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1030 - 1100 (Chappo) Audit Discussion - Industry Day Jun 2021 v2.pptx
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June 2021
Distribution Financial Audit Update for Industry Day
AGENDA
Our Financial Audit Journey
Audit Categories/Terms/Elements
Scope of DLA Inventory
Drives Auditor Focus
Risk Management
Audit Readiness Handbook
Assessments and Inventory Accuracy
Compliance and Assertion Process
Supplier Responsibilities
Questions
Repeatable Processes and E2E Documentation
Risk Identification and Mitigation
Effective Internal Controls (systemic preventative)
Continuous Improvement & Learning (turnover)
Formal Online E2E Course + OJT (all business cycles)FY17FY19FY15
Clean Opinion=Reliance on DLA Distribution Records (Right Item, Right Condition, Right Quantity)
Audit: SSAE-16
IPA: Team Kearney
Opinion: Modified
Audit: DLA FFSA
IPA: Ernst & Young (EY)
Opinion: Disclaimer
Audit: DLA FFSA (EY)
IPA: EY
Opinion: Disclaimer
Audit: SOIDC (RMA)
Opinion: UnModified
Audit: DLA FFSA (EY)
Opinion: Disclaimer
Audit: SOIDC & AUP (EY)
SOIDC Opinion: Adverse
AUP Result: Errors noted
Audit Opinions:
Un-Modified
Modified
Disclaimer
Adverse
Audit: Inventory QTY only
IPA: DoD IG
Opinion: Modified/Qualified
Audit History and Future Years: Financial Statement Audit Results FY21
Audit: DLA FFSA (EY)
Opinion: Disclaimer
Audit: SOIDC & AUP
Not performed
Audit: DLA FFSA (EY)
Opinion: Disclaimer
Audit: SOIDC (EY)
Opinion: TBD
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Knowledge Transfer Key
Onboarding New Hires
Impacted by Dual Systems (DSS + WMS) environment
Testing + Risk Assessment required as WMS is deployed for mitigation during design.. Not afterward
FY21 Assertion Process providing ROI for Internal Controls Assessments
Understanding Audit Types of Audits Linkage to Owners Assertions
DLA Full Financial Statement Audit (FFSA)
Audit performed on all of DLAs business cycles (financials and operations)
Auditor starts at Financial Statements compared to the floor and the reverse; looks at the floor and tests against the financial statements (i.e. completeness and existence)
Cyclic:
Oct-Dec: Audit Planning
Jan-Mar: In depth auditor business process walkthroughs
Jan-Oct: PBC submissions and responses
Jun-Sep: Year-end inventory count observations and roll forward transaction tracingService Owned Inventory in DLA Custody (SOIDC)
Controls-based audit (open book audit)
Auditor tests based on Risk Control Matrix (RCM), and Management Descriptions of Systems (MDS) written by DLA
Each control objective and activity submitted is tested for design and effectiveness
Requires detailed process mapping, risk evaluation, controls, and a written Management Description of System/Services
Agreed Upon Procedures (AuP)
Performed for MILSVC Owner Materiel at the request of MILSVCs IPA.
Services IPA to select samples for book to floor counts likely with observation by their IPA
Floor to book samples completed and observed by MILSVC IPA
Substantive testing audit, physical inventories are performed, and accuracy is documented and projected over the holdings for that owner
Rights testing is conducted to prove DLAs right to hold materiel for given owner using receipt data and evidential matter
Military Services FFSA
DLA Distribution as the custodian for Mil Services materiel
Distribution assist, as needed, to Mil Service Audit requests via Evidential Matter, data pulls, and meetings or On site audit work with the DLA Distribution Centers
Understanding Audit Opinions & Timeline/CycleUnderstanding Audit Elements Existence, Completeness, Rights
How do we get Distribution from a Disclaimer and Adverse Opinion to a Modified or Clean Opinion ?
Existence: What we say is on our books is actually in location
Must Reduce Variance and Improve Accuracy (Receipt, Storage, and Shipment)
Completeness: What we see on the floor in recorded in our books
Must have items recorded accurately and timely into our system
Rights: We must have posted the item to the correct Owner record
Receive materiel and place into custody to correct Owner & perform all changes in ownership fully and accurately with Evidential Matter (EM)
Timeliness Elements of Audit (always checked by the IPA):
Recordation of inventory (accurate books, recorded timely)
Proof of shipment/delivery (to close out the sale, inbound or outbound)
Cut-off procedures (clean books in process work is closed out timely)
Inventory Adjustments reviewed prior to acceptance/changes
No Proration logic appliedScope of Inventory By Owner & Dollar Value Top 10 *Overall Approx. $142 Billion Total Value
Data Current as of COB: Sept 30, 2020
Top 10 Sites by Owner
Other category comprises of RICs that are not mapped to a current MilService. (Example RICs included but not limited to: 1A9, 70X, H9D, JSC, SSD, etc.)
Note: Dollar Value is estimated using FLIS Standard Price.
Note: DLA DSS is the Accountable Property System of Record (APSR). This data does not include Retail operations performed outside of DSS. For example: Pearl Harbor Shipyard and Norfolk Shipyard.
Audit Element:
Existence: Book to Floor
DLAs Fraud Risk Management (FRM) Strategy and Compliance RoadmapAssess
Organizations complete an annual assessmentof fraud risk, included in the Agency Fraud Risk Profile, and completed an annual assessmentof fraud controls
The ERM PMO / RICAs work through governance structure toidentify and prioritize the risk and controlremediation
ERM PMO monitors audits, guidance, and GAOs high risk list for potential high priority fraud activities.
Design and Implement
The FRM Strategy summarizes DLA's plan & integration with existing fraud reduction efforts
Integration with OUSD(C)'s fraud analytics program (Advana) and other automated tools
ERM PMO informs DLA staff of strategy and planning through DOD's SOA Handbook and Workshops and communication products
Evaluate and Adapt
DOD and DLA report the effectiveness of organizational and Agency FRM activities through the Fraud Control Assessment results
Continuous improvement of FRM program, tools, and technologies to combat fraud
Commit
Chief Risk Officer is responsible for managing DLA fraud risks, serving as the repository of knowledge of fraud risk, and controls and manages the fraud risk assessment process
DLA Governance Boards (ERWG, SRMT, and SMC) form the DLA FRM Program
Agency and organizational tone at the top sends the message that there is zero tolerance for fraud
Implementing DODs FRM Strategy at the Agency level
DLA Distribution AR Handbook -- Audit Goals & Leadership Checklist Example --DLA Distribution Compliance Program
Purpose: Mandate an independent and standardized approach to detect, prevent, deter and correct process deviations
Operates as an internal control to detect and mitigate risk
Provides an independent and unbiased evaluation of each DCs execution of policies, processes, and SOPs
Assesses conformance to the standards required to pass a Financial Audit
Identifies, reports, and monitors corrective actions through completionDLA Distribution Compliance and Assertion Program
Program Workload Design:
Operational Checks (QA Surveillances)
Compliance Checks Critical Business Process Monitoring
DLA Receiving Process Adherence
DLA MRO Pick/Pack Process Adherence
DLA Re-warehousing Process Adherence
DLA Vehicle Load Order (VLO) Truck Loading Process Adherence
Floor to Book Inventory Monitoring (Completeness)
Supply Discrepancy Report (SDR) /
Storage Quality Control Report (SQCR)
Validations
Assertion Process Leadership asserts monthly their ability to pass audit (Can Assert, Can Somewhat Assert, or Cannot Assert)DLA Supplier Responsibilities
Assistance is needed from DLA suppliers to ensure that material sent to our Distribution Centers complies with contract terms and conditions.
Material is shipped in the appropriate quantity
Material is marked and packaged correctly
Material is sent to the correct address/customer.
Supplier/Vendor compliance in keeping with DLAs standards for KCC (Kind/Condition/Count), packaging and labeling are imperative for minimizing rework and helping DLA achieve an Unmodified (Clean) Opinion.
Q & A
14
Distribution Financial Audit Update for Industry Day
AGENDA
Our Financial Audit Journey
Audit Categories/Terms/Elements
Scope of DLA Inventory
Drives Auditor Focus
Risk Management
Audit Readiness Handbook
Assessments and Inventory Accuracy
Compliance and Assertion Process
Supplier Responsibilities
Questions
Repeatable Processes and E2E Documentation
Risk Identification and Mitigation
Effective Internal Controls (systemic preventative)
Continuous Improvement & Learning (turnover)
Formal Online E2E Course + OJT (all business cycles)FY17FY19FY15
Clean Opinion=Reliance on DLA Distribution Records (Right Item, Right Condition, Right Quantity)
Audit: SSAE-16
IPA: Team Kearney
Opinion: Modified
Audit: DLA FFSA
IPA: Ernst & Young (EY)
Opinion: Disclaimer
Audit: DLA FFSA (EY)
IPA: EY
Opinion: Disclaimer
Audit: SOIDC (RMA)
Opinion: UnModified
Audit: DLA FFSA (EY)
Opinion: Disclaimer
Audit: SOIDC & AUP (EY)
SOIDC Opinion: Adverse
AUP Result: Errors noted
Audit Opinions:
Un-Modified
Modified
Disclaimer
Adverse
Audit: Inventory QTY only
IPA: DoD IG
Opinion: Modified/Qualified
Audit History and Future Years: Financial Statement Audit Results FY21
Audit: DLA FFSA (EY)
Opinion: Disclaimer
Audit: SOIDC & AUP
Not performed
Audit: DLA FFSA (EY)
Opinion: Disclaimer
Audit: SOIDC (EY)
Opinion: TBD
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Audit: DLA FFSA
Opinion: TBD
Audit: SOIDC
Opinion: TBD
Audit: AuP
Result:
Knowledge Transfer Key
Onboarding New Hires
Impacted by Dual Systems (DSS + WMS) environment
Testing + Risk Assessment required as WMS is deployed for mitigation during design.. Not afterward
FY21 Assertion Process providing ROI for Internal Controls Assessments
Understanding Audit Types of Audits Linkage to Owners Assertions
DLA Full Financial Statement Audit (FFSA)
Audit performed on all of DLAs business cycles (financials and operations)
Auditor starts at Financial Statements compared to the floor and the reverse; looks at the floor and tests against the financial statements (i.e. completeness and existence)
Cyclic:
Oct-Dec: Audit Planning
Jan-Mar: In depth auditor business process walkthroughs
Jan-Oct: PBC submissions and responses
Jun-Sep: Year-end inventory count observations and roll forward transaction tracingService Owned Inventory in DLA Custody (SOIDC)
Controls-based audit (open book audit)
Auditor tests based on Risk Control Matrix (RCM), and Management Descriptions of Systems (MDS) written by DLA
Each control objective and activity submitted is tested for design and effectiveness
Requires detailed process mapping, risk evaluation, controls, and a written Management Description of System/Services
Agreed Upon Procedures (AuP)
Performed for MILSVC Owner Materiel at the request of MILSVCs IPA.
Services IPA to select samples for book to floor counts likely with observation by their IPA
Floor to book samples completed and observed by MILSVC IPA
Substantive testing audit, physical inventories are performed, and accuracy is documented and projected over the holdings for that owner
Rights testing is conducted to prove DLAs right to hold materiel for given owner using receipt data and evidential matter
Military Services FFSA
DLA Distribution as the custodian for Mil Services materiel
Distribution assist, as needed, to Mil Service Audit requests via Evidential Matter, data pulls, and meetings or On site audit work with the DLA Distribution Centers
Understanding Audit Opinions & Timeline/CycleUnderstanding Audit Elements Existence, Completeness, Rights
How do we get Distribution from a Disclaimer and Adverse Opinion to a Modified or Clean Opinion ?
Existence: What we say is on our books is actually in location
Must Reduce Variance and Improve Accuracy (Receipt, Storage, and Shipment)
Completeness: What we see on the floor in recorded in our books
Must have items recorded accurately and timely into our system
Rights: We must have posted the item to the correct Owner record
Receive materiel and place into custody to correct Owner & perform all changes in ownership fully and accurately with Evidential Matter (EM)
Timeliness Elements of Audit (always checked by the IPA):
Recordation of inventory (accurate books, recorded timely)
Proof of shipment/delivery (to close out the sale, inbound or outbound)
Cut-off procedures (clean books in process work is closed out timely)
Inventory Adjustments reviewed prior to acceptance/changes
No Proration logic appliedScope of Inventory By Owner & Dollar Value Top 10 *Overall Approx. $142 Billion Total Value
Data Current as of COB: Sept 30, 2020
Top 10 Sites by Owner
Other category comprises of RICs that are not mapped to a current MilService. (Example RICs included but not limited to: 1A9, 70X, H9D, JSC, SSD, etc.)
Note: Dollar Value is estimated using FLIS Standard Price.
Note: DLA DSS is the Accountable Property System of Record (APSR). This data does not include Retail operations performed outside of DSS. For example: Pearl Harbor Shipyard and Norfolk Shipyard.
Audit Element:
Existence: Book to Floor
DLAs Fraud Risk Management (FRM) Strategy and Compliance RoadmapAssess
Organizations complete an annual assessmentof fraud risk, included in the Agency Fraud Risk Profile, and completed an annual assessmentof fraud controls
The ERM PMO / RICAs work through governance structure toidentify and prioritize the risk and controlremediation
ERM PMO monitors audits, guidance, and GAOs high risk list for potential high priority fraud activities.
Design and Implement
The FRM Strategy summarizes DLA's plan & integration with existing fraud reduction efforts
Integration with OUSD(C)'s fraud analytics program (Advana) and other automated tools
ERM PMO informs DLA staff of strategy and planning through DOD's SOA Handbook and Workshops and communication products
Evaluate and Adapt
DOD and DLA report the effectiveness of organizational and Agency FRM activities through the Fraud Control Assessment results
Continuous improvement of FRM program, tools, and technologies to combat fraud
Commit
Chief Risk Officer is responsible for managing DLA fraud risks, serving as the repository of knowledge of fraud risk, and controls and manages the fraud risk assessment process
DLA Governance Boards (ERWG, SRMT, and SMC) form the DLA FRM Program
Agency and organizational tone at the top sends the message that there is zero tolerance for fraud
Implementing DODs FRM Strategy at the Agency level
DLA Distribution AR Handbook -- Audit Goals & Leadership Checklist Example --DLA Distribution Compliance Program
Purpose: Mandate an independent and standardized approach to detect, prevent, deter and correct process deviations
Operates as an internal control to detect and mitigate risk
Provides an independent and unbiased evaluation of each DCs execution of policies, processes, and SOPs
Assesses conformance to the standards required to pass a Financial Audit
Identifies, reports, and monitors corrective actions through completionDLA Distribution Compliance and Assertion Program
Program Workload Design:
Operational Checks (QA Surveillances)
Compliance Checks Critical Business Process Monitoring
DLA Receiving Process Adherence
DLA MRO Pick/Pack Process Adherence
DLA Re-warehousing Process Adherence
DLA Vehicle Load Order (VLO) Truck Loading Process Adherence
Floor to Book Inventory Monitoring (Completeness)
Supply Discrepancy Report (SDR) /
Storage Quality Control Report (SQCR)
Validations
Assertion Process Leadership asserts monthly their ability to pass audit (Can Assert, Can Somewhat Assert, or Cannot Assert)DLA Supplier Responsibilities
Assistance is needed from DLA suppliers to ensure that material sent to our Distribution Centers complies with contract terms and conditions.
Material is shipped in the appropriate quantity
Material is marked and packaged correctly
Material is sent to the correct address/customer.
Supplier/Vendor compliance in keeping with DLAs standards for KCC (Kind/Condition/Count), packaging and labeling are imperative for minimizing rework and helping DLA achieve an Unmodified (Clean) Opinion.
Q & A
14
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