079 - Internal Audit GENERAL GOVERNMENT SERVICES Internal Audit. At a Glance:

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1 GENERAL GOVERNMENT SERVICES INTERNAL AUDIT Operational Summary Mission: The mission of the Internal Audit Department (IAD) is to provide reliable, independent, objective evaluations and business and financial advisory services to the Board of Supervisors and County management. Our role is to assist both parties with their important business and financial decisions; as well as to contribute to protecting and safeguarding the County's resources and assets. At a Glance: Total FY Current Modified Budget: 2,682,192 Total FY Projected Expend + Encumb: 2,642,023 Total Recommended FY ,677,205 Percent of County General Fund: 0.09% Total Employees: Strategic Goals: Assist the Board of Supervisors and County executive management in ensuring the County's assets and resources are safeguarded; the County's accounting and financial reporting is timely and accurate; and the County's executive management has timely information and relevant analysis for its business and financial decisions. Maintain integrity, objectivity and independence in providing professional internal audits, assurance and attestation services, and suggested corrective recommendations to our clientele. We report on the County's internal controls, accounting records, and financial and business operations through our public audit reports and reviews. Key Outcome Indicators: 2011 Business Plan 2012 Business Plan Performance Measure Results Target How are we doing? PROFESSIONALISM OF THE AUDIT DEPARTMENT What: Evaluation surveys measure the value of our audit services and report products. Why: Provides feedback regarding auditors' professionalism, communications, knowledge & recommendations. USEFULNESS OF AUDIT FINDINGS AND RECOMMENDATIONS What: Management concurrence with audit recommendations measures the usefulness of our report product. Why: Management concurrence with audit recommendations assures validity & reasonableness of our reports. Internal Audit Department received an average rating of 4.5 out of 5 in the evaluation surveys. Management either fully concurred or partially concurred with 100% of audit recommendations. Achieve an average rating of 3.5 out of 5.0 in our evaluation surveys. Achieve management's full or partial concurrence of 80% or better of audit recommendations. IAD continues to receive high ratings of our services. IAD continues to receive management concurrence on a high percentage of audit recommendations. 420 County of Orange

2 GENERAL GOVERNMENT SERVICES FY Key Project Accomplishments: The Audit Director was elected as an AICPA Ambassador for a 3-year term for their Government Performance and Accountability Committee (GPAC). In this capacity Dr. Hughes along with fellow "Ambassadors" represent GPAC to a world-wide audience. Dr. Hughes' expertise in developing controls to identify and stop fraud was recognized in February 2012 as a Key Note Speaker at a "Thought Leadership" Symposium in Australia. In addition, he provided a one-day workshop in October 2011 on detecting and stopping fraud for the California State Association of Counties (CSAC). Wrote an article about CAATs (computer assisted audit routines) and their use by IAD. CAATs give auditors the ability to audit 100% of transactions rather than on a sample basis. The article was published in the Association of Local Government Auditor's (ALGA) Quarterly Journal for Summer Implemented an internship program to provide support, under close supervision, in performing a variety of routine internal auditing work of the department, such as financial audits and mandates and internal control audits. Developed and conducted an annual Audit Plan based on a comprehensive annual Risk Assessment that included input from the Board of Supervisors and County executive management on identifying risk areas and/or areas of audit interest in their respective department or agency. Provided assessment of critical and/or high impact business functions by conducting Internal Control Audits and Information Technology Audits and making recommendations to improve controls, processes, and efficiency and effectiveness. Audits performed include: Audit of Treasury Cost Allocations to Pool Participants, Sheriff-Coroner Contract Administration - US Immigration and Customs Enforcement (ICE), Treasurer's Investment Compliance (annual audit of $7.2 billion in investments), Health Care Agency Medical Billing (included IT component), Probation GPS Electronic Monitoring Programs, Fee Generated Revenues (OCW&R and OCPW), Social Services Agency IT General Controls, CAPS+ Finance User Access/Segregation of Duties, as well as multiple grant, revenue generating lease, and revolving fund audits. Provided IT controls assistance to key system implementations including the Property Tax Management System, eprocurement, and T-TC central web payment portal. Performed monthly computer assisted audit techniques (CAATs) to analyze data for payroll (about $1.3 billion direct deposits annually for regular payroll) and vendor payments (about $2.4 billion annually). Also, analyzed IHSS providers vs. County employees. Responded to special requests by the Board of Supervisors (BOS), Audit Oversight Committee (AOC) and County executive management to address immediate needs and provide timely responses. Audits performed include: Countywide Audit of Employee Cash Advance, Follow-up Audit of External Audit Management Letters/Single Audit Report, Performance Measure Validation - Human Resources Department, Sheriff-Coroner Inmate Welfare Fund, Sheriff-Coroner Law Enforcement Service Contract Cost Study for FY , and Clerk Recorder Fund 12D. Facilitated Control Self-Assessment and Process Improvement (CSA-PI) workshops in the Human Resources Department and Public Administrator/Public Guardian. Maintained a Follow-up Audit process by which all audit recommendations are verified as satisfactorily implemented or remediated. Performed other audit projects and activities such as managing the OC Fraud Hotline, providing technical assistance to departments/agencies, quarterly reporting of Countywide external audit activity, and monitoring cash loss activity. Kept the BOS, AOC, and County executive management informed of audit issues. Submitted Monthly Audit Activity Reports to the Board of Supervisors and quarterly status reports to the AOC. Followed professional standards issued by the Institute of Internal Auditors (IIA), Government Accountability Office (GAO), and American Institute of Certified Public Accountants (AICPA), as applicable. Followed a recognized internal control framework known as the Committee of Sponsoring Organizations of the Treadway Commission (COSO). County of Orange 421

3 GENERAL GOVERNMENT SERVICES Developed, trained and helped audit staff acquire and maintain their professional certifications. Applied best management practices promoted by the Employee Performance Programs (EMAP, P4P, PIP), Leadership Academy, and other training as directed by the CEO and County HR. Organizational Summary OC Internal Audit Department Audit Services Audit Services - Internal Audit consists of fourteen professional audit staff and two administrative staff. Our professional audit team performs the core department function of planning and conducting audits based on a comprehensive annual Risk Assessment and requests from the Board of Supervisors and Audit Oversight Committee. Ten Year Staffing Trend: In , the Board of Supervisors directed Internal Audit to transfer a Senior Auditor II (Administrative Manager I) position to the Office of the Performance Audit Director; therefore, our staffing level was reduced by 1 position. Also, one remaining vacant position was deleted in the First Quarter Budget Adjustment. In , there were no changes in position count. The administrative duties of our retired Administrative Manager (including Budgeting, Human Resources, and Purchasing) continued to be performed by the professional audit staff. In , there are no change to position counts. Budget Summary Ten Year Staffing Trend Highlights: The Internal Audit Department was established as a separate department independent of the County Auditor-Controller by Board Resolution dated April 25, In , due to budget constraints we were unable to fill three vacant positions. In addition, the administrative duties of our retired administrative manager were allocated among the professional audit staff. In , we continued to be unable to fill three vacant positions due to budget constraints and subsequently two of the three vacant positions were deleted. Plan for Support of the County's Strategic Priorities: Internal Audit will continue to support and assist the Board of Supervisors and County executive management in the accomplishment of their strategic business goals and objectives. Internal Audit's contribution is testing and reporting on their internal control systems and processes as these relate to safeguarding the County's asset and resources, prudent and reasonable financial stewardship, accurate recording and reporting, and achieving the County's goals and objectives. 422 County of Orange

4 GENERAL GOVERNMENT SERVICES Internal Audit is committed to a process of continuous learning by keeping updated on relevant issues in business and industry with regard to accounting trends and financial best practices and applies professional auditing standards to all audit engagements. Changes Included in the Recommended Base Budget: IAD's Net County Cost limit for FY remains unchanged and the proposed budget maintains the current level of operations. However, due to non-discretionary cost increases in salaries/benefits and services/supplies and a small decrease in audit service revenue, our base budget has a shortfall of $29,019. Therefore, IAD submitted a reduce augmentation to meet the NCC limit. IAD is not requesting a restore augmentation for the shortfall and will absorb the reductions primarily by continuing the voluntary work furlough program in FY Recommended Budget History: FY FY Change from FY FY Budget Projected (1) FY Budget Sources and Uses Actual As of 3/31/12 At 6/30/12 Recommended Amount Percent Total Positions Total Revenues 9,987 41,580 11,880 29,700 (11,880) Total Requirements 2,485,104 2,682,192 2,663,259 2,677,205 (4,987) Net County Cost 2,475,117 2,640,612 2,651,379 2,647,505 6, (1) Requirements include prior year encumbrance and expenditures. Therefore, the above totals may not match FY projected requirements included in "At a Glance" (Which exclude these). Columns may not total correctly due to rounding. Detailed budget by expense category and by activity is presented for Budget Control: Internal Audit in the Appendix on page A90 Highlights of Key Trends: Dynamic Financial Environment of the County: This includes managing decreased revenues caused by State deficits or economic conditions beyond our control. Such an environment requires flexibility in the annual Audit Plan. As such, the Internal Audit Department (IAD) must be ready to respond to unscheduled assignments from the Board of Supervisors majority. We estimate hours required for Board of Supervisors' requested reviews based on history and reserve hours in the Audit Plan specifically for this purpose. Staff Retention and Replacement: Because the IAD is a small department, each of our staff is significant to the accomplishment of the Audit Plan. All members including the Audit Director perform original work and are involved in numerous audits. Due to budget constraints, IAD has been unable to replace any positions when staff separates from our department due to job transfer or retirement. Subsequently, these vacant positions were deleted; this affects the flexibility in our audit plan. Information Technology (IT) issues: The pace of technological advancement and the benefits to be realized by implementing these advances to improve County business operations is increasing at an accelerating speed. As such, Information Technology (IT) Audits continue to be an important part of our audit efforts. The IT audit process compliments and may integrate with the Internal Control Audits (ICA). ICAs are audits that determine whether controls and processes are in place over critical business processes, and include an evaluation of the adequacy and integrity of internal controls. We also perform computer assisted audit techniques (CAAT). CAATs are automated queries applied to large amounts of electronic data searching for specified characteristics in the areas of duplicate vendor payments, employee-vendor match, multiple direct depos- County of Orange 423

5 GENERAL GOVERNMENT SERVICES its for payroll checks, and working retiree thresholds. In 2008, we hired an IT Audit Manager to enable us to address IT issues and perform audits of information system controls and processes. However, budget constraints have not allowed us to hire, on an as-needed basis, expert consultants with recognized industry expertise to provide IT audit assistance, consulting and in-house training. Budget Units Under Agency Control: No. Agency Name Audit Services 079 Internal Audit 2,667,205 Total 2,667, County of Orange

6 Appendix Summary of Proposed Budget by Revenue and Expense Category: FY FY Change from FY FY Budget Projected (1) FY Budget Revenues/Appropriations Actual As of 3/31/12 At 6/30/12 Recommended Amount Percent Charges For Services $ 9,925 $ 41,580 $ 11,880 $ 29,700 $ (11,880) % Miscellaneous Revenues Total Revenues 9,987 41,580 11,880 29,700 (11,880) Salaries & Benefits 2,416,671 2,566,773 2,532,003 2,564,085 (2,688) Services & Supplies 93, , , ,860 1, Intrafund Transfers (25,500) (47,080) (47,080) (50,740) (3,660) 7.77 Total Requirements 2,485,104 2,682,192 2,663,259 2,677,205 (4,987) Net County Cost $ 2,475,117 $ 2,640,612 $ 2,651,379 $ 2,647,505 $ 6, % (1) Requirements include prior year encumbrance and expenditures. Therefore, the above totals may not match FY projected requirements included in "At a Glance" (Which exclude these). Columns may not total correctly due to rounding. A90 County of Orange