Defense Primer: Understanding the Process for Auditing the Department of Defense Page: 1 of 2

;* Congressional Research Service
Informing the legislative debate since 1914

June 26, 2018
Defense Primer: Understanding the Process for Auditing the
Department of Defense

The Chief Financial Officers Act of 1990 (CFO Act, P.L.
101-576) requires annual audits of financial statements for
federal agencies. Under the CFO Act, audits of federal
agencies are the responsibility of the agency's inspector
general (IG), but the IG may contract with one or more
external auditors to perform the audit.
While a number of Department of Defense (DOD)
components already undergo annual audits (e.g., the U.S.
Army Corps of Engineers, Defense Contract Audit Agency,
and National Reconnaissance Office), DOD is undergoing
its first-ever agency-wide financial audit in FY2018.
Generally, the process and standards used to audit DOD are
the same as those used to audit other federal agencies.
Understanding why and how the DOD audit is conducted
can help Congress evaluate the results and usefulness of the
audit.
DOD has contracted with external accounting firms to
conduct its FY2018 audit. Different components within
DOD are currently being audited by different firms.
DOD expects to spend more than $340 million to conduct
the FY2018 audit and to release the results in November
2018. It is to submit a full report to Congress by March 31,
2019. Thereafter, final audit reports are to be issued
annually in November, covering the prior fiscal year.
Why an Audit?
Government entities, including the United States
government as a unitary entity, issue annual reports that
present the current financial position and condition, and
discuss key financial topics and trends. An audit of the
financial information provides accountability over the use
of public resources by government agencies to Congress,
oversight bodies, and the public.
Financial audits aim to provide reasonable assurance that
the financial statements of an entity are free of material
misstatements whether caused by error or fraud.
DOD's financial management has been on the Government
Accountability Office's (GAO) High-Risk list since 2015.
High-Risk list agencies or programs are considered
vulnerable to fraud, waste, abuse, and mismanagement, or
at most in need of transformation. An audit of DOD can
provide critical insight into the reliability of financial data,
and efficiency and effectiveness of internal operations;
review compliance with statutes and financial regulations;
and uncover potential problems. With such information,
DOD and Congress could take steps to improve the
efficiency and effectiveness of internal operations.

While it is too early to estimate with any confidence
potential financial and operational benefits of an audit,
there is general consensus that DOD will gain valuable
information from the effort. The Department has anticipated
spending more than $550 million to address potential audit
findings.
How Are Audits Done?
For each line item on a financial statement and notes to the
financial statement, an auditor will examine a sample of the
underlying economic events to determine the accuracy of
the information reported. The auditor is expected to give an
unbiased professional opinion on whether the financial
statements and related disclosures are fairly stated in all
material respects for a given period of time in accordance
with Generally Accepted Accounting Principles (GAAP).
While the Federal Accounting Standards Advisory Board
(FASAB) promulgates the financial reporting and
accounting standards for federal government entities, GAO
is responsible for establishing auditing standards for federal
government agencies, including federal grant recipients in
state and local governments.
Material misstatement in financial reporting can be
defined as information on a financial statement that
could potentially affect the reader's decision or the
conclusions drawn by a reader about the financial
status of an agency
Auditing Standards
GAO issues the Generally Accepted Government Auditing
Standards (GAGAS), also commonly known as the "Yellow
Book," which provides a framework for conducting federal
government audits. The Yellow Book requires auditors to
consider the visibility and sensitivity of government
programs in determining the materiality threshold. Similar
to the requirements in the private sector, GAGAS requires
federal financial reporting to disclose compliance with
laws, regulations, contracts, and grant agreements that have
a material effect on the entities' financial statements.
Some organizations within the federal government use a
hybrid of external and internal auditors. Whether external
or internal auditors perform the function, they are required
to adhere to the standards established under GAGAS.
In addition to examining the financial information, an audit
evaluates the management's assertion of the internal control
over financial reporting. Audit of internal control includes
audit of computer systems at the entity-wide, system, and
application levels. GAGAS recommends using specific
frameworks for internal control policies and procedures,

www.crs.gov 17-5700

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Schwartz, Moshe & Gnanarajah, Raj. Defense Primer: Understanding the Process for Auditing the Department of Defense, report, June 26, 2018; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc1213109/m1/1/ocr/: accessed April 20, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.

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