Lawrence Berkeley Natinal Lab Observatins frm Audit Prcedures September 15, 2006
Table f Cntents Page Yur Needs and Expectatins 3 Backgrund 4 Risk Assessment 5 Audit Strategy 6 Details f Wrk Perfrmed 8 29 This dcument is intended fr use by the Regents Cmmittee n Audit and the management f the University f Califrnia and has been cmpleted in the cntext f ur audit f the University f Califrnia taken as a whle. The matters raised in this reprt are nly thse which have cme t ur attentin that we believe need t be brught t yu. They are nt a cmplete listing f every ptential matter arising frm ur prcedures and we cannt be respnsible fr reprting all risks in yur business r internal cntrl weaknesses. This reprt shuld nt be quted in whle r in part withut ur prir written cnsent. N respnsibility fr any third party is accepted as the reprt has nt been prepared fr, and is nt intended fr, any ther purpse. 2
Yur Needs and Expectatins Based n ur discussins with the Regents Cmmittee n Audit (the Audit Cmmittee) and with input frm the management f the University f Califrnia (UC), we have set frth these needs and expectatins and ur actins t address them. Needs/Expectatins Prvide the Audit Cmmittee and UC management with an assessment f the Lab s financial accunting and reprting prcess. Prir t issuance t the UC management and Audit Cmmittee, results f the assessments are t be prvided t the Lab s finance management. Develp management cmments with departmental respnses fr submissin t the Audit Cmmittee. Keep management apprised f audit results and issues n a timely basis. Prvide cmmunicatin f ur expectatins t Lab persnnel and UC management. On this engagement we cmpleted analytics, internal cntrls review and substantive audit testing and ensured that a cnsistent level f quality and rigr was applied. Any recmmendatins fr internal cntrl imprvements are cmmunicated t the Lab s finance management via this reprt f management cmments and recmmendatins. Onging. PwC Actins We prepared a detailed listing f items required t be prvided (PBC list). Mnitred the listing and ntified management f any issues that arise. Our prcedures were applied t balances at March 31, 2006 and June 30, 2006. Because certain financial data f the labs is established by the DOE and is nt cnslidated by the University, we did nt perfrm a cmplete audit f the Lab s accunts n a stand-alne basis. Had we cnducted such an audit, additinal matters may have arisen t reprt t yu. 3
Backgrund During the current year, we cnducted expanded audit prcedures at the University f Califrnia perated Lawrence Berkeley Natinal Labratry ( LBNL ). We nted that management has undertaken cnsiderable effrt t bring recnciliatins current and has been successful in making marked imprvements in the cntrl envirnment in cmparisn t prir years. While this reprt raises cntrl and dcumentatin issues, these shuld be viewed as recmmendatins fr cntinuus imprvement in the cntrl envirnment. During ur audit entrance meeting, we were infrmed by management that the Department f Energy ( DOE ) had experienced significant technical difficulties surrunding its IT system cnversin frm the legacy MARS general ledger system t the new STARS general ledger system. As a result, a significant number f accunts in the LBNL general ledger had nt been able t prperly rll-up t the DOE (STARS) system. This issue was discussed between management and the audit team and bth parties agreed that ur audit apprach and prcedures wuld fcus n the LBNL legacy general ledger system (MARS) nly. As such, we d nt prvide any assurance t the DOE (STARS) trial balance. 4
Risk Assessment Our audit apprach f the University f Califrnia is risk-based. In cnnectin with the perfrmance f the audit, we perfrmed certain expanded prcedures, as detailed herein, t prvide the Audit Cmmittee and UC management with additinal infrmatin n the Lab prcesses and identify areas fr imprvement. Assessment and identificatin f risks are perfrmed cntinuusly thrughut the prcess. We fcus n the risks that have a ptential impact n financial reprting and cntrls that mitigate thse risks. The table belw utlines ur risk assessments and ur respnses t them. Risk Assessment A preliminary assessment f the significant balance sheet accunts t identify significant variances and unusual items within the accunts as f March 31, 2006 and an update f that assessment as f June 30, 2006. Obtain an understanding f the verall cntrl envirnment including understanding f the key accunting cycles. The key accunting cycles addressed as part f this cntrl risk assessment are: Cash Charges, purchasing, transfers and payables Payrll Receivables Our assessment was cmplemented by substantive testing f the abve areas. Financial statement assertins (Cmpleteness, Accuracy, Validity, Existence) f the significant financial statement accunts are addressed. Fraud review prcedures and internal audit reprts review. PwC Actins By perfrming varius tests, as well as interviews with Lab s management, we assessed and dcumented ur understanding f the Lab s cntrl envirnment during the interim phase f this year s audit and utilized that assessment as a preliminary basis fr ur prcedures. We met with Lab s management t btain an verall understanding f the Lab s cntrl envirnment. We dcumented the prcess and cntrl prcedures as they relate t each f the fur accunting cycles. In additin, we perfrmed a mnitring cntrls review f each f the accunting cycles. We perfrmed the apprpriate substantive detail testing f significant balance sheet and expense accunts. The details and the results f the wrk perfrmed are dcumented herein. We btained and reviewed all internal audit reprts issued in fiscal 2006. In additin, we inquired with Lab s management and internal audit f their awareness f any knwn instances f fraud. 5
Audit Strategy Audit Strategy Cash and Cash Equivalents Accunts Receivable Prepaid Expenses Inter-cmpany Inventry Audit Prcedure Assess and test mnitring cntrls ver the cash cycle Perfrm review f cash accunt Cnfirmed bank accunt balances with Unin Bank f Califrnia Perfrm analytical review Perfrm testing f bank accunt recnciliatins Assess and test mnitring cntrls ver the receivables cycle Perfrm analytical review Review accunts receivable recnciliatins Perfrm subsequent receipts testing Evaluate the allwance fr dubtful accunts Perfrm review f prepaid accunt recnciliatins Perfrm analytical review Perfrm review f inter-cmpany balances recnciliatins Review inventry recnciliatins Perfrm analytical review Perfrmed assessment f the need fr an inventry prvisin Prperty, Plant and Equipment Accunts Payable Review accunt recnciliatins Perfrm dispsal and additin testing Perfrm analytical review Review repairs and maintenance accunts Assess and test mnitring cntrls Review accunt recnciliatins Perfrm search fr unrecrded liabilities Perfrm analytical review 6
Audit Strategy (cntinued) Audit Strategy Accruals, prvisins and ther liabilities Deferred revenue Pensin, Pst-retirement, Medical and Other Benefits Cmmitments and Other Cntingencies Equity (Cntributed Capital and Retained Earnings) Payrll Assess and test mnitring cntrls ver the treasury cycle Perfrm review f accunt recnciliatins Perfrm review f letter f credit recnciliatins Perfrm analytical review Perfrm testing f supprt Assess and test mnitring cntrls Review accunt recnciliatins Perfrm analytical review Perfrm substantive testing Perfrm review f accunt recnciliatins Perfrm analytical review Discuss any cmmitments/cntingencies with management Cnsider results f ther audit tests fr additinal cmmitments/cntingencies Cnfirm transfer f funds Detailed analytical prcedures Audit Prcedure Assess and test mnitring cntrls Perfrm substantive testing 7
Details f Wrk Perfrmed 8
Cash Assessed and tested mnitring cntrls ver the cash cycle Obtained an updated verview f the cntrls ver the cash cycle Assessed and tested mnitring cntrls ver the cash cycle fr the fllwing accunts: Vendr accunt Payrll accunt Nn-DOE accunts Selected a sample f three mnthly bank recnciliatins frm each f the largest vendr and payrll accunts and ensured that they were being perfrmed timely n a regular basis and ensuring apprpriate review by an individual ther than the preparer. Examined and reviewed the list f utstanding checks as at March 30, 2006 and agreed t the bank recnciliatin perfrmed. We selected 30 utstanding checks and tested t ensure that they cleared the bank in a timely manner. Selected a sample f fur nn-doe accunt recnciliatins and ensured that they were being perfrmed timely n a regular basis and ensuring apprpriate review. 9
Cash (cntinued) Perfrmed review f cash accunt descriptin. Examined and reviewed descriptin f cash accunt and agreed t the BSC Summary. Cnfirmed all bank accunt balances with Unin Bank f Califrnia. Perfrmed cmpleteness check and verified that all DOE bank accunts are listed in the cnfirmatin. Perfrmed analytical reviews. Obtained an understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Perfrmed detailed substantive testing Perfrmed testing f interim (March 30, 2006) bank recnciliatin and recnciling items. Reviewed year-end (June 30, 2006) bank recnciliatins fr unusual r significant recnciling items. N exceptins nted during ur prcedures ver the cash cycle 10
Accunts Receivable Assessed and tested mnitring cntrls ver the receivables cycle Obtained an updated verview f cntrls ver the receivables cycle. Selected 4 mnthly Accunt Receivable recnciliatins and reviewed fr timeliness f cmpletin and review. Selected 4 mnthly Accunts Receivable aging reprts and reviewed fr timeliness f cmpletin and review. Selected 5 Requests fr Reimbursable Wrk Refunds and reviewed fr evidence f authrized review. Selected 5 Requests fr Issuance f Check and reviewed fr evidence f authrized review and apprval by Requestr and FSD Apprver. 11
Accunts Receivable (cntinued) Perfrmed analytical reviews Obtained an understanding f the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Reviewed accunts receivable recnciliatins Reviewed 10 Accunts Receivable recnciliatins ttaling $7 millin r 66% f the Accunts Receivable balance as f June 30, 2006. Tested recnciling items t supprting dcumentatin, as applicable. Perfrmed subsequent receipts testing Obtained the Outstanding Receivable as Billing / Payment Reprt Nn-statistically selected 30 samples f large Accunts Receivable custmer balances as f March 31, 2006. Vuched subsequent cash payment t ensure validity f the Accunts Receivables and prper accunt classificatin. Evaluated the allwance fr dubtful accunts 12
Accunts Receivable (cntinued) Observatin: During ur review f the recnciliatin between the accunts receivable aging detail and the general ledger, we nted significant recnciliatin differences which related t unbilled DOE csts incurred fr research n prjects fr which the funding had nt been frmally apprved. These csts are captured in ne f tw sub-ledger accunts that are nt reprted t the DOE until such time as the funding has been apprved by the DOE. Once the funding prcess is cmplete, the Lab is able t bill the DOE and transfer the balance frm a suspense accunt t the accunts receivable detail sub ledger. As a result, the amunt reprted t the DOE n the STARS trial balance fr accunts receivable, revenue and the related equity d nt reflect the actual csts fr DOE related prjects that have been incurred thrugh that date, since frmal apprval is pending. Recmmendatin: This has been a practice that has been agreed t by the DOE & LBNL management. Hwever, we recmmend that management mnitr the level f such unbilled csts t prevent any significant expsures frm nn-apprved funding f prjects. Management s Respnse: Management cncurs t the recnciliatin items nted abve and cncurs that this is a general practice between DOE and UC. 13
Prepaids Reviewed prepaid expenses recnciliatins Reviewed 1 Prepaid Expense accunt recnciliatin ttaling $330 millin r 99% f the Prepaid Expenses balance as f June 30, 2006. Tested recnciling items t supprting dcumentatin, as applicable. Perfrmed analytical reviews Obtained an understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Perfrmed substantive testing n prepaid expenses Tested Pensin Plan asset which represented $309M, r 99.9% f the balance at March 31, 2006, thrugh review f the FAS 87 Interim Statement prepared by the University f Califrnia and its recnciliatin t the Pensin Plan asset. N exceptins nted during ur prcedures ver the prepaid accunts 14
Inter-cmpany Perfrm review f inter-cmpany balances recnciliatins Obtained Inter-cmpany Receivables and Liability Balance. Agreed balances t related Financial Jurnal btained frm UC audit team and reviewed that balances were prperly recrded as Accunts Receivable and Accunts Payable in the UC bks. N exceptins nted during ur prcedures ver the inter-cmpany accunts 15
Inventry Reviewed inventry recnciliatins Reviewed Inventry Recnciliatin ttaling $1 millin, r 88%, f the Inventry balance as f June 30, 2006. Tested recnciling items t supprting dcumentatin, as applicable. Perfrmed analytical reviews Obtained an understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Reviewed plicies fr valuatin and accunting f inventry Reviewed financial plicies and prcedures fr accunting fr excess inventry. Reviewed financial plicies and prcedures fr allwance fr lss n stres inventry. N exceptins nted frm ur prcedures ver inventry accunts. 16
Prperty, Plant & Equipment Reviewed accunt recnciliatins Reviewed accunt recnciliatins fr fixed assets and accumulated depreciatin as f June 30, 2006. Tested recnciling items t supprting dcumentatin, as applicable. Perfrmed analytical reviews Obtained an understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Perfrmed dispsal and additins testing Selected and tested a sample f 93 transactins, r 36 additins, 17 dispsals and 40 wrk-in-prcess transactins, frm the PP&E activity during the year. N exceptins nted frm ur prcedures ver the PP&E accunts. 17
Accunts Payable Assessed and tested mnitring cntrls ver the accunts payable cycle Obtained an updated verview f cntrls ver the purchasing and payables cycle. Obtained and reviewed IAS testing. Perfrmed testing f the Cst Allwability fr review and authrizatin. Obtained Self-Assessment mid-year Reprt and reviewed fr cmpleteness. Selected 4 mnthly Accunts Payable aging reprts and reviewed fr timeliness f cmpletin and review. Obtained Invice Certificatins. Selected 30 samples f Request fr Issuance f Check and reviewed fr prper review and authrizatin. Selected 4 samples f Accunts Payable recnciliatins and reviewed fr timeliness f cmpletin and review. 18
Accunts Payable (cntinued) Reviewed accunts payable recnciliatin Reviewed inventry recnciliatin ttaling $31.9 millin, r 98%, f the Accunts Payable balance as f June 30, 2006. Tested recnciling items t supprting dcumentatin, as applicable. Obtained and reviewed IAS testing. Perfrm search fr unrecrded liabilities Obtained disbursement listings. Nn-statistically selected 30 expenses paid frm July 1, 2006 t September 1, 2006. Verified validity and accuracy and reviewed t determine whether item had been prperly included in r excluded frm the liability accunts at year-end. Perfrmed analytical reviews Obtained an understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. 19
Accunts Payable (cntinued) Observatins During ur review f the March 30, 2006 Accunts Payable Aging Reprt, we nted that f a ttal f $18.4 millin in payables included in the aging, nly $9.7 millin had been recrded t the General Ledger. Upn further inquiry, we nted that the $8.7 millin difference represents the amunt f Accunts Payable which had nt cmpleted the accunts payable certificatin prcess at mnth-end. A prtin f these (apprximately $3 millin) is included in ther accrual accunts as a result f the purchase receipt recrding prcess. The certificatin prcess requires a physical sign-ff f all invices received t recrd in the aging and initiate payment. Invices are required t be signed ff by an emplyee with prper authrizatin. This finding was als nted by Internal Audit during their review. Accrding t the internal audit reprt, 50% f invices tk lnger than tw weeks t be certified. As a result, certain accunts payable are nt being paid in a timely manner. We updated ur prcedures at year-end and, based n that update, LBNL had an unrecrded liability f apprximately $6.5 millin at year-end as a result f the abve issue. This unrecrded liability has been recrded at the UCOP level as an audit adjustment t present the full liability amunt at year-end in the cnslidated UC financial statements. Recmmendatin: We suggest that the Lab revise its prcesses t allw fr reduced certificatin time and faster payment prcessing. Lab management shuld als mnitr utstanding Accunts Payable t ensure that utstanding amunts are being paid timely. 20
Accunts Payable (cntinued) Management Respnse: Management cncurs that the LBNL s accunts payable liability was understated by $6.5 millin because f the reasn cited n the prir page. An audit adjustment fr this understatement was dne by UCOP. An Accunts Payable Reengineering Team will be created t address this and ther issues identified in LBNL s Internal Audit Reprt by the end f December 2006. LBNL will accrue invices n certificatin hld each June and September t ensure that the accunts payable liability accunt is accurately stated. The fllwing crrective actins t imprve the accuracy f the accunts payable liability have been undertaken: The match tlerance levels have been crrected t allw fr amunts that are less than the purchase rder amunt t be apprved. A Financial Plicy and Prcedures n Accrued Liabilities was issued in March 2005. The Plicy identifies what shuld be accrued and when that accrual shuld take place. Management als cncurs with the recmmendatin t reduce invice certificatin time, and prcess invices sner. These issues will als be addressed by the Accunts Payable Reengineering Team. The fllwing crrective actins t imprve the speed f the invice prcessing have been undertaken: Prcurement des a weekly review f purchase rders placed in a status that prhibit payments. A Financial Plicy n Invice Certificatins was published that defines rles and respnsibilities fr this prcess. 21
Accruals, Prvisins and Other Liabilities Assessed and tested mnitring cntrls ver the treasury cycle Obtained an updated verview f cntrls ver the treasury cycle. Assessed and tested mnitring cntrls ver the treasury cycle. Tested the three main letter f credit accunt recnciliatins Vendr Payrll Nn-DOE Obtained Letter f Credit Recnciliatins. Systematically selected 4 samples fr each bank accunt and reviewed recnciliatins fr timeliness f cmpletin and review. Perfrmed review f accunt recnciliatins Reviewed Accruals, Prvisins and Other Liabilities ttaling $935 millin, r 99% f the Accruals, Prvisins and Other Liabilities balance as f June 30, 2006. Tested recnciling items t supprting dcumentatin, as applicable. 22
Accruals, Prvisins and Other Liabilities (cntinued) Perfrmed review f letter f credit recnciliatins Obtained Letter f Credit Recnciliatins fr Vendr Accunt and Payrll Accunt. Agreed the adjusted bank balance t the bk balance. Reviewed material recnciling items (utstanding checks were tested thrugh sampling and testing prcedures). Tested transfers between accunts. Perfrmed analytical reviews Obtained a thrugh understanding and dcumented the cmpsitin and descriptin f significant accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Perfrmed detailed testing Obtained detailed listing f mnthly vacatin accruals. Nn-statistically selected 30 samples and tested fr mathematical accuracy and verified balances t supprting dcumentatin. N exceptins nted frm ur prcedures ver the accruals, prvisins and ther liabilities accunt balances. 23
Pensin and Pst-Retirement Reviewed significant pensin and pst-retirement accunt recnciliatins as f March 31, 2006. Perfrmed analytical reviews Obtained an understanding and dcumented the cmpsitin and descriptin f the accunts Obtained explanatins and assessed reasnableness f significant and material variances N exceptins nted frm ur prcedures ver the pensin and pst-retirement accunt balances. 24
Deferred Revenue Assessed and tested mnitring cntrls Reviewed the general ledger accunt recnciliatins fr nine significant balances as f March 31, 2006. Obtained an updated verview f the revenue cycle. Reviewed accunt recnciliatins Reviewed the general ledger accunt recnciliatins fr nine significant balances as f March 31, 2006 Perfrmed analytical reviews Obtained an understanding and dcumented the cmpsitin and descriptin f significant accunts Obtained explanatins and assessed reasnableness f significant and material variances Perfrmed substantive testing f 45% f the deferred revenue balance Selected a sample f 30 items in the deferred revenue balance and agreed check cpy r cntracts. N exceptins nted frm ur prcedures ver the deferred revenue accunts. 25
Equity Perfrmed analytical reviews Obtained a thrugh understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant and material variances. Reviewed Equity recnciliatins Reviewed the general ledger accunt recnciliatins fr fur significant balances as f March 31, 2006. Tested recnciling items t supprting dcumentatin, as applicable. N exceptins nted frm ur prcedures ver the equity accunts. 26
Payrll Assessed and tested mnitring cntrls Obtained a updated understanding f the payrll cycle. Tested mnitring cntrls ver the payrll cycle. Selected 4 PepleSft Mnthly Paid vs. Effrt Reprts and reviewed t ensure fllw-up dcumentatin is nted fr all emplyees n the reprt. Selected and btained 10 weeks f the Wkly Emplyees w/ot & Sick/OT & Vacatin/OT > 16 exceptin reprt and reviewed t ensure prper review. Selected and btained 4 payrll tax recnciliatins and reviewed fr evidence f timely preparatin and prper review. Selected a sample f 4 ACH wire payments transmitted by autmatic pick-up by Unin Bank f Califrnia and reviewed fr 2 required n-line apprvals. Selected a sample f 18 vendr check requests and reviewed fr supervisry signatures and authrizatin. Selected a sample f 18 electrnic payments (ACH) t vendrs fr apprpriate apprval. Selected a sample f 45 emplyee timesheets and reviewed fr evidence f supervisry apprval. 27
Payrll (cntinued) Perfrmed substantive testing f payrll csts Selected a sample f 30 emplyees and agreed t payrll checks and payrll registers t verify the validity and accuracy f payrll csts. Perfrmed analytical reviews Obtained a thrugh understanding and dcumented the cmpsitin and descriptin f the accunts. Obtained explanatins and assessed reasnableness f significant r unusual changes. N exceptins nted frm ur prcedures ver the payrll accunts. 28
Review f Internal Audit Results Review f Internal Audit Reprts Obtained all internal audit reprts issued during the year. We reviewed thse reprts t determine whether any issues nted relate t financial statement assertins r the allwability f csts under the DOE cntract. Re-perfrmance f Internal Audit Cst Allwability Testing Reviewed Internal Audit testing f cst allwability during the perid frm Oct. 1, 2004 thrugh May 31, 2005. We selected 58 transactins that were tested by Internal Audit. We reviewed the supprting dcumentatin fr the csts t ensure that the csts are allwable under the DOE cntract and that ur cnclusins and thse f Internal Audit were cnsistent. 29
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