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INSPECTOR GENERAL AUDITING

DAO 213-3: INSPECTOR GENERAL AUDITING
Number: DAO 213-3
Effective Date: 2006-10-19

SECTION 1. PURPOSE.

.01 This Order prescribes the policies and procedures of the Office of Inspector General (OIG) for conducting and reporting on audits and other matters related to audits.

.02 This revision generally updates the Order to reflect audit policies and procedures of the OIG not previously contained in the Order.

SECTION 2. AUTHORITY.

.01 The Inspector General has the authority to conduct and supervise audits of the programs and operations of the Department of Commerce (the Department) as provided in the Inspector General Act of 1978, as amended, 5 U.S. App. 3 (the Act). All audit activities within the Department are within the responsibility of the OIG and will be carried out by or under the direction of the Office of Audits (OA) headed by the Assistant Inspector General for Auditing (AIGA).

.02 In performing the Department's audit function, the Inspector General is authorized, under the Act, to have access to all records, reports, audits, reviews, documents, papers, recommendations and other material available to the Department that relate to Department programs and operations.

SECTION 3. RESPONSIBILITIES OF THE OIG.

.01 General Audit Functions. OA will perform, or arrange to have performed, and report on financial audits, performance audits, and attestation engagements of all operating units, programs, activities and functions of the Department. OA may also perform or review financial audits and attestation engagements of contracts, grants, cooperative agreements, loans and other agreements proposed or entered into by operating units of the Department.

.02 Financial Audits. Financial audits include financial statement audits and financial assistance and contract audits.

a. Financial Statement Audits are primarily concerned with providing reasonable assurance about whether the financial statements of an audited entity are presented fairly in all material respects and in conformity with generally accepted accounting principles.

b. Financial Assistance and Contract Audits include determining whether financial information is presented in accordance with established or stated criteria, whether the entity has adhered to specific financial compliance requirements, and whether the entity's internal control structure over financial reporting is suitably designed and implemented to achieve the control objectives.

.03 Performance Audits. A performance audit is an objective and systematic examination for the purposes of providing an independent assessment of the performance of a government organization, program, activity, or function in order to provide information to improve public accountability and facilitate decision making by parties with responsibility to oversee or initiate corrective action. Performance audits include economy and efficiency audits and program audits.

a. Economy and efficiency audits include determining whether a governmental entity is using its resources economically and efficiently, the causes of inefficiencies or uneconomical practices, and whether the entity is in compliance with applicable laws and regulations.

b. Program audits include determining whether and the extent to which an entity is achieving the results required by legislation, the effectiveness of the entity's program, activities and functions, and/or whether the entity is complying with applicable laws and regulations.

.04 Attestation Engagements. Attestation engagements concern examining, reviewing, or performing agreed upon procedures on a subject matter or an assertion about a subject matter and reporting on the results. The subject matter of the attestation engagement may take many forms, including historical or prospective performance or condition, historical events, analyses, or systems and processes. Attestation engagements can cover a broad range of financial or non financial objectives such as: an entity's internal control over financial reporting; an entity's compliance with requirements of specified laws, regulations, rules, contracts, or grants; management's discussion and analysis presentation; reliability of performance measures; and allow ability and reasonableness of final grant and contract costs.

.05 Financial Audits and Attestation Engagements Performed by Others. OA will rely on financial audits and attestation engagements of Department-funded organizations, programs, activities and functions performed by state and local government audit organizations or independent public accountants, under provisions of applicable Office of Management and Budget (OMB) Circulars, to the fullest extent practicable, provided that:

a. the audit and attestation reports and working papers are available for review by OA;

b. the audits and attestation engagements are performed in accordance with generally accepted auditing standards (including the government auditing standards issued by the Comptroller General of the United States and OMB); and

ac. the audits and attestation engagements otherwise meet the requirements of the Department of Commerce OIG.

.06 Other Responsibilities. The Chief Financial Officers Act of 1990, as amended by the Government Management Reform Act of 1994, requires the annual preparation and audit of organization-wide financial statements of 24 executive branch departments and agencies. To fulfill this requirement, the OIG may perform the audit of the Department's consolidated financial statements, as well as audits of selected bureaus of the Department, or may contract with an independent certified public accounting firm (or multiple firms) to conduct any of such audits. In addition, the Federal Financial Management Improvement Act of 1996 requires that the report on these audits state whether the agency financial management systems comply substantially with federal financial management systems requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level.

.07 Pre-award Screening Process. In accordance with policies and procedures developed by the OIG and Department and operating unit officials, OA will perform certain pre-award screening procedures for the Department to help determine the responsibility of applicants for financial assistance from the Department or one of its organizational units. These procedures may include review of an applicant's credit rating and related financial information; assessment of unresolved federal audit findings and open OIG audit recommendations relating to the applicant; review of government-wide suspension and debarment lists; pre-award accounting system surveys; and review of name checks of individual applicants or key officers, employees or representatives of an applicant that is a corporation, organization or other legal entity, which are performed by the OIG Office of Investigations pursuant to Section 9 of DAO 207-10. It is the responsibility of program officials to determine what, if any, action should be taken as a result of adverse information developed through the pre award screening process. However, at the request of the OIG, such officials will provide a written explanation of a particular determination to the OIG.

.08 Quality Standards. OA manages its activities using a quality control system designed to assure that established professional standards, policies, and procedures are adhered to in the conduct of audits, the preparation and issuance of reports, the resolution of contested findings, and the performance of all other aspects of its assigned duties. OA complies with standards established by the Comptroller General for audits and attestation engagements of federal entities, organizations, programs, activities, functions, and of government contractors, non-profits, and other non-government entities. In addition, OA takes appropriate steps to assure that any work performed by non-federal auditors complies with the standards established by the Comptroller General and OMB.

SECTION 4. RESPONSIBILITIES OF DEPARTMENT OFFICIALS AND EMPLOYEES.

.01 General. Secretarial officers and the heads of operating units are responsible for ensuring compliance with Department policies; establishing and executing plans and procedures for preventing fraud, waste and abuse in their programs and operations; extending full cooperation to OA in implementing an effective audit program; and objectively reviewing and evaluating audit findings and recommendations. Although the Secretarial officers and heads of operating units do not have to accept all audit recommendations, in accordance with Section 9 of this Order and DAO 213-5, they must take timely action on all accepted recommendations and provide justification for any rejected recommendations.

.02 Agency Liaison. Each Secretarial officer or the head of each operating unit shall appoint a senior official as agency liaison who will be the primary contact between OIG and the Department office or operating unit at the headquarters level for the conduct of audits. The same person should be the agency liaison for all audit matters, including the handling of Government Accountability Office (GAO) reports and the resolution of OIG and GAO audit recommendations. The agency liaison will also keep the OIG informed of changes within the departmental agency or operating unit that may affect audit planning, e.g., changes in organization, legislation, program emphasis, and funding.

.03 Cooperation with the OIG. It is Department policy that all employees fully cooperate with OA so that audits may be conducted and brought to a prompt and appropriate conclusion. Department officials shall make every effort to assist OA in achieving the objective of effective audits.

.04 Access to Records. Each Department office or operating unit and each employee shall furnish OA, upon request, access to and copies of all records, reports, audits, reviews, documents, papers, recommendations, or other materials available to it. The OIG will handle such materials consistent with all current laws and regulations protecting the confidentiality of the information. In conformity with law, Department officials shall also provide the necessary authorizations for OA access to computer and other data or records when such are kept by another government agency or by any outside contractor, grantee or other recipient of Department assistance.

.05 No Reprisals. No employee or official who has authority to take, direct others to take, recommend or approve any personnel action shall direct any employee to refrain from making a complaint or reporting information to the OIG. Further, no employee or official shall take or threaten any action against any employee as a reprisal for making a complaint or disclosing information to the OIG, or for evidencing an intention to do so, unless the complaint was made or the information disclosed with the knowledge that it was false or with willful disregard for its truth or accuracy.

SECTION 5. PROCEDURES FOR INTERNAL AUDITS.

.01 Requests for OIG Audit Activities. Department officials may request specific audits by contacting the AIGA. The OIG will consider such requests, but retains discretion as to the subject matter and timing of all audit activities.

.02 Audit Notification. OA will normally give advance notification to appropriate Department officials for survey and audit review work.

.03 Entrance Conference. Before an audit starts, OA will arrange to discuss the following with officials responsible for the organization or function to be audited: the purpose of the audit; the expected scope of the review; the anticipated ending date; and other pertinent matters. Department officials should take advantage of this opportunity to assure that they have a clear understanding of the audit objectives and to inform OA of areas or activities needing special audit attention and any other pertinent information that would assist in planning the audit.

.04 Audit Performance.

a. At the beginning of an audit, OA may perform an audit survey of the programs, entity or function to be audited. The audit survey is a systematic examination and analysis of the organization, methods, and management controls governing the operations of the audited entity. Principal objectives of the survey are to:

1. ascertain agency problems and concerns;

2. identify areas where the need for detailed audit is indicated; and

3. obtain maximum cost/benefit by pinpointing major concerns and dropping minor matters. It is important that Department employees cooperate fully with the auditors in achieving these objectives in order for audits to be of maximum benefit to agencies and to obtain the most effective use of audit resources.

b. At the completion of survey work, any potential findings that have been identified in the survey will be discussed with officials of the organization to determine whether, without additional survey work or an audit, agreement can be reached between OA and the office or operating unit as to existence of the findings and the support for them. If agreement is reached, a report will be furnished in accordance with paragraph 5.06 of this Order.

ac. OA may issue a preliminary report before completing the full audit when significant findings require immediate management action to curtail or prevent fraud, waste or abuse.

d. During an audit, the auditor(s) may hold periodic informal meetings with officials of the organization being audited to discuss the progress of the audit and matters being developed. During these discussions, the audi tee will express views on the audit results and disclose any facts not previously known to the auditor(s) that could alter conclusions.

.05 Exit Conferences.

a. Upon completion of the audit, OA will hold an exit conference to discuss the results and proposed recommendations with the head of the Department office or operating unit audited and/or other appropriate officials, except for specific matters which, pursuant to applicable audit or investigations policy, may not be disclosed.

b. In order to make these discussions effective, the appropriate Department official or head of the operating unit shall encourage affected officials and personnel to openly and candidly discuss with OA representatives:

1. audit findings that fall within such officials' areas of responsibility; and

2. those recommendations upon which such officials have the authority to act.

ac. Open and candid discussions of audit results help assure that audit reports are factual and that the auditors' conclusions and recommendations are sound and reasonable.

.06 Issuance of Audit Report.

a. After the exit conference, a draft report will be furnished as expeditiously as possible to the Department officials who have responsibility for taking action on the reported matters. Department officials shall submit written comments that are objective, and pertinent to the matters discussed in the draft report, and as brief as possible to the AIGA within 30 days after transmittal of the draft report.

b. The audited's reactions to the audit findings and recommendations are an important part of the audit. The audi tee will, therefore, respond to the report and specifically:

1. state concurrence or reasons for non-concurrence with, and make other pertinent comments about the findings; and

2. briefly indicate the action taken or proposed to be taken regarding the recommendations.

ac. Agency officials may request, and the OIG may approve, an extension of the due date for the agency's response to the draft report. Such requests should be directed to and approved by the AIGA.

d. In the final report, the OIG will include comments received from Department officials, including opposing views and statements of actions that have been taken or are proposed. OA may, as appropriate, include a rebuttal in the final report. Copies of final reports will be sent to those Department offices concerned with the activity audited.

SECTION 6. PROCEDURES FOR EXTERNAL AUDITS.

.01 Audit Workload and Priorities. OA will plan and conduct audits of Department contracts, grants, cooperative agreements, loans and other financial agreements. Contracting officers, grant administrators, and other designated officials may, from time to time, request special audits of contracts, agreements, cost proposals, or cost and pricing data, in addition to scheduled audits. Such requests may be directed to the Deputy Assistant Inspector General for Regional Audits (DAIG/RA). The OIG will determine, depending on the priority of the matter and the availability of resources, the extent to which such special audits will be made and the timing thereof.

.02 Audits Performed by OA. The following procedures will apply to external audits performed by OA.

a. OA staff will notify the contractor, grantee, borrower or other recipient to be audited (i.e., the audi tee) of the intended starting date for the audit and other arrangements necessary to expedite the audit. The appropriate contracting officer, grant administrator or other designated official also will be notified of the intended audit and the estimated completion date.

b. At the beginning of each audit, an entrance conference will be conducted to discuss the following with the audi tee: the purpose of the audit; the expected scope of the review; the anticipated ending date; and other pertinent matters.

ac. During the course of an audit, a discussion of the findings will be conducted with the audi tee to the fullest extent feasible. At the conclusion of each audit, and except where deemed inappropriate, an exit conference will be conducted with the auditee to discuss and obtain concurrence in findings and possible disallowances and to obtain a clear statement of the position taken by the auditee on the findings and possible disallowances.

d. Final OA reports will be addressed to the responsible contracting officer, grant administrator, or other designated official.

.03 Audits Performed by Others. The following policies and procedures will apply to reviewing external audits performed by non-federal auditors of state, local, nonprofit, and for-profit entities receiving Department funds.

a. Audits of State and Local Governments and of Nonprofit Entities.

1. OA will (i) perform all single audit cognizant agency responsibilities for non-federal entities assigned by OMB to the Department, and (ii) assume general oversight responsibilities for unassigned non-federal entities for which the Department provides predominant federal funding. OA will ensure that all material audit findings involving Department funds are resolved in accordance with OA policies and procedures.

2. OA will review each audit report forwarded to the OIG by the Federal Audit Clearinghouse using the appropriate standard review guide. All reports on cognizant and general oversight recipients found to contain major compliance deficiencies should be corrected either through direct communication with the auditor or by returning the report to the auditor.

b. Audits of For-Profit Entities. In accordance with Departmental policy, commercial organizations, sole proprietors, and individuals receiving financial assistance in excess of $500,000 must have a program-specific audit performed prior to close-out of the award but no less frequently than once every five years. Each program-specific audit report submitted to OA will be reviewed for compliance using the standard desk review guide, focusing on such issues as whether the auditor is independent and qualified, and if the report includes all required opinions and schedules. In addition, OA will review the reports for compliance with GAO Government Auditing Standards and the program-specific audit requirements described in OMB Circular A-133. Any reports found to have major compliance deficiencies will be returned to the auditor for correction.

c. Independent Public Accountants. Independent public accountants (IPAs) engaged to perform financial audits and attestation engagements of Department-financed organizations must be either Certified Public Accountants (CPAs) or public accountants licensed on or before December 31, 1970, by state regulatory authorities.

SECTION 7. REFERRALS TO THE OFFICE OF INVESTIGATIONS.

Indications of fraud or other criminal activity discovered during the conduct of an audit will be referred to the Assistant Inspector General for Investigations (AIGI). Audit reports will not be issued until matters under investigation either have been resolved or issuance of the report is cleared by the IG. When the audit is being performed at the request of a contracting officer, grant administrator, or other designated Department official, OA will notify the requestor that the matter has been referred to the AIGI, unless the IG or the AIGI determines that such notification would interfere with an investigation or prosecution.

SECTION 8. HANDLING OF AUDIT REPORTS AND AUDIT INFORMATION.

.01 Dissemination of Audit Reports. Audit reports will be submitted to Department officials who have responsibility for taking action on the results and recommendations of the audit. Copies of the reports may be furnished to other Department officials who have a need for the report in the course of performing their official duties. External reports involving matters other than the review of contracts, loans or loan guaranties will be provided to the auditee or the auditee's representative, except as provided in Section 7 of this Order or in the GAO standards for government auditing. Any further dissemination of audit reports must be coordinated with the OIG.

a. The OIG reviews final performance audit reports for public release. On occasion, other types of final audit reports may also be reviewed for public release. Audit reports cleared for public release will normally be made available on the OIG website at www.oig.doc.gov or may be obtained from the OIG Publications Unit.

b. The availability of any audit report in response to a Freedom of Information Act (FOIA) or Privacy Act request will be reviewed and determined by the OIG. All requests for copies of audit reports should be promptly referred to the OIG FOIA Officer in accordance with applicable Department procedures.

.02 Security of Audit Reports.

a. Audit reports will be marked "For Official Use Only" where deemed necessary by the OIG. As such, they become subject to applicable Department security regulations concerning administratively controlled materials.

.03 Inquiries Concerning Audit Work.. Inquiries to a Department office or operating unit concerning internal OIG audit work, whether contemplated or in progress, shall be referred to the AIGA. Inquiries concerning external audit work shall be referred either to the DAIG/RA or to the appropriate Regional Inspector General for Audits.

SECTION 9. ACTION ON AUDIT REPORTS.

.01 Follow-up on Reports. The OA is responsible for following-up on all open audit recommendations contained in OA reports, IPA reports or other audit agency reports as they relate to the Department or entities funded by the Department.

.02 Audit Resolution Responsibilities. Secretarial officers, heads of operating units, contracting officers, grant administrators, and other designated officials are required by OMB Circular A-50 to:

a. make final written determinations of the action to be taken on audit report recommendations;

b. initiate action to assure that such determinations are carried out;

c. assure that final resolution proceeds as rapidly as possible; and

d. assure that resolution actions are consistent with law and regulations, including written justification or legal basis for rejecting any recommendations and decisions not to seek recovery of amounts due as a result of audit reports. The designated agency liaison (see paragraph 4.02 of this Order and DAO 213-5) shall be the point of contact within the organization on matters concerning unresolved audit recommendations and costs questioned.

.03 Audit Resolution Procedures. Detailed procedures for resolving audit recommendations and costs questioned are contained in DAO 213-5, including requirements for assuring that final written determinations are made within a maximum of six months from issuance of the report, and formally resolved as rapidly as possible, as mandated by applicable OMB Circulars.

SECTION 10. EFFECT ON OTHER ORDERS.

This Order supersedes Department Administrative Order 213-3, dated December 8, 1989, and supplements the information in DAO 213-5.

Signed by: Inspector General

Approved by: Secretary of Commerce

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