demonstrated the difficulty in  performing a fully substantive audit. For example, when the Marine Corps  was unable to provide documentary support for certain transactions, it  attempted to rely on (1) data and information generated by DLA systems  and processes that support MILSTRIP transactions and (2) information  generated by U.S. Transportation Command systems and processes for  shipments of military items and household goods. This is directly contrary  to the DOD FIAR Guidance on audit dealbreakers related to DOD feeder  systems, which states that substantive testing of transactions to  supporting documentation cannot overcome ineffective or missing  information technology system controls when transaction evidence is  electronic and only maintained within a system or the key supporting  evidence is system-generated reports.
The other military services and some DOD agencies use these same  mission support agencies’ business processes and systems to issue and  ship military supplies and equipment and ship household goods, and they  make payments (outlays) based on billings generated by these agencies’  business feeder systems. To the extent that the other military services are  unable to locate original support for tested transactions, there is a  potential risk that if DOD mission support agencies’ systems and  processes are not tested to reasonably assure the reliability of transaction  data, the other military services’ and DOD will experience the same  problem as the Marine Corps. Accordingly, DOD’s FIAR Guidance  recognizes that for large volumes of transactions, it is more effective and  efficient to rely on internal controls, including information system controls,  rather than planning to fully rely on substantive testing of larger numbers  of sampled transactions for which documentary support must be located  and provided to the auditors. Since December 2011, DOD’s FIAR  Guidance has stated that DOD mission support agencies are responsible  for resolving dealbreakers related to their information systems,  processes, and controls and obtaining SSAE No. 16 examinations.  However, because of uncorrected accounting, reporting, and information  system weaknesses, the Marine Corps has relied primarily on costly,  labor-intensive efforts to locate and provide documentary support for  substantive tests of transactions.
According to DOD’s November 2014 FIAR Plan Status Report, DLA and  U.S. Transportation Command are still in the beginning stages of their  audit readiness efforts. As a result, the military services and defense  agencies have asserted audit readiness for their fiscal year 2015  schedules of budgetary activity without these mission-support agencies  having undergone SSAE No. 16 examinations.
Until these support agencies’ systems, controls, and processes have  been tested and are deemed reliable for financial management reporting  and audit purposes, the Marine Corps, the other military services, and  defense agencies that rely on these systems and processes may  experience the same challenges we identified in the Marine Corps’ fiscal  year 2012 audit with regard to providing support for shipment transactions  in audits of their fiscal year 2015 General Fund schedules of budgetary  activity.
section_title: Ability to Assure the Reliability of Reported Obligations and Outlays Is Questionable
paragraphs: The Marine Corps’ fiscal year 2012 audit identified serious issues  regarding the reliability of reported obligations and outlays. These issues  relate to effective processes and controls for reasonably assuring   (1) proper cutoff of beginning- and end-of-period obligations and outlays  and (2) reported shipment obligations and outlays reflect activity for the  accounting period audited. Because the Marine Corps and other military  services record shipment obligations and outlays that occurred during  each accounting period to current year appropriations, subsequent  research and analysis are required to determine the appropriate fiscal  year appropriation to be charged and to make necessary adjustments to  both obligations and outlays. If the billings are made after the end of the  accounting period and research to determine the proper appropriations to  be charged extends several months into the next accounting period, first-  and second-year schedules of budgetary activity may reflect activity  outside the scope of the schedule.
To address audit readiness concerns related to shipment obligations and  outlays, in September 2013, the DOD Comptroller and the Office of the  Under Secretary of Defense (Acquisition, Technology and Logistics),  Office for Transportation Policy, established the DOD-wide Transportation  Financial Auditability Working Group to facilitate DOD component audit  readiness in the department’s freight (military equipment and supplies  and materials) and personal property (household goods) process  areas. The Working Group is approaching the transportation audit  readiness issues in two phases: (1) developing an obligation methodology  with enterprise guidance based on FIAR requirements and input from  financial management function representatives and (2) achieving overall  improvements in transportation processes, systems, and controls. The  DOD Comptroller reviewed and approved an obligation methodology to  provide direction on establishing policies and procedures for managing  transportation transactions funded with bulk estimated obligations.
In July 2014, the Transportation Working Group distributed the obligation  methodology to the Army, the Navy, the Marine Corps, the Air Force, U.S.  Transportation Command, DLA, and DFAS. The obligation methodology  was intended to provide a baseline for DOD components, including the  military services, DLA, and U.S. Transportation Command, to develop  and refine corrective action plans in preparation for the audits of their  fiscal year 2015 schedules of budgetary activity.
Overall transportation business function improvements focus on long- standing transportation financial issues across DOD that require in-depth  process analysis and development of standard processes and procedures  across the department. The first six focus areas relate to management of  transportation account code usage from obligation to payment. The  remaining focus areas, which cover information systems, bill payment and  expenditure processes, and key supporting documentation, will begin in  fiscal year 2015. Efforts to improve business processes, establish  business rules (i.e., policy), and achieve systems integration are expected  to be completed in fiscal year 2019 or 2020, to support sustainment of  auditability. While these are important efforts, until DOD components and  service agencies implement effective processes and controls to ensure  that shipment obligations and outlays are recorded to the proper fiscal  years, they will face significant challenges in audits of their schedules of  budgetary activity and, ultimately, their SBRs.
section_title: Conclusions
paragraphs: The unqualified opinion on the Marine Corps’ Fiscal Year 2012 General  Fund Schedule initially reported by the DOD OIG was not supported by  sufficient audit procedures or sufficient, appropriate audit evidence.  Specifically, the OIG did not (1) perform sufficient procedures to  determine the completeness of transactions reported on the Marine  Corps’ Fiscal Year 2012 General Fund Schedule, (2) perform sufficient  procedures to determine the reliability of certain evidence used to support  transactions in the Marine Corps’ Schedule, (3) perform sufficient  procedures to determine whether budget activity was recorded in the  proper period and whether shipment obligations were properly recorded,  and (4) properly consider and evaluate the audit evidence in concluding  and reporting on the result of the audit. As a result, the OIG did not obtain  sufficient, appropriate evidence to support the reported audit opinion.  Further, the DOD OIG lacked policy and procedures for resolving  disagreements among the audit team and documenting the basis for the  resolution of such disagreements.
The OIG withdrew its opinion on the Marine Corps’ Fiscal Year 2012  General Fund Schedule because of issues identified in the audit of the  Marine Corps’ Fiscal Year 2014 General Fund Schedule that raised  questions concerning the completeness of transactions in the Fiscal Year  2012 Schedule on which its opinion was based. At that time, the OIG  indicated that once additional information has been gathered and  analyzed, the fiscal year 2012 audit opinion will be revisited in light of its  analysis and reissued. In commenting on our report, the OIG stated that it  would consider all relevant information, including the findings and  recommendations in our report and the findings of the four ongoing audits  of suspense accounts as well as a report from the OIG’s Quality and  Standards Office before deciding whether to reissue an opinion on the  Marine Corps’ Fiscal Year 2012 General Fund Schedule.
The Marine Corps made limited progress on resolving uncorrected  financial management weaknesses. Consequently, inadequate risk  management efforts will likely pose continuing challenges to its  auditability. Moreover, the concerns identified with the Marine Corps audit  also pose significant challenges to DOD-wide audits because the other  military services and DOD components rely on many of the same  supporting agencies’ business processes and feeder systems to carry out  their missions and operations. For example, unless DOD and the military  services can provide assurance of (1) completeness of general ledger  data and the populations of budgetary transactions used in audit testing,  along with proper cutoff and reporting of transactions to the appropriate  fiscal year; (2) reliability of financial data generated by DOD agencies’  business processes and systems; and (3) proper recording of obligations  and outlays, they will be unable to generate auditable schedules of  budgetary activity and ultimately auditable sets of financial statements.  The ultimate goal of financial audits is to provide accountability over  DOD’s vast resources along with reliable information to support  management decisions on DOD’s missions and operations. Achieving a  clean audit opinion would be a normal outcome of sound financial  management systems, processes, and controls.
section_title: Recommendations for Executive Action
paragraphs: To improve the quality of DOD’s financial statement audits and ensure  that corrective actions to address audit recommendations are fully and  effectively implemented prior to their closure, we are making the following  three recommendations to the Department of Defense Inspector General:  In addition to analyzing additional information related to the  withdrawal of the auditor’s opinion on the Marine Corps’ Fiscal Year  2012 General Fund Schedule, reconsider the conclusions made in the  OIG’s initial audit report based on the findings in our report before  determining whether the auditor’s opinion should be reissued or  revised, or whether additional work should be performed.
Develop and document a quality assurance process for elevating  disagreements between the audit team and OIG management to  ensure appropriate, objective resolution of the disagreements.
Ensure that Marine Corps corrective actions fully address audit  recommendations and document auditor review of the actions taken  before closing the related recommendations.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the DOD OIG, the Marine Corps, and  the Office of the DOD Comptroller. We received written comments from  each of these entities, which are reprinted in appendixes II through IV,  respectively We summarize and evaluate the OIG’s, Marine Corps’, and  Office of the DOD Comptroller’s comments below, and we provide  detailed responses to the OIG’s comments following the comment letter in  appendix II. We made technical corrections and clarifications in the body  of our report, where appropriate.
subsections: section_title: DOD OIG Comments and Our Evaluation
paragraphs: In commenting on our report, the DOD OIG agreed with our three  recommendations directed to it but generally disagreed with our findings  that the OIG did not perform sufficient procedures, under professional  standards, and consequently did not obtain sufficient, appropriate audit  evidence to support its audit opinion on the Marine Corps’ Fiscal Year  2012 General Fund Schedule. The OIG stated that it believed its report  was supported when it was issued on December 20, 2013. The OIG  provided comments on (1) the use of professional judgment,   (2) completeness of transactions, (3) reliability of evidence, (4) cutoff  testing, (6) reliability of recorded obligations, (7) materiality and audit  conclusions, and (8) resolution of differences within the audit team. The  OIG also commented on our oversight of the Marine Corps’ fiscal years  2012 through 2014 audits.
During our review of the audit of the Marine Corps’ Fiscal Year 2012  General Fund Schedule, we had numerous discussions with the OIG,  beginning at the end of February 2013, regarding the key areas  discussed in our report. In drafting our report, we carefully considered the  responses to our concerns that the OIG provided during these  discussions. Such OIG responses were generally consistent with the  OIG’s written comments on our draft report. Accordingly, the OIG’s  comments do not raise issues that we had not already considered and  appropriately addressed in our work. Further, our findings are consistent  with the requirements in professional auditing standards cited in our  report.
In addition, the OIG referred, in several places, to additional procedures  applied in the audits of the Marine Corps’ Fiscal Years 2013 and 2014  General Fund Schedules. The OIG stated that certain audit testing in  subsequent audits was expanded to address GAO concerns. We  understand that the results of subsequent, expanded audits may provide  additional insights into risks and the extent of any misstatements that may  exist in the key areas discussed in our report. However, our findings in  this report are focused on the adequacy of audit procedures applied and  documented as part of the OIG’s audit of the Marine Corps’ Fiscal Year  2012 General Fund Schedule.
subsections: section_title: Use of Professional Judgment
paragraphs: The OIG commented that auditing standards recognize that the auditor  needs to make professional judgments throughout the audit. We  acknowledge that auditing standards recognize the need for professional  judgment in conducting an audit. However, auditing standards also  include requirements that the auditor needs to fulfill in order to comply  with such standards. Auditor requirements in the standards are clearly  denoted with the terms “must,” “is required to,” and “should.”
Our report includes references to the relevant requirements in auditing  standards and the basis for our determination that in certain key audit  areas, the OIG did not perform sufficient procedures, under such  standards, and consequently did not obtain sufficient, appropriate audit  evidence to support its audit opinion on the Marine Corps’ Fiscal Year  2012 General Fund Schedule. Specifically, we found that the OIG did not perform sufficient procedures to determine the completeness of  transactions reported on the Marine Corps’ Schedule, perform sufficient procedures to determine the reliability of certain  evidence used to support transactions included on the Schedule, perform sufficient procedures to determine whether budgetary activity  was recorded in the proper period and shipment obligations were  properly recorded, and properly consider and evaluate the audit evidence in concluding and  reporting on the results of the audit.
As stated in our report, had sufficient audit procedures been performed in  key areas of concern that we identified, additional misstatements may  have been identified that when aggregated with already identified  misstatements, could be material to the Marine Corps’ Fiscal Year 2012  General Fund Schedule.
section_title: Completeness of Transactions
paragraphs: The OIG stated that in its professional judgment, it reduced the risk of  material misstatement related to completeness of outlays and obligations  to an acceptable level. In our report, we noted several areas where, in our  view, there is a high risk of material misstatement related to  completeness of outlays and obligations and provided the supporting  reasons (e.g., ineffective processes and controls, material amounts  involved, and known prior misstatements). As noted in our report, auditing  standards require that the auditor design and perform audit procedures to  reduce the risk of material misstatement to an acceptably low level. Also,  such standards require that the auditor(1) assess the risk of material  misstatement at the relevant assertion level and (2) perform substantive  procedures for all relevant assertions related to material classes of  transactions, account balances, and disclosures to determine whether  there is evidence of any material misstatements. Auditing standards  further state that existence and completeness are always relevant  assertions.
We found that the OIG did not perform sufficient procedures to determine  whether (1) material amounts of fiscal year 2012 obligations and outlays  were improperly charged to fiscal year 2011 and prior appropriations, and  (2) all nonpayroll feeder system transactions (representing about half of  the reported fiscal year 2012 budgetary activity) were properly included in  the Marine Corps’ Fiscal Year 2012 General Fund Schedule.
The OIG also mentioned that the March 23, 2015, withdrawal of its  unqualified opinion report on the Marine Corps’ Fiscal Year 2012 General  Fund Schedule was not related to the completeness concerns discussed  in our report. However, our concerns related to the risk that all  transactions that should have been included in the Marine Corps’ Fiscal  Year 2012 General Fund Schedule were not included in the Schedule,  which includes the risk that suspense account transactions were not  appropriately included in the Marine Corps’ Schedule.
section_title: Reliability of Evidence
paragraphs: In response to our finding that the OIG did not perform sufficient  procedures to determine the reliability of certain evidence used to support  transactions in the Marine Corps’ Fiscal Year 2012 General Fund  Schedule, the OIG stated that it believes that audit evidence used to test  the Schedule was appropriate and permissible under the auditing  standards. As discussed in our report, auditing standards require that in  examining evidence supporting a transaction, the auditor should consider  the reliability of the information used as audit evidence, such as electronic  documents, including consideration of controls over its preparation and  maintenance, where relevant. Such consideration would normally  include any information that raises doubts about the reliability of the  evidence. If the auditor has doubts about the reliability of information to  be used as audit evidence or is aware of problems with the reliability of  the data, the auditor should determine what modifications or additions to  the audit procedures are necessary to resolve the issues. Also, when the  auditor uses entity-produced information in performing audit testing or  procedures to support audit testing, the audit standards require that the  auditor obtain evidence about the accuracy and completeness of the  information, for example, by performing procedures to determine whether  the related controls over the data are effective.
As noted in our report, the auditors did not document their consideration  of the reliability of the audit evidence provided by other DOD agencies,  although there was evidence that should have raised doubt about the  reliability of the audit evidence. In addition, the auditors relied on support  produced by certain Marine Corps systems without obtaining sufficient  evidence about the accuracy and completeness of this information.
section_title: Cutoff Testing
paragraphs: The OIG commented that it believed that the cutoff testing performed on  outlays was both sufficient and in accordance with auditing standards.  While the OIG comments described certain cutoff tests that were  performed, the OIG, as discussed in our report, did not (1) sufficiently  document its assessment of the risk of material misstatement related to  cutoff, (2) perform sufficient cutoff testing procedures with respect to  certain risks (e.g., fiscal year 2012 appropriation transactions that may be  inappropriately recorded as fiscal year 2011 transactions), and   (3) perform sufficient cutoff testing procedures with respect to certain  types of transactions (e.g., transactions with known long transaction  cycles). Consequently, there may be misstatements related to cutoff that  would not have been detected by the OIG’s audit procedures. As noted  above, auditing standards require that the auditor design and perform  audit procedures to reduce the risk of material misstatement to an  acceptably low level.
The OIG also stated that the risk of material misstatement related to  cutoff was low, based on the results of the audits of the Marine Corps’  fiscal years 2011, 2012, and 2013 (first quarter) budgetary activity.  Further, the OIG stated that additional procedures performed during the  fiscal years 2013 and 2014 audits did not indicate there was a high risk of  material misstatement. In our view, there was a high risk of material  misstatement related to cutoff for the reasons included in our report and  the fact that cutoff testing was not performed in prior year audits. While  we agree that subsequent audits may provide additional information for  understanding the risk of material misstatement related to cutoff, we  believe that certain cutoff risks were not adequately addressed during the  fiscal year 2012 audit. Also, we do not believe that the documentation  adequately addressed the auditor’s assessment of the risk of material  misstatement, including any other considerations beyond the information  documented in the audit of the Marine Corps’ Fiscal Year 2012 General  Fund Schedule.
section_title: Reliability of Recorded Obligations
paragraphs: The OIG commented that it believes that sufficient audit procedures were  performed to determine whether the accounting estimate for  transportation shipments was reasonable in the context of the Schedule  taken as a whole. As discussed in our report, the audit documentation  showed that the OIG had identified several audit risks associated with the  Marine Corps’ accounting for shipment transactions. For example, the  Marine Corps (1) did not have sufficient documentation available to  support its multiple obligation processes for shipment transactions and   (2) was unable to match the liquidations (outlays) with corresponding  obligations. The audit documentation also showed that the OIG had  attempted to perform substantive detail testing of the Marine Corps’  shipment obligations; however, the Marine Corps was unable to provide  support for $231.5 million of its reported $529.5 million in fiscal year 2012  shipment obligations.
As stated in our report, auditing standards identify procedures that the  auditor may consider when reviewing and testing the process used to  develop management’s estimates, including controls over the process  and the relevance, reliability, and sufficiency of historical data used in the  estimate. The OIG commented that it had performed four of the nine  procedures enumerated in the auditing standards. In addition, the auditing  standards state that the auditor’s objective is to obtain sufficient,  appropriate evidence to provide reasonable assurance that the  accounting estimates are reasonable in the circumstances. In  assessing the reasonableness of an estimate, auditing standards state  that the auditor normally concentrates on key factors and assumptions  that include sensitivity to variations, deviations from historical patterns,  susceptibility to misstatements and bias, and the entity’s historical  experience related to the reliability of prior year estimates. As stated in  our report, the audit documentation did not contain evidence that the OIG  sufficiently performed certain other procedures enumerated in the  auditing standards that we believe are important related to (1) identifying  whether there were controls over the preparation of the accounting  estimates and supporting data that may be useful in the evaluation and  (2) considering whether sources of data and factors that management  used in forming the assumptions were relevant, reliable, and sufficient for  the purpose of determining the estimates based on information gathered  in other audit tests.
section_title: Materiality and Audit Conclusions
paragraphs: The OIG stated that it believes the results of the audit work were properly  considered and that it appropriately evaluated the audit evidence in  accordance with all applicable auditing standards to conclude and report  on the results of the audit of Marine Corps’ Fiscal Year 2012 General  Fund Schedule. The OIG stated that its calculation of misstatements  related to errors and untested amounts totaled approximately   $773 million. The OIG also stated that all known misstatements or known  risk factors were appropriately considered. The OIG stated that even if it  included the $35.8 million that we reported related to unsupported  contract payment transactions, the revised misstatements would total  approximately $808.8 million, which is still below the overall materiality  threshold of $826 million that the OIG had established for the audit.
As discussed in our report, auditing standards state that in evaluating  whether the financial statements are presented fairly, in all material  respects, in conformity with GAAP, the auditor must consider the effects,  both individually and in the aggregate, of misstatements (both known and  likely) that are not corrected by the entity. At the conclusion of the  audit, the auditor accumulates identified misstatements and considers  whether such misstatements are material to the entity’s financial  statements. Auditing standards further state that as the aggregate  misstatement approaches materiality, the risk that the financial  statements could be materially misstated also increases; consequently,  the auditor should consider the effect of undetected misstatements, in  concluding on whether the financial statements are fairly stated.  Because the OIG’s previously noted calculation of misstatements totaling  $773 million represents nearly 94 percent of its $826 million materiality  threshold for the audit, in accordance with auditing standards, the OIG  should have determined an amount for undetected misstatements and  included this amount in its materiality calculation for concluding on the  results of the audit of the Marine Corps’ Fiscal Year 2012 General Fund  Schedule. However, the OIG did not do so.
Further, had sufficient audit procedures been performed in the key areas  of concern that we identified, additional misstatements  may have been  identified that, when aggregated with already identified misstatements,  could be material to the Marine Corps’ Fiscal Year 2012 General Fund  Schedule. Consequently, in the absence of such additional procedures,  we do not believe that the OIG obtained sufficient, appropriate evidence  to reduce the risk of material misstatement to an appropriately low level.
section_title: Resolution of Differences within the OIG Audit Team
paragraphs: The OIG agreed with our recommendation that it develop and document a  quality assurance process for elevating disagreements between the audit  team and OIG management to ensure appropriate, objective resolution of  the disagreements. The OIG also stated that it was developing a  formalized process for elevating such disagreements.
section_title: GAO Oversight and Timely Input
paragraphs: The OIG commented that we did not always provide timely input on the  results of our oversight of the OIG’s audits of the Marine Corps’ Fiscal  Years 2012 and 2013 General Fund Schedules and that the OIG was  encouraged by the interaction that took place between GAO and the OIG  as part of the audit of the Marine Corps’ Fiscal Year 2014 General Fund  Schedule. For the audit of the Marine Corps’ Fiscal Year 2012 General  Fund Schedule, we provided comments to the OIG as we identified  issues and concerns about its audit. For example, on May 1, 2013, when  the OIG was in the process of concluding on the fiscal year 2012 audit  results, we informed the OIG that audit procedures were not performed to  test cutoff, and that cutoff is a key assertion that must be tested to provide  audit evidence related to the completeness of transactions included in  financial statements for the period audited. On May 30, 2013, the OIG  made a decision to include cutoff as one of the additional areas it planned  to test in its audit of the Marine Corps’ Fiscal Year 2012 General Fund  Schedule. In addition, as the OIG has noted, audit testing was expanded  in subsequent audits based on the concerns we identified with the fiscal  year 2012 Marine Corps audit.
section_title: Marine Corps Comments and Our Evaluation
paragraphs: The Marine Corps agreed overall with our discussion of actions needed  on the issues related to the audit of its fiscal year 2012 General Fund  Schedule. However, the Marine Corps did not agree with certain findings  with respect to (1) support for certain audit sample items, and   (2) progress in addressing audit recommendations. We acknowledge the  Marine Corps’ continuing efforts to improve accountability over its  financial management systems and internal controls.
subsections: section_title: Support for Certain Sample Items
paragraphs: The Marine Corps stated that although the OIG may have deliberated  with it on requiring an additional cutoff sample of 334 outlay transactions,  the Marine Corps was not issued the additional samples and was not  asked to provide supporting documentation. The discussion in our report  is supported by the OIG’s audit documentation and a discussion with the  auditors. Our review of the OIG’s audit documentation found that on  September 6, 2013, the OIG e-mailed two, separate statistical samples  for cutoff testing of obligations and outlays to the Marine Corps and  requested that the Marine Corps provide the requested supporting  documentation by close of business on September 13, 2013. The audit  documentation shows that the Marine Corps responded to the obligation  sample. However, OIG auditors told us that Marine Corps officials  advised them that they could not respond to the request for additional  fiscal year 2012 outlay samples because Marine Corps staff was  responding to samples for the fiscal year 2013 Marine Corps audit, and  sufficient staff were not available to respond to samples from both audits.
section_title: Progress in Addressing Audit Recommendations
paragraphs: The Marine Corps acknowledged that much work remains to fully mitigate  its internal control weaknesses. However, the Marine Corps commented  that it does not agree with our assertion that significant, uncorrected  control weaknesses continue to impair the Marine Corps’ ability to  produce consistent, reliable, and sustainable financial information for day- to-day decision making on its missions and operations. The objective of  internal control is to provide reasonable assurance of (1) the  effectiveness and efficiency of the entity’s operations, (2) reliability of  financial reporting, and (3) compliance with applicable laws and  regulations. An operating environment with significant, uncorrected  weaknesses in internal controls lacks this assurance. In addition, the  nature of the Marine Corps’ material weaknesses in internal control,  which the OIG reported, include (1) financial management systems that  do not comply with FFMIA requirements related to compliance with GAAP  for federal government entities and the USSGL and (2) ineffective  financial management oversight with regard to identifying and correcting  accounting errors. The existence of such material weaknesses  demonstrates that the Marine Corps does not have reasonable assurance  of the reliability of its financial management operations.
Further, the Marine Corps stated that in addition to the 11 accounting and  financial reporting recommendations that were closed by the OIG, it had  remediated an additional 17 accounting and financial reporting  recommendations and was awaiting validation testing from the OIG or an  audit firm. The Marine Corps also stated that based on reinforced  coordination with its information technology stakeholders and testing  through the completion of the audit of its Fiscal Year 2014 Schedule, 94  of 95 information technology system recommendations were remediated.  We have not assessed the corrective actions taken subsequent to the  December 20, 2013, issuance of the audit report on the Marine Corps’  Fiscal Year 2012 General Fund Schedule and our update in August 2014.
section_title: Office of the DOD Comptroller Comments and Our Evaluation
paragraphs: The Office of the DOD Comptroller generally agreed with the findings in  our report related to DOD-wide audit readiness implications and  summarized efforts that are planned or under way to test controls over  business processes and financial-related systems to help ensure the  reliability of data used for DOD financial audits. However, the Office of the  DOD Comptroller stated that our report does not recognize many of the  corrections and improvements made by the Marine Corps or the value of  lessons learned from the Marine Corps audits. We acknowledge DOD’s  continuing efforts to become audit ready.
Our report includes several examples where the DOD Comptroller and its  FIAR Team had developed appropriate audit readiness guidance several  years ago to help DOD components and mission support agencies, such  as DLA, effectively respond to requirements under professional auditing  standards in their audit readiness efforts. Our report also states that  certain DOD components, such as the mission support agencies, have  not followed the FIAR Guidance regarding audit readiness timelines for  supporting DOD components with regard to assuring that their own  processes, systems, and controls are effective and can be relied on to  support their DOD customers’ audits. To the extent that the other DOD  military services and DOD agencies rely on these support agencies, they  are likely to experience similar challenges as the Marine Corps with  regard to having reliable information for decision making on their missions  and operations and achieving auditability of their budgetary information.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of Defense, the  DOD Inspector General, the Under Secretary of Defense (Acquisition,  Technology and Logistics); the Under Secretary of Defense  (Comptroller)/Chief Financial Officer; the Deputy Chief Financial Officer;  the Under Secretary of Defense (Personnel and Readiness); the Director  of the Defense Finance and Accounting Service; the Director for Financial  Improvement and Audit Readiness; the FIAR Governance Board; the  Assistant Secretaries (Financial Management and Comptroller) of the  Army, the Navy, and the Air Force; the Commandant of the Marine Corps;  the Director of the Office of Management and Budget; and other  interested parties. In addition, the report will be available at no charge on  the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-9869 or khana@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last   page of this report. GAO staff members who made key contributions to  this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) determine the extent to which the audit was  performed in accordance with professional auditing standards;   (2) analyze the status of the Marine Corps’ actions to address identified  accounting, financial reporting, and information technology system control  weaknesses; and (3) identify any implications to the Department of  Defense (DOD) based on the Marine Corps’ Fiscal Year 2012 General  Fund Schedule of Budgetary Activity (General Fund Schedule) audit  results.
To address our first objective, we analyzed auditor documentation, test  results, and conclusions to determine the extent to which the work  complied with professional auditing standards. As our criteria, we used  professional audit standards issued by the American Institute of Certified  Public Accountants, which are consistent with generally accepted  government auditing standards, and considered additional guidance in  the GAO/President’s Council on Integrity and Efficiency Financial Audit  Manual. We followed the guidance in Section 650 of the Financial Audit  Manual for relying on the work of others. We reviewed the Marine Corps’  Office of Inspector General (OIG) audit contracts and statements of work  and the Marine Corps’ management representation letters, which contain  assertions about the reliability of its financial reporting in accordance with  generally accepted accounting principles, related to the audits of the  Marine Corps’ Fiscal Year 2012 General Fund Schedule and its Fiscal  Years 2011 and 2010 General Fund Statements of Budgetary Resources.  In addition, we reviewed the OIG Marine Corps Auditor Reports, including  the audit opinions, and Reports on Internal Control and Compliance with  Laws and Regulations as well as the auditor’s reports to Marine Corps  management that included detailed auditor findings and  recommendations, and the Marine Corps’ responses to the auditor’s  reports.
We also reviewed the audit documentation related to planning, executing,  concluding, and reporting on the audit. We retested selected auditor  sample items for significant classes of transactions, such as civilian and  military payroll, unpaid obligations related to undelivered orders and  delivered orders, and outlays (payments or liquidations of the orders  received) to determine if we agreed with the auditors’ conclusions on  tests of those sample items. Throughout our audit, we discussed the  concerns we identified regarding the conduct of the audit with OIG and  independent public accounting firm auditors, including concerns about   (1) completeness of reported budgetary transactions, (2) the reliability of  data generated by DOD feeder systems, (3) proper fiscal year cutoff and  the reliability of reported shipment obligations, and (4) the auditors’  conclusions on the audit as well as the basis for auditor judgments made  during the audit.
To analyze the status of the Marine Corps’ actions to address audit  recommendations on identified accounting, financial reporting, and  information technology system control weaknesses, we used federal  internal control standards as our criteria. We assessed the status of the  Marine Corps’ corrective actions on recommendations from the Marine  Corps’ fiscal years 2010 through 2012 audits. We met with Marine Corps  officials to discuss corrective action plans and actions completed and  under way as well as their process for monitoring corrective actions. We  reviewed auditor support for closed recommendations to determine  whether the (1) corrective actions had been appropriately designed to  address reported weaknesses and (2) documentation on closed  recommendations confirmed that actions to address them had been  completed.
To identify any DOD-wide implications of the Marine Corps’ Fiscal Year  2012 General Fund Schedule audit results, we considered our findings  with regard to the conduct of the Marine Corps audit and the status of  Marine Corps actions to address auditor recommendations as well as  November 2014 Financial Improvement and Audit Readiness (FIAR) Plan  Status Report information on the status of DOD military service and DOD  mission support agency audit readiness efforts. We gave particular  consideration to audit readiness issues we identified with regard to  assuring the (1) completeness of populations and proper cutoff,   (2) reliability of financial data and information generated by DOD business  processes and feeder systems, and (3) reliability of reported obligations  and outlays. We considered whether DOD agencies and the other military  services relied on many of the same systems, processes, and controls as  the Marine Corps and would be likely to experience similar issues in their  audits.
We conducted this performance audit from July 2012 through July 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense Office of Inspector General
subsections: section_title: GAO Comments
paragraphs: 1.  Material misstatements. The OIG stated that we did not identify any  material misstatements that were excluded from its conclusions on the  audit. It was not our objective to audit the Marine Corps’ Fiscal Year  2012 General Fund Schedule of Budgetary Activity (General Fund  Schedule). Consequently, we did not perform audit tests to determine  whether material misstatements occurred. As stated in our report, the  OIG did not perform sufficient audit procedures, under professional  standards, and consequently did not obtain sufficient, appropriate  evidence to support its opinion on the Marine Corps’ Fiscal Year 2012  General Fund Schedule of Budgetary Activity (General Fund  Schedule). Had sufficient audit procedures been performed in key  areas of concern that we identified, additional misstatements may  have been identified that when aggregated with the already identified  misstatements, could be material to the Marine Corps’ Fiscal year  2012 General Fund Schedule.  2.  Rejected transactions. The OIG stated that figure 3 in our draft  report indicated that rejected transactions were removed from the  Standard Accounting, Budgeting and Reporting System (SABRS) with  no process to eventually include corrected transactions in SABRS.  Because figure 3 depicts feeder system data flow, we revised the  arrow related to the flow of rejected transactions to show that, if  handled correctly, the rejected transactions would be corrected and,  entered into SABRS. However, as discussed in our report, the OIG  did not perform sufficient procedures to reasonably assure that  rejected transactions were properly resolved and entered into SABRS  before closing a related audit recommendation.   3.  Reconciliation of SABRS to Fund Balance with Treasury. The OIG  stated that we expressed concern that it did not complete a full  comparison of fiscal year SABRS transaction activity to the Marine  Corps’ fiscal year 2012 Fund Balance with Treasury reconciliation.  The OIG stated that such a comparison is an acceptable procedure  for gaining assurance of completeness, but it is not a required audit  procedure. We referred to such testing as an example of one of the  types of audit procedures that may be performed to determine  whether recorded transactions are complete.
The OIG also stated that it had traced selected transactions to the  reconciliation. However, as stated in our report, these procedures  would not be effective for testing completeness of transactions  recorded in SABRS because they begin with items that are already  recorded in SABRS.  4.  Fiscal year 2012 activity recorded to fiscal year 2011  appropriations. The OIG stated that our example of $3.8 billion in  Marine Corps fiscal year 2012 outlays that was recorded to fiscal year  2011 appropriations as reported by the Department of the Treasury,  overstated the risk to the Marine Corps’ Fiscal Year 2012 General  Fund Schedule. The OIG stated that the Marine Corps fiscal year  2012 outlay activity would include charges to 1-year appropriations as  well as multiyear appropriations. We specifically excluded multiyear  appropriations in calculating the $3.8 billion amount in our example.  We included this example in our report because it illustrates that the  amount of such transactions charged to prior year appropriations was  material. As stated in our report, we believe the risk of material  misstatement to the Marine Corps’ Fiscal Year 2012 General Fund  Schedule related to transactions recorded in fiscal year 2012 to prior  year appropriations that should have been charged to fiscal year 2012  appropriations is high based on numerous reported Marine Corps’  weaknesses in controls over accounting and financial reporting and  the magnitude of fiscal year 2012 Marine Corps’ outlays that were  recorded to prior fiscal year appropriations. Accordingly, testing of  such transactions was necessary to determine whether there were  any material misstatements.
In addition, the OIG stated that the audit of the Marine Corps’ Fiscal  Year 2012 Schedule appropriately excluded fiscal year 2012  transactions recorded to fiscal year 2011 because the Schedule only  included current year appropriations. However, the scope of a first- year audit of a schedule of budgetary activity would appropriately  include a determination of whether transactions related to current  fiscal year appropriations were improperly charged to prior year  appropriations, and, therefore, improperly excluded from the  schedule.   5.  Consideration of DOD agencies as third parties. The OIG stated  that the auditing standards permit the use of both internal and external  evidence and state that evidence from a knowledgeable source that is  independent is generally more reliable than evidence obtained only  from internal sources. Further, the OIG stated that based on its audit  approach, it does not consider information obtained from the Defense  Logistics Agency (DLA) and U.S. Transportation Command to be  internal evidence. Instead, the OIG considered these DOD agencies  to be third parties with respect to the Marine Corps. As stated in our  report, in examining evidence supporting a transaction, the auditor  should consider the reliability of the information used as audit  evidence, such as electronic documents, including consideration of  controls over its preparation and maintenance where relevant. Such  consideration would normally include any information that raises  doubts about the reliability of the evidence. If the auditor has doubts  about the reliability of information to be used as audit evidence or is  aware of issues with the reliability of the data, the auditor should  determine what modifications or additions to the audit procedures are  necessary to resolve the issues. Also, as discussed in our report,  there were well-known, documented issues that should have raised  significant doubts about the reliability of the data from DLA and U.S.  Transportation Command systems and processes that the OIG relied  on in its transaction testing for the audit of the Marine Corps’ Fiscal  Year 2012 General Fund Schedule.  6.  Military Standard Requisitioning and Issue Procedures  (MILSTRIP) material weakness. The OIG stated that although it  agrees that there are weaknesses surrounding MILSTRIP processes,  DOD’s fiscal year 2012 Agency Financial Report does not conclude  that the data within the system is unreliable and that the reported  weaknesses would not prevent the auditors from using the MILSTRIP  information to complete the audit tests. We disagree. As discussed in  our report, DOD reported DLA’s MILSTRIP process as a department- wide material weakness, stating that the department could not  effectively account for transactions and balances in the MILSTRIP  orders process. Because this and other factors should have raised  doubts about the reliability of MILSTRIP process data, auditors should  determine what modifications or additions to the audit procedures are  necessary to resolve the issues.   7.  Relevance of OIG report on Defense Enterprise Accounting and  Management System (DEAMS). The OIG stated that auditing  standards do not require a Statement on Standards for Attestation  Engagements (SSAE) No. 16 examination of system information in  order for the results to be used to corroborate data from another entity  and that the Marine Corps did not rely solely on DEAMS for its  financial statement reporting. However, the concern raised in our  report was that the OIG used information from DEAMS as audit  evidence and DEAMS had known data reliability issues. As discussed  above, if there are doubts about the reliability of information to be  used in audit testing, auditors should determine what modifications or  additions are needed to the audit procedures to resolve the issues.  8.  Relevance of disclaimer on DOD financial statements. The OIG  stated that although it issued a disclaimer on DOD’s department-wide  financial statements for fiscal year 2012, its audit effort on the  department-wide statements did not include any tests of DEAMS or  MILSTRIP data that were used to corroborate the Marine Corps  transactions. The OIG stated that as a result, there was no direct  connection between the results of the DOD department-wide financial  statement audit report and the audit of the Marine Corps’ Fiscal Year   2012 General Fund Schedule. As discussed in our report, in  disclaiming an opinion on DOD’s department-wide financial  statements for fiscal year 2012, the OIG reported that DOD financial  management and business feeder systems were unable to adequately  support material amounts on the financial statements as of September  30, 2012. The well-known, documented issues related to these  systems should have raised significant doubts about the reliability of  the data used in testing and the OIG should have determined what  modifications or additions were needed to the audit procedures to  resolve the issues.  9.  Reallocation of shipment outlays. The OIG stated that it agrees  with us that some transactions may be recorded in the wrong period,  although the Marine Corps did not report and the OIG did not identify  any material instances where the Marine Corps recorded transactions  in an improper period. As discussed in our report, the OIG’s audit  documentation did not include evidence that the OIG performed any  procedures to (1) test the accuracy of the Marine Corps’ allocation of  fiscal year 2012 shipment billings to previous fiscal year  appropriations or (2) confirm that the related adjustments were  recorded to ensure that the portion of the outlays that pertained to  previous fiscal year appropriations, and in some cases, other military  services, were excluded from the outlays reported on the Marine  Corps’ Fiscal Year 2012 General Fund Schedule.
The OIG also stated that our draft report was misleading regarding the  discussion of $21 million of fiscal year 2012 shipment billings the  Marine Corps was analyzing in January 2013 to determine the extent  of adjustments needed to the Marine Corps reported fiscal year 2012  outlays. The OIG stated that our auditors were present during a series  of meetings to assess this situation. The meetings the OIG referred to  were held in November and December 2014, which was after the OIG  had issued its opinion on the Marine Corps’ Fiscal Year 2012 General  Fund Schedule.  10. Cutoff control testing on outlays. The OIG stated that it was able to  resolve 7 transactions that its initial testing had determined were  exceptions (errors) and that the other 14 transactions were supported  by evidence obtained from DLA, an agency external to the Marine  Corps. We revisited Marine Corps documentation that was available  for 18 of the 21 transactions and determined that the additional  support was sufficient for 6 of the 18 transactions. We revised the  discussion in our report accordingly. However, because support for  the other 12 transactions was not sufficient, we continue to believe  that controls over cutoff for outlays were not effective and the OIG  should have performed substantive detail tests of cutoff for outlays.  11. Adjustments to progress payment transactions. The OIG stated  that while the Marine Corps may not always properly record certain  progress payment transactions the OIG obtained evidence that an  outlay occurred related to a valid obligation. The OIG stated its  position that for purposes of the Marine Corps’ Fiscal year 2012  General Fund Schedule, if support for progress payment outlays could  not be obtained, adjusting the outlay transaction to an advance  payment would have no net effect on the Marine Corps’ schedule. The  OIG stated that it considered such occurrences as a compliance  issue. However, as stated in our report, the audit documentation  showed that the audit team had initially determined that it could not  conclude on the accuracy of sampled contract outlay transactions for  which there was no support that the goods and services paid for were  received. More specifically, the audit documentation showed that the  audit team could not determine the validity of certain progress  payment obligations because the contract information provided to  them by the Marine Corps did not contain sufficient detail to make  such a determination. Further, the audit documentation showed that  the tested contractor invoices were related to progress payments and  the audit team had determined that progress payments should not be  recorded as advances. The audit team planned to include the  unsupported contract obligations and outlays in its overall calculation  of misstatements. The audit documentation also showed that OIG  management subsequently made an assumption that the unsupported  outlay transactions could be adjusted and reported as advance  payments to avoid counting the amounts as untested. As stated in our  report, the audit documentation did not include a reconciliation or  explanation for such conflicting statements between OIG  management and the audit team.  12. Quantitative Methods Division (QMD) certification. The OIG  commented that it disagreed with the discussion in our report  regarding QMD’s certification of statistical sampling and stated that  although QMD expressed some concern with the statistical methods  used by the audit firm, QMD confirmed that the statistical projections  were calculated accurately and signed the certification. As stated in  our report, we reviewed the documentation on QMD’s certification and  held discussions with QMD statisticians regarding reasons why they  added a note that qualified their certification. Specifically, the note  stated that QMD expresses no opinion as to the application of results  with respect to the evaluation of the sample results against materiality.  QMD officials told us that they qualified their certification because the  auditors mixed two methods for making statistical estimates, QMD  was not included in the materiality assessment process, and as a  result, they did not know the basis for the auditor judgments that were  made. QMD officials also told us that this was unusual and that they  are generally included in auditor assessments of materiality to help  the auditors interpret sampling results.
section_title: Appendix III: Comments from the United States Marine Corps
section_title: Appendix IV: Comments from the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Robert F. Dacey (Chief  Accountant), Gayle L. Fischer (Assistant Director), Richard Mayfield  (Auditor-in-Charge), Michael Bingham, Gloria Cano, Jeremy Choi,  Francine DelVecchio, Doreen Eng, Donald D. Holzinger, Pierre Kamga,  Jason Kelly, Jason Kirwan, Richard Larsen, Gregory Marchand (Assistant  General Counsel), Quang Nguyen, Brian Paige, Heather Rasmussen,  Robert Sharpe, Eric Stalcup, and Ivy Wu made key contributions to this  report.