Audit Sample Failures and a Dropped Interface
During the FY 2025 financial statement audit, the sample of 80 O&M obligations includes 12 without receiving reports or acceptance evidence. A system interface from the procurement feeder to the general ledger failed for three days in June and dropped 1,400 obligation records totaling $8.7 million; the records were manually re-entered from a spreadsheet, but 90 lack a unique transaction identifier. The comptroller must sign the management assertion in 20 working days. The auditors have proposed a top-side adjustment of $8.7 million to increase obligations and decrease unobligated balances. Management believes the records are probably valid because the procurement office confirms the contracts exist, but no reconciliation has been completed. The account's total obligations are $240 million, and the materiality threshold is $5 million.
1. Should the comptroller accept the $8.7 million top-side adjustment? What evidence is needed before the assertion?
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The comptroller should not accept the $8.7M top-side adjustment as a plug. A top-side adjustment must be supported by a documented reconciliation and proper accounting authority; it cannot substitute for missing feeder records. The $8.7M is material against the $5M threshold, so an unsupported adjustment could misstate obligations and unobligated balances. Before signing the assertion, management should reconcile the procurement feeder to the general ledger, trace the 1,400 records to contract numbers and receiving evidence, resolve the 90 missing unique identifiers, and identify duplicates or omissions. If valid obligations are missing from the ledger, record them through the normal journal-entry process with an audit trail; if duplicates exist, reverse them. The auditors' proposed adjustment may be a valid correcting entry after reconciliation, but not before. Document the reconciliation, approvals, and any remaining uncertainty.
2. Are the 12 missing receiving reports and the interface failure a deficiency, significant deficiency, or material weakness? Explain the judgment.
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The judgment depends on likelihood and magnitude, not on labels. The 12 of 80 missing receiving reports is a 15% error rate; projected across $240M of obligations, that could imply roughly $36M of unsupported transactions, well above the $5M materiality threshold. The interface failure affected $8.7M and 1,400 records, and 90 records lack unique identifiers, which weakens traceability. Procurement confirmation that contracts exist is compensating evidence, but it does not prove receipt, acceptance, or accurate obligation amounts. If the control failure could reasonably result in a material misstatement not prevented or detected in time, it is a material weakness. If it is less severe but more than inconsequential, it is a significant deficiency. The comptroller should assess with the auditors, document the conclusion, and avoid asserting that the records are correct until reconciliation is complete.
3. What corrective actions and internal control changes should be implemented before the next audit cycle?
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Corrective actions should address both transaction-level and system-level controls. Transaction level: require a receiving report or acceptance evidence before payment; perform a three-way match among order, receipt, and invoice; and review the 12 sample exceptions for payment recovery or adjustment. System level: add interface reconciliation controls, record counts, hash totals, and exception reports; monitor the feeder daily; require unique transaction identifiers; and maintain a reviewed manual-entry log with independent approval. Management should complete a root-cause analysis of the June interface failure, test the contingency procedure, train users, and track the corrective action plan through the internal control assessment under OMB Circular A-123. The goal is to prevent a repeat before the next audit cycle and to provide evidence that the control is operating.