Lawrence Berkeley National Lab. Observations from Audit Procedures October 17, 2005

Transcription

1 Lawrence Berkeley National Lab Observations from Audit Procedures October 17, 2005

2 Table of Contents Page Your Needs and Expectations 3 Background 4 Risk Assessment 5 Audit Strategy 6 Details of Work Performed 8 36 This document is intended for use by the Regents Committee on Audit and the management of the University of California and has been completed in the context of our audit of the University of California taken as a whole. The matters raised in this report are only those which have come to our attention that we believe need to be brought to you. They are not a complete listing of every potential matter arising from our procedures and we cannot be responsible for reporting all risks in your business or internal control weaknesses. This report should not be quoted in whole or in part without our prior written consent. No responsibility for any third party is accepted as the report has not been prepared for, and is not intended for, any other purpose. 2

3 Your Needs and Expectations Based on our discussions with the Regents Committee on Audit (the Audit Committee) and with input from the management of the University of California (UC), we have set forth these needs and expectations and our actions to address them. Needs/Expectations Provide the Audit Committee and UC management with an assessment of the Lab s financial accounting and reporting. Prior to issuance to the UC management and the Audit Committee, results of the assessments are to be provided to the Lab s finance management. Develop management comments with departmental responses for submission to the Audit Committee. Keep management apprised of audit results and issues on a timely basis. On this engagement we will complete analytics, internal control reviews and substantive audit testing and ensure that a consistent level of quality and rigor is applied. Recommendations for internal control improvements will be communicated to the Lab s finance management for comment and a final report will be prepared and delivered to the Audit Committee. Ongoing. PwC Actions Provide communication of our expectations to Lab personnel and UC management. We will prepare a detailed listing of items required to be provided (PBC list). We will monitor the listing and notify management of any issues that arise. As discussed at the March Audit Committee meeting, since Lawrence Livermore and Los Alamos have certain financial data which is restricted, and since our procedures were limited to the March 31 and June 30, 2005 periods, to provide a consistent scope of work for all Labs, we did not perform a complete audit of the Lab on a stand-alone basis. Had we conducted such an audit, additional matters may have arisen to report to you. 3

4 Background This year, we conducted expanded audit procedures at all three UC operated national laboratories. While this report raises control and documentation issues, these should be viewed as recommendations for continuous improvement in the control environment. 4

5 Risk Assessments Our audit approach of the University of California is risk-based. In connection with the performance of the audit, we performed certain expanded procedures, as detailed herein, to provide the Audit Committee and UC management with additional information on the Lab processes and identify areas for improvement. Assessments and identifications of risk are performed continuously throughout the process. We focus on the risks that have a potential impact on financial reporting and controls that mitigate those risks. The table below outlines our risk assessments and our responses to them. Risk Assessments A preliminary assessment of the significant balance sheet accounts to identify significant variances and unusual items within the accounts as of March 31, 2005 and an update of that assessment as of June 30, Obtain an understanding of the overall control environment including understanding of the key accounting cycles. The key accounting cycles addressed as part of this control risk assessment are: Cash Charges, purchasing, transfers and payables Payroll Receivables Our assessment was complemented by substantive testing of the above areas. Financial statement assertions (Completeness, Accuracy, Validity, Existence) of the significant financial statement accounts are addressed. Fraud review procedures and internal audit reports review. PwC Actions By performing various tests, as well as interviews with Lab management, we assessed and documented our understanding of the Lab s control environment during the interim phase of this year s audit and utilized that assessment as a preliminary basis for our procedures. We met with Lab management to obtain an overall understanding of the Lab s control environment. We documented the process and control procedures as they relate to each of the four accounting cycles. In addition, we performed a monitoring controls review of each of the accounting cycles. We performed the appropriate substantive detail testing of significant balance sheet and expense accounts. The details and the results of the work performed are documented herein. We obtained and reviewed all internal audit reports issued in fiscal In addition, we inquired with Lab management and internal audit of their awareness of any known instances of fraud. 5

6 Audit Strategy Cash and cash equivalents Audit Strategy Audit Procedure Assess and test monitoring controls over the cash cycle. Review and test bank account reconciliations. Perform analytical reviews. Accounts receivable Assess and test monitoring controls over the receivables cycle. Perform analytical reviews. Review accounts receivable reconciliations. Perform subsequent receipts testing. Evaluate the allowance for doubtful accounts. Prepaid expenses Inventory Building, equipment and accumulated depreciation Accounts payable, accrued liabilities and funds held for others Perform review of prepaid account reconciliations. Perform analytical reviews. Perform testing of support. Review inventory reconciliations. Perform analytical reviews. Perform substantive testing on inventory. Review account reconciliations. Perform disposal and addition testing. Perform analytical reviews. Review repairs and maintenance accounts. Assess and test monitoring controls. Review account reconciliations. Perform search for unrecorded liabilities. Perform substantive testing. Perform analytical reviews. 6

7 Audit Strategy (continued) Audit Strategy Pension and post-retirement medical Audit Procedure Perform review of account reconciliations. Perform analytical reviews. Deferred revenue Commitments and contingencies Equity (contributed capital and retained earnings) Payroll Assess and test monitoring controls. Review account reconciliations. Perform analytical reviews. Perform substantive testing. Discuss any commitments/contingencies with management. Consider results of other audit tests for additional. commitments/contingencies. Confirm transfer of funds. Detailed analytical procedures. Assess and test monitoring controls. Perform substantive testing. 7

8 Cash Assessed and tested monitoring controls over the cash cycle: -- Obtained an updated overview of controls over the cash cycle. -- Assessed and tested monitoring controls over the cash cycle. We tested the three main bank account reconciliations to ensure they were prepared and had evidence of review. Reviewed and tested bank account reconciliations: -- Obtained information regarding the Lab s three main bank accounts (98% of total cash): 1) Concentration Account 2) Payroll Account 3) Vendor Account (reconciled in conjunction with Concentration Account) -- Tested bank reconciliations: 1) Agreed the adjusted bank balance to the book balance. 2) Reviewed material reconciling items (outstanding checks were tested through sampling and testing procedures). 3) Tested transfers between accounts. No exceptions noted. Performed analytical reviews. 8

9 Cash (continued) Evidence of review of bank reconciliations Observation During our review of cash reconciliations, we found two out of six reconciliations were performed and reviewed at month end; however, there was no evidence of sign-off in accordance to Lab policy. While all six reconciliations were performed, the review of the reconciliations was not documented. Recommendation We recommend that the bank account reconciliations be reviewed on a timely basis in accordance with the Lab s accounting policy. In addition, upon review, the reviewer should sign or initial the date of review to ensure that the review is evidenced. Management s Response LBNL concurs with this recommendation. Note that job assignments changed and new employees began in General Accounting during this period. The staff now understand this important control and full compliance is expected. 9

10 Accounts Receivable Assessed and tested monitoring controls over the receivables cycle: -- Obtained an updated overview of controls over the receivables cycle. -- Assessed and tested monitoring controls over the receivables cycle: We obtained a sample of three monthly account reconciliations for review to ensure they are prepared and reviewed in a timely fashion before the next month s closing. We selected a sample of three AR aging reports for review and evidence of supervisory sign-offs. We obtained a listing of refund checks for 26 advance payment refunds and selected a sample of five AP check requests (Request for Issuance of Check) and agreed that it has been reviewed and signed by a supervisory official. No exceptions noted. 10

11 Accounts Receivable (continued) Performed analytical reviews: -- Obtained an understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. Reviewed accounts receivable reconciliations: -- Reviewed 13 accounts receivable reconciliations totaling $10.3M or 87% of the accounts receivable balance as of March 31, Tested reconciling items to supporting documentation, as applicable. 11

12 Accounts Receivable (continued) Performed subsequent receipts testing: -- Selected a sample of 30 large accounts receivable customer balances as of March 31, 2005 and vouched subsequent cash payment to ensure validity of the receivables and proper account classification. No exceptions noted. Evaluated the allowance for doubtful accounts. 12

13 Prepaids Reviewed prepaid account reconciliations: -- Reviewed two general ledger account reconciliations totaling $7,211,000 or 95% of the balance as of March 31, The two largest prepaid accounts are below at June 30, 2005: Suspense Debits ($8,177,277): This account is used to record debits arising in the course of operations that cannot be readily analyzed and debited to the proper account due to lack of information, uniqueness of the transaction, or similar complication. Pension Plan Asset ($308,965,371): This account is used to record UC Employees Pension Plan. Performed analytical reviews: -- Obtained an understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. 13

14 Prepaids (continued) Performed testing to support: -- Detail tested 95% of the prepaid balance as of March 31, 2005 through review of supporting checks or verification of payment. No exceptions noted. 14

15 Prepaids (continued) Clarify status of pension and post-retirement balances Observation The Lab records a net pension asset in their balance sheet representing the net over-funding related to the University Retirement Plan for University employees who work at the Lab. For Berkeley, this prepaid pension amounted to $308,965,371 at June 30, In a similar fashion, a liability is recorded representing the post-retirement obligation for University employees. These prepaid assets and liabilities have been recorded by the Lab based upon the accounting principles followed by the DOE and do not necessarily equate to a legal determination as to the owner or obligor related to these plans. In connection with the Berkeley contract renewal, we understand the University made substantial progress in clarifying that the liability for post-retirement benefits for Lab employees is a DOE liability. Recommendation While the Berkeley Lab has made progress on this issue in the current year, full clarification has not yet been achieved for all Labs. The Labs should continue to seek clarification of the owner or obligor of the post-retirement or pension obligors and assets at appropriate contractual stages. Management s Response LBNL will continue to comply with UC s determination of the legal owner/obligor of the plans. 15

16 Prepaids (continued) Adjust and revise suspense debit account Observation During our review of the prepaid expenses account, we noted that the Lab made payments totaling $8.2 million on June 28, 2005 after the Lab s internal reporting cutoff on June 27, Due to the use of this internal cutoff date, the Lab made a manual entry to record the cash payments against the prepaid suspense debit account rather than reducing the related payables and accruals. While we understand that the internal closing schedule necessitates the use of an early cutoff date, the existing practice results in overstating both liabilities and assets as reported in the University financial statements. Note however this practice does not affect DOE reporting since there is no difference in the cutoff at the DOE s year-end. In the future, the Lab should consider some analysis or estimation process to more properly present its assets and liabilities for correct reporting to the University. Recommendation Since the University consolidates certain assets and liabilities at June 30, the current treatment results in at least an overstatement of assets and understatement of expenses. As discussed, consider further analysis to properly state the balance sheet as reported by the University. Management s Response LBNL concurs with this recommendation. UC reports will be adjusted to reflect the estimated application of cash after the ledger cutoff has been made each June so that the Laboratory s assets and liabilities are properly reported to the University. This process began with the FY05 report. 16

17 Inventory Reviewed inventory reconciliations: -- Reviewed the account reconciliations for significant Stores Inventory, MARS 1691, as of March 31, Performed analytical reviews: -- Obtained an understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. Performed substantive testing on inventory: -- Average inventory cost testing: Selected a sample of inventory asset types and tested to ensure that the calculation of the average cost of inventory is accurate. No exceptions noted. -- Inventory purchases: Selected a sample of 30 inventory purchases and agreed purchases to invoices and check payments. No exceptions noted. 17

18 Inventory (continued) Discrepancy between the general ledger and the stores inventory subledger Observation During our review of inventory accounts, we noted that the inventory subledger (Maximo) did not agree to the general ledger by approximately $40,000, or 4.2% of the inventory balance at March 31, This difference is due to a system interface issue and results from the average cost not being appropriately calculated. Management has informed us that this problem is a known issue and system changes are underway to address it. Also, during our review of inventory reconciliations, we noted numerous manual adjustments were made to agree the general ledger to the subledger. Making manual adjustments to reconcile these two ledgers is an inefficient process and may lead to the possibility of undetected misappropriation of inventory. Recommendation We recommend that the Lab completes its project to address the system interface issue and also consider ways to reduce manual entries going forward. Management s Response Changes to the inventory subledger (Maximo) to correct the interface problem are scheduled to be completed by December 31, With this fix, the need for manual adjustments will be eliminated. 18

19 Inventory (continued) Review of journal entries Observation During review of inventory accounts, we noted that there was a credit balance in account # of approximately $226,000, or 23.7% of the inventory balance at March 31, Management has researched this balance during the current year and determined it relates to a misposting from Management has not yet reversed this credit balance. Recommendation We recommend management reverse the credit balance that it determines to be incorrect. Management s Response LBNL concurs with this recommendation. Appropriate correcting entries will be made in conjunction with the Maximo/Financial Management System integration fix. The correcting entry will be completed by UC s next fiscal year-end of June

20 Inventory (continued) No formal procedure for stores inventory loss allowance Observation During our review of the inventory allowance, we noted that the Lab does not have formal procedures for calculating the allowance for the stores inventory. In addition, the Lab was not able to provide a detail of the rationale for the current balance on the inventory allowance account, which amounted to approximately $292,857 at June 30, Recommendation We recommend that the Lab implement a standardized and formalized procedure in order to establish the allowance for loss for the stores inventory based upon appropriate factors such as inventory turns, planned usage, etc. Management s Response LBNL concurs with the recommendation. A Financial Policy and Procedure for the Inventory Loss Allowance will be published. 20

21 Building and Equipment Reviewed account reconciliations: -- Reviewed the reconciliations for fixed assets and accumulated depreciation as of March 31, Performed disposal and additions testing. Reviewed repairs and maintenance accounts. Performed analytical reviews: -- Obtained an understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. 21

22 Building and Equipment (continued) Discrepancy between the general ledger and the asset subledger (Asset Management System) Observation During our review of fixed assets account reconciliations, we noted that the Lab had an unreconciled difference at $80,332, or less than 1% of the PP&E balance at June 30, 2005, between its PP&E subledger for personal and real property in the Asset Management System (AMS) and the general ledger (PeopleSoft). While this difference has been identified, it has not formally been resolved or written off. Recommendation We recommend that the Lab resolves and writes off this remaining difference. Management s Response LBNL wrote off the difference in August

23 Accounts Payable Assessed and tested monitoring controls: -- Obtained an updated overview of the purchases and payables cycle. -- Tested monitoring controls over the purchases and payables cycle: We obtained understanding of the procurement processes and reviewed expense report for budget vs. actual. We obtained a current Self-Assessment Procurement Report and reviewed for comparison to benchmark and industry standards, employee satisfaction rating, information availability, and cost to spend ratio. We selected three AP aging reports for review of the aging and evidence of supervisory reviews. No exceptions noted. We obtained a sample of 20 checks and reviewed for evidence of approval. No exceptions noted. We obtained a sample of 15 reconciliations and reviewed for evidence of supervisory signature and ensure accounts were reconciled. No exceptions noted. 23

24 Accounts Payable (continued) Reviewed account reconciliations: -- Reviewed general ledger account reconciliations totaling $13M or 94% of the balance as of March 31, Performed search for unrecorded liabilities: -- Selected a sample of 30 expenses paid from July 1, 2005 to August 10, 2005 and verified validity and accuracy of the expense through review of supporting documentation (i.e. invoice and check copy). No exceptions noted. Performed analytical reviews. 24

25 Accrued Liabilities Performed analytical reviews: -- Obtained a thorough understanding and documented the composition and description of significant accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. Reviewed account reconciliations: -- Reviewed the reconciliations for significant balances as of March 31, Performed substantive testing of 99% of the accrued liabilities at March 31, 2005: -- Vacation accruals. Selected a sample of 30 employee vacation amounts and verified against the payroll register and years of service with the vacation accrual policy. No exceptions noted. -- Payroll accruals. Tested payroll accrual of $18M through subsequent payments. No exceptions noted. 25

26 Accrued Liabilities (continued) Current vs. long-term classification Observation During the review of the accrued liabilities, we noted that management did not segregate the accrued vacation benefits between short-term and long-term. At June 30, 2005, the amount of the accrued vacation pay is $15.5 million. Recommendation We recommend that management performs an analysis on the classification of the short-term and long-term for accrued vacation pay and adjust the account within the balance sheet, as necessary, for purposes of reporting to UC. Management s Response LBNL concurs with this recommendation. Entries to distinguish the short-term portion of the accrued vacation liability will be made after a report to capture this information is prepared. 26

27 Funds Held For Others Performed analytical review: -- Obtained an understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. Reviewed account reconciliations: -- Reviewed the general ledger account reconciliations for five significant balances or approximately 90% of the balance as of March 31, No exceptions noted. 27

28 Pension and Post-Retirement Reviewed significant pension and post-retirement account reconciliations as of March 31, Performed analytical reviews: -- Obtained an understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. 28

29 Deferred Revenue Assessed and tested monitoring controls: -- Obtained an updated overview of the revenue cycle. -- Tested monitoring controls over the revenue cycle. Reviewed account reconciliations: -- Reviewed the general ledger account reconciliations for eight significant balances as of March 31, Performed analytical reviews: -- Obtained an understanding and documented the composition and description of significant accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. Performed substantive testing of 98% of the deferred revenue balance: -- Selected a sample of 30 items in the deferred revenue balance and agreed check copy or contracts. No exceptions noted. 29

30 Deferred Revenue (continued) STARS and interfacing issue Observation As of June 30, 2005, the Suspense Credits account has a balance of $9,523,599. This is due to the fact that DOE has implemented a new system called STARS that does not allow the Lab to book any credit balances during the three-day hard close. The Lab attempted to apply the suspense credits after the June 30 financial close, but STARS refuses to take the adjustments. As a result, the $9.5 million Suspense Credits were reflected in liabilities. Recommendation We recommend the Lab further research this issue and adjust this account through communication with DOE. Management s Response LBNL concurs with the recommendation. The Lab will work with DOE to determine the proper recording of credit balances in STARS. 30

31 Equity Performed analytical reviews: -- Obtained a thorough understanding and documented the composition and description of the accounts. -- Obtained explanations and assessed reasonableness of significant and material variances. Reviewed accounts receivable reconciliations: -- Reviewed 12 equity account reconciliations totaling $1,805,538,689 or 99% of the account balance as of June 30, Tested reconciling items to supporting documentation, as applicable. No exceptions noted. 31

32 Equity (continued) Unreconciled balance sheet account Observation During the review of the equity accounts, we noted that account #8138 Deferred Cost Environmental Liability (Funded) is a new expense account posted by DOE with no accounting supporting documentation. In addition, this account has not been reconciled since it was first opened in April 2005, nor was it assigned to anyone to reconcile. The total amount of the unreconciled balance is $1.6 million. Recommendation We recommend that this account be evidenced by supporting documentation and reconciled on a regular basis. Management s Response LBNL concurs with this recommendation. The account has now been assigned to a staff member to reconcile, and we are pursuing obtaining supporting documentation from DOE. 32

33 Payroll Assessed and tested monitoring controls: -- Obtained an updated overview of the payroll cycle. -- Tested monitoring controls over the payroll cycle: We obtained PeopleSoft Monthly Paid vs. Effort Report and reviewed to ensure follow-up documentation is noted for all employees on the report. No exceptions noted. We selected and obtained 10 weeks of the Wkly Employees w/ot and Sick/OT & Vacation/OT > 16 hours Report and reviewed whether the Lab is making necessary corrections and documenting evidence of review. We noted exceptions as discussed in our recommendations. We selected a sample of three payroll reconciliation reports and through inquiry, ensured that reconciliation reports are reviewed and prepared in a timely manner. No exceptions noted. We obtained and reviewed a sample of five payroll reconciliations to ensure all reconciliations were signed and dated in a timely manner. No exceptions noted. 33

34 Payroll (continued) We selected a sample of 45 payroll check requests and reviewed for supervisory signatures and authorization. We noted exceptions as discussed in our recommendations. We selected a sample of three electronic payments (ACH) to vendors for appropriate supervisor approval. In addition, we selected a sample of 15 ACH payment requests and tested for proper approval. No exceptions noted. We selected a sample of 45 employee timesheets for review and evidence of supervisory approval. No exceptions noted. Performed substantive testing of payroll costs: -- Selected a sample of 30 employees and agreed to payroll checks and payroll registers to verify the validity and accuracy of payroll costs. No exceptions noted. 34

35 Payroll (continued) Lack of formal approval on payroll check requests Observation During the testing of controls surrounding the approval of payroll check requests, we noted that 20 out of 45 selections had no evidence of review and/or approval. Payroll check requests were made for employees due to various payroll matters which the Lab needs to issue a manual check to the individual (e.g., returned checks and incorrect direct deposit bank account information). Recommendation We recommend the Lab implement formal approval for all payroll check requests. Management s Response An automated process to assure that supporting documentation for payroll check requests is obtained was implemented in August

36 Payroll (continued) Lack of formal review on payroll exception report Observation During the testing of controls surrounding the review of the Wkly Employees w/ot and Sick/OT & Vacation/OT> 16 hours payroll report, we noted that the exception report had no evidence of review. The exception reports reflected all employees who earned overtime compensation with 16 or more qualified overtime hours. Recommendation We recommend that Lab personnel evidence review of the Wkly Employees w/ot and Sick/OT & Vacation/OT> 16 hours payroll report to document the functioning of the control. Management s Response Payroll Department personnel now initial exception reports as evidence of review. 36

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