CFO Auditing Standards in the 21 st Century

1. CFO Auditing Standards in the 21st Century By James P. Kearney Performance Management Consulting, Inc. 27 July 2005

2. Questions for This Group • How many of You are Accountants? • How many of You participate in the preparation of the Financial Statements of your Entities? • How many of You are in Entities with a significant amount of Plant, Property & Equipment (PP&E)? (One Billion or more) • How many of You have positions that affect Your Entity’s PP&E in some significant way? • How many of You feel that this CFO Audit stuff is mainly an Accounting thing?

3. Audit of Balance SheetPlant, Property & Equipment (PP&E) • Each of the CFO Federal Entities has to prepare at least Annual Financial Statements • The Balance Sheet audit requires the Entity to make five (5) Assertions regarding PP&E: • Valuation • Ownership • Completeness • Existence • Presentation/Disclosure

4. Assumptions Regarding Your Entity’s Capitalized PP&E • I am assuming that Your Entity has: • An approved Capitalization Threshold • Supportable Useful Lives for each type of Asset (General Personal Property, Aircraft, Vessels, Buildings/Structures, Software, Vehicles, Electronic Systems, etc.) • Acceptance criteria for when an asset is Placed In Service (Constructed Assets)/ Beneficial Occupancy (Buildings), Title passes (Delivered Assets)

5. Audit of Valuation • This audit process focuses on the Value of Your Capitalized Assets and how you document this Value for New assets and Improvements to Existing assets? • How do you document your Direct Costs • Contracts (Invoices, DD 250’s, Contractor’s Release) • Labor (Do you have a labor distribution System?) • Transportation (Are these funded centrally?) • Survey & Design (Are these by Asset?) • Direct cost of Inspection & Supervision • Handling & Storage costs (Centrally funded?)

6. Audit of Valuation (cont.) • How do you document your Indirect Costs • Program Management (Invoices, DD 250’s, Contractor’s Release) • Systems, Integration and Testing • How are these allocated to the Direct costs? • Based on Obligations, Expenditures? • Are Undelivered Orders included; who tells accounting that the UDOs are valid? • Are all Indirect costs allocated each year or are some carried forward to future deliveries? • Is the Allocation Methodology tested? • Do you allocate indirect cost to Assets that are expensed?

7. Audit of Valuation (cont.) • Auditors typically test Valuation through statistical samples. For example, if Auditors are testing the Value of an Entity’s Buildings they will: • Gain an understanding of the processes, policies and methodologies associated with how the Entity buys, builds and/or improves its buildings and allocates indirect costs. • Ask the Entity for their entire population of Buildings • Tie the value of these Buildings to the General Ledger • Take a statistically valid sample of the building population • Ask the Entity to provide the supporting documentation (Invoices, DD-250s, Transfer Documents, Indirect Costing Methodologies, etc.) for the sample items • Plug their results into their statistical module and determine if the Entities values fall within the Auditor’s expected range.

8. Audit of Ownership • This audit process focuses on the documentation you have to support your assertion that the asset is yours • Most Assets; You Paid for it, You Own it; BUT: • If Land; do you have Title documents? • If Buildings or Constructed assets; do you have Contractor’s Release or other transfer document? • If you have made Improvements or Built a Building on another Entity’s Property do you Own it or is it a Leasehold Improvement? • Auditors can test ownership via attribute sampling; can you produce documentation that you own it or not.

9. Audit of Completeness • This audit process focuses on how an Entity knows that all owned assets are being reported. • How often are inventories of Your Assets conducted? • Who certifies that the Assets have not been disposed of? • Who updates the Asset’s inventory record upon acquisition or disposal of assets? • Auditors test Completeness via “floor to book and book to floor” and reviewing Expenditure data. Does your Entity do any Testing of Assets?

10. Audit of Existence • This audit process focuses on “touching” and “seeing” assets. • Often done in conjunction with Completeness testing • Auditors often test via attribute testing; can you produce the asset for visual inspection? • How does you Entity support testing of: • Software • Electronic Systems • Operational Assets that move around

11. Audit of Presentation • Presentation focuses on the information put onto the Financial Statements. Clearly this is all Accounting stuff? Not exactly; there are allot of Disclosure requirements in footnotes about which Accountants don’t know anything. • How does the Entity determine if its PP&E is Impaired? • How does the Entity determine if its PP&E has Deferred Maintenance? • Auditors test this by reviewing Entity reports and information (Flag meeting minutes, Budget and Supplemental Requests, even Newspapers)

12. Bottom Line • CFO Audits are a Group Effort. If an Entity is going to be successful all parts of the organization must be involved: • Need the Programs who order and/or operation the PP&E • Need the Contracting Officers who procure the PP&E • Need the Property Managers who write the policies and procedures regarding PP&E • Need the Accountants who record and report the PP&E • Need the Custodians who inventory and know the status of the PP&E

13. QUESTIONS • Are there any questions?