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 was most recently updated in November 2013 and describes the following five audit readiness phases and activities that DOD reporting entities (including the Army) are to include in their FIPs. 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. Corrective Action Phase: Entities develop and execute plans to address identified deficiencies and verify implementation of corrective actions. Assertion/Evaluation Phase: The FIAR Directorate reviews assertions by entity management that assessable units are audit ready. An IPA or the DOD Office of Inspector General (OIG) examines readiness, and entity management addresses any reported deficiencies. Validation Phase: The FIAR Directorate validates audit readiness based on its assessment of the IPA examination report and documentation supporting successful remediation of auditor-identified deficiencies. Audit Phase: An IPA or the DOD OIG performs an audit of the financial statements or specified elements of them and issues an opinion on whether they are fairly presented in accordance with generally accepted accounting principles. Appendix II provides more specific information on the phases, tasks, and deliverables that the FIAR Guidance requires reporting entities to include in their FIPs. In response to component difficulties in preparing for a full SBR audit, the November 2012 FIAR Plan Status Report and the March 2013 FIAR Guidance included a revision to narrow the scope of initial audits to only current year budget activity and expenditures on a Schedule of Budgetary Activity (SBA). Under this approach, beginning in fiscal year 2015, reporting entities are to undergo an examination of their SBAs by an IPA or the DOD OIG reflecting the balances and associated activity related only to funding approved on or after October 1, 2014. As a result, SBAs will exclude unobligated and unexpended amounts carried over from prior years’ funding as well as information on the status and use of such funding in subsequent years (e.g., obligations incurred and outlays). These amounts will remain unaudited. Over the ensuing years, as the unaudited portion of SBR balances and activity related to this funding decline, the audited portion is expected to increase. The NDAA for Fiscal Year 2010, as amended by the NDAA for Fiscal Year 2013, requires that the FIAR Plan describe specific actions to be taken and the costs associated with ensuring that DOD’s SBR is validated as ready for audit by not later than September 30, 2014. Further, the FIAR Plan Status Report is required to include a determination by the Chief Management Officer of each military department concerning its ability to achieve an auditable SBR by September 30, 2014, and if the department is unable to meet this deadline, an explanation as to why it is unable to meet the deadline as well as an alternative deadline and a description of the plan for achieving an auditable SBR by the alternative deadline. In addition, all material amounts reported on the SBR will need to be auditable in order to achieve the mandated goal of full financial statement audit readiness by September 30, 2017. The Army prepared its audit readiness strategy to provide a high-level overview for Army leaders and stakeholders to understand the Army’s approach for achieving audit readiness in accordance with the FIAR Guidance. In connection with this strategy, the Army’s approach for achieving General Fund SBR audit readiness includes four separate FIPs developed to guide improvement efforts in the following areas: (1) budget execution, (2) military pay, (3) financial reporting, and (4) FBWT. The Army also relies on service providers to ensure the audit readiness of service provider systems and business processes that support services In addition, as provided to the Army and affect its General Fund SBR.shown in figure 1, establishing the Army’s audit-ready systems environment is integral to the Army’s audit readiness strategy, including implementation of the General Fund Enterprise Business System (GFEBS) and other key enterprise resource planning (ERP) systems. GFEBS is absorbing more than 100 legacy accounting and other systems to standardize business processes and provide more accurate data on funds availability and execution. According to Army sources, GFEBS is one of the world’s largest ERP systems, supporting approximately 1 million transactions each day and over 53,000 users at over 200 locations in 71 countries in fiscal year 2013. Also, according to Army sources, obligations incurred associated with contracts, civilian pay, and other business activities that were processed in GFEBS represented about 52 percent of total obligations incurred reported in the Army’s General Fund SBR for fiscal year 2013. Based on efforts to record military pay expenditure and accounting data in GFEBS beginning in fiscal year 2014, Army officials stated that GFEBS is expected to be the primary system for processing Army obligations incurred for fiscal year 2014. The Army reported that it completed Discovery Phase audit readiness efforts for all four of its General Fund SBR FIPs, including the FIP for budget execution, in March 2013 and expects to complete the Corrective Action and Assertion/Evaluation Phases by June 2014 and September 2014, respectively. The Army’s FIP for budget execution, the focus of this report, is particularly important as it addresses improvement efforts involving significant budgetary resources and financial activity reported in its General Fund SBR across multiple business processes. Further, this FIP focuses on the development of GFEBS-based audit-ready processes, including those that affect obligations incurred reported in the Army’s General Fund SBR, and emphasizes incremental “waves” of audit readiness assertions and IPA examinations to assess progress of Army locations and business processes operating in the GFEBS environment. Originally, the Army planned four waves, but in fiscal year 2012 it compressed its assertions to three waves to meet the DOD time frame and NDAA mandate for achieving audit readiness. The activity and timing of these waves are as follows. Wave 1. In June 2011, the Army asserted audit readiness at 3 of 227 locations with five business processes.examination in November 2011 and reported that the Army did not effectively design test plans for evaluating the operating effectiveness of key controls for several processes. The IPA also reported that the An IPA completed an Army did not (1) properly identify all key control objectives and activities and risks of misstatement related to its processes or consider the control environment as a whole and (2) properly identify the financial statement risks related to key control activities and objectives within its processes. Wave 2. In June 2012, the Army asserted audit readiness at 10 of 227 with eight locations (3 Wave 1 locations and 7 additional locations)business processes. An IPA completed an examination in April 2013 and reported several inadequacies in the Army’s Wave 2 readiness assertion, as discussed later in our report. Wave 3. In June 2013, the Army asserted audit readiness for eight GFEBS processes and activities at remaining locations. An IPA is to complete an examination by May 2014. Full General Fund SBA. The Army is to assert audit readiness for all current year activity and funding by June 2014. To help prioritize and guide its efforts, the Army developed its FIP for budget execution emphasizing the implementation of effective GFEBS processes for achieving SBR audit readiness. However, the Army did not fully complete key tasks to help ensure that its FIP adequately considered the scope of efforts required to achieve audit readiness and addressed significant qualitative risks or other factors affecting its efforts, as required by FIAR Guidance. For example, the Army’s analysis identifying Army and service provider business processes and systems supporting its General Fund SBR FIP for budget execution was incomplete. In accordance with the March 2013 FIAR Guidance, the Army limited the scope of its efforts to focus on achieving SBA audit readiness by September 30, 2014. Therefore, the Army excluded measures to ensure the readiness of beginning balances associated with funding received in, and carried forward from, prior years and activity processed in certain legacy systems. While achieving SBA audit readiness can provide a meaningful indicator of progress, the amounts excluded are material to the Army’s SBR and may continue to represent material portions of future SBRs. Further, the Army had not performed an assessment to adequately demonstrate the expected magnitude of these amounts in future years and address risks associated with them as required. As a result, the Army lacks important assurance that it will achieve audit readiness goals as planned. Also, the Army did not address whether it will meet the September 30, 2014, deadline for an auditable SBR in its determination of audit readiness included in DOD’s November 2013 FIAR Plan Status Report and did not clearly indicate an alternative date for achieving full SBR audit readiness, as required by the NDAA for Fiscal Year 2013. Per the FIAR Guidance, Discovery Phase Task 1 (statement to process analysis) requires reporting entities to identify the assessable units, business processes, systems, and other characteristics associated with amounts reported in each financial statement line item. Also, because of the significant reliance placed on service providers, the FIAR Guidance also requires reporting entities to (1) coordinate with them to ensure that the statement to process analysis identifies significant assessable units associated with service provider processes and systems supporting each line item and (2) formalize and document their relationship with the service providers in a memorandum of understanding (MOU). Completing these tasks is essential for understanding the relative importance and multifaceted nature of audit readiness efforts and for developing an effective strategy. However, we found that the Army had not effectively completed these tasks as discussed below. Statement to process analysis.