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. 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. In December 2014, a contract was  signed with an IPA to audit the Navy’s fiscal year 2015 General Fund  Schedule of Budgetary Activity. 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. FBWT audit readiness is a step in achieving full financial statement audit  readiness. Navy Did Not Fully Implement Certain FBWT FIP Tasks in Accordance with the FIAR Guidance

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. In the Navy’s case, the process analysis is particularly important for  understanding the FBWT financial reporting process because the Navy’s  transactions do not follow the typical flow of data used to produce  financial statements. Without a complete  FBWT process analysis and system narratives, internal controls and risks  for each of the systems in the process may not be readily identified and  appropriately tested. However, the Navy did not prioritize its  FBWT audit readiness efforts, quantitatively or qualitatively, or fully  implement its audit readiness prioritization and strategy for key  information systems prior to assertion. The Navy’s lack of prioritization of key  information technology systems used in the FBWT process limits  management’s ability to focus audit readiness efforts on the most  important systems. Specifically, the  Navy did not document information technology general computer controls  for significant systems or the hardware and software interfaces as  required by the FIAR Guidance. Also, the system narratives and flowcharts the Navy provided did not  sufficiently disclose the flow of data. Identifying controls by assessable unit is  important for determining whether assessable units, sub-assessable  units, and associated systems are producing reliable information and  helps link systems and controls to the transaction flows. An evaluation of key supporting documentation is  important for determining whether the Navy would be able to support  amounts presented in the financial statements and provide an external  auditor with sufficient and appropriate evidence to perform the audit. Conclusions

The Navy has made progress in performing its key audit readiness  activities, including the development of its FBWT FIP to help guide  implementation of its General Fund SBR improvement efforts. In addition,  although the Navy performed substantive tests for supporting  documentation, such testing may not provide sufficient evidence of the  Navy’s ability to produce needed documentation in a sustained manner  for future audits. Recommendations for Executive Action

To improve the Navy’s implementation of the FIAR Guidance for its  General Fund FBWT FIP and facilitate efforts to achieve SBR auditability,  we recommend that the Secretary of the Navy direct the Assistant  Secretary of the Navy, Financial Management and Comptroller, to take  the following seven actions in the Discovery phase. In response to our recommendations, the  Navy stated that it has actions planned, taken, or under way to   (1) develop procedures and documentation that describe the processes  associated with the flow of data; (2) prepare a quantitative drilldown;   (3) prioritize audit readiness efforts for key FBWT systems; (4) document  control activities, information technology general computer controls for  significant systems, systems documentation locations, and hardware,  software, and interfaces; (5) prepare an internal control assessment  document; (6) test effectiveness of FBWT controls, which includes  assessing the availability of supporting documentation; and (7) obtain  monthly data from DFAS on invalid FBWT transactions. Appendix I: Objective, Scope, and Methodology

The objective of our review was to determine the extent to which the Navy  developed and implemented the Discovery phase for its General Funds’  Fund Balance with Treasury (FBWT) financial improvement plan (FIP) in  accordance with the Financial Improvement and Audit Readiness (FIAR)  Guidance. To address our  objective, we analyzed the Navy’s FBWT FIP to determine whether it  contained the applicable elements and tasks to be performed for the  Discovery phase of audit readiness as required by the FIAR Guidance. We identified and reviewed the Navy’s FBWT FIP key deliverables  required by the FIAR Guidance, such as system narratives and  flowcharts, internal control assessments, and the Navy’s test results.
Why GAO Did This Study

The National Defense Authorization Act for Fiscal Year 2014 mandates an audit of DOD's fiscal year 2018 department-wide financial statements. To help achieve this, the DOD Comptroller issued the FIAR Guidance to provide a standard methodology for DOD components to follow to improve financial management and achieve audit readiness, and designated the SBR as an audit priority. Full implementation of the Navy's General Fund FIP for FBWT is essential to achieving audit readiness for its General Fund SBR. The Navy asserted Statement of Budgetary Activity (SBA) audit readiness as of September 30, 2014, and in February 2016 received a disclaimer of opinion on the audit of its SBA for fiscal year 2015.
GAO is mandated to audit the U.S. government's consolidated financial statements, which cover activities and balances of executive branch agencies, including DOD. GAO's objective in this report was to determine the extent to which the Navy developed and implemented the Discovery phase of its General Fund FBWT FIP in accordance with the FIAR Guidance. GAO analyzed the Navy's FBWT FIP to determine whether it contained the tasks and activities required by the FIAR Guidance for the Discovery phase. GAO also reviewed the Navy's FBWT FIP key deliverables, such as process narratives and flowcharts, internal control assessments, and test results.

What GAO Found

The Navy has made progress in performing audit readiness activities, including developing a financial improvement plan (FIP) for its Fund Balance with Treasury (FBWT). These activities are critical to the Navy's General Fund Statement of Budgetary Resources (SBR) improvement efforts. The Navy's FBWT FIP is particularly important as it addresses improvement efforts across multiple business processes, including contract and vendor payments and military and civilian payroll that provide significant input to the SBR. However, the Navy did not fully implement certain tasks in its FBWT FIP in accordance with the Department of Defense's (DOD) Financial Improvement and Audit Readiness (FIAR) Guidance. These included activities in all four key tasks of the Discovery phase, the first of the five FIAR guidance phases. In the Discovery phase, the reporting entity documents processes, prioritizes audit readiness efforts, assesses and tests controls, and evaluates supporting documentation.
Document processes. The Navy did not fully document its FBWT process in system narratives and flowcharts. For example, the Navy's analysis did not explain the complex process that occurs within the Defense Departmental Reporting System - B, including merging data and deleting duplicative transactions. In the Navy's case, the process analysis is particularly important because the Navy's transactions do not follow the typical flow of data used to produce financial statements. Without a complete FBWT process analysis and system narratives, internal controls and risks for each of the systems in the process may not be readily identified and appropriately tested.
Prioritize audit readiness efforts. The Navy did not prioritize FBWT audit readiness efforts or fully implement its audit readiness prioritization and strategy for key information systems prior to its assertion of audit readiness. The Navy's lack of prioritization of key information technology limits management's ability to focus audit readiness efforts on the systems with the highest risk.
Assess and test internal controls. Within the FBWT assertion package, the Navy did not document information technology general computer controls for significant systems or the hardware and software interfaces, as required. Also, the Navy did not identify internal controls by assessable units (e.g., information systems supporting financial statement line items or other discrete portions of the program). Identifying controls by assessable unit is important for determining whether assessable units, sub-assessable units, and associated systems are producing reliable information and helps link systems and controls to the transaction flows.
Evaluate supporting documentation. Although the Navy performed substantive tests for supporting documents, such testing may not provide sufficient evidence of the Navy's ability to produce documentation in a substantive manner for future audits. An evaluation of key supporting documentation is important for determining whether the Navy would be able to support amounts presented in the financial statements or provide an external auditor with sufficient and appropriate evidence to perform the audit.
Addressing these shortfalls is critical to achieving audit readiness.

What GAO Recommends

GAO recommended that the Navy fully implement the FIAR Guidance for FBWT in the areas of process analysis, prioritization, internal control assessment and testing, and evaluation of supporting documentation to support audit readiness. The Navy concurred with all seven recommendations.