The National Defense Authorization Act (NDAA) for Fiscal Year 2010 requires that DOD develop and maintain the FIAR Plan. The FIAR Plan must include specific actions to take and the costs associated with correcting the financial management deficiencies that impair DOD’s ability to prepare reliable and timely financial management information and ensure that its financial statements are validated as ready for audit by September 30, 2017. Further, the NDAA for Fiscal Year 2014 mandates an audit of DOD’s fiscal year 2018 department-wide financial statements and submission of those results to Congress by March 31, 2019. Since DOD management relies heavily on budget information for day-to-day management decisions, the DOD Comptroller designated the SBR as an audit priority. In response to difficulties encountered in preparing for an SBR audit, DOD reduced the scope of initial SBR audits beginning in fiscal year 2015 to focus on current-year budget activity reported on a Schedule of Budgetary Activity. This is an interim step toward achieving an audit of multiple-year budget activity required for an audit of the SBR. In the last quarter of fiscal year 2014, each military service, including the Navy, asserted audit readiness on its General Fund Schedule of Budgetary Activity. The fiscal year 2015 Schedule of Budgetary Activity reflects the balances and associated activity related only to budgetary authority on or after October 1, 2014. In December 2014, DOD contracted with an IPA, for the audit of the Navy’s fiscal year 2015 Schedule of Budgetary Activity. In February 2016, the IPA issued a disclaimer of opinion on the Navy’s Schedule of Budgetary Activity and identified pervasive control deficiencies in the Navy’s decentralized financial management and information technology environment. Navy management concurred with the findings in the IPA’s report and stated that it will develop and execute corrective actions to address the IPA’s recommendations, including those related to FBWT. In May 2010, the DOD Comptroller issued the FIAR Guidance to provide a standard methodology for DOD components to follow in developing an audit strategy and implementing FIPs. The FIAR Guidance defines DOD’s strategy, goals, roles and responsibilities, and procedures for the components to become audit ready. Specifically, the guidance provides a standard methodology that DOD components are required to follow in developing and implementing FIPs. These plans, in turn, provide a framework for planning, performing, documenting, and monitoring efforts to achieve auditability. To manage their improvement efforts, components may develop multiple FIPs, including plans related to specific assessable units, which can be information systems supporting financial statement line items or other discrete portions of the program. The FIAR Guidance describes the five audit readiness phases and activities that DOD reporting entities (including the Navy) should include in their FIPs. The five audit readiness phases are Discovery, Corrective Action, Assertion/Evaluation, Validation, and Audit. Each phase includes multiple tasks and activities that reporting entities should complete and the corresponding required deliverables. (App. II identifies the detailed FIAR tasks and required deliverables for each of these phases.) Most of the audit readiness process occurs in the Discovery and Corrective Action phases. In the Discovery phase, entities document their processes and identify, test, and assess their controls and evaluate and confirm the existence of documentation supporting relevant financial statement assertions. In the Corrective Action phase, entities develop and execute plans to address identified deficiencies and verify implementation of corrective actions. In the last three phases, a reporting entity (1) asserts its audit readiness, (2) has its assertion independently validated, and (3) employs an IPA firm to perform a financial audit. The Navy asserted audit readiness but did not complete the Corrective Action phase or validate the assertion because of time constraints and moved directly into an audit of its Schedule of Budgetary Activity by an IPA firm. The Navy’s FBWT FIP provides a framework for planning, executing, and tracking essential steps with supporting documentation to achieve audit readiness for its FBWT. Figure 1 shows important milestones and events in Navy’s FBWT FIP and overall audit readiness efforts. In April 2013, the Navy asserted that its FBWT process was audit ready. The scope of the Navy’s audit readiness assertion began with the feeder systems that provide collection and disbursement transactions and extended through posting these transactions to DFAS’s Defense Departmental Reporting System - Budgetary (DDRS-B). At the time of the Navy’s assertion in April 2013, the Navy reported that 21 of 33 key controls that it had identified for FBWT were operating effectively. The Navy further reported that it had developed corrective action plans for the remaining 12 controls and the corrective actions were under way. Subsequent to the Navy’s assertion, in May 2013, the DOD OIG initiated a review of the Navy’s FBWT assertion to determine audit readiness. Because of the significance of its findings, including that the Navy did not include in its assertion all significant systems affecting the FBWT line item, the DOD OIG did not complete its review. In August 2013, the DOD OIG provided the Navy with informal feedback, including areas for improving its FBWT audit readiness. In February 2014, in response to the DOD OIG’s feedback and to support the FBWT-related line items on its financial statements, the Navy expanded the scope of its FBWT audit readiness efforts to include all systems affecting the financial statement line items, including the Defense Departmental Reporting System - Audited Financial Statements (DDRS-AFS) system. Although the Navy expanded the scope of FBWT audit readiness efforts through financial statement compilation and reporting, it did not reassert FBWT audit readiness. In March 2014, the DOD OIG began another engagement, which involved a review of the Navy’s FBWT reconciliations. A DOD OIG official told us that this engagement did not include a review of the Navy’s FBWT assertion, but rather was to determine whether the Navy’s FBWT reconciliation was effective, supportable, and sustainable. In September 2014, DOD officials announced that all military services and many defense agencies had asserted General Fund Schedule of Budgetary Activity audit readiness. In December 2014, a contract was signed with an IPA to audit the Navy’s fiscal year 2015 General Fund Schedule of Budgetary Activity. For fiscal year 2015, the Navy’s Schedule of Budgetary Activity and FBWT were based on funding from 19 General Fund appropriation accounts. The IPA was to determine whether the Schedule of Budgetary Activity and related notes were fairly presented, in all material respects, in accordance with U.S. generally accepted accounting principles. In January 2015, after the Navy performed additional internal control testing, it reduced the total number of key internal controls for FBWT from 33 to 31. At that time, the Navy reported that 25 of the 31 controls were deemed to be operating effectively and that corrective actions were under way for the remaining 6 key controls. In April 2015, the DOD OIG issued a report on the process the Navy uses to reconcile its FBWT accounts. Reconciling FBWT activity records with the Department of the Treasury (Treasury) is similar to reconciling a checkbook to a bank statement. The Treasury Financial Manual requires agencies to reconcile their FBWT accounts to Treasury balances on a monthly basis. In its report, the DOD OIG noted several findings, including that the Navy (1) did not use general ledger data as source data for FBWT reporting, (2) had difficulty identifying the universe of transactions supporting the FBWT balance, and (3) may have used unreliable computer-processed data from two FBWT-related systems with reported significant deficiencies in internal controls. Further, in February 2016, the IPA issued a disclaimer of opinion on the Navy’s Schedule of Budgetary Activity and identified material weaknesses in internal control. One of the material weaknesses included controls over FBWT reporting and reconciliations, including the Navy’s related controls over its third-party service provider. As noted above, Navy management concurred with the findings in the IPA’s report and stated that it will develop and execute corrective actions to address the IPA’s recommendations. Going forward, DOD’s goals are to assert audit readiness for existence and completeness of its mission-critical assets by June 2016 and to assert full financial statement audit readiness by September 30, 2017. FBWT audit readiness is a step in achieving full financial statement audit readiness. Although the Navy included all the required audit tasks for the Discovery phase in developing its FBWT FIP, it did not fully implement certain required activities within these tasks in accordance with the applicable FIAR Guidance. These included activities in all four key tasks of the Discovery phase, which requires the Navy to (1) perform statement-to- process (process) analysis, (2) prioritize audit readiness efforts, (3) assess and test internal controls, and (4) evaluate supporting documentation. The purpose of these tasks is to improve financial information for Navy management and provide information to support the financial statement audit. Completion of these tasks remains important because FBWT collections and disbursements are integral to the Navy’s Schedule of Budgetary Activity, which is currently undergoing a second year audit for fiscal year 2016. Further, the FBWT line item is included on the Navy’s balance sheet, which is expected to be audited when the Navy undergoes the full financial statement audit planned for fiscal year 2018. The FIAR Guidance states that reporting entities are to perform a process analysis. We found that the Navy did not implement certain tasks for documenting the FBWT process, as required by the FIAR Guidance. The process analysis includes tracing from a summary amount, such as a line item on a financial statement, to underlying support, such as accounts in the general ledger, and support for those accounts, such as subledgers and transactions.