Agreed Upon Procedures and Audit Evidence Requirements

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Agreed Upon Procedures and Audit Evidence
Requirements

• ASMC-PDI
• 2010

Gregory N. Sinclitico Assistant Auditor
General Financial Management and Comptroller
2 June 2010
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Agreed Upon Procedures (AUP)

• What are they
• A type of accepted work recognized by the
  auditing profession used to give a level of
  assurance that applies specific procedures to a
  specific subject area.
• An auditor is engaged by a client to issue a
  report of findings based on specific procedures
  performed.
• GAO Government Auditing Standards (Yellow Book)
  1.23c and 6.13b/ Statement on Auditing Standards
  (SAS) AT 201.03

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Typical Agreed Upon Procedure Memo

• Memo exchanged and signed among all parties
  (activities and Audit Service)
• Memo details
• Objective
• Criteria
• Scope
• Access requirements
• Tests to perform
• Sampling approach
• Communication
• Reporting/Distribution

photo by Sergeant Joseph R. Chenelly
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Agreed Upon Procedure Subject Areas

• Accuracy/reliability of performance measures
• Activity compliance with laws, instructions and
  policies
• Internal controls over financial reporting
• Quantity, condition and valuation of inventory or
  assets

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Typical Agreed Upon Procedures Objectives

• Verify if audit trails and internal controls
  exist for financial statement information
• Verify if corrective actions have been taken on
  deficiencies noted in the Financial Improvement
  Plan

photo by Mass Communication Specialist 3rd Class
Michael Croft
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Examples of Typical AUP Tests

• Determine whether
• Audit trails exist for acquisitions, disposal or
  financial reporting
• Equipment is properly monitored in the record
  system
• Inventories are performed and fully documented
• Perform partial book (records)-to-floor and
  floor-to-book inventories
• Reconciliations are performed and fully documented

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Agreed Upon Procedures

• Reporting details
• Criteria used
• Tests performed
• Results of specific tests
• Related internal controls tested
• AUP is a results-only report
• Report distribution is generally limited to the
  parties involved in the agreement
• Report can be released under the Freedom of
  Information Act by the Auditor General

photo by Mass Communication Specialist3rd Class
Josue L. Escobosa
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Agreed Upon Procedures Will Not

• Provide negative assurance
  (We found nothing)
• Address materiality/significance of results
• Report on any differences between the AUP and a
  full-scope audit
• Render an opinion or any level of assurance

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Completed AUP Engagements

• Navy Other Liabilities Account - General Fund
  (FY2005)
• Navy Environmental Liabilities Account - GF
  (FY2005)
• NRL Working Capital Fund F/S (FY2008)
• MSC Working Capital Fund F/S (FY2009)
• NAVFAC Working Capital Fund F/S (FY2010)
• Marine Corps FBWT Account (FY 2006)
• Marine Corps Real Property Account (FY 2007)
• Marine Corps Personal Property Account (FY 2008)
• TRICARE Management Activity Financial Improvement
  Initiative (FY 2007)

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• Audit Evidence
• Requirements

photo by Mass Communication Specialist 1st Class
Geronimo Aquino
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Audit Evidence (GAO Yellow Book 7.55-7.67)

• Auditors
• Must obtain sufficient, appropriate evidence to
  provide a reasonable basis for their findings
  and conclusions
• Sufficient a judgmental measure
• What is enough?
• Enough to persuade a knowledgeable person the
  conclusion is reasonable
• Appropriate a qualitative measure that address
  relevancy, validity and reliability

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4 Types of Audit Evidence

• Documentary
• Existing information contract records, receipts,
  invoices, electronic data, etc.
• Physical
• Inspection or observation of people, property or
  events
• Analytical
• Activity-based/auditor-based comparisons,
  calculations, ratios and/or metric results, etc
• Testimonial
• Inquiries, interviews or questionnaires

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Audit Trails and Source Documentation

• What are audit trails?
• Records (either paper or electronic) that enable
  someone to reconstruct a transaction
• Should be able to clearly answer the who,
  what, when, where, why and how
  questions
• What is source documentation?
• Evidence of initial input into the accounting
  process, and serves as transaction evidence
• Serves as a part of the audit trail should
  validation of a transaction be necessary
• Describes the basic facts of a transaction, such
  as
• Who authorized the event?
• What was the event?
• When did it occur?
• Where did it occur?
• Why did it occur?
• How much was spent on the event?

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Management Assertions 5 Categories

• Existence or Occurrence (do assets physically
  exist?)
• Completeness (are all transactions included?)
• Rights and Obligations (does the entity own the
  assets and/or owe the liabilities?)
• Valuation or Allocation (are values accurate?)
• Presentation and Disclosure (do the financial
  statements contain all required information?)

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How Types of Evidence Support Assertions
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Existence or Occurrence

• Assets and liabilities exist at a given date and
  recorded transactions have occurred during a
  given period.
• Audit Tests (Evidence Required)
• Observe inventories
• Test transactions between a preliminary physical
  inventory date and the balance sheet reconcile
  results
• Obtain confirmation from third parties
• Other tests (i.e., receipts/transfers, disposal
  procedures and book-to-floor)

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Completeness

• All transactions and accounts that should be
  presented in the financial statements are
  included.
• Audit Tests (Evidence Required)
• Test transactions for proper recording and
  classification
• Test purchases to determine if they are properly
  recorded
• Other tests sight-backs (floor-to-book)
  consumable and pilferable items

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Rights and Obligations

• Assets are the rights of the entity and
  liabilities are the obligations of the entity at
  a given date.
• Audit Tests (Evidence Required)
• Test records and determine if recorded property
  is owned by the entity as evidenced by contracts,
  invoices, receipt/transfer documents or other
  applicable records.

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Valuation or Allocation

• Asset, liability, equity, revenue and expense
  components have been included in the financial
  statements at appropriate amounts.
• Audit Tests (Evidence Required)
• Test records and determine if they are recorded
  in the proper category and at the right cost for
  the proper accounting period
• Test for actual, historical or depreciated costs

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Presentation and Disclosure

• Particular components of the financial statements
  are properly classified, described and disclosed.
  
• Audit Tests (Evidence Required)
• Test whether footnotes contain all information
  required to be disclosed
• Test categories (are they properly recorded as
  acquisitions, disposals, repairable, expendable,
  salvageable)

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Real and Personal Property Source Documentation

• Audit trails exist within iNFADS and DPAS
• Real and personal property source documentation
  to support rights and obligations is maintained
  (DD-1354 and DD-1348)
• Real and personal property transactions are
  capitalized at DONs threshold
• Source documentation to support disposals is
  being maintained for real and personal property
• Real property capital improvements and repairs
  are categorized and reported

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Real and Personal Property Internal Control

• Monthly reconciliations of real and personal
  property are performed
• Resource Elevations Analysis (REAs) ensure that
  real and personal property inventories are
  performed, and that source documentation was
  maintained
• Perform existence and completeness testing of
  real and personal property
• Real and personal property financial information
  is input timely into DPAS/iNFADS

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The Goal Sustainment
Maintaining an audit readiness condition through
the execution of regular, consistent, and
well-controlled (internal controls) business
processes
photo by Photographers Mate 1st Class David M.
Tilton
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Contact Information

• Thank you for your time and attention
• Gregory Sinclitico 202-433-6401
• Gregory.Sinclitico_at_navy.mil
• Barbara McCabe 202-433-6871
• Barbara.McCabe_at_navy.mil