Financial Improvement and Audit Readiness (FIAR) Guidance

The FIAR Methodology defines the key tasks, underlying detailed activities and resulting work products that all reporting entities should follow to become audit ready. The FIAR Methodology maximizes the potential for successful financial statement audits by considering the methods financial statement auditors use to assess financial statement accuracy in accordance with auditing standards. This guidance draws on the definitions, criteria and requirements that financial statement auditors use to help reporting entities adequately prepare for their first-time financial statement audits. This section of the FIAR Guidance focuses on explaining the concepts of financial statement assertions and financial reporting objectives (FROs), and the tests of internal controls and key supporting documents (KSDs) needed to demonstrate audit readiness. Auditors are required to apply professional judgment when determining whether they have obtained sufficient appropriate evidence (through tests of internal controls and key supporting documents) to form an opinion on the financial statements. Reporting entity management must perform a similar assessment to determine whether it has sufficient evidence to demonstrate the organization is audit ready.

Wave 4 of the FIAR Methodology requires that the valuation assertion for material financial statement lines items, including property and inventory/OM&S, be achieved. Additionally, presentation and disclosure should be considered in this wave (if not previously covered – see also the Financial Reporting assessable unit table in Section 5). One significant and potentially very costly challenge in Wave 4 is obtaining auditable values for the significant amount of existing DoD assets located worldwide and procured many years ago, well before passage of the CFO Act and other legislation mandating auditability. To address and overcome this impediment to achieving auditability, OUSD (Comptroller) has undertaken several initiatives over the past few years including:

Reporting entities must value their assets in accordance with the Federal Accounting Standards Advisory Board Statement of Federal Financial Accounting Standard Number 6 (SFFAS No. 6), Accounting for Property, Plant and Equipment and SFFAS No. 10, Accounting for Internal Use Software. If existing business processes or systems limit full compliance with SFFAS No. 6 and SFFAS No. 10, reporting entities must report their asset values in accordance with SFFAS No. 35, Estimating the Historical Cost of Property, Plant and Equipment, where applicable.

However, the Comptroller has issued these recent policy memoranda, particularly the March 14, 2016 general equipment valuation guidance, anticipating that FASAB will adopt its current exposure draft that rescinds SFFAS No. 35 and establishes “deemed cost” as a one-time alternative approach to general equipment valuation. DoD reporting entities should review the policy memoranda as they begin Wave 4 and develop execution strategies and methodologies to satisfy the reporting requirements and incorporate the activities into their Financial Improvement Plans.

FIAR Goal

The Financial Improvement and Audit Readiness goal is to improve the Department’s financial management operations, helping provide America’s Service men and women with the resources they need to carry out their mission and improving our stewardship of the resources entrusted to us by the taxpayers. Success will be demonstrated through a financial statement audit performed by independent auditors resulting in an unmodified audit opinion on the Department’s financial statements.

The Department has made significant progress in recent years with regard to its audit readiness efforts for General Fund budgetary data (Statement of Budgetary Resources). In January 2015, approximately 91 percent of Fiscal Year (FY) 2015 DoD General Fund budgetary data was under independent audit. Reporting entities should update FIPs regularly and provide assertion documentation to reporting entity management as each work product is completed, so management can assess and monitor interim progress and address impediments early in the process.

Auditing the Financial Statements

The primary purpose of a financial statement audit is to provide reasonable assurance through an opinion (or disclaimer of an opinion) about whether a reporting entity’s financial statements are presented fairly in all material respects in conformity with United States (U.S.) generally accepted accounting principles (GAAP). These audits are performed in accordance with Generally Accepted Government Auditing Standards (GAGAS).

In order to help the Department of Defense achieve its goal of having all of its financial statements ready for audit by September 30, 2017, reporting entities must begin to shift their focus towards balance sheet line items.

Reporting entities must be able to assert the audit readiness of all business processes and sub-processes associated with General Equipment, including acquisitions, depreciation, transfers, dispositions and general ledger recording. Furthermore, reporting entities should have controls in place to properly account for General Equipment acquired by and/or in the possession of contractors. The nature of the item, rather than who has possession of the asset, is the basis for proper accountability.

Valuation Challenges

During Wave 4 execution, reporting entities are required to properly value and report new asset acquisitions, accepted and placed into service effective October 1, 2013, as well as properly value existing assets that will have a positive net book value on or after September 30, 2017. Establishing historical acquisition costs for existing assets poses a difficult challenge as existing DoD systems and processes were not designed to record, process and report financial transactions accurately and in accordance with GAAP. In addition, the ability to successfully value new asset acquisitions requires the implementation of effective business processes and controls for recording, processing and reporting new asset acquisitions.

Other challenges that must be addressed in coordination with leading OSD offices are:

Financial Reporting Objectives

FROs are defined as objectives that capture the outcomes needed to achieve proper financial reporting and serve as a point against which the effectiveness of financial controls can be evaluated. In other words, FROs are a further disaggregation of financial statement assertions at the line item level, and are provided in the FIAR Guidance to help reporting entities ensure they have appropriately considered and assessed all relevant risks/assertions.

These FROs were obtained from the Government Accountability Office’s (GAO) Financial Audit Manual (FAM). Utilizing FROs derived from auditor guidance helps reporting entities ensure they have addressed all significant risks and financial statement assertions that will likely be evaluated during financial statement audits.

A full list of Financial Reporting Risks, Key Supporting Documents and Financial Reporting Objectives may be found in Appendix B of the FIAR Guidance.


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