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1 [1] (June 26, 2018)

handle is hein.crs/crsmthzzawh0001 and id is 1 raw text is: SCongressional Research Service ~~~Info rigthe egvslative debatecsancel1914 June 26, 2018 Defense Primer: Understanding the Process for Auditing the Department of Defense The Chief Financial Officers Act of 1990 (CFO Act, P.L. 101-576) requires annual audits of financial statements for federal agencies. Under the CFO Act, audits of federal agencies are the responsibility of the agency's inspector general (IG), but the IG may contract with one or more external auditors to perform the audit. While a number of Department of Defense (DOD) components already undergo annual audits (e.g., the U.S. Army Corps of Engineers, Defense Contract Audit Agency, and National Reconnaissance Office), DOD is undergoing its first-ever agency-wide financial audit in FY2018. Generally, the process and standards used to audit DOD are the same as those used to audit other federal agencies. Understanding why and how the DOD audit is conducted can help Congress evaluate the results and usefulness of the audit. DOD has contracted with external accounting firms to conduct its FY2018 audit. Different components within DOD are currently being audited by different firms. DOD expects to spend more than $340 million to conduct the FY2018 audit and to release the results in November 2018. It is to submit a full report to Congress by March 31, 2019. Thereafter, final audit reports are to be issued annually in November, covering the prior fiscal year. Why an Audit? Government entities, including the United States government as a unitary entity, issue annual reports that present the current financial position and condition, and discuss key financial topics and trends. An audit of the financial information provides accountability over the use of public resources by government agencies to Congress, oversight bodies, and the public. Financial audits aim to provide reasonable assurance that the financial statements of an entity are free of material misstatements whether caused by error or fraud. DOD's financial management has been on the Government Accountability Office's (GAO) High-Risk list since 2015. High-Risk list agencies or programs are considered vulnerable to fraud, waste, abuse, and mismanagement, or at most in need of transformation. An audit of DOD can provide critical insight into the reliability of financial data, and efficiency and effectiveness of internal operations; review compliance with statutes and financial regulations; and uncover potential problems. With such information, DOD and Congress could take steps to improve the efficiency and effectiveness of internal operations. While it is too early to estimate with any confidence potential financial and operational benefits of an audit, there is general consensus that DOD will gain valuable information from the effort. The Department has anticipated spending more than $550 million to address potential audit findings. How Are Audits Done? For each line item on a financial statement and notes to the financial statement, an auditor will examine a sample of the underlying economic events to determine the accuracy of the information reported. The auditor is expected to give an unbiased professional opinion on whether the financial statements and related disclosures are fairly stated in all material respects for a given period of time in accordance with Generally Accepted Accounting Principles (GAAP). While the Federal Accounting Standards Advisory Board (FASAB) promulgates the financial reporting and accounting standards for federal government entities, GAO is responsible for establishing auditing standards for federal government agencies, including federal grant recipients in state and local governments. Material misstatement in financial reporting can be defined as information on a financial statement that could potentially affect the reader's decision or the conclusions drawn by a reader about the financial status of an agency Auditing Standards GAO issues the Generally Accepted Government Auditing Standards (GAGAS), also commonly known as the Yellow Book, which provides a framework for conducting federal government audits. The Yellow Book requires auditors to consider the visibility and sensitivity of government programs in determining the materiality threshold. Similar to the requirements in the private sector, GAGAS requires federal financial reporting to disclose compliance with laws, regulations, contracts, and grant agreements that have a material effect on the entities' financial statements. Some organizations within the federal government use a hybrid of external and internal auditors. Whether external or internal auditors perform the function, they are required to adhere to the standards established under GAGAS. In addition to examining the financial information, an audit evaluates the management's assertion of the internal control over financial reporting. Audit of internal control includes audit of computer systems at the entity-wide, system, and application levels. GAGAS recommends using specific frameworks for internal control policies and procedures, www.crs.gov i 7-570 0

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