Contract / Vendor Pay Assertion: 31 January 2014

Contract / Vendor Pay Assertion: 31 January 2014

Understanding Audit: FY17 Results and Way Ahead Dr. Dorothy Potter Risk Management Section Head Risk and Compliance Branch Programs and Resources Headquarters, U.S. Marine Corps January 2, 2018 UNCLASSIFIED Full Financial Statement Audit What is a Full Financial Statement Audit? Annual, comprehensive review of the health of the Marine Corps measured in dollars. Budget, Balance Sheet, Internal Controls, IT Systems

Wide ranging impact from equipment and property accountability, to IT risk management, to business process design and control Goal: Unmodified Opinion FY17 Result: Disclaimer 9 Material Weaknesses 134 Notices of Findings or Recommendations (NFRs) Future progress will be measured by fixing NFRs 2 Audit Return on Investment - Clean opinion is a basic expectation from the taxpayer, Congress, and top leadership - However, true value to Marines is increased accountability over resources and the promise of increased funding to support operations and

investment - Example: Accountability of ammunition - Example: Equipment accountability and resourcing - Example: IT Controls 3 Goal: Unmodified Opinion by FY20 Achieved by incremental reduction of NFRs and Material Weaknesses Grant Thornton Thornton (SBA) (SBA) Grant FY2010 FY2010 Clifton, Larsen, Larsen, Allen

Allen (SBA) (SBA) Clifton, FY 2014 2014 FY FY 2017 2017 FY Kearney and and Co, Co, P.C. P.C. (FFS) (FFS) Kearney FY 2020 2020 FY DoN DoN Financial Financial

Statement Statement Merge Merge -- Army Army Corps Corps of of Engineers Engineers experience experience shows shows that that level level of of effort effort decreases decreases with with successful successful corrective corrective

action action 4 Keys to Success and Questions to Ask - Who is reviewing your internal controls? - Understanding business process SOPs and Evidence of Oversight Not just for financial managers - Whats the root cause of the problem? - Have we tested to ensure its fixed? - Are our IT systems and business processes designed with audit in mind?

5 Questions 6 UNCLASSIFIED Types of Audit Opinions NOTE: In FY13, the American Institute of Certified Public Accountants (AICPA) issued guidance to clarify the opinion type names to be consistent with the language used in the International Standards on Auditing (ISAs). UNCLASSIFIED 7 UNCLASSIFIED FY17 Material Weaknesses (Slide 1) 1. Entity-Level Controls (P&R / C4) - Mature Entity Level Control Processes Lacking (Tone, PCN Consistency) - Incomplete IT System RMF Entity Rationalization and Implementation 2. Ability to provide complete, timely, and sufficient evidence (All Areas)

- Timeliness of Business Process Documentation - Transaction Level Data Populations Supporting Account Balances - Complete and Timely Documentation Supporting Sampled Transactions 3. Financial Reporting and Analysis (P&R, FM Community) - Completeness of Financial Statements and Disclosures (A136, GAAP, Aviation, MERCHF) - FM Analysis and Oversight (SABRS, DDRS, Oversight of DFAS) - Accounting For Estimates (AP Accrual Estimations, Contingent Legal Liabilities, CivPay Labor Accrual Oversight 4. Integrated Financial Management Systems (P&R, I&L) - SABRS Interface Controls, SABRs to SMARTS Reconciliation, Feeder to SABRs Reconciliation, SABRS to APSR Reconciliation UNCLASSIFIED 8 UNCLASSIFIED

FY17 Material Weaknesses (Slide 2) - ICOFR Material Weaknesses (continuedSlide 2) 5. Accounting for Property, Plant, and Equipment (PP&E) (I&L, MCICOM, Commanders) - Existence and Completeness of PP&E (Ineffective Inventory Mgmt Controls) - Valuation of PP&E (Statements of Differences) 6. Accounting for Operating Materials and Supplies (OM&S) (I&L, LOGCOM, MCSC) - Populations and Transactional Data (Temp Storage, Set Assembies, Ammo) - Valuation of OM&S (e.g. OIS-MC) 7. Fund Balance with Treasury Controls (P&R) - Disbursements and Collections, DFAS Suspense Accounts 8. Business Process Controls (P&R, FM, Supply, Internal Controls) - Documentation fully supporting e.g. leave, triannual review, entitlement changes, timekeeping, R&A, Segregation of Dutiesetc. 9. Information Systems (IT PMs, Commanders, all users) - Continue transition to NIST RMF UNCLASSIFIED 9

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