    Financial Audit Manual: Update to Part II--Tools (01-APR-03,
    GAO-03-466G).

    In July 2001, the U.S. General Accounting Office (GAO) and the
    President's Council on Integrity and Efficiency (PCIE) issued the
    GAO/PCIE Financial Audit Manual (FAM). The FAM provides guidance
    for financial audits conducted by the Inspector General
    community, GAO, and their contractors. The FAM is a key part in
    enhancing accountability over taxpayer-provided resources. GAO
    and the PCIE are committed to keeping the FAM current and intend
    to prepare updates as needed. With this goal in mind, a GAO/PCIE
    task force prepared this update to volume II of the FAM, which
    provides tools to assist the auditor in complying with audit
    standards .
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-03-466G
        ACCNO:   A06738
      TITLE:     Financial Audit Manual: Update to Part II--Tools
         DATE:   04/01/2003
      SUBJECT:   Audits
    	     Financial management
    	     Financial statement audits
    	     Auditing procedures
    	     Auditing standards
    	     Auditors
    	     Financial records
    	     Internal audits
    	     Internal controls
    	     Reporting requirements
    	     Standards evaluation

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    GAO-03-466G

    United States General Accounting Office President*s Council on Integrity
    and Efficiency GAO/ PCIE Financial

    Audit Manual

    Update to Part II - Tools Update to Part II GAO- 03- 466G

    [This page intentionally left blank]

    April 2003 Dear Colleague: In July 2001, the U. S. General Accounting
    Office (GAO) and the President*s Council on Integrity and Efficiency
    (PCIE) issued the GAO/ PCIE Financial Audit Manual (FAM). The FAM provides
    guidance for financial audits conducted by the Inspector General
    community, GAO, and their contractors. The FAM is a key part in enhancing
    accountability over taxpayer- provided resources. GAO and the PCIE are
    committed to keeping the FAM current and intend to prepare

    updates as needed. With this goal in mind, a GAO/ PCIE task force prepared
    this update to volume II of the FAM, which provides tools to assist the
    auditor in complying with audit standards . The new or updated sections
    are highlighted in the table of contents for volume II. It was issued as
    an exposure draft on the internet in September 2002, and we incorporated
    changes based on comments received. The original GAO/ PCIE FAM, which will
    be updated by having these additional sections incorporated, and this
    April 2003 update are available on the internet at www. GAO. gov or www.
    ignet. gov/ pande/ audit. html

    If you have comments or suggestions for additional projects for further
    FAM updates, please e- mail them to

    FAM_ Comments@ oig. doi. gov We extend our thanks to the many individuals
    and organizations that provided comments and insights to make the manual
    stronger. The task force assembled by GAO and the PCIE also deserves much
    credit for its dedication to completing this project. Jeffrey C. Steinhoff
    The Honorable Gregory H. Friedman Managing Director Chair, President*s
    Council on Integrity U. S. General Accounting Office and Efficiency Audit
    Committee

    Filing instructions for April 2003 FAM Volume II * Tools update: Retain
    from original

    July 2001 version Insert from April 2003

    update Delete from original July 2001 version

    Cover to volume II Contents * Part II (including title page) Contents *
    Part II

    (including title page) Section 600 (including title

    page and sections 601, 650, 650 A, B, and C, 660, 660 A, B, C, and D)

    Section 600 title page Section 700 (including title

    page and sections 701 and 701 A and B)

    Section 700 title page Section 800 (including title

    page and sections 802, 803, 808, 809, 810, 812, 813, 814, 816, and 817)
    Section 800 title page Section 900 (including title

    page and sections 902, 902 A, B, and C, 903, 921, 921 A, B, C, and D)

    Section 900 title page Section 1000 title page Sections 1001 and 1001 A
    Sections 1002 and 1002 A,

    B, C, and D Section 1002 title page Sections 1003, 1004, and

    1005 Section 1006 title page Section 1006

    Changes affecting volume I

    Glossary title page Glossary (22 pages) Glossary (17 pages) Abbreviations
    title page Abbreviations (3 pages) Abbreviations (2 pages)

    [This page intentionally left blank.]

    CONTENTS * PART II * TOOLS April 2003 GAO/ PCIE Financial Audit Manual -
    Part II Contents- 1

    600 PLANNING AND GENERAL 601 Introduction to Part II * Tools 650 650 A 650
    B 650 C

    Using the Work of Others Summary of Audit Procedures and Documentation for
    Review of Other Auditors' Work Example Audit Procedures for Using the Work
    of Others Example Reports When Using the Work of Others 660 660 A 660 B

    660 C 660 D

    Agreed- Upon Procedures Example Agreed- Upon Procedures Engagement Letter
    Example Representation Letter from Responsible Entity on Agreed- Upon
    Procedures Engagement Agreed- Upon Procedures Completion Checklist Example
    Agreed- Upon Procedures Report 700 INTERNAL CONTROL (See also section 900)

    701 701 A 701 B

    Assessing Compliance of Agency Systems with the Federal Financial
    Management Improvement Act (FFMIA) Example Audit Procedures for Testing
    Compliance with FFMIA Summary Schedule of Instances of Noncompliance with
    FFMIA 800 COMPLIANCE 801 Reserved

    802 General Compliance Checklist 803 Antideficiency Act 804 Reserved 805
    Reserved 806 Reserved 807 Reserved 808 Federal Credit Reform Act of 1990
    809 Provisions Governing Claims of the U. S. Government (31 U. S. C. 3711-

    3720E) (Including the Debt Collection Improvement Act of 1996) (DCIA) 810
    Prompt Payment Act 811 Reserved 812 Pay and Allowance System for Civilian
    Employees, as Provided Primarily

    in Chapters 51- 59 of Title 31, U. S. Code

    Contents - Part II - Tools April 2003 GAO/ PCIE Financial Audit Manual -
    Part II Contents- 2 813 Civil Service Retirement Act 814 Federal Employees
    Health Benefits Act 815 Reserved 816 Federal Employees' Compensation Act
    817 Federal Employees' Retirement System Act of 1986

    900 SUBSTANTIVE TESTING 901 Reserved 902 902 A

    902 B 902 C

    Related Parties, Including Intragovernmental Activity and Balances Example
    Account Risk Analysis for Intragovernmental Activity and Balances Example
    Specific Control Evaluation for Intragovernmental Accounts Example Audit
    Procedures for Intragovernmental and Other Related

    Parties' Activity and Balances 903 Auditing Cost Information 921

    921 A 921 B 921 C 921 D

    Auditing Fund Balance with Treasury (FBWT) Treasury Processes and Reports
    Related to FBWT Reconciliation Example Account Risk Analysis for Fund
    Balance with Treasury Example Specific Control Evaluation for Fund Balance
    with Treasury Example Audit Procedures for Fund Balance with Treasury

    1000 REPORTING 1001 Management Representations 1001 A Example Management
    Representation Letter 1002 1002 A 1002 B 1002 C 1002 D

    Inquiries of Legal Counsel Example Audit Procedures for Inquiries of Legal
    Counsel Example Legal Letter Request Example Legal Representation Letter
    Example Management Summary Schedule 1003 Financial Statement Audit
    Completion Checklist 1004 Checklist for Reports Prepared Under the CFO Act
    1005 Subsequent Events Review 1006 Reserved. (For Related Parties, see
    section 902)

    [This page intentionally left blank.]

    Planning and General 601 - INTRODUCTION TO PART II * TOOLS

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 601- 1 .01 Part
    II of the GAO/ PCIE Financial Audit Manual (FAM) consists of tools to
    assist the auditor 1 in performing a financial statement audit. These
    tools are generally

    organized according to the phases of the audit: tools in section 600 deal
    with the planning phase and general issues; section 700, the internal
    control phase; section 800, compliance; section 900, substantive testing;
    and section 1000, the reporting phase.

    .02 Many of the tools in the various sections include activities that
    would be performed during other phases of the audit. Thus, the auditor
    should refer to the sections in part II early in the audit. For example,
    section 701, Assessing Compliance of Agency Systems with the Federal
    Financial Management Improvement Act, includes procedures that would be
    performed throughout the audit, not just during the internal control
    phase, although many of them would be performed then. Also, section 902,
    Related Parties, Including Intragovernmental Activity and Balances, has
    procedures that the auditor may decide to perform in the planning and
    internal control phases of the audit as well as during the testing phase.

    .03 The audit procedures presented in the examples in this and other
    sections of part II (tools) of the GAO/ PCIE FAM are examples of some of
    the audit steps typically performed in each area. They should be used in
    conjunction with the appropriate FAM sections. In using these procedures,
    the auditor should use judgment to add additional procedures, delete
    irrelevant procedures, modify procedures, indicate the extent and timing
    of procedures, and change the terminology to that used by the audited
    entity. The auditor may integrate these steps with the audit programs for
    related line items. For example, tests of intragovernmental activity and
    balances (section 902) may be integrated with tests of accounts receivable
    and payable, and, to improve efficiency, the auditor may coordinate those
    tests with related nonintragovernmental activity and balances.

    1 The term "auditor," throughout the FAM includes individuals who may be
    titled auditor, analyst, evaluator, or have a similar position
    description.

    [This page intentionally left blank.]

    Planning and General 650 - USING THE WORK OF OTHERS April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 1 .01 In many audits, the
    auditor uses the work and reports of other auditors and specialists. Other
    auditors include CPA firms, Inspectors General, state auditors, and
    internal auditors. Specialists include actuaries and information systems
    auditors. The audit organization may contract with a CPA firm to perform
    parts of or the entire audit. The audit organization should use FAM 650 to
    design and perform appropriate oversight and other procedures to use the
    work of other auditors and specialists. (The audit organization using the
    work of other auditors and specialists is referred to below as "the
    auditor.") This section provides

    guidance on using the work of other auditors and specialists and the
    nature and extent of procedures the auditor should perform. .02 Various
    professional standards provide guidance in this area. These standards

    include AU 543, "Part of Audit Performed by Other Independent Auditors";
    AU 322, "The Auditor's Consideration of the Internal Audit Function in an
    Audit of Financial Statements"; AU 336, "Using the Work of a Specialist";
    1 and AU 315 (SAS No. 84), "Communication Between Predecessor and
    Successor Auditors." These standards have different requirements depending
    on whether the other organization is an independent auditor, an internal
    auditor, or a specialist.

    .03 The auditor may use the work of other auditors and specialists in
    various situations, for example:

    audits by Inspectors General or CPA firms in accordance with the GAO/ PCIE
    FAM;

    CPA firms or specialists hired to do parts of an audit (for example,
    review information systems controls, review actuarial calculations, test
    specific accounts);

    single audits or audits of federal funds performed by state auditors and
    CPA firms;

    work performed by internal auditors; and

    internal audit staff who provide direct assistance to the auditor. .04 AU
    543.13 states: "In some circumstances the principal auditor may consider
    it

    appropriate to participate in discussions regarding the accounts with 1
    The AICPA also issued Practice Alert 2002- 02, Use of Specialists.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 2 management personnel of the
    component whose financial statements are being

    audited by other auditors and/ or to make supplemental tests of such
    accounts. The determination of the extent of additional procedures, if
    any, to be applied rests with the principal auditor alone in the exercise
    of his professional judgment and in no way constitutes a reflection on the
    adequacy of the other auditor's work. Because the principal auditor in
    this case assumes responsibility for his opinion on the financial
    statements on which he is reporting without making reference to the audit
    performed by the other auditor, his judgment must govern as to the extent
    of procedures to be undertaken." .05 The above paragraph makes clear that
    the principal auditor exercises

    considerable judgment in deciding what procedures are necessary to use the
    work of the other auditor. FAM 650 provides guidance in making the
    judgments necessary to use the work of others. These judgments include

    the type of reporting (see paragraphs 650.09-. 10),

    the auditor's evaluation of the other auditors' or specialists'
    independence and objectivity (see paragraphs 650.11-. 24),

    the auditor's evaluation of the other auditors' or specialists'
    qualifications (see paragraphs 650.25-. 35), and

    the auditor's determination of the level of review (see paragraphs
    650.36-. 41). .06 The auditor should coordinate with other auditors whose
    work he or she wishes to use. In turn, the other auditor should consider
    the needs of auditors who plan

    to use the work being performed so that the judgments exercised by both
    auditors could satisfy the needs of both. This is best done before major
    work is started. For example, auditors of a consolidated entity (such as
    the U. S.

    government or an entire department or agency) are likely to plan to use
    the work of auditors of subsidiary entities (such as individual
    departments and agencies or bureaus and components of a department). This
    coordination can result in more economy, efficiency, and effectiveness of
    government audits in general and avoid duplication of effort. In addition,
    the coordination needs to be ongoing throughout the audit so that the
    timing needs of both the auditor and the other auditors are met. The other
    auditors should make their audit documentation available for review by the
    auditor on an ongoing basis during the audit. .07 In this coordination,
    the auditor should inform the other auditor how his or her

    work and report will be used. AU 543.07 indicates that if the auditor's
    report will name the other auditor, the auditor should obtain permission
    to do so and should present the other auditor's report together with the
    principal auditor's report. For CPA firms, this permission may be obtained
    through the contracting process. The auditor also should provide the other
    auditors a draft of the report as a

    courtesy.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 3 .08 When there is a
    difference of opinion between the two auditors, the principal

    auditor generally should confer with the other auditor to reach agreement
    with him or her as to the procedures necessary to satisfy both auditors'
    professional judgments. If both auditors are unable to reach agreement,
    see paragraphs 650.54 to .56. Section 650 B contains example audit
    procedures for using the work of others, which depend on the judgments
    made.

    TYPES OF REPORTING .09 There are various types of reporting when using the
    work of other auditors and specialists. The type of reporting depends on
    the degree of responsibility the auditor accepts and the work performed by
    the auditor. Factors for the auditor to consider in deciding which type of
    reporting to use include the amount of assurance the auditor wishes to
    provide, legal requirements, and cost- benefit

    considerations. The degree of resources required varies by type of report
    and generally increases in the order presented below. The type of
    reporting should be decided in planning the job and generally should be
    discussed with the other auditors or specialists. In deciding the type of
    reporting, the auditor should consider AU 504.03, which states that an
    auditor is "associated with financial statements when he has consented to
    the use of his name in a report, document, or written communication
    containing the statements." (Section 650 C contains examples of wording
    for two types of reporting.) The types of reporting are as follows.

    a. No association with report* In this situation, the other auditors' or
    specialists' report is provided directly to the auditee and/ or to
    significant users. The auditor may use this method when the auditor merely
    procures the audit but is not acting as "the auditor." For example, if
    there is no legal requirement for a separate report by the auditor, the
    user does not need a separate report from the auditor, and a separate
    report would provide no additional information. When the auditor is
    required by law to perform the audit, he or she should not use this option
    since he or she is associated with the report.

    b. Auditor transmittal letter* There are two types of transmittal letters,
    one expressing no assurance and one expressing negative assurance on the
    other auditors' work. For either type, the auditor is associated with the
    financial statements as described in AU 504. The fourth standard of
    reporting states, (in the last sentence) "where an auditor's name is
    associated with financial statements, the report should contain a clear-
    cut indication of the character of the auditor's work, if any, and the
    degree of responsibility the auditor is taking." Because the auditor did
    not perform an audit, the auditor should

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 4 disclaim an opinion and
    should not express concurrence with the other

    auditors' opinion. The auditor may use this approach when there is no
    legal requirement for the auditor to express an opinion or concurrence but
    the auditor is required to or wants to issue a report or letter. The
    auditor may expand the letter to highlight certain findings or information
    or to indicate that certain procedures were performed. See example 1 of
    section 650 C for

    wording for both types of transmittal letters. * Auditor transmittal
    letter expressing no assurance* For this letter,

    the auditor issues a transmittal letter without reviewing the other
    auditors' documentation. In these situations, the transmittal should be
    clear as to the limitations of the auditor's work. The auditor still has
    the responsibility to monitor any contract and meet the requirements of
    the IG Act, as amended, CFO Act, and Accountability of Tax Dollars Act of
    2002, if applicable.  Auditor transmittal letter expressing negative
    assurance* This

    letter indicates that the auditor reviewed the other auditors' or
    specialists' report and related documentation and inquired of their
    representatives and states that the auditor found no instances where the
    other auditors did not comply, in all material respects, with Government
    Auditing Standards (GAGAS).

    c. The auditor issues a report that refers to other auditors' reports and
    indicates a division of responsibilities* To use this approach, the
    auditor has two decisions to make: (1) whether the auditor may serve as
    the principal auditor (AU 543.01-. 03) and (2) whether the auditor should
    refer to the work of the other auditors (AU 543.01-. 10). The auditor
    should exercise considerable judgment in making these decisions and should
    document the basis for the decisions. One consideration the auditor may
    use in deciding whether the auditor is the principal auditor is whether
    the auditor has sufficient knowledge of the entire entity, including
    portions audited by other auditors. Another consideration is the
    materiality and importance of the consolidated assets, liabilities,
    expenses, revenues, or net position he or she has not audited. The auditor
    may issue a report that refers to other auditors when (1) the other
    auditors have reported on financial statements for a component entity that
    is part of the entity whose financial statements the auditor is reporting
    on and

    (2) the auditor does not wish to take responsibility for the other
    auditors' work. (See AU 543.09 for example wording. This approach may be
    used only for CPA firms or for other auditors who are organizationally
    independent [see paragraph 650.14]; it may not be used for internal
    auditors or specialists.) However, if the reader of the report could
    question the basis for the principal auditor issuing the opinion because
    of the significant materiality and

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 5 importance of the portion of
    the financial statements audited by the other

    auditors, the auditor should consider whether there is a need to issue a
    report that does not mention the other auditors' work, which may require
    additional work (see 650.09 e below). d. The auditor issues a report that
    expresses concurrence with the other

    auditors' report and conclusions* The auditor may use this approach when
    other auditors have reported on financial statements and the auditor needs
    or wants to provide more assurance than what is provided by the
    transmittal letter. 2 Expressing concurrence means that the auditor would
    have reached the same opinion or conclusion had he or she done the audit.
    Therefore, the auditor needs to do the same level of work as he or she
    would have done to take responsibility for the other auditor's work. 3 The
    auditor usually accomplishes this by (1) reviewing the audit documentation
    and (2) having discussions with entity management and/ or performing
    supplemental tests. See example 2 in section 650 C for report wording.
    This approach may be

    used only for CPA firms or for other auditors who are organizationally
    independent (see paragraph 650.14). This report should not be used for
    specialists, since AU 336.15 prohibits reference to a specialist's report
    unless the auditor issues a qualified or adverse opinion or a disclaimer
    of opinion based on the specialist's work. This approach also should not
    be used for internal auditors. AU 322.19 notes that the responsibility to
    report on the

    2 For example, a certain audit may be required by law, in which the
    auditor, although allowed to hire other auditors to do the work, is
    required to give his or her own opinion. In the absence of such a
    requirement, a report expressing concurrence is generally not cost-
    effective because of the resources required.

    3 In this instance both the other auditor and the auditor that expresses
    concurrence are principal auditors because both have sufficient knowledge
    of the overall financial statements and the important issues, and the
    concurring auditor, by reason of the level of work done, has also audited
    the financial statements.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 6 financial statements rests
    with the auditor and cannot be shared with internal

    auditors. 4 e. The auditor issues a report that does not mention the other
    auditors' or specialists' work* In this situation, the auditor issues the
    report in section 595 A and/ or B (as if no other auditors or specialists
    were involved). This means the auditor takes responsibility for the other
    auditors' or specialists' work. (See 650.09 c above for a discussion of
    principal auditor issues.) The auditor may use this approach when the
    other auditors have done part of the audit; the approach also may be used
    when the other auditors have done substantially the entire audit. 5 The
    auditor usually accomplishes this by (1) reviewing the audit documentation
    and (2) having discussions with entity management and/ or performing
    supplemental tests. The auditor also should

    use this approach when using the work of specialists and internal
    auditors, because professional standards do not permit referring to
    specialists' or internal auditors' work (unless, for specialists, the
    auditor issues a qualified or adverse opinion or a disclaimer of opinion
    based on the specialist's work). GAO uses this approach in the audit of
    the consolidated financial statements of the United States Government.

    4 There may be situations where the auditor is asked to provide a separate
    opinion in addition to presenting the other auditors' report. In these
    situations, the auditor should follow the wording in section 595 A and/ or
    B and should add the following in lieu of the introduction to the first
    paragraph on page 595 A- 5:

    "To help fulfill these responsibilities, we contracted with the
    independent certified public accounting firm of [insert firm name] to
    perform a financial statement audit in accordance with U. S. generally
    accepted government auditing standards,

    OMB's bulletin, Audit Requirements for Federal Financial Statements, and
    the GAO/ PCIE Financial Audit Manual. The report of [name of CPA firm]
    dated [date] is attached. We evaluated the nature, timing, and extent of
    the work, monitored progress throughout the audit, reviewed the
    documentation of [name of CPA firm], met with partners and staff members
    of [name of firm], evaluated the key judgments, met with officials of
    [entity being audited], performed independent tests of the accounting
    records [if applicable], and performed other procedures we deemed
    appropriate in the circumstances. Our opinions expressed above are

    consistent with the opinions of [name of CPA firm]. Thus, in this audit,
    we:" (continue with numbered items). 5 For example, a number of other
    auditors may have audited individual components

    of an entity and the auditor may audit the consolidation process. The
    auditor may choose to use this approach if the auditor has sufficient
    knowledge of the entire entity and does additional work (see paragraph
    650.10).

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 7 .10 The following chart
    presents an overview of the work the auditor generally

    should perform for each type of report or letter. "Yes" means some of that
    category of work generally should be performed. "No" means that the
    category is generally not required for the report or letter. The extent of
    work in each

    category depends on the auditor's judgment. See paragraph 650.36 for
    discussion on level of review.

    Type of reporting Evaluate the other auditors' independence

    and objectivity (paragraphs

    650.11-. 24) Evaluate

    the other auditors' qualifications

    (paragraphs 650.25- .35)

    Level of Review (paragraphs

    650.36- .42)

    Hold discussions and/ or perform supplemental tests (paragraphs

    650.43- .47)

    No association with report (paragraph 650.09 a) No 6 No None No

    Auditor transmittal letter expressing no assurance (paragraph 650.09 b,
    first bullet) Yes Yes Low or none No

    Auditor transmittal letter expressing negative assurance (paragraph 650.09
    b, second bullet) Yes Yes Moderate or low

    No

    Report refers to the other auditors' re port and indicates a division of
    responsibilities (paragraph 650.09 c) Yes Yes Low or none No

    6 If the auditor contracts with the other auditors, the contracting
    process generally will require the auditor to evaluate the other auditors'
    independence, objectivity, and qualifications and to monitor performance
    under the contract.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 8 Type of reporting Evaluate

    the other auditors' independence

    and objectivity (paragraphs

    650.11-. 24) Evaluate

    the other auditors' qualifications

    (paragraphs 650.25- .35)

    Level of Review (paragraphs

    650.36- .42)

    Hold discussions and/ or perform supplemental tests (paragraphs

    650.43- .47)

    Report concurs with the other auditors' report or does not mention the
    other auditors' work (paragraph 650.09 d

    and e) Yes Yes High, moderate,

    or low Yes for internal

    auditors' work (should include supplemental tests). Yes for auditors' work
    for high level of review. No for auditor's work for moderate or low level
    of review EVALUATING THE OTHER AUDITORS' OR SPECIALISTS'

    INDEPENDENCE AND OBJECTIVITY .11 Unless the auditor has no association
    with the report, the auditor should evaluate the other auditors' or
    specialists' independence and objectivity. Where the auditor has
    previously used the work of the same other auditors, the auditor generally
    should update the previous evaluation. GAGAS 3.11 indicates that audit
    organizations and individual auditors should be free from personal and
    external impairments to independence, should be organizationally
    independent, and should maintain an independent attitude and appearance.
    The auditor should first evaluate organizational independence. Different
    standards apply to CPA firms, other organizationally independent auditors,
    internal auditors, and specialists.

    .12 For CPA firms and specialists, the contracting process is designed to
    select a firm that is independent and objective. The statement of work or
    request for proposal should ask the firms to represent that they are
    independent and objective with respect to the auditee and should request
    the firms to describe in their proposals all work, including nonaudit
    services, they have done for the auditee in the last several years (see
    GAGAS Amendment No. 3, Independence, and Answers to Independence
    Questions). The technical evaluation panel should evaluate

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 9 whether the nature and extent
    of this work or other factors cause an

    independence or objectivity issue. In this evaluation, the panel may
    consider, for example, whether (1) the other auditors will need to audit
    their own work or (2) whether the other auditors made management decisions
    or performed management functions.

    .13 If possible, 7 the auditor should have a role in contracting for the
    CPA firm or specialist. When the auditor does not participate in
    contracting for the CPA firm or specialist, the auditor generally should
    obtain an overview of the contracting process; this generally should
    include reading the statement of work or request for proposal and the
    proposal of the firm selected, and understanding the

    evaluations of the panel selecting the firm. The auditor should determine
    whether the firm provided a representation as to independence and
    objectivity (usually in its proposal). If the firm has not provided a
    representation as to independence and objectivity, the auditor should
    obtain a representation from the firm. If the auditor is not familiar with
    the firm, the auditor should inquire of professional organizations (such
    as the American Institute of Certified Public

    Accountants or the Public Company Accounting Oversight Board established
    by the Sarbanes- Oxley Act of 2002) as to the firm's professional
    reputation and standing.

    .14 For government auditors, the auditor should decide whether the other
    audit organization is organizationally independent to report externally or
    whether it should be considered an internal audit organization. The
    auditor may refer to the work of organizationally independent government
    auditors but should not refer to the work of internal audit organizations
    in the audit report; generally more extensive review and supervision are
    necessary when dealing with internal auditors. The auditor should obtain
    written representations from the head of the government audit organization
    that to the best of his or her knowledge, the organization and the
    individual auditors doing the work are independent of the entity being
    audited. This means that the individual auditors are free of personal
    impairments to independence and maintain an independent attitude and
    appearance; it also means that the organization is free from external
    impairments and is organizationally independent (see GAGAS 3.11). The
    representation letter may indicate the general criteria for determining
    independence, such as "under the criteria in GAGAS." The representations
    should be for the period of the financial statements to the date of the
    other auditors' report. Since the decision on the independence and
    objectivity of the other auditors is needed to plan the

    7 Under the CFO Act and the Government Management Reform Act, if the IG is
    not doing the audit, he or she is required to determine the CPA firm that
    will do the work.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 10 auditor's work, the auditor
    generally should obtain oral representations early in

    the audit, with written representations at the end of the audit. 8 .15
    Government auditors may be presumed to be free from organizational
    impairments to independence when reporting externally to third parties if
    their audit organization is organizationally independent of the audited
    entity. Government audit organizations may meet the requirement for
    organizational independence in a number of ways. There is a presumption
    that a government audit organization is organizationally independent
    (GAGAS 3.30.1) if the audit organization is

    a. "assigned to a level of government other than the one to which the
    audited entity is assigned (federal, state, or local), for example, a
    federal auditor auditing a state government program, or b. "assigned to a
    different branch of government within the same level of

    government as the audited entity, for example, a legislative auditor
    auditing an executive branch program."

    .16 There is also a presumption of organizational independence if the head
    of the audit organization (GAGAS 3.30.2) meets one of the following:

    a. "is directly elected by voters of the jurisdiction being audited, b.
    "is elected or appointed by a legislative body, subject to removal by a

    legislative body, and reports the results of audits to and is accountable
    to a legislative body,

    c. "is appointed by someone other than a legislative body, so long as the
    appointment is confirmed by a legislative body and removal from the
    position is subject to oversight or approval by a legislative body, and
    reports the results of audits to and is accountable to a legislative body,
    or

    d. "is appointed by, accountable to, reports to, and can only be removed
    by a statutorily created governing body, the majority of whose members are
    independently elected or appointed and come from outside the organization
    being audited." .17 If the other audit organization or its head meets one
    of the above criteria, the

    auditor need not perform any procedures concerning organizational 8
    Obtaining a representation from the head of the audit organization is
    similar to

    the procedure for CPA firms under AU 543.10b.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 11 independence other than to
    obtain a representation letter from the head of the

    audit organization as noted in paragraph 650.14 (see paragraph 650.23 for
    tests of personal independence). However, if the auditor encounters
    evidence that the audit organization might not be organizationally
    independent, the auditor should consider the need for inquiries and other
    procedures; the auditor should then evaluate the results of these
    procedures.

    .18 In addition to the presumptive criteria, GAGAS recognize that there
    may be other organizational structures under which a government audit
    organization could be free from organizational impairments. These other
    structures should provide sufficient safeguards to prevent the audited
    entity from interfering with the audit organization's ability to perform
    the work and report the results impartially. For the audit organization to
    be considered free from organizational impairments to report externally
    under a structure different from the ones listed above, the audit
    organization (GAGAS 3.30.3) should have all of the following safeguards:

    a. "statutory protections that prevent the abolishment of the audit
    organization by the audited entity,

    b. "statutory protections that require that if the head of the audit
    organization is removed from office, the head of the agency should report
    this fact and the reasons for the removal to the legislative body,

    c. "statutory protections that prevent the audited entity from interfering
    with the initiation, scope, timing, and completion of any audit, d.
    "statutory protections that prevent the audited entity from interfering
    with the

    reporting on any audit, including the findings, conclusions, and
    recommendations, or the manner, means, or timing of the audit
    organization's reports,

    e. "statutory protections that require the audit organization to report to
    a legislative body or other independent governing body on a recurring
    basis, f. "statutory protections that give the audit organization sole
    authority over the

    selection, retention, and dismissal of its staff, and g. "statutory access
    to records and documents that relate to the agency,

    program, or function being audited." .19 If the head of the audit
    organization concludes that the organization has all the safeguards listed
    above, the audit organization may be considered free from organizational
    impairments to independence when reporting externally. The

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 12 audit organization should
    document the statutory provisions in place that provide

    these safeguards. The external quality assurance reviewer will review
    these provisions to determine whether the necessary safeguards are
    present.

    .20 The auditor using the work of other auditors who meets these
    requirements should request a representation letter (see paragraph 650.14)
    from the head of the audit organization; the auditor should review the
    above documentation and discuss it with the head of the audit
    organization. He or she also may discuss the matter with the external
    quality assurance reviewer, legal counsel for the audit organization, and
    his or her own legal counsel.

    .21 If the auditor decides that the government audit organization is not
    organizationally independent to report externally (either because it does
    not meet the criteria in GAGAS or for another reason), the auditor should
    determine whether the other auditors are organizationally independent to
    report internally. These auditors are internal auditors. The Institute of
    Internal Auditors' (IIA) Standards for the Professional Practice of
    Internal Auditing defines internal auditing as "an independent, objective
    assurance and consulting activity designed to add value and improve an
    organization's operations. It helps an organization accomplish its
    objectives by bringing a systematic, disciplined approach to evaluate and
    improve the effectiveness of risk management, control, and governance
    processes." GAGAS contain guidance on organizational independence for
    government internal auditors. For example, internal auditors should be
    outside the staff or line management function of the unit under audit.
    They should report their results and be accountable to the head or deputy
    of their agency. IIA standards require internal auditors to be objective
    for the activities they audit. These GAGAS and IIA standards of
    independence for internal auditors differ from independence under the
    AICPA Code of Professional Conduct or independence for external auditors
    under GAGAS. The auditor generally should determine whether the internal
    auditors whose work is to be used are independent of the activities they
    audit. The auditor also should consider the organizational status of the
    head of the audit organization, including (GAGAS 3.30.5) whether the head:

    "is accountable to the head or deputy head of the government entity;

    "is required to report the results of the audit organization's work to the
    head or deputy head of the government entity, and

    "is located organizationally outside the staff or line management function
    of the unit under audit."

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 13 .22 If the auditor concludes
    that the internal auditors are not independent under

    GAGAS and IIA standards, the auditor should treat the work as if the
    auditee prepared it. If the auditor concludes that the internal auditors
    are independent under GAGAS and IIA standards, the auditor may use their
    work to the extent permitted by AU 322. In either case, the auditor may
    not issue a report referring

    to or concurring with the work of internal auditors. .23 In addition to
    evaluating the other auditors' organizational independence, the

    auditor should evaluate whether the audit team has any personal
    impairments. For both internal auditors and organizationally independent
    government audit organizations, the auditor generally should ask how the
    other auditors monitor the personal independence of individual staff
    members, especially those doing the work the auditor would like to use.

    .24 The auditor should document the work performed and the conclusions
    reached as to independence and objectivity. The documentation should
    indicate the auditor's conclusion as to whether the other auditors are
    independent and objective and the basis for that conclusion. The auditor
    should consult with the Reviewer if there are questions about the other
    auditors' independence or objectivity.

    EVALUATING THE OTHER AUDITORS' OR SPECIALISTS' QUALIFICATIONS .25 After
    evaluating the other auditors' or specialists' independence and
    objectivity,

    the auditor should evaluate the other auditors' or specialists'
    qualifications to perform the specific tasks required. This involves
    evaluating the qualifications of the firm or audit organization and
    evaluating the qualifications of the specific audit team. Where the
    auditor has previously used the work of the same other auditors, the
    auditor generally should update the previous evaluation.

    .26 For CPA firms and specialists, qualifications are generally evaluated
    through the contracting process. The firm submits resumes for the audit
    team and demonstrates why its team is qualified to do the work. CPA firms
    should be asked to submit their latest peer review report (or inspection
    report specified by the Public Company Accounting Oversight Board), letter
    of comments, and response to the peer review report. The firm generally
    submits its plan for doing the work. The purpose of the technical
    evaluation panel under the contracting process is to select a qualified
    firm.

    .27 Where the auditor did not participate in the contracting process, the
    auditor should consider how the qualifications of the firm were evaluated.
    For example, did the evaluation panel review resumes of the team; review
    the audit approach;

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 14 and read the peer review
    report, the related letter of comments, and the firm's

    response to the peer review report? The auditor should read these
    documents and reach a conclusion as to qualifications. .28 For auditors
    other than CPA firms, the auditor should ask whether the audit
    organization had a peer review and the date of that review. IGs have peer

    reviews performed every 3 years by other IGs. Most state auditors also
    have peer reviews every 3 years. To comply with GAGAS, the audit
    organization should have a peer review every 3 years. The IIA standards
    indicate that, "[ e] xternal assessments, such as quality assurance
    reviews, should be conducted at least once every five years by a
    qualified, independent reviewer or review team from

    outside the organization.". While reviews under the IIA standard are not
    designed to report whether the audit organization's quality control
    adheres to GAGAS, they do provide evidence about whether the work adheres
    to a recognized set of professional standards. The auditor should read the
    peer review report, the letter

    of comments, and the audit organization's response. Where the audit
    organization has received an unqualified peer review report recently
    (usually less than 1 year ago), further review of the audit organization's
    qualifications is generally not required.

    .29 Where the peer review report is not recent, the auditor also should
    review the results of the audit organization's internal inspection
    program. If the peer review is not recent, the inspection is important in
    highlighting new quality control issues. The inspection generally should
    include reviews of documentation, interviews of staff members, and tests
    of functional areas. Where the inspection is recent (usually within the
    past year) and the inspection report is unqualified, further review of the
    audit organization's qualifications is generally not required.

    .30 Where the peer review or inspection report is qualified or adverse,
    the auditor should evaluate whether the quality control system has since
    been strengthened to allow the auditor to use the other auditors' work.
    The auditor may review the organization's action plan for improving
    quality controls. Inspection results are helpful in determining whether
    quality controls have improved since the peer review. The auditor should
    consider the effect of the remaining weaknesses in determining the nature
    and extent of procedures the auditor will perform.

    .31 Where the peer review is not recent and there is no inspection
    program, the auditor generally should obtain an overview of the important
    policies and procedures in the functional areas:

    independence, integrity, and objectivity (see above);

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 15 personnel management
    (includes recruiting and hiring, advancement,

    professional development and training, and assigning personnel to
    assignments);

    audit performance (includes supervision and consultation);

    acceptance and continuance of assignments; and

    monitoring programs. .32 This information usually is obtained through
    interviews of the audit

    organization's management and staff and through reading the audit
    organization's quality control summary document, if one has been written.
    The auditor also may read the organization's manuals and other guidance
    for conducting audits.

    .33 In addition to evaluating the audit organization's qualifications, the
    auditor also should evaluate the overall qualifications of the other
    auditors' team assigned to do the work. Reviewing resumes of key team
    members may accomplish this. The auditor should consider the specific
    education, training, certifications, and experience of key team members.
    In evaluating qualifications, the auditor should consider the specific
    role of staff members on the job. When the auditor has knowledge of
    qualifications from prior experience with key team members, the auditor
    should inquire about experience in the time since the last audit. .34
    Where the auditor is not fully satisfied as to the other auditors'
    qualifications, the

    auditor generally should perform a more detailed review of the
    documentation and/ or perform supplemental tests of key line items (see
    paragraph 650.36). The auditor also may help the other auditors improve
    future audits.

    .35 If the auditor has significant concerns about the other auditors'
    independence, objectivity, or qualifications, the auditor should revise
    the audit approach. For example, the auditor may:

    contract with another firm,

    ask the other auditors to substitute more highly qualified or objective
    staff members,

    do the audit without using the other auditors' work, treating any work
    done by the other auditors as prepared by the auditee,

    divide the work so that the other auditors test the areas where they are
    qualified, and the auditor does the rest of the audit, or

    issue a disclaimer of opinion.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 16 PLANNING THE REVIEW AND
    TESTING OF THE OTHER AUDITORS'

    OR SPECIALISTS' WORK

    .36 After evaluating the other auditors' or specialists' independence,
    objectivity, and qualifications, the auditor should develop a written plan
    for reviewing and, if necessary, testing the work done. This plan
    documents the level of review the auditor believes necessary. The level of
    review is high, 9 moderate, or low. 10 The plan should be reconsidered as
    the work progresses. The level of review is a judgment the auditor makes;
    this judgment generally should be made for each material line item and
    should consider the following factors: a. The type of report or letter the
    auditor will issue (less review is needed for a

    transmittal letter than for reports in which the auditor takes
    responsibility for the other auditors' work). (See paragraph 650.10.)

    b. Whether the other auditors issue a disclaimer of opinion because of a
    scope limitation (less work is needed to concur with a scope limitation
    than to concur with an unqualified opinion). (See paragraph 650.37.)

    c. Whether the auditor's report might contain a disclaimer because of a
    scope limitation (less work is needed if the auditor's report will contain
    a scope limitation). (See paragraph 650.39.)

    d. The other auditors' independence, objectivity, and integrity (both for
    the audit team and for the other audit organization) including whether the
    other audit organization is an independent auditor or an internal auditor
    (the level of review increases as independence, objectivity, and integrity
    decreases).

    e. The other auditors' qualifications to perform the work the auditor
    wishes to use (both for the audit team and for the other audit
    organization) (the level of review increases as the other auditors'
    qualifications decrease).

    9 Some situations may require significantly more work than the work shown
    for the high level. In those situations, the auditor generally should
    perform significant supplemental tests; in some cases, the audit may be a
    joint audit. 10 In some situations, the auditor may decide less review or
    no review is necessary.

    These situations typically involve entities or line items that are very
    small in relation to the financial statements taken as a whole. In these
    situations the auditor may decide to read the other auditors' report and
    the financial statements and ask questions if anything seems unusual.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 17 f. The auditors' prior
    experience with the other auditors (both for the audit team and for the
    other audit organization) (the level of review decreases as

    the auditor has favorable experience in working with the other auditors).
    g. The materiality of the line item in relation to the financial
    statements the

    auditor is reporting on, taken as a whole (the level of review increases
    as the line item becomes more material).

    h. The combined risk (combination of inherent risk and control risk) and
    the risk of material fraud for the line item and assertion in the
    financial statements the other auditors are auditing (the level of review
    increases as the combined risk and the risk of material fraud increase).

    .37 If the other auditors' work had a scope limitation, this generally
    affects the level of review (except for transmittal letters with no
    assurance). If the other auditors disclaim an opinion on the financial
    statements because of a scope limitation, the auditor should issue a
    disclaimer of opinion (unless the financial statements the other auditors
    audited are not material to the financial statements the auditor is
    auditing). It will not take much review to be satisfied that the
    disclaimer is appropriate. Discussions with entity management and/ or
    supplemental tests are

    not required in this situation, and the review of documentation may be
    limited to summary documentation. Thus, the level of review is usually low
    or no review (see footnote 6). However, the auditor may decide to do
    additional work to learn about the entity, to help the other auditor plan
    future audits, or to help management correct the causes of the scope
    limitation.

    .38 If the other auditors' work had a scope limitation that results in a
    qualified opinion, this generally needs a moderate or high level of review
    to determine whether the other auditors should have disclaimed an opinion
    and that the only issues are those relating to the qualification.

    .39 A scope limitation on the auditor's work that results in a disclaimer
    also may affect the level of review. Since the auditor has already decided
    that not enough work can be done on the overall financial statements, no
    amount of review of the other auditors' work is likely to change that
    conclusion. Thus, as in the situation above, discussions with entity
    management and/ or supplemental tests are not required, the review of the
    other auditors' documentation may be limited to summary documentation, and
    the level of review is usually low or no review (see footnote 6). However,
    the auditor may decide to do additional work to learn about the entity, to
    help the other auditor plan future audits, or to help management correct
    the causes of the scope limitation.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 18 .40 A scope limitation on
    the auditor's work that results in a qualified opinion needs a

    similar amount of work as an unqualified opinion. .41 Section 650 A
    illustrates the work that generally should be performed for each

    level of review for each significant line item as well as what to retain
    in the documentation.

    REVIEW OF DOCUMENTATION .42 The extent of the auditor's review of the
    other auditors' or specialists' documentation depends on the level of
    review and is a judgment based on the factors in paragraph 650.36. For the
    low level of review, the review of documentation may be limited to key
    summary planning and completion documentation. For the moderate level, the
    auditor generally should review more of the other auditors' or
    specialists' documentation, especially those evidencing important
    decisions. For financial statement audits, these include the General Risk
    Analysis (GRA) or audit plan or equivalent documents; the Account Risk
    Analysis (ARA) (or equivalent documentation) for significant accounts; the

    Specific Control Evaluations (SCE) (or equivalent documentation) for
    significant applications; the documentation for high- risk accounts,
    estimates, and judgments; the analytical procedures; the audit completion
    checklist (or equivalent documentation); the audit summary memorandum; and
    the summary of possible adjustments. For the high level of review, the
    auditor generally should review all of the items for the moderate level of
    review plus the important detailed documentation.

    DISCUSSIONS AND/ OR SUPPLEMENTAL TESTS WHERE LEVEL OF REVIEW IS HIGH .43
    AU 543.13 states: "In some circumstances the principal auditor may
    consider it

    appropriate to participate in discussions regarding the accounts with
    management personnel of the component whose financial statements are being
    audited by other auditors and/ or to make supplemental tests of such
    accounts." "In some circumstances" is interpreted to mean when the level
    of review is high. Thus, where the level of review is high, the auditor
    should (1) review audit documentation and (2) hold discussions with
    auditee management and/ or perform tests of original documents. The
    objective of these additional procedures is for the auditor to obtain
    additional evidence about whether key items are properly handled and well
    supported. For example, the auditor generally should discuss key items
    with auditee management, especially estimates and judgments; this
    discussion generally should be with the other auditors present. The
    auditor generally should attend the entrance and exit conferences and
    other key meetings held by other auditors or specialists. The

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 19 auditor should consider that
    for key items that are high risk, discussions with

    management may not provide sufficient evidence and supplemental tests may
    need to be performed.

    .44 Supplemental tests may be a selection of the other auditors' work,
    additional tests of the accounting records, or both. To perform
    supplemental tests, the auditor should have access to the entity's
    personnel and their books and records. The auditor may coordinate access
    to the entity's personnel and records through

    the other auditor. The auditor and the other auditor also may jointly
    perform parts of a test, where the sample is planned jointly and the
    results are evaluated jointly. Although supplemental tests are usually
    performed only when the level of review is high, the auditor may decide to
    perform supplemental tests in other situations to learn about the entity,
    to help the other auditor plan future audits, or to help management
    correct problems.

    .45 Where the other auditor is an internal auditor, the auditor should
    perform supplemental tests. Accordingly, for internal auditors,
    supplemental tests generally should be of greater scope (see AU 322.26).

    .46 The auditor generally should limit discussions with entity management
    and/ or supplemental tests to line items that are both high combined risk
    and material to the financial statements the auditor is reporting on,
    especially in areas involving

    estimates and judgments or in areas on which users place extensive
    reliance. The auditor's supplemental tests generally should include some
    items that the other auditor tested that appear to be exceptions to
    determine whether they were appropriately considered in formulating an
    opinion. The auditor should consider performing supplemental tests while
    the other auditors are at the auditee location and have access to records;
    this can minimize the inconvenience to the auditee.

    .47 It is not necessary to perform supplemental tests of the work of
    specialists. As indicated in AU 336.12, the auditor should understand the
    methods and assumptions used by the specialists, test the data provided to
    the specialists (extent of testing is based on risk and materiality), and
    evaluate whether the specialists' findings support the financial statement
    assertions. If the auditor believes the findings are unreasonable, the
    auditor should apply additional procedures and/ or consider the need to
    obtain another specialist.

    SUBSEQUENT EVENTS REVIEW AND DATING OF THE AUDITOR'S REPORT .48 The
    auditor's report should be dated when the auditor completes fieldwork. If
    the other auditors' or specialists' report is dated earlier and the
    auditor's report

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 20 does not mention the other
    auditors' report or concurs with the other auditors' report (example 2 of
    section 650 C), the subsequent events review should be

    updated to the date of the auditor's report. The auditor may ask the other
    auditors to update the subsequent events work to the required date, or the
    auditor may update the subsequent events review. Since this requires
    additional work, the auditor should attempt to complete fieldwork when the
    other auditors complete fieldwork. This issue should be considered in
    planning. It is not necessary to update the subsequent events review when
    the auditor issues a

    transmittal letter (example 1 of section 650 C).

    STAFFING THE REVIEW OF THE OTHER AUDITORS' OR SPECIALISTS' WORK .49 When
    staffing the review, the auditor should consider that the other auditors
    or

    specialists may already have reviewed the work at several levels. The
    auditor's staff reviewing the work generally should have enough experience
    in financial statement auditing to understand the judgments that need to
    be made and to interact with the higher levels of the other audit
    organization. Most of the review

    generally should be done by or under the direction of an assistant
    director or a manager who has significant experience in performing and
    reviewing financial statement audit work. Supplemental tests may be done
    by less experienced staff members and supervised by an assistant director
    or an experienced audit

    manager. Primary review of the experienced audit manager's or assistant
    director's documentation should be performed by the audit director or an
    assistant director designated by the audit director. However, the
    assistant director or audit manager should review the documentation of
    supplemental tests performed by the less experienced staff members.
    Because of the high level of financial statement auditing experience of
    staff members doing and reviewing this work, secondary review should be
    performed only in very high- risk situations.

    .50 When the other auditors' work involves the review of computer
    controls, an information systems auditor in a management role generally
    should do the auditor's review. An audit assistant director should review
    the information systems auditor's documentation to determine that related
    audit objectives were achieved.

    EVALUATING THE WORK

    .51 After the auditor has completed the review of the other auditors'
    work, and, if necessary, the supplemental testing, the auditor should
    determine whether the work is sufficient and acceptable for the auditors'
    use. The auditor should summarize the evaluation in the audit summary
    memorandum.

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 21 .52 Sometimes, the other
    auditors use methodologies or audit approaches that are

    different from those the auditor would have used. The auditor should
    recognize that auditing requires a great deal of professional judgment and
    that there often are alternative ways to achieve audit objectives. Thus,
    the auditor should first understand the basis for the nature, timing, and
    extent of the other auditors' procedures. The auditor should evaluate
    whether sufficient evidence has been

    obtained to meet the auditor's objectives; usually the auditor should
    consider materiality and combined risk for the particular line item in
    this evaluation. If the auditor has concerns about whether the other
    auditors' work provides sufficient evidence, the auditor should discuss
    the matter with the audit director and the

    Reviewer before formally discussing the issue with the other auditors. .53
    The auditor should consider the significance of the test results to the
    audit of the

    financial statements the auditor is reporting on. As an example, the other
    auditors might have selected a nonstatistical sample and/ or the sample
    size might be smaller than the sample size the auditor would have
    selected. The auditor might decide that this provides sufficient evidence
    in an area that is less material or is not risky. However, if the area is
    material or risk is high, the auditor might conclude that sufficient
    evidence has not been obtained and that additional work is needed. In this
    case, after consulting with the audit director and the Reviewer, the
    auditor generally should either ask the other auditors to perform
    additional tests or perform the additional tests; if the additional
    testing is not done, the auditor should consider the effect of this scope
    limitation on the auditor's report. Since reaching this conclusion after
    the work is performed is inefficient, when

    the level of review is high, the auditor generally should coordinate or
    concur with major planning decisions before audit work is started.

    .54 Sometimes, the auditor may disagree with the conclusions or judgments
    of the other auditors. In this case, the auditor should consider the other
    auditors' work as well as any other evidence necessary to determine the
    appropriate conclusion.

    .55 The auditor should then discuss the issue with the other auditors to
    attempt to resolve the disagreement. It is important to attempt to resolve
    disagreements to reduce confusion that may arise from differing auditor
    views. In planning the audit, the auditor should try to identify potential
    disagreements early. Once identified, the auditor should discuss the
    issues with the other auditors as early as possible so that they can be
    resolved timely.

    .56 If the auditor does not reach agreement with the other auditors, the
    auditor should consider how to report. For very material disagreements,
    the auditor may decide not to transmit the other auditors' report, instead
    issuing a disclaimer of opinion due to a scope limitation or doing
    additional work, if necessary, to issue

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 22 an appropriate opinion. In
    less material disagreements, the auditor may transmit

    the other auditors' report, issue the transmittal letter or report, and
    describe the disagreement and the basis for the auditor's conclusions.

    DOCUMENTING THE REVIEW OF OTHER AUDITORS' OR SPECIALISTS' WORK .57
    Regardless of the type of reporting or the level of review, the auditor's

    documentation should contain the items listed in section 650 A under
    "documentation." .58 In addition, where the auditor performs supplemental
    tests of the accounting

    records, the auditor's documentation should contain a description of the
    work (this may be a list of the documents the auditor examined or tick
    marks on a copy of the other auditors' documentation if that is the basis
    for the selection) and the auditor's conclusion. It is not necessary to
    retain copies of the documents examined.

    .59 It is important to distinguish between the auditor's responsibilities
    to review the documentation of other auditors versus what the auditor
    might copy and retain from that documentation. The auditor should use
    judgment in deciding which of the other auditors' or specialists'
    documents to copy and retain. Copies of documents readily available from
    the other auditors or the auditee (such as

    invoices and contracts) need not be retained. Section 650 A indicates what
    documentation the auditor generally should retain.

    .60 The auditor may decide to retain other documentation if it might be
    useful in understanding the entity, training staff members, planning
    future audits, reviewing the documentation, or writing the report.
    Documentation in this category includes the entity profile (or
    equivalent), the general risk analysis or audit plan, the audit programs,
    the ARA and SCE forms (or equivalent), the trial balance or lead
    schedules, the management representation letter, and the attorney
    representation letter. Auditors often find it helpful to keep copies of
    documents in case questions are raised in review but not to include those
    copies

    in the documentation unless they are needed to document the work
    performed. Documents should not be retained if they are no longer needed.
    The audit plan or audit program may indicate which documents to retain.

    USING INTERNAL AUDIT STAFF TO PROVIDE DIRECT ASSISTANCE TO THE AUDITOR .61
    Sometimes the auditor or the auditee requests that internal auditors
    provide

    direct assistance to the auditor. Before this is done, the auditor should
    be

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 23 satisfied with the
    independence, objectivity, and qualifications of the staff

    assigned to do the work requested. AU 322.27 indicates that in these
    situations "the auditor should inform the internal auditors of their
    responsibilities, the objectives of the procedures they are to perform,
    and matters that may affect the nature, timing, and extent of
    procedures.... The auditor should also inform the internal auditors that
    all significant accounting and auditing issues identified during the audit
    should be brought to the auditor's attention." The auditor should direct,
    review, test, and evaluate the work done by internal auditors to the
    extent appropriate based on the auditor's evaluation of risk, materiality,
    objectivity, and qualifications.

    USING AGENCY SPECIALISTS .62 Many agencies have actuaries, security
    specialists, statistical specialists, and other specialists whose work the
    auditor would like to use. Unless these specialists are part of an
    organization that is organizationally independent or under contract to
    such an organization, the auditor should evaluate their work as the work
    of any auditee employee. The auditor generally should use specialists in
    the audit organization or contract for outside specialists to develop and

    implement appropriate tests. MULTIPLE LEVELS OF OTHER AUDITORS .63
    Sometimes there are several levels of other auditors. For example, the IG
    might hire a CPA firm to do an audit. The IG may issue a report concurring
    with the CPA's report or a letter transmitting the CPA's report; GAO may
    then use the work of the IG.

    .64 In these situations, each audit organization should follow the
    guidance in section 650. The IG should evaluate the independence (see
    paragraphs 650.11-. 24) and qualifications of the other auditors (see
    paragraphs 650.25-. 35), should review the audit documentation (see
    paragraph 650.42), and may need to have discussions with entity management
    and/ or perform supplemental tests of key accounts (see paragraphs
    650.43-. 47) (depending on the level of review deemed appropriate). GAO
    should evaluate the qualifications of the IG organization (by reading the
    peer review report, the letter of comments, and the audit organization's
    response as described in paragraph 650.25) and the team doing the
    monitoring, should review the IG's documentation, and may perform
    supplemental tests. When GAO finds that the IG has done and documented

    adequate work including discussions with management and/ or supplemental
    tests, GAO's discussions and/ or supplemental tests would be quite
    limited* perhaps a walk- through of work done in high- risk and material
    areas. Often, GAO may attend fewer meetings than the IG staff attends and
    would concentrate

    Planning and General 650 - Using the Work of Others April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 650- 24 the review on the IG's
    documentation. GAO may then issue a report on the

    financial statements. .65 Because of the potential for inefficiency, there
    should be close coordination

    between the various auditors. The IG and GAO may perform the review
    jointly. Sometimes, a memorandum of understanding might be useful in
    documenting responsibilities. A chart that describes the review to be done
    by each organization may be useful. The following is a useful format for
    this chart (with more detail added as necessary under each phase):

    Procedures Phase Other auditor IG review GAO review Planning Internal
    control Testing Reporting REPORTS ON OTHER AUDITORS' WORK .66 The auditor
    may be asked to issue a report evaluating work done by other

    auditors in a situation where the auditor is not using the work of the
    other auditors. For example, the auditor might be asked to evaluate an
    audit done by a CPA firm. While AU 543, 322, and 336 are not directed
    towards these situations, the guidance in FAM 650 is helpful in planning
    and reporting on these assignments.

    Planning and General 650 A - SUMMARY OF AUDIT PROCEDURES AND

    DOCUMENTATION FOR REVIEW OF OTHER AUDITORS' WORK

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650 A- 1 .01
    The table in this section indicates the work that generally should be
    performed for each level of review, as well as what generally should be
    retained in the

    documentation. The table does not include work on other auditor's
    independence, objectivity, and qualifications. (See paragraphs 650.11-. 35
    for a discussion of that work.) Where the other auditor uses equivalent
    documents, review those documents.

    .02 In the table, steps to be performed and documents to be retained at
    the low level of review are indicated by regular font. The moderate level
    of review includes the low level plus those in bold letters. The high
    level of review includes the moderate level plus those in BOLD CAPITALS.

    Planning and General 650 A - Summary of Audit Procedures and Documentation
    for Review of

    Other Auditors' Work April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 650 A- 2 AUDIT PROCEDURES At entity level For significant line items,
    accounts, or applications - Communicate with the other auditors: - as to
    the objectives of the work - discuss their procedures and

    results - Attend key entrance and exit meetings - COORDINATE OR CONCUR IN
    SIGNIFICANT PLANNING DECISIONS BEFORE MAJOR WORK IS STARTED - Review:

    - general risk analysis - audit plan - scope of work - audit summary
    memorandum - summary of unadjusted

    misstatements - analytical procedures - completion checklist -
    determination of planning and design materiality - information systems

    background - general and application

    controls documentation (done by information systems auditor)

    - representation letters - key documentation - Read: - other auditor's
    report - financial statements and notes - stewardship report and required

    supplementary information - other accompanying information - management's
    response

    - Review: - audit program - conclusions about significant issues and their
    resolution (often

    in audit summary) - account risk analysis (ARA) - specific control
    evaluations

    (SCE) - cycle memo - flowcharts - determination of test materiality -
    sampling plan - other auditors' key documentation - documentation for
    high- risk accounts, estimates, and judgments - analytical procedures -
    evaluation of sample results - summary of possible adjustments

    - PARTICIPATE IN DISCUSSIONS WITH MANAGEMENT PERSONNEL AND/ OR PERFORM
    SUPPLEMENTAL TESTS OF THE LINE ITEMS (ESPECIALLY KEY ITEMS, ESTIMATES AND
    JUDGMENTS); COMPARE CONCLUSIONS

    Planning and General 650 A - Summary of Audit Procedures and Documentation
    for Review of

    Other Auditors' Work April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 650 A- 3 DOCUMENTATION Retain Optional Auditor prepared: - audit plan
    - audit program - memo documenting entrance and exit conference - MEMOS
    DOCUMENTING KEY

    MEETINGS ATTENDED AND DISCUSSIONS WITH AUDITEE MANAGEMENT - results of
    review of

    documentation - SUPPLEMENTAL TEST DOCUMENTATION - summary memo Other
    auditor prepared:

    At entity level: - other auditor's report - final financial statements and
    notes - stewardship report - management letter - other auditor's
    unadjusted

    misstatements, estimate of the imprecision of audit procedures, and
    comparison with materiality - audit completion checklist - other auditor's
    audit summary memo At line item level:

    - documentation that supports exceptions - other auditor's documentation

    evidencing significant judgments and conclusions - entity profile

    - general risk analysis - other auditor's audit plan - other auditor's
    audit program - account risk analyses - specific control evaluations

    - sampling plan - trial balance - lead schedules

    - evaluation of sample results - management representation letter - legal
    representation letter

    [This page intentionally left blank.]

    Planning and General 650 B - EXAMPLE AUDIT PROCEDURES FOR USING

    THE WORK OF OTHERS April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 650 B- 1 This program is appropriate when using the work of other
    auditors or the work of specialists to perform a full or partial audit of
    financial statements. The steps should be tailored to the circumstances
    and the planned level of review by deleting inapplicable steps, modifying
    the steps, and adding additional steps. When the other auditors or
    specialists have done only part of an audit, many of the steps below may
    be deleted. Many of the steps also may be deleted for the low level of
    review or when the auditor plans to issue a transmittal letter. The
    program consists of three sections: evaluating independence, objectivity,
    and qualifications for CPA firms and specialists; evaluating independence,
    objectivity, and qualifications for government auditors; and monitoring
    the work (for all types of other auditors and for specialists). The
    auditor generally should use one of the first two sections and the third
    section. A separate form generally should be used for each other auditor
    or specialist.

    Entity:________________________________________________________________
    Job code:_____________________________________________________________
    Period of audit:________________________________________________________

    Step Done by/ date

    W/ P ref

    EVALUATING INDEPENDENCE, OBJECTIVITY, AND QUALIFICATIONS FOR CPA FIRMS AND
    SPECIALISTS 1. Read the statement of work or request for proposal

    to determine whether this contracting document provides sufficient
    background on the auditee and indicates the objectives of the work, what
    the contractor should include in its proposal, how proposals will be
    evaluated, and how the report will be used.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 2 Step Done

    by/ date W/ P

    ref

    Independence and objectivity: 2. Determine whether proposal of selected
    firm includes a representation as to the firm's

    independence and objectivity. 3. If proposal does not include a
    representation as to independence and objectivity, obtain written
    representation from firm. Qualifications: 4. Read proposal of selected
    firm. In reviewing

    proposal, evaluate the overall qualifications of the team performing the
    work. Review resumes and consider for key team members their educational
    level, professional certifications, and professional experience (including
    whether key team members have current knowledge and experience in the type
    of work done). 5. If the auditor does not know the qualifications of the
    selected firm, review peer review report, letter

    of comments, and response letter. 6. Communicate orally or in writing with
    the other auditors to be satisfied that they understand the requirements,
    the timetable, and the report or letter the auditor expects to issue.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 3 Step Done

    by/ date W/ P

    ref EVALUATING INDEPENDENCE, OBJECTIVITY, AND QUALIFICATIONS FOR
    GOVERNMENT AUDITORS Independence and objectivity:

    1. For all government audit organizations, obtain written representation
    from the head of the audit organization that the audit organization and
    the individual auditors are independent of the entity being audited. 2.
    Determine whether the audit organization meets

    ONE of the criteria in paragraph 650.15, or the head meets ONE of the
    criteria in paragraph 650.16.

    If the organization (or its head) meets one of these criteria, no further
    work is needed unless the auditor finds contrary evidence as to
    independence and objectivity in other parts of the audit. Indicate which
    criterion is met; document the evaluation of any other evidence obtained.
    (Go to step 6.) 3. If the audit organization (or its head) does not meet

    any of the criteria in step 2, determine whether it meets ALL of the
    criteria in paragraph 650.18. 4. Review the audit organization's
    documentation of

    how it meets the requirements of step 3. Discuss with head of audit
    organization (consider discussing with external quality control reviewer,
    legal counsel for audit organization, and auditor's legal counsel). (Go to
    step 6.)

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 4 Step Done

    by/ date W/ P

    ref

    5. If the audit organization does not meet the criteria for organizational
    independence to report externally, determine whether the organization is

    an independent internal audit organization under GAGAS and IIA standards.
    Determine whether the internal auditors are objective for the activities
    they audit. Consider the organizational status of the head of the audit
    organization, including whether the head

    is accountable to the head or deputy head of the government entity,

    is required to report the results of the audit organization's work to the
    head or deputy head of the government entity, and

    is located organizationally outside the staff or line management function
    of the unit under audit. 6. For all government audit organizations, obtain
    an

    understanding of organization's policies to enhance the objectivity of
    individual auditors, including

    policies to prohibit auditors from auditing areas where relatives are
    employed,

    policies to prohibit auditors from auditing areas where they were recently
    assigned or are scheduled to be assigned after they complete their tour of
    duty in auditing, and

    policies to require representations as to objectivity and lack of
    conflicts of interest from each auditor. 7. Prepare memorandum documenting
    work

    performed and conclusions as to independence and objectivity.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 5 Step Done

    by/ date W/ P

    ref

    Qualifications: 8. Read the latest peer review report, letter of

    comments, and the audit organization's response. Note date of report and
    whether it is unqualified. If report is recent (usually within the past
    year) and

    unqualified, go to step 12. 9. If the peer review is not recent, review
    the latest inspection report, if any, and the organization's response.
    Note date of report and whether it is unqualified. If the inspection is
    recent (usually

    within the past year) and unqualified, go to step 12. 10. If the
    organization has not had a recent peer review or inspection, obtain an
    overview of the important policies and procedures in the functional areas
    (through interviews of management and staff and

    through reading the summary quality control document, if any). Consult
    with Reviewer before performing this step. 11. If the peer review or
    inspection report was qualified

    or adverse, determine whether the quality control system has since been
    strengthened. Review the organization's action plan for strengthening its
    quality control system. Consider the effect of remaining weaknesses in
    determining the level of review.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 6 Step Done

    by/ date W/ P

    ref

    12. Inquire how the audit organization determined the staffing for the
    audit. Evaluate the overall qualifications of the team performing the
    work. Review resumes and consider for key team members:

    educational level, professional certifications, and professional
    experience;

    continuing professional education, especially whether key team members
    have received training and have current knowledge in the type of work
    done;

    supervision and review of work;

    whether the audit team has adequate sources for consultation and use of
    specialists, especially for audit sampling, audit methodology, and review
    of computer controls; and

    quality of documentation, reports, and recommendations. 13. If the auditor
    has significant concerns about the

    audit organization's or team's objectivity or qualifications, the auditor,
    in developing the audit plan, may either

    ask the audit organization to substitute more objective or highly
    qualified staff members;

    do the work, treating any work done by the other auditors as prepared by
    the auditee;

    divide the work so that the other auditors test the areas where they are
    qualified and the auditor does the rest of the audit; or

    issue a disclaimer of opinion.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 7 Step Done

    by/ date W/ P

    ref MONITORING THE WORK (FOR ALL TYPES OF OTHER AUDITORS AND FOR
    SPECIALISTS) 1. Develop a plan for reviewing the other auditors' or

    specialists' work and, if necessary, performing supplemental tests of the
    accounting records. Determine the level of review for each line item. 2.
    Monitor the planning of the audit (FOR MODERATE

    AND HIGH LEVEL OF REVIEW).

    Attend entrance meeting and key planning meetings.

    Review the entity profile.

    Review the General Risk Analysis or equivalent document (and audit plan if
    prepared as a separate document) (FOR ALL LEVELS OF REVIEW).

    Review the determination of planning materiality and design materiality.

    Have an information systems auditor review the information resource
    management background information and the documentation for review of
    general and application controls.

    Document line items and applications to be reviewed.

    For each such line item, review the Account Risk Analyses, the Specific
    Control Analyses, the cycle flowcharts, the cycle memoranda, the
    determination of test materiality, and the audit program or equivalent
    documents.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 8 Step Done

    by/ date W/ P

    ref

    3. Monitor the execution of the audit (for reports following example 2 of
    section 650 C or section 595 A and/ or B WHERE LEVEL OF REVIEW IS HIGH).

    Attend key meetings, especially those discussing high- risk areas,
    significant estimates and judgments, and the other auditors' conclusions.

    Discuss key items with auditee management, especially significant
    estimates and judgments.

    Perform supplemental tests of the accounting records.

     Generally do for high risk and material line items, especially in areas
    involving estimates and judgments or ones that users rely on extensively.

     Generally do while the other auditors are at the auditee location and
    have access to the records.

     Examine some of the same documents the other auditors examined or make
    own selection or both.

     Compare results of other auditors' work to results of supplemental
    tests.  Document scope of supplemental testing and conclusions reached.

    Planning and General 650 B - Example Audit Procedures for Using the Work
    of Others April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650
    B- 9 Step Done

    by/ date W/ P

    ref

    4. Monitor the completion of the audit (items with * are usually not
    necessary for LOW level of review)

    Review the overall analytical procedures.

    *Review the key documentation for the line item and for completing the
    audit; consider evaluations of sample results. (For example, were
    projections appropriate? Was appropriate action taken based on sample
    results?) *Determine whether the subsequent events

    review was updated to the date of the auditor's report. Review the audit
    summary memorandum, conclusions about line items, and summary of possible
    adjustments. Review the audit completion checklist (or equivalent
    document).

    Review the management representation letter and the legal representation
    letter.

    *Attend key exit conference( s).

    Read the other auditors' report, the financial statements, the notes, the
    other accompanying information, and management's response. 5. Prepare
    summary memorandum. 6. Write the auditor's report or transmittal letter.

    [This page intentionally left blank.]

    Planning and General 650 C - EXAMPLE REPORTS WHEN USING THE

    WORK OF OTHERS April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    650 C- 1 EXAMPLE 1 * TRANSMITTAL LETTER We contracted with the independent
    certified public accounting firm of [name of firm] to audit the financial
    statements of [name of entity] as of [date] and for the year then ended.
    The contract required that the audit be done in accordance with U. S.
    generally accepted government auditing standards; OMB's bulletin, Audit
    Requirements for Federal Financial Statements; and the GAO/ PCIE Financial

    Audit Manual. In its audit of [name of entity], [name of CPA firm] found

    the financial statements were fairly presented, in all material respects,
    in conformity with U. S. generally accepted accounting principles,

    [entity] had effective 1 internal control over financial reporting
    (including safeguarding assets) and compliance with laws and regulations,

    [entity's] financial management systems substantially complied 2 with the
    requirements of the Federal Financial Management Improvement Act of 1996
    (FFMIA), and no reportable noncompliance with laws and regulations it
    tested.

    [Name of CPA firm] also described the following significant matters:
    [Discuss significant matters].

    1 If the other auditors did not provide an opinion on internal control,
    change this to "there were no material weaknesses in internal control"
    (and include a definition of material weakness in a footnote). 2 If the
    other auditors did not provide an opinion (i. e., did not give positive

    assurance) on whether the entity's systems complied with FFMIA, change
    this to "no instances in which entity's financial management systems did
    not substantially comply" (i. e., negative assurance).

    Planning and General 650 C - Example Reports When Using the Work of Others
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650 C- 2 [For
    transmittal letters expressing no assurance, use the following paragraph:]

    [Name of CPA firm] is responsible for the attached auditor's report dated
    [date] and the conclusions expressed in the report. We do not express
    opinions on [name of entity] 's financial statements or internal control
    or on whether [entity] 's financial management systems substantially
    complied with FFMIA; or conclusions on compliance with laws and
    regulations.

    [For transmittal letters expressing negative assurance, use the following
    paragraph:] In connection with the contract, we reviewed [name of CPA
    firm] 's report and

    related documentation and inquired of its representatives. Our review, as
    differentiated from an audit in accordance with U. S. generally accepted
    government auditing standards, was not intended to enable us to express,
    and we do not express, opinions on [name of entity] 's financial
    statements or internal control 3 or on whether [entity] 's financial
    management systems substantially complied with FFMIA; 4 or conclusions on
    compliance with laws and regulations. [Name of CPA firm] is responsible
    for the attached auditor's report dated [date] and the conclusions
    expressed in the report. However, our review disclosed no

    instances where [name of CPA firm] did not comply, in all material
    respects, with U. S. generally accepted government auditing standards. 5 3
    If the other auditors did not provide an opinion on internal control,
    change this to read "conclusions about the effectiveness of internal
    control." 4 If the other auditors did not provide an opinion on FFMIA,
    change "opinion" to "conclusions." 5 If the auditor found that the other
    auditors did not comply with GAGAS, or if the

    auditor disagrees with the other auditors' conclusions, see paragraphs
    650.54-. 56.

    Planning and General 650 C - Example Reports When Using the Work of Others
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650 C- 3
    EXAMPLE 2 * REPORT CONCURRING WITH OTHER AUDITORS'

    OPINION (PRESENTING REPORT OF OTHER AUDITORS AFTER THE AUDITOR'S REPORT) 6
    Under [citation of statute], we are responsible for auditing [name of
    entity]. To

    help fulfill these responsibilities, we contracted with [name of firm], an
    independent certified public accounting firm. [Name of firm] 's report
    dated [date] is attached.

    We concur 7 with [name of firm] 's report that indicated:

    the financial statements were fairly presented, in all material respects,
    in conformity with U. S. generally accepted accounting principles,

    [entity] had effective internal control over financial reporting
    (including safeguarding assets) and compliance with laws and regulations,

    [entity's] financial management systems substantially complied with the
    requirements of the Federal Financial Management Improvement Act of 1996
    (FFMIA), and no reportable noncompliance with laws and regulations it
    tested.

    Details of their conclusions are in their report. OBJECTIVES, SCOPE, AND
    METHODOLOGY Management is responsible for (1) preparing the financial
    statements in

    conformity with U. S. generally accepted accounting principles, (2)
    establishing, maintaining, and assessing internal control to provide
    reasonable assurance that the broad control objectives of 31 U. S. C. 3512
    (c), (d) (Federal Managers' Financial Integrity Act) are met, (3) ensuring
    that [entity] 's financial management systems substantially comply with
    FFMIA requirements, and (4) complying with applicable laws and
    regulations.

    6 This example assumes the other auditors opined on internal control and
    on whether the financial management systems substantially complied with
    FFMIA. If the other auditors provided negative assurance, appropriate
    changes should be made.

    7 If the auditor does not concur with the other auditors' report, see
    paragraphs 650.54-. 56.

    Planning and General 650 C - Example Reports When Using the Work of Others
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 650 C- 4 We are
    responsible for obtaining reasonable assurance about whether (1) the

    financial statements are presented fairly, in all material respects, in
    conformity with U. S. generally accepted accounting principles, and (2)
    management maintained effective internal control, the objectives of which
    are the following:

    Financial reporting: Transactions are properly recorded, processed, and
    summarized to permit the preparation of financial statements and
    stewardship information in conformity with U. S. generally accepted
    accounting principles, and assets are safeguarded against loss from
    unauthorized acquisition, use, or disposition.

    Compliance with laws and regulations: Transactions are executed in
    accordance with laws governing the use of budget authority and with other
    laws and regulations that could have a direct and material effect on the
    financial statements and any other laws, regulations, and governmentwide
    policies identified by OMB audit guidance.

    We are also responsible for (1) testing whether [entity's] financial
    management systems substantially comply with the three FFMIA requirements,
    (2) testing compliance with selected provisions of laws and regulations
    that have a direct and material effect on the financial statements and
    laws for which OMB audit guidance requires testing, and (3) performing
    limited procedures with respect to certain other information appearing in
    the Accountability Report. To help fulfill these responsibilities, we
    contracted with the independent certified

    public accounting (CPA) firm of [name of firm] to perform a financial
    statement audit in accordance with U. S. generally accepted government
    auditing standards; OMB's bulletin, Audit Requirements for Federal
    Financial Statements; and the GAO/ PCIE Financial Audit Manual. We
    evaluated the nature, timing, and extent of the work, monitored progress
    throughout the audit, reviewed the documentation of the CPA firm, met with
    partners and staff members, evaluated the key judgments, met with
    officials of [entity being audited], performed independent tests of the
    accounting records, and performed other procedures we deemed appropriate
    in the circumstances. We conducted our work in accordance with U. S.
    generally accepted government auditing standards.

    Planning and General 660 * AGREED- UPON PROCEDURES

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660- 1 .01 In
    an engagement to apply agreed- upon procedures, a client engages an
    auditor to perform specific procedures on subject matter and report on the
    results to assist users in evaluating subject matter or an assertion.
    Agreed- upon procedures should be performed in accordance with the
    Statements on Standards for

    Attestation Engagements (SSAE). The auditor should read appropriate
    sections (e. g., AT 101, Attest Engagements, and AT 201, Agreed- Upon
    Procedures Engagements) and thoroughly understand them before performing
    agreed- upon procedures. .02 An agreed- upon procedures engagement may be
    applied to a variety of subject

    matter. The engagement will vary depending on the needs of the user. The
    engagement may assist entity management by providing information for
    making decisions and give report users information on important areas.
    Examples of agreed- upon procedures are:

    compare payroll information reported to the Office of Personnel Management
    with the entity's payroll records and general ledger;

    compare entity reconciliations of intragovernmental activity and balances
    with supporting documentation and compare amounts with the financial
    statements and with reports to the Department of the Treasury (Treasury);

    trace tax collections from the master file to deposit confirmations,
    determine whether they were recorded in the appropriate period and in the
    correct tax class;

    trace amounts on the entity's financial statements to an "account grouping
    worksheet," foot the worksheet, read the CFO's explanation for any
    differences, and compare the explanation with supporting documentation;
    and

    examine official receipt documents to determine whether they were included
    in the weekly deposit; compare deposit amounts to amounts reported on the
    statement of funding.

    .03 In agreed- upon procedures engagements, all parties involved, which
    include the report users, the entity responsible for the subject matter
    (which may or may not be the same as the user), and the auditor, should
    clearly understand the

    procedures to be applied. Since users may have different needs, the
    nature, timing, and extent of the agreed- upon procedures also may differ.
    Therefore, the users, and not the auditor, assume the responsibility for
    the sufficiency of the

    Planning and General 660 * Agreed- Upon Procedures April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 660- 2 design and extent of the
    procedures since they best understand their own needs, although the
    auditor may assist the user in designing the procedures.

    .04 The auditor should establish and document an understanding with the
    users regarding the nature, timing, and extent of the agreed- upon
    procedures to be performed. The auditor may document this understanding
    using an engagement letter to the users. (See example in section 660 A.)

    .05 The subject matter should be capable of evaluation against criteria
    that are suitable and available to users. Suitable criteria should have
    objectivity, measurability, completeness, and relevance. The procedures
    should be subject to reasonably consistent measurement and the criteria
    should be agreed upon. The auditor should not perform overly subjective
    procedures or use terms with uncertain meaning unless they are defined
    within the agreed- upon procedures.

    .06 The auditor need not perform additional procedures beyond the agreed-
    upon procedures. If matters come to the auditor's attention by other means
    that significantly contradict the subject matter (or assertion), the
    auditor should include these matters in the report. For example, if during
    the course of applying agreed- upon procedures regarding an entity's
    operation, the auditor becomes aware of a material weakness related to the
    assertion by means other than the

    agreed- upon procedures, the auditor should include this matter in the
    report. This may be done by mentioning the material weakness with a
    footnote reference to another report where it is described in detail. .07
    Where circumstances impose restrictions on the performance of the agreed-
    upon

    procedures, the auditor should attempt to obtain agreement from the users
    of the report to modify the agreed- upon procedures. When agreement cannot
    be obtained (for example, when the agreed- upon procedures are published
    by a regulatory agency that will not modify the procedures), the auditor
    should describe restrictions in the report or withdraw from the
    engagement.

    WRITTEN REPRESENTATIONS .08 The auditor should determine if a
    representation letter is necessary. The auditor may determine that a
    representation letter is necessary, for example, if (1) the responsible
    entity is so large there is a risk as to whether one person knows whether
    pertinent information has been made available to the auditor, (2) the

    subject matter depends on estimates, judgments, or future events (i. e.,
    whether the subject matter is less objective and fact- based and more
    subjective), or (3) the user of the report believes written
    representations should be obtained. Although generally not required
    (unless specifically required by another attestation standard, such as in
    a compliance engagement) a representation letter

    Planning and General 660 * Agreed- Upon Procedures April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 660- 3 may nonetheless be a useful
    means of documenting the responsible entity's representations. (See FAM
    section 660 B for an example representation letter for

    an agreed- upon procedures engagement.) .09 The responsible entity's
    refusal to furnish written representations determined by

    the auditor to be necessary constitutes a scope limitation. In such
    circumstances, the auditor should do one of the following:

    disclose in the report the inability to obtain representations from the
    responsible entity,

    withdraw from the engagement, or

    change the engagement to another form of engagement (e. g., a performance
    audit).

    DOCUMENTATION

    .10 In accordance with GAGAS, the auditor should prepare and maintain
    documentation in connection with an agreed- upon procedures engagement
    that is appropriate for the engagement. They should contain sufficient
    information to enable an experienced auditor having no previous connection
    with the engagement to ascertain from them the evidence that supports the
    auditors' agreed- upon procedures report. .11 Although the quantity, type,
    and content of documentation varies with the

    circumstances, ordinarily it should be sufficient to demonstrate that the
    work was adequately planned and supervised and sufficient evidential
    matter was obtained to provide a reasonable basis for the report. .12 The
    auditor generally should prepare a summary memorandum that recaps the

    work performed and refers to the detailed documentation. This memorandum
    generally should include the auditor's conclusion on whether the work was
    performed in accordance with GAGAS, including the attestation standards,
    and the GAO/ PCIE FAM and whether the report is appropriate. (See FAM
    section 660 C for an agreed- upon procedures completion checklist.)

    REPORTING

    .13 An auditor should report on the agreed- upon procedures in the form of
    results. The auditor should not provide any opinion or negative assurance
    about whether the subject matter or the assertion is fairly stated based
    on the criteria. The report should include information such as the
    identification of the entities that

    Planning and General 660 * Agreed- Upon Procedures April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 660- 4 agreed to the procedures and
    took responsibility for the sufficiency of the design

    and extent of the procedures for their purposes, as shown in the example
    report in FAM section 660 D.

    .14 The auditor should report all results arising from application of the
    agreed- upon procedures. The concept of materiality does not apply to
    results to be reported in an agreed- upon procedures engagement unless the
    users of the report agree to the definition of materiality. This could be
    included in the engagement letter. Any agreed- upon materiality limits
    should be described in the report. .15 The auditor should include a
    statement indicating that the report is intended for

    the specified users who have agreed upon the procedures performed and
    taken responsibility for the sufficiency of the design and extent of the
    procedures for their needs. However, since governmental reports are
    generally a matter of public record, the distribution of the report is not
    limited.

    .16 The auditor may have performed agreed- upon procedures on an element,
    account, or item of financial statements and also audited the same
    financial statements. If the audit report on the financial statements
    includes a departure from a standard report, the auditor generally should
    include a reference to the audit report and the departure from the
    standard report in the agreed- upon procedures report. .17 The auditor
    also may include explanatory language about such matters as the

    following:

    stipulated facts, assumptions, or interpretations (including the source);

    description of the condition of records, controls, or data to which the
    procedures were applied;

    explanation that the auditor has no responsibility to update the report;
    or

    explanation of sampling risk. .18 The auditor should state the results in
    definitive, rather than qualified, language and avoid vague or ambiguous
    language. The following table provides examples of appropriate and
    inappropriate descriptions of findings.

    Planning and General 660 * Agreed- Upon Procedures April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 660- 5 Examples of appropriate/
    inappropriate description of findings

    Description of findings Procedures agreed- upon Appropriate Inappropriate

    Based on the total tax liability, select and recompute the 50 largest
    excise tax returns from the quarter ended September 30 and compare these
    amounts with the certified audit file.

    Recomputed amounts for the selected excise tax returns agreed with the
    amounts in the certified audit file.

    Nothing came to our attention as a result of applying this procedure.

    Select a random sample of 45 Treasury SF- 224 reconciliations; determine
    if XYZ reported revenue receipts were properly classified and reconciled
    to Treasury FMS records.

    Revenue receipts selected randomly from the monthly Treasury SF- 224
    reconciliation process were properly classified

    and agreed with Treasury FMS records.

    The revenue receipts approximated the amount shown in the Treasury FMS
    records.

    Examine personnel files of 40 individuals randomly selected from the
    timekeeping records for the year; determine if all the selected files
    contain a current and approved Notification of Personnel Action.

    Thirty of the selected files contained a current and approved Notification
    of Personnel Action. Ten

    files did not contain a current and approved Notification of Personnel
    Action (list and identify exceptions).

    Some of the personnel files did not contain a current and approved
    Notification of Personnel Action.

    Other Report Issues

    .19 The report should be addressed to the users who have agreed upon the
    procedures to be performed (see paragraph 660.03). The date of completion
    of the agreed- upon procedures should be used as the date of the agreed-
    upon procedures report. If the audit organization's procedure is to date
    reports with the issue date, the date of completion of fieldwork may be
    stated in the report (e. g., "We completed the agreed- upon procedures on
    [date].").

    .20 Agency comments should be obtained from the entity responsible for the
    subject matter. If time constraints present problems, oral comments may be
    obtained.

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    Planning and General 660 A - EXAMPLE AGREED- UPON PROCEDURES

    ENGAGEMENT LETTER April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 660 A- 1 [Date] Management of ABC Agency Subject: Fiscal Year 20X1
    Agreed- Upon Procedures for the Tax Trust Fund Dear Management Official:
    Based on our discussions, we agree to perform agreed- upon procedures to
    assist ABC Agency in determining the completeness and accuracy of receipts
    transferred to the tax trust fund. XYZ Agency is responsible for the
    information

    to which these procedures will be applied. This letter documents our
    agreement to perform these agreed- upon procedures related to fiscal year
    20X1. We will perform these procedures in accordance with U. S. generally
    accepted government auditing standards, which incorporate the financial
    audit and attestation standards established by the American Institute of
    Certified Public Accountants (AICPA). The procedures are included in the

    enclosure to this letter. We will meet with you as needed to discuss the
    agreedupon procedures, results, and other issues that may arise.

    We are not engaged to perform, and will not perform, an examination, the
    objective of which would be to express an opinion on the amount of
    receipts transferred to the tax trust fund. Accordingly, we will not
    express such an

    opinion. Were we to perform additional procedures, other matters might
    come to our attention that we would report to you. Our report will be
    intended solely for your information and use and should not be used by
    those who have not agreed to the procedures or taken responsibility for
    the sufficiency of the procedures for their purposes. However, the report
    will be a matter of public record and its distribution will not be
    limited.

    Planning and General 660 A - Example Agreed- Upon Procedures Engagement
    Letter April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 A- 2
    Unless we hear from you, we will assume your concurrence with these

    procedures and their sufficiency for your purposes. 1 Please contact me at
    [telephone number] if you or your staff have any questions.

    Sincerely yours, [Name of Director] Director

    Enclosure cc: XYZ Agency

    1 The auditor may request the users to document their agreement with the
    procedures and their sufficiency for their purposes by signing the
    engagement letter and returning it to the auditor.

    Planning and General 660 A - Example Agreed- Upon Procedures Engagement
    Letter April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 A- 3
    Agreed- Upon Procedures for Tax Receipts and Refunds

    General

    Compare fiscal year 20X1 tax collections for the ABC tax trust fund per
    XYZ's Statement of Custodial Activity with * the trust fund's accounting
    records and  ABC's consolidated financial statements.

    Obtain explanations and examine supporting documentation for differences.

    Sampling A. Use dollar unit sampling (DUS) and an 80- percent confidence
    level to select a sample of ABC tax trust fund tax revenue receipts and
    refunds for fiscal year 20X1. Use $300 million as the test materiality,
    which is 1 percent of the total revenue collected. Use an expected
    aggregate misstatement of $100 million, or one- third of test materiality.
    The projected sample size for this population is expected to be 40
    transactions.

    For the sample items selected:

    Receipts testing * Compare tax receipts transactions (for example cash
    receipts, federal tax deposit (FTD) receipts, reversals, and adjustments)
    with source documents to determine whether the amounts agree, the
    transactions are recorded in the appropriate period based on the
    transaction date, and they

    are properly categorized as ABC tax trust fund receipts. Refunds testing *
    Compare refund transactions with the source documents (for example,
    payment vouchers, FTD coupons, tax returns) to determine whether the
    amounts agree, the transactions are recorded in the appropriate period
    based on the transaction date, and they are properly categorized as ABC
    tax trust fund refunds.

    B. Use DUS and the same sampling parameters as above to extract
    statistical samples of total XYZ revenue receipts and refunds for fiscal
    year 20X1.

    For the sample items selected:

    Test whether the tax receipt or refund amounts and tax category from
    source documentation agrees with amounts recorded for each of the revenue
    receipts or refunds sample items.

    [This page intentionally left blank.]

    Planning and General 660 B - EXAMPLE REPRESENTATION LETTER FROM
    RESPONSIBLE ENTITY ON AGREED- UPON

    PROCEDURES ENGAGEMENT

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 B- 1 [XYZ
    Agency letterhead] [Date]

    Dear Auditor: In connection with the agreed- upon procedures engagement
    for XYZ's budget execution process for the period from October 1, 20X0
    through September 30, 20X1, we confirm to the best of our knowledge and
    belief, the following representations made to you in performing these
    agreed- upon procedures.

    We acknowledge responsibility for XYZ's budget execution process. We
    acknowledge responsibility for selecting the criteria [state criteria] and
    for determining the appropriateness of the criteria for our purposes.

    Our budget execution process is [state assertion about budget execution
    process based on the criteria selected].

    We know of no matters that would contradict our assertion about our budget
    execution process.

    There have been no communications from regulatory or oversight agencies
    concerning our budget execution process or noncompliance with budgetary
    laws or the Antideficiency Act.

    We have made available to you all records and related data pertaining to
    our budget execution process during the period from October 1, 20X0
    through September 30, 20X1.

    XYZ's budget execution process is designed to meet the requirements of the
    Antideficiency Act.

    The accounting records and fund status reports are checked quarterly to
    determine whether all source documents that affect the appropriation and
    fund balance have been recorded properly, accurately, and on a timely
    basis.

    Planning and General 660 B * Example Representation Letter from
    Responsible Entity on

    Agreed- Upon Procedures Engagement April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 660 B- 2 The agency's accounting system provides
    timely disclosure of total valid obligations incurred to date and total
    budgetary resources available for obligations within each apportionment.

    The system also provides timely disclosure of the authorization or
    creation of commitments, obligations, or expenditures that exceed
    apportionments and allotments. We are not aware of instances of
    noncompliance with the above- stated

    procedures.

    There has been no fraud involving management, employees, or contractor
    staff who have significant roles in the operation of our budget execution
    process. We have no plans or intentions that would materially affect our
    budgetary

    process or operations. Sincerely yours,

    Management, XYZ Agency

    Planning and General 660 C - AGREED- UPON PROCEDURES COMPLETION

    CHECKLIST

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 C- 1
    Entity:_________________________________________________________________
    Job code:______________________________________________________________

    Principal report:________________________________________________________
    .01 This checklist is a tool to help auditors comply with the requirements
    for agreedupon procedures engagements. No specific signatures are required
    on the

    checklist in the planning phase. .02 Several of the last questions include
    steps in GAO's quality control process,

    including the GAO workpaper set, second partner review, and review by the
    Technical Accounting and Auditing Expert (Chief Accountant at GAO) when
    that person is not the second partner. GAO auditors should complete these
    questions and forms. IG auditors and other auditors may use these
    questions and forms or

    may substitute questions and forms that consider their reporting style and
    quality control.

    Step N/ A Yes No W/ P ref

    1. Has the audit team documented an understanding with the users? 2. Does
    the documentation cover the following?

    The nature of the engagement.

    Identification of the subject matter, the responsible entity, and the
    criteria.

    Identification of the users of the report.

    Auditor's responsibilities. Reference to GAGAS and the attestation
    standards.

    Agreement on procedures.

    Disclaimers expected.

    Any involvement of a specialist. Materiality limits.

    Planning and General 660 C * Agreed- Upon Procedures Completion Checklist
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 C- 2 Step
    N/ A Yes No W/ P ref

    3. Was an entrance conference held with the responsible entity? 4. Has the
    auditor determined whether a letter of

    representation from the responsible entity is necessary? (Note: This is
    not a requirement.) 5. Were applicable laws and regulations

    documented if part of the procedures? 6. Were review responsibilities
    communicated to individuals on the assignment? 7. Does the documentation
    contain the following? a. The scope and methodology, including any

    sampling criteria used. b. Documentation of the work performed to support
    reported results. c. Descriptions of transactions and records

    examined. d. Evidence of supervisory review.

    8. Does the documentation record that the applicable standards were
    followed (AT 201 and AT 101)?

    9. Does the documentation record a reasonable basis for the results of the
    agreed- upon procedures? 10. Does the summary memorandum summarize the
    results of the procedures and refer to the documentation?

    Planning and General 660 C * Agreed- Upon Procedures Completion Checklist
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 C- 3 Step
    N/ A Yes No W/ P ref

    11. Were any deviations from the standard reporting elements documented
    and the basis approved by the assistant director with copies

    of the documentation sent to the audit director and Reviewer (AT 201.31)?

    12. Was the report referenced? 13. Did the assistant director review the
    following? a. Understanding with the client. b. Memorandum of entrance
    conference with

    the responsible entity. c. Completed work programs. d. Memorandums on key
    engagement issues. e. Summary of the results of the procedures. f.
    Memorandum of exit conference with the

    responsible entity. g. Deviations from standard reporting

    language. h. Financial schedules/ statements. i. Agreed- upon procedures
    report. j. GAO workpaper set (or equivalent).

    14. Did the audit director review the following? a. Understanding with the
    client. b. Summary of results of the procedures. c. Memorandum of exit
    conference with

    responsible entity. d. Deviations from standard reporting

    language. e. Agreed- upon procedures report. f. GAO workpaper set (or
    equivalent).

    15. Did the assistant director or the auditor in charge determine that all
    significant review notes were resolved appropriately?

    Planning and General 660 C * Agreed- Upon Procedures Completion Checklist
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 C- 4 Step
    N/ A Yes No W/ P ref

    16. Did the assistant director initial all documentation bundle covers to
    indicate that all documentation was sufficiently reviewed?

    17. Is the report appropriate as to the following? a. Wording. b. Scope of
    work. c. GAGAS. d. Explanatory paragraphs.

    18. Was the report reviewed by the following? a. Office of the General
    Counsel. b. Technical Accounting and Auditing Expert. c. Second partner
    (or equivalent), if not Technical Accounting and Auditing Expert.

    19. Is the agreed- upon procedures report dated appropriately or does the
    report indicate when the auditor completed fieldwork? (AT 201)

    Planning and General 660 C * Agreed- Upon Procedures Completion Checklist
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 C- 5 SECOND
    PARTNER'S (OR EQUIVALENT) CONCURRENCE ON

    AGREED- UPON PROCEDURES WORK Objective of second partner (or equivalent)
    review: To objectively review significant engagement matters to conclude,
    based on all facts the second partner (or equivalent) has knowledge of,
    that no matters were found that caused the second partner (or equivalent)
    to believe that (1) the procedures were not performed in accordance with
    GAGAS, which incorporate financial audit and attestation standards
    established by the American Institute of Certified Public Accountants and
    (2) the report does not meet professional standards and audit organization
    policies. Procedures: Before the report was issued, I performed the
    following

    procedures:

    as necessary, discussed significant engagement issues with the audit
    director;

    read documentation of key decisions and consultations;

    read the agreed- upon procedures report; and

    confirmed with the audit director that there are no unresolved issues.

    Conclusions: Based on all the relevant facts of which I have knowledge, I
    found no matters that caused me to believe that (1) the agreed- upon
    procedures were not performed in accordance with GAGAS and the AICPA's
    attestation standards related to agreed- upon procedures engagements and
    (2) the report is not in accordance with professional standards and audit
    organization policies.
    ____________________________________________________________________ Title
    Signature Date

    Planning and General 660 C * Agreed- Upon Procedures Completion Checklist
    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 C- 6
    TECHNICAL ACCOUNTING AND AUDITING EXPERT'S

    CONCURRENCE ON AGREED- UPON PROCEDURES WORK Objective of review: When the
    Technical Accounting and Auditing Expert is not the second partner (or
    equivalent), the Technical Accounting and Auditing Expert should read the
    report. The Technical Accounting and Auditing Expert should then sign the
    conclusions below.

    Conclusions: Based on my reading of the report, I found no matters that
    caused me to believe that (1) the agreed- upon procedures were not
    performed in accordance with GAGAS and the AICPA's attestation standards
    related to agreed- upon procedures engagements and (2) the report is not
    in accordance with professional standards and audit organization policies.
    ____________________________________________________________________

    Title Signature Date

    Planning and General 660 D - EXAMPLE AGREED- UPON PROCEDURES

    REPORT

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 D- 1 [Date]
    Management of ABC Agency

    Subject: Applying Agreed- Upon Procedures: Count of Cash and Related Items
    Dear Management Official: We have performed the procedures contained in
    the enclosure to this letter, which we agreed to perform and with which
    you concurred, solely to meet your needs for an independent count of cash
    and cash- related items as of September 30, 20X1.

    We conducted our work in accordance with U. S generally accepted
    government auditing standards, which incorporate financial audit and
    attestation standards established by the American Institute of Certified
    Public Accountants. These

    standards also provide guidance when performing and reporting the results
    of agreed- upon procedures.

    You are responsible for the adequacy of the procedures to meet your
    objectives and we make no representation in that respect. The procedures
    we agreed to perform consist of counting amounts for cash and related
    receipts and comparing combined totals to the authorized amounts. The
    enclosure contains the agreedupon procedures and our results. We were not
    engaged to perform, and did not perform, an examination, the

    objective of which would have been to express an opinion on the amount of
    cash on hand. Accordingly, we do not express such an opinion. Had we
    performed additional procedures, other matters might have come to our
    attention that we would have reported to you. We completed our agreed-
    upon procedures on [date of completion].

    We provided a draft of this letter, along with the enclosure, to your
    representatives for review and comment. They agreed with the results
    presented in this letter and its enclosure.

    Planning and General 660 D - Example Agreed- Upon Procedures Report April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 D- 2 This letter
    is intended solely for the use of the management of ABC Agency and

    should not be used by those who have not agreed to the procedures or have
    not taken responsibility for the sufficiency of the procedures for their
    purposes. However, the report is a matter of public record and its
    distribution is not limited.

    If you have any questions, please call [name, title, and telephone
    number]. Sincerely yours,

    [Name of Director] Director

    Enclosure

    Planning and General 660 D * Example Agreed- Upon Procedures Report April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 660 D- 3 RESULTS OF
    CASH COUNTS

    Procedures We counted and totaled cash on hand for the petty cash fund as
    of [date]. We also listed and totaled the receipts on hand evidencing
    disbursements from the fund. Finally, we compared the combined total of
    cash and receipts available to the amount authorized for the fund ($ 500).

    Results We counted cash totaling $258.96 and scheduled 14 receipts
    totaling $174.85. The combined total of cash and receipts on hand
    accounted for $433.81 of the $500 in authorized petty cash funds. In
    addition, the custodian provided us two separate Expense Summary Report
    and Petty Cash Itemization Sheets and related receipts for an additional
    $65.09, which had been submitted for reimbursement to the fund. Thus, the
    unexplained difference between the authorized amount and the total cash
    and receipts evidencing petty cash fund disbursements was $1.10.

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    Internal Control 701 * ASSESSING COMPLIANCE OF AGENCY SYSTEMS WITH THE
    FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT (FFMIA) April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 701- 1 .01 FFMIA emphasizes the need
    for agencies to have systems that can generate

    timely, reliable, and useful information with which to make informed
    decisions and to ensure ongoing accountability. FFMIA requires the 24 CFO
    Act departments and agencies 1 to implement and maintain financial
    management systems that comply substantially with (1) federal financial
    management systems requirements, (2) applicable federal accounting
    standards, and (3) the U. S. Government Standard General Ledger (SGL) at
    the transaction level. The law also requires auditors to report whether
    agency financial management systems comply with the FFMIA requirements.
    OMB has provided FFMIA implementation guidance to help agencies and their
    auditors determine compliance. This section

    also provides guidance for assessing agency systems' compliance with
    FFMIA. It explains FFMIA's requirements and discusses audit issues related
    to testing for compliance with the act. An example audit program is
    included as section 701 A.

    FFMIA REQUIREMENTS

    .02 OMB Circular A- 127, Federal Financial Systems, 2 also addresses the
    three FFMIA requirements. OMB Circular A- 127 prescribes policies and
    standards for executive branch departments and agencies to follow in
    developing, operating, evaluating, and reporting on financial management
    systems (see www. whitehouse. gov/ omb/ financial). In its FFMIA
    implementation guidance, OMB identifies the applicable requirements from
    Circular A- 127 that should be assessed when making an FFMIA compliance
    determination. 3 OMB, in Circular A- 127, refers to the federal financial
    management systems requirements, a series of publications issued by the
    Joint Financial Management Improvement Program (JFMIP), as the source of
    governmentwide requirements for financial management systems software
    functionality. JFMIP has developed a framework to describe the basic
    elements of an integrated financial management system,

    1 OMB also requires certain designated entities to determine FFMIA
    compliance. 2 OMB is considering revising this guidance. 3 OMB did not
    include certain elements of Circular A- 127, section 7, in its FFMIA

    implementation guidance because some of the elements are not essential to
    satisfying the requirements of FFMIA and to the ability of an agency's
    systems to provide reliable, timely, and useful information necessary for
    federal managers' responsibilities. Accordingly, those elements are not
    included in this section.

    Internal Control 701 * Assessing Compliance of Agency Systems with the
    Federal Financial

    Management Improvement Act (FFMIA) April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 701- 2 including the core financial system. Agency
    financial management systems fall into four categories: core financial
    systems, other financial and mixed systems 4 (such as procurement,
    property, budget, payroll, and travel systems), shared

    systems, 5 and departmental executive information systems (systems to
    provide information to all levels of management.)

    .03 JFMIP has developed publications of systems requirements for the core
    financial system and for some of the mixed or feeder systems (see www.
    jfmip. gov). The systems requirements in the publications are stated as
    either mandatory (required) or value- added (optional). Agencies should
    use the mandatory functional and technical requirements in planning system
    improvement projects, whereas value- added requirements should be used as
    needed. The core financial management system affects all financial event
    transaction processing because it maintains reference tables used for
    editing and classifying data, controls transactions, and maintains
    security. The core financial management system consists of six functional
    areas: general ledger management, funds management,

    payment management, receivable management, cost management, and reporting.
    OMB Circular A- 127 requires agencies to use for agency core financial
    management systems commercial- off- the- shelf (COTS) software that has
    been tested and certified through the JFMIP software certification
    process. According to JFMIP, core financial management system
    certification does not mean that agencies that install qualified software
    packages will have financial systems that are in compliance with FFMIA.
    Many other factors can affect the capability of the systems to comply with
    FFMIA, including modifications made to the JFMIPcertified core financial
    management system software, and the validity and completeness of data from
    feeder systems. JFMIP's certification process does not eliminate or
    significantly reduce the need for agencies to develop and conduct a
    comprehensive testing effort to ensure that the software product meets
    their requirements

    .04 The federal accounting standards, the second requirement of FFMIA, are
    promulgated by the Federal Accounting Standards Advisory Board (FASAB).
    FASAB develops accounting standards after considering the financial and
    budgetary information needs of Congress, executive agencies, and other
    users of federal financial information as well as comments from the public
    (see www. fasab. gov). FAM section 560 describes the relationship of the
    FASAB standards to the hierarchy of accounting principles.

    4 Mixed systems are any information systems that support both financial
    and nonfinancial functions of the federal government. Mixed systems can
    also be feeder systems.

    5 Shared systems are governmentwide systems used by agencies with
    information and data definitions common to all users.

    Internal Control 701 * Assessing Compliance of Agency Systems with the
    Federal Financial

    Management Improvement Act (FFMIA) April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 701- 3 .05 Implementing the SGL at the transaction
    level is also a requirement of FFMIA.

    The SGL provides a uniform chart of accounts and guidance for use in
    standardizing federal agency accounting and supports the preparation of
    standard external reports required by OMB and Treasury (see www. fms.
    treas. gov/ ussgl). The SGL is defined in the latest supplement, which is
    released annually, to the Department of the Treasury's Treasury Financial
    Manual (TFM). The supplement is composed of five major sections (1) chart
    of accounts, (2) account descriptions, (3) accounting transactions, (4)
    SGL attributes, and (5)

    report crosswalks. Each agency should implement a chart of accounts that
    is consistent with the SGL and meets the agency's information needs. OMB
    Circular A- 127 states that application of the SGL at the transaction
    level means that financial management systems will process transactions
    following the definitions and defined uses of the general ledger accounts
    as described in the SGL. Transaction detail supporting SGL accounts are
    required to be available in the financial management systems and directly
    traceable to specific SGL account

    codes. In addition, the criteria for recording financial events in all
    financial management systems should be consistent with accounting
    transaction definitions and processing rules defined in the SGL.

    .06 OMB's FFMIA implementation guidance requires the CFO act agency
    auditors to perform tests of the compliance of the entity's systems with
    FFMIA. Auditors who are reporting that agency financial management systems
    do not substantially comply with FFMIA requirements are to include in
    their reports (1) the entity or organization responsible for the financial
    management systems that have been found not to be substantially compliant
    and all pertinent facts relating to the noncompliance, (2) the nature and
    extent of the noncompliance including areas in which there is substantial
    but not full compliance, (3) the primary reason or

    cause of the noncompliance, (4) the entity or organization responsible for
    the noncompliance, (5) any relevant comments from any responsible officer
    or employee, and (6) a statement with respect to the recommended remedial
    actions for each instance of noncompliance and the time frames for
    implementing these actions. FFMIA as well as OMB's FFMIA implementation
    guidance require agencies to report whether the agencies' financial
    management systems comply with FFMIA's requirements and prepare
    remediation plans that include resources, remedies, and intermediate
    target dates necessary to bring the agency's financial management systems
    into substantial compliance. .07 According to OMB's FFMIA implementation
    guidance, auditors are to plan and

    perform their audit work in sufficient detail to enable them to determine
    the degree of compliance and report on instances of noncompliance for all
    of the applicable FFMIA requirements. The guidance describes specific
    minimum requirements from Circular A- 127 that agency systems should meet
    to achieve compliance and provides indicators of compliance. The
    indicators included in

    Internal Control 701 * Assessing Compliance of Agency Systems with the
    Federal Financial

    Management Improvement Act (FFMIA) April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 701- 4 OMB's implementation guidance are
    characterized as examples and are not allinclusive. The four primary
    factors OMB identifies as critical to assessing compliance with FFMIA are
    determining whether agencies can: 6 Prepare financial statements and other
    required financial and budget reports

    using information generated by the financial management system( s);
    Provide reliable and timely financial information for managing current
    operations; Account for their assets reliably, so that they can be
    properly protected from loss, misappropriation, or destruction; and,

    Do all of the above in a way that is consistent with federal accounting
    standards and the Standard General Ledger.

    AUDIT ISSUES

    .08 While financial statement audits will offer some assurances regarding
    FFMIA compliance, auditors should design and implement additional testing
    to satisfy the criteria in FFMIA. For example, in performing financial
    statement audits, auditors generally focus on the capability of the
    financial management systems to process and summarize financial
    information that flows into agency financial statements. In contrast,
    FFMIA requires auditors to assess whether an agency's financial management
    systems comply with systems requirements. To do this, auditors need to
    consider whether agency systems provide complete, accurate, and timely
    information for managing day- to- day operations. This is based on
    Congress' expectation, in enacting FFMIA, that agency managers would have
    any necessary information to measure performance on an ongoing basis
    rather than just at year- end. Financial statement auditors generally
    review performance measure information for consistency with the financial
    statements, but do not assess whether managers have the performance-
    related information to manage

    during the fiscal year. .09 As a result of the overlapping scope and
    nature of FFMIA assessments and

    financial statements audits, the auditor should use, where appropriate,
    the audit work performed as part of the financial statement audit. In the
    example audit program (FAM 701 A) for testing compliance with FFMIA,
    several procedures indicate that the auditor may have performed the
    procedure as part of the financial statement audit; whereas, other
    procedures needed to assess FFMIA compliance require additional work not
    normally contemplated by financial statement auditors. The determination
    of FFMIA compliance need not be performed simultaneously with the
    financial statement audit. The determination of FFMIA compliance may be
    performed by different staff or staggered

    6 OMB is considering revising this guidance.

    Internal Control 701 * Assessing Compliance of Agency Systems with the
    Federal Financial

    Management Improvement Act (FFMIA) April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 701- 5 throughout the assessment time frame. While
    the example audit program provides steps the auditor should perform, the
    auditor may tailor the steps to satisfy the objectives or intent of the
    step if the step cannot be completed as described. Because of the broad
    scope of federal operations and the many

    variations that can and do flow from such a broad scope, the degree of
    specificity in the example audit program varies. For example, each agency
    will likely need and use a variety of internal reports for managing
    current operations. These

    reports may be on line or in hard copy. Auditors will need to use their
    skills and professional judgment to assess the adequacy of these reports
    that are essential to having FFMIA compliance. Auditors may also rely on
    other work products that address the objectives of the example audit
    procedures.

    .10 As discussed in FAM section 350, the auditor need not perform specific
    tests of the systems compliance with FFMIA requirements for agencies with
    longstanding, well- documented financial management systems weaknesses
    that severely affect the systems' ability to comply with FFMIA
    requirements. The auditor should understand management's process for
    determining whether its systems comply with FFMIA requirements and report
    any deficiencies in management's process along with previously identified
    problems.

    .11 FAM paragraphs 580.62 through .66 and FAM section 595 A provide FFMIA
    reporting guidance. When reporting a lack of substantial compliance, the
    auditor should refer to FAM 595 B for suggested modifications to the
    report. FAM Part III, section 1603, provides guidance that GAO will use to
    provide an affirmative statement when reporting on compliance with FFMIA.

    [This page intentionally left blank.]

    Internal Control 701 A * EXAMPLE AUDIT PROCEDURES FOR TESTING

    COMPLIANCE WITH FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 1 Entity
    __________________________________________________________________

    Date of review __________________________________________________________
    Job code _______________________________________________________________
    Objective: FFMIA requires the 24 major departments and agencies covered by
    the CFO Act to implement and maintain financial management systems that
    comply substantially with (1) federal financial management systems
    requirements, (2) applicable federal accounting standards, and (3) the U.
    S. Government Standard General Ledger (SGL) at the transaction level. OMB
    also requires

    certain designated entities to determine FFMIA compliance. The objective
    of this audit program is to assess whether agencies' systems' comply with
    FFMIA.

    FFMIA example audit procedures: Description of Procedure

    Done by/ date

    W/ P ref.

    I. Planning (May be combined with the work to plan the financial statement
    audit)

    A. To understand the FFMIA requirements, read:

    Federal Financial Management Improvement Act, P. L. 104- 208.

    Audit Requirements for Federal Financial Statements (OMB Bulletin). OMB
    Memorandum, January 4, 2001, Revised Implementation Guidance for the
    Federal Financial

    Management Improvement Act. JFMIP Publications of Federal Financial
    Management System Requirements including the Framework and Core Financial
    System Requirements.

    Form and Content of Agency Financial Statements (OMB Bulletin) FASAB
    Standards. Treasury Financial Manual (TFM) sections related to the SGL
    (see transmittal letter S2- 01- 02 and TFM Part 2, Chapter 4000).

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 2 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref.

    OMB Circular No. A- 123, Management Accountability and Control.

    OMB Circular No. A- 127, Financial Management Systems.

    OMB Circular No. A- 130, Management of Federal Information Resources.

    Government Information Security Reform (GISR) legislation, Floyd D. Spence
    National Defense Authorization Act for Fiscal Year 2001, Pub. L. 106- 398.
    B. Read the prior year's workpapers and audit report to

    identify (1) the auditors' FFMIA determinations, (2) reported instances of
    noncompliance with FFMIA, and (3) material weaknesses and reportable
    conditions related to the agency's financial management systems.

    Prepare a schedule of the previously identified problems to follow up on
    the status of these specific problems. See section 701 B for an example of
    the schedule.

    C. Read the most recent FMFIA report, IG reports, GAO reports, internal
    control workpapers from the financial statement audit or other reports
    related to financial systems and consider the impact of any reported
    weaknesses on the FFMIA assessment.

    Obtain an update on the status of the issues and document problems
    identified in the schedule in section 701 B.

    D. Read the cycle memoranda for each of the audit cycles completed for the
    current year audit. Document issues related to FFMIA compliance in the
    schedule in section 701 B.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 3 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. E. From the work performed in part I (planning), decide

    whether it is necessary to perform the remaining test steps. If the
    information gathered indicates "longstanding, well- documented financial
    management systems weaknesses" that preclude compliance with FFMIA
    requirements, then:

    1. Document recognition of longstanding, welldocumented financial
    management systems weaknesses and identify the source for this conclusion.
    2. Obtain and document an understanding of management's process for
    determining whether its

    systems comply with FFMIA requirements. Report any deficiencies identified
    in management's process. 3. Complete step V (summary), except for
    completion

    of the schedule in FAM section 701 B.

    II. Testing for Compliance with Federal Financial Management Systems
    Requirements

    A. Ask whether the agency has an agencywide inventory of its systems. If
    so, obtain the inventory and any supporting documentation.

    B. From the agency's inventory of systems, identify the core financial
    management systems and the feeder systems.

    1. Document the key internal controls and the information flows between
    the core financial systems and the feeder systems in a flowchart or
    narrative. (This step may be performed as part of the internal control
    phase). a. Determine whether the feeder systems are

    integrated or interfaced with the core financial system. Note: Feeder
    systems that are integrated with the core financial system share data
    tables. Therefore, reconciliations should not be necessary.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 4 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. b. If the feeder systems interface with the core

    systems, determine whether reconciliations are performed between the
    systems. If reconciliations are performed, determine how

    often and by whom; assess the adequacy of the reconciliation, including
    follow- up activities and supervisory review. c. Through interviews with
    agency management

    and reading of systems documentation, determine if the agency's systems
    have detective controls (i. e., batch control or hash totals or
    supervisory reviews) and preventive controls (i. e. segregated duties,
    appropriate authorizations, or access controls) to process transactions
    properly and timely. (May be performed as part of the internal control
    phase). 2. Using the documentation prepared in step II. B. 1

    above, identify those JFMIP financial management systems requirements that
    are applicable to the agency's operations. For example, for those agencies
    that do not have grant or loan programs, the auditor would not need to
    assess whether JFMIP requirements related to grants or loans are
    applicable. Document the results.

    C. Determine whether the agency's core financial management system and the
    financial portions of its applicable feeder systems, as identified in step
    II. B. 2 above, conform to JFMIP's federal financial management systems
    requirements.

    Ask whether the agency's core financial management system is a JFMIP-
    certified COTS system. If so, ask which version of the software is

    being used and obtain the agency's JFMIP certification for that software
    version. [Agencies replacing software to meet core financial system
    requirements must use JFMIP- certified core financial management systems
    as required by OMB Circular A- 127, but it is not a noncompliance issue
    for FFMIA purposes.]

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 5 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. 1. Ask whether there have been significant changes in

    the agency's automated business processes since compliance testing with
    JFMIP requirements was last performed. If so, ask whether the agency has
    performed an assessment of any new functionality using the JFMIP system
    requirements documents, GAO checklists, or similar tools. Document the
    results. 2. For those agencies with a core financial

    management system that is not a JFMIP- certified COTS and for any feeder
    systems, obtain any analyses performed by agency management to support its
    FFMIA and FMFIA assessments that document how the agency's systems conform
    to the

    applicable JFMIP systems requirements. If management has not performed an
    analysis of systems functionality, go to step C. 5.

    3. Select several important functions that management has reported as
    complying with the systems requirements and determine if management's
    assessment can be relied upon. 4. If management's results cannot be relied
    upon for

    each system, perform an assessment of the functionality of the applicable
    systems using JFMIP system requirement documents, GAO checklists or other
    similar tools. 5. Document in section 701 B, the instances and related
    impact in which the agency's systems did

    not comply with JFMIP requirements.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 6 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. D. Ask if management receives appropriate reports that

    are significant to performing day- to- day management operations. 1.
    Determine the adequacy of reports used to manage

    day- to- day operations. a. For reports that are produced by the agency's
    financial management systems, ask

    knowledgeable users, read the agency's financial management systems
    documentation, and from other audit work, use professional judgment to
    determine if the reports produced by the systems are timely, useful,
    reliable,

    complete, and appropriately summarized for the management level receiving
    the report. Use professional judgment, agency policy, and/ or criteria
    evident from each report to determine its timeliness and accuracy; i. e.,
    if a report is due by the 10 th of each month, verify it was provided by
    the 10 th of each month. If only online access is provided for important
    internal reports, through observation, documentation, and inquiry* such as
    obtaining systems logs and

    asking key managers about their work habits* assess whether the reports
    were available and accessed. Through inquiry and observation,

    assess if management uses the reports to manage operations. Ask management
    what improvements are needed in the current reporting methods. Document
    the results. b. If the reports were not produced by the agency's

    financial management systems, ask how the reports were prepared and
    perform a similar assessment as described in step D. 1. a.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 7 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. 2. Determine whether appropriate levels of

    management are receiving adequate and timely management information. See
    FAM paragraph 903.12 for questions related to determining FFMIA compliance
    with SFFAS No. 4. a. Using professional judgment and industry best
    practices, identify internal management

    performance- related information that should be available for managing
    day- to- day operations. b. Determine whether appropriate levels of

    management are receiving the information identified in step D. 2. a. c. If
    full costing is not used in these management reports, assess whether the
    lack of full cost

    information affects the usefulness of the information. Review management's
    justification that full costing would not be beneficial for the internal
    reports. This may need to be assessed on a case- by- case basis. 3.
    Include any deficiencies identified and related impact in the schedule
    shown in section 701 B. E. Identify the agency's external reports that are
    related

    to financial management such as those used for budget formulation and
    execution, fiscal management of agency programs, funds management,
    payments and receipts management, and to support the legal, regulatory,
    and other special requirements of the agency.

    1. Through interviews with knowledgeable users and reading of the agency's
    financial management system documentation, determine if the reports are
    produced by the systems. a. For external reports that are tested as part
    of

    the financial statement audit, include any deficiencies identified and the
    related impact in section 701 B. b. For external reports that are not
    tested as part

    of the financial statement audit, using professional judgment select
    several reports and assess whether the reports are reliable, timely,

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 8 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. and complete. Include any deficiencies identified and the related
    impact in section 701 B. 2. As an indicator of systems deficiencies,
    determine

    the magnitude and type of adjustments made by both management and the
    auditors to derive financial statements after the end of the accounting
    period.

    F. Determine if the agency's financial management systems track financial
    events and summarize information to facilitate the preparation of
    auditable financial statements. This determination can result from work
    performed as part of the financial statement audit. Document the
    deficiencies and the related

    impact in the schedule shown in section 701 B. G. Determine if the
    financial management systems enable the agency to prepare, execute, and
    report on the agency's budget in accordance with the requirements of OMB
    Circular No. A- 11. This determination can

    result from work performed as part of the financial statement audit.
    Document the deficiencies and the related impact in the schedule shown in
    section 701 B.

    H. Determine if the agency's financial management systems capture and
    produce the financial information required to measure program performance.

    1. Identify the agency's performance measures from its most recent
    accountability report that include data from the agency's financial
    management systems. 2. Ask agency management whether an assessment

    was performed of the validity of the financial data used to derive the
    performance measures. If so, obtain and review the assessment and any
    supporting documentation. 3. If agency management has not assessed the
    validity

    of the financial data used to derive the agency's performance measures,
    include this deficiency in section 701 B.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 9 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. 4. Determine if recent GAO or IG reports have

    addressed the validity of financial data used to derive performance
    measures. 5. If any deficiencies were identified, include them

    along with the related impact in the schedule shown in FAM section 701 B.

    I. Coordinate with the Information Security (IS) auditors to determine if
    the agency has implemented and maintains a program to provide adequate
    security for all agency information that is collected, processed,
    transmitted, stored, or disseminated in financial management systems. 1.
    Have the IS auditors review the annual

    management evaluation and the annual independent evaluation conducted in
    accordance with the Government Information Security Reform (GISR)
    legislation. 2. Document the deficiencies and related impact identified by
    the IS auditors in the schedule shown

    in section 701 B. J. Determine if the financial management systems include
    internal control to safeguard resources against waste,

    loss, and misuse, and whether reliable data are obtained, maintained, and
    disclosed in system generated reports. Some of the information needed to

    make this determination may be obtained from the work performed in the
    internal control phase of the financial statement audit, and other systems
    internal control weaknesses may be identified from other audit reports
    reviewed and steps performed in this program. Document the results in
    section 701 B.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 10 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref.

    III. Testing for Compliance with the Federal Accounting Standards

    A. Determine if the agency's financial statements are compiled in
    accordance with applicable accounting standards.

    1. Ask agency management and review financial statement audit results to
    determine whether any FASAB standards are not applicable. Document the
    results. Analyze the resultant list of applicable/ inapplicable FASAB
    standards for reasonableness and use the list as a reference in performing
    these steps. 2. Determine if any issues reported as part of the financial
    statement audit were related to the lack

    of the agency's implementation of the accounting standards in their
    systems or the standards were not properly applied because of inadequate
    or improperly implemented manual procedures. Document the results in the
    schedule shown in section 701 B.

    B. Perform tests to determine if the agency's cost accounting systems use
    the agency's accounting classification elements

    to identify and establish unique cost objects to capture, accumulate, and
    report costs and revenues;

    allocate and distribute the full cost and revenue of cost objects as
    defined by OMB including services provided by one federal entity to
    another for external reporting; and transfer cost data directly to and
    from other cost

    systems/ applications that produce or allocate cost information. Also, see
    step II. D. 2 of this audit program.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 11 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. C. From the deficiencies identified in performing steps in

    part II (testing for compliance with federal financial management systems
    requirements) and from tests conducted as part of the financial statement
    audit, determine if the financial systems record and

    summarize transactions in accordance with applicable accounting standards.
    Note that the systems functionality assessments performed in step II. B.

    should have determined any compliance issues related to accounting
    standards since the accounting standards are used as a source for systems
    functionality requirements. Document the results and the related impact in
    the schedule shown in section 701 B.

    IV. Testing for Compliance with the SGL

    A. Determine whether the agency financial management systems use financial
    data that can be traced directly to SGL accounts to produce reports
    providing financial information for both internal and external reporting.

    1. Ask agency management and from the documentation prepared in step II.
    B. 1 above, determine how financial transaction data are summarized from
    the financial systems to the core financial system. 2. Compare the
    agency's chart of accounts to the SGL

    accounts and identify any deviations. 3. Review all of the standard
    entries allowed by the

    core financial system to determine if these entries conform to the SGL
    posting rules. 4. Document any deficiencies and the related impact

    in the schedule shown in section 701 B. B. Ask whether the agency uses a
    crosswalk from its

    chart of accounts for its core financial management system to the SGL. If
    so, perform tests to determine the accuracy of the crosswalk. 1. Trace all
    SGL accounts to the crosswalk.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 12 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. 2. Identify any SGL accounts that are not included in

    the crosswalk. Identify any agency accounts not associated with an SGL
    account in the crosswalk. 3. Compare the posting rules used by the system
    to

    those included in the SGL to determine whether the posting rules used by
    the system conform to the SGL. 4. Document deficiencies and the related
    impact in

    the schedule shown in section 701 B. V. Summary

    A. Summarize the results of the work performed above and assess the
    agency's compliance with the federal financial management systems
    requirement of FFMIA.

    1. Finalize the schedule of the FFMIA noncompliances identified in the
    schedule prepared in FAM section 701 B. 2. Read the agency's management
    representation

    letter covering the fiscal year under audit to obtain the agency
    management's FFMIA determination. a. Document the entity or organization
    responsible

    for the financial management systems that have been found not to comply.
    b. Document all facts pertaining to the:

    i. nature and extent of the noncompliance and areas where there is
    substantial but not full compliance;

    ii. primary reason or cause of the noncompliance; iii. impact of the
    noncompliance; iv. entity or organization responsible for the

    noncompliance; and v. relevant comments from any responsible

    officer or employee. c. Assess the recommended remedial actions for

    each instance of noncompliance and the time frames for implementing these
    actions. Include this assessment in the schedule in section 701 B.

    Internal Control 701 A * Example Audit Procedures for Testing Compliance
    with FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 A- 13 FFMIA
    example audit procedures:

    Description of Procedure Done

    by/ date W/ P

    ref. 3. After reviewing the nature and extent of

    deficiencies identified, conclude whether the systems deficiencies
    identified constitute lack of substantial compliance with FFMIA. Consider
    the four factors in paragraph 701.07 from OMB's FFMIA implementation
    guidance when drawing this conclusion. 4. Prepare the FFMIA section of the
    report. See FAM

    paragraphs 580.62 through .66 and sections 595 A, 595 B, and 1603, as
    appropriate.

    [This page intentionally left blank.]

    Internal Control 701 B * SUMMARY SCHEDULE OF INSTANCES OF NONCOMPLIANCE
    WITH FFMIA

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701 B- 1

    Source of information used in identifying

    deficiencies in agency systems Nature and

    extent of noncom pliance

    Substan tial but not

    full com pliance? (Y or N)

    Applicable criteria (JFMIP,

    FASAB citation)

    Respon sible

    entity Primary reason or cause of noncom pliance

    Impact of noncom

    pliance Agency comments

    on noncom

    pliance Corrective action in remediation plan?

    (Y or N) Assessment of corrective

    actions and time frames W/ P refer

    ence Com ments Prior year's reported instances of noncompliance

    (Step I. B.) Prior year's material weak

    nesses and reportable

    conditions that affect FFMIA determination (Step I. B.)

    Internal Control 701 B * Summary Schedule of Instances of Noncompliance
    with FFMIA April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701
    B- 2

    Source of information used in identifying

    deficiencies in agency systems Nature and

    extent of noncom pliance

    Substan tial but not

    full com pliance? (Y or N)

    Applicable criteria (JFMIP,

    FASAB citation)

    Respon sible

    entity Primary reason or cause of noncom pliance

    Impact of noncom

    pliance Agency comments

    on noncom

    pliance Corrective action in remediation plan?

    (Y or N) Assessment of corrective

    actions and time frames W/ P refer

    ence Com ments Weaknesses in the agency's most recent FMFIA report that

    affect FFMIA determination (Step I. C.)

    Weaknesses in Recent IG and GAO reports that affect FFMIA determination

    (Step I. C.) Cycle memo

    randa for the current year's audit (Step I. D.)

    Internal Control 701 B * Summary Schedule of Instances of Noncompliance
    with FFMIA April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701
    B- 3

    Source of information used in identifying

    deficiencies in agency systems Nature and

    extent of noncom pliance

    Substan tial but not

    full com pliance? (Y or N)

    Applicable criteria (JFMIP,

    FASAB citation)

    Respon sible

    entity Primary reason or cause of noncom pliance

    Impact of noncom

    pliance Agency comments

    on noncom

    pliance Corrective action in remediation plan?

    (Y or N) Assessment of corrective

    actions and time frames W/ P refer

    ence Com ments Instances in which the agen cy's systems did

    not comply with JFMIP's

    functional requirements (Step II. C.)

    Preparation of internal manage ment reports (Step II. D.)

    Preparation of external agency reports (Step II. E.)

    Internal Control 701 B * Summary Schedule of Instances of Noncompliance
    with FFMIA April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701
    B- 4

    Source of information used in identifying

    deficiencies in agency systems Nature and

    extent of noncom pliance

    Substan tial but not

    full com pliance? (Y or N)

    Applicable criteria (JFMIP,

    FASAB citation)

    Respon sible

    entity Primary reason or cause of noncom pliance

    Impact of noncom

    pliance Agency comments

    on noncom

    pliance Corrective action in remediation plan?

    (Y or N) Assessment of corrective

    actions and time frames W/ P refer

    ence Com ments Preparation of auditable

    financial statements (Step II. F.)

    Preparation, execution, and

    reporting on agency budget in accordance with OMB require

    ments (Step II. G.) Management's assessment of the validity of information
    used

    to derive perfor mance measures (Step II. H.)

    Internal Control 701 B * Summary Schedule of Instances of Noncompliance
    with FFMIA April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701
    B- 5

    Source of information used in identifying

    deficiencies in agency systems Nature and

    extent of noncom pliance

    Substan tial but not

    full com pliance? (Y or N)

    Applicable criteria (JFMIP,

    FASAB citation)

    Respon sible

    entity Primary reason or cause of noncom pliance

    Impact of noncom

    pliance Agency comments

    on noncom

    pliance Corrective action in remediation plan?

    (Y or N) Assessment of corrective

    actions and time frames W/ P refer

    ence Com ments Implementation

    and maintenance of an information security program (Step II. I.) Internal
    controls as part of finan cial management

    (Step II. J.) Preparation of agency financial statements in

    accordance with applicable ac

    counting stan dards (Step III. A.)

    Internal Control 701 B * Summary Schedule of Instances of Noncompliance
    with FFMIA April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 701
    B- 6

    Source of information used in identifying

    deficiencies in agency systems Nature and

    extent of noncom pliance

    Substan tial but not

    full com pliance? (Y or N)

    Applicable criteria (JFMIP,

    FASAB citation)

    Respon sible

    entity Primary reason or cause of noncom pliance

    Impact of noncom

    pliance Agency comments

    on noncom

    pliance Corrective action in remediation plan?

    (Y or N) Assessment of corrective

    actions and time frames W/ P refer

    ence Com ments Compliance

    issues related to the implemen

    tation of applic able accounting standards (Step III. C.)

    Agency financial systems' imple

    mentation of the SGL accounts (Step IV. A.)

    Agency use of a crosswalk from its core financial

    management system to the SGL (Step IV. B.)

    [This page intentionally left blank.]

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 1 .01 The compliance testing
    section consists of a General Compliance Checklist

    (questionnaire) for identifying laws and regulations for compliance
    testing and supplements for the laws OMB requires auditors of CFO Act
    agencies to test for (see section 295 H) and other laws of general
    applicability auditors may consider during federal financial audits. The
    compliance supplements provide detailed guidance for assessing the
    effectiveness of compliance controls and testing compliance with the
    significant provisions of each law.

    .02 The General Compliance Checklist (Form 802), or equivalent, generally
    should be completed for federal financial audits. If an individual law is
    considered to be significant for purposes of compliance testing, the
    related supplement should be completed. Supplements should be completed
    only for laws required to be tested for CFO Act agencies and for other
    laws identified for compliance testing on the General Compliance
    Checklist. Use of these documents is described below.

    .03 To understand and evaluate compliance controls, the auditor also
    should follow the guidance in FAM 260 on identifying risk factors and in
    FAM 320 on understanding information systems. The FAM also provides
    additional guidance on compliance considerations for all audit phases.
    INSTRUCTIONS FOR GENERAL COMPLIANCE CHECKLIST .04 The checklist contains a
    summary of each law. The auditor generally should use

    this checklist or equivalent to determine which of these laws are
    considered to be significant for purposes of testing compliance, as
    discussed in FAM 245. The auditor should indicate whether each law meets
    the criteria for significance by placing a check mark in the appropriate
    column (yes or no). OMB audit guidance requires auditors of CFO Act
    agencies to test for five of the laws, as noted in section 295 H. Auditors
    also may test for the other four laws if they have determined they are
    material to the financial statements being audited.

    .05 The auditor may need to use estimates or interim information in the
    preliminary column. The final amounts (based on the audited amounts or the
    final amounts of available budget authority) are used to determine whether
    all laws that would

    be significant in quantitative terms have been identified for control and
    compliance testing. The sources of all amounts included in this checklist
    should be documented. If the law is considered to be significant from a
    qualitative standpoint, the reasons for this conclusion should be
    documented.

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 2 .06 Supplements to the
    General Compliance Checklist (Form 802)

    Law _ Supplement number Antideficiency Act (required for CFO Act agencies)
    803 Federal Credit Reform Act of 1990 (required for CFO

    Act agencies) 808

    Provisions Governing Claims of the U. S. Government as provided primarily
    in 31 U. S. C. 3711- 3720E (Including the Debt Collection Improvement Act
    of 1996 (DCIA)) (required for CFO Act agencies)

    809 Prompt Payment Act (required for CFO Act agencies) 810 Pay and
    Allowance System for Civilian Employees as

    Provided Primarily in Chapters 51- 59 of Title 5, U. S. Code (required for
    CFO Act agencies)

    812 Civil Service Retirement Act 813 Federal Employees Health Benefits Act
    814 Federal Employees' Compensation Act 816 Federal Employees' Retirement
    System Act of 1986 817

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 3 Entity
    _________________________________________________________________ Period
    of financial statements ____________________________________________ Job
    code _______________________________________________________________
    Description of Law Yes No Antideficiency Act - 31 U. S. C. 1341, 1342,
    1514, 1517

    This law imposes restrictions on the amounts of budgetary authority that
    may be obligated or expended. As discussed in FAM 250, the auditor should
    obtain information on the entity's budget authority, from sources such as
    appropriation

    legislation, and identify all legally binding restrictions on budget
    execution.

    Do the amounts of any legally binding budget execution restrictions on
    budget authority in effect during the audit period exceed planning
    materiality or are provisions of the Antideficiency Act otherwise
    considered to be significant?

    (OMB audit guidance requires auditors of CFO Act agencies to test for
    compliance with this law.)

    Preliminary Final Individual appropriations budget authority Planning
    materiality If yes, complete compliance supplement 803. ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 4 Description of Law Yes No
    Federal Credit Reform Act of 1990 (FCRA), 2 U. S. C. 661- 661f This law
    contains numerous provisions relating to the recording

    of activity related to direct loans, loan guarantees, and related
    modifications for budget accounting purposes. The law provides that after
    October 1, 1991, an agency may incur new direct loan obligations or make
    new loan guarantee commitments only to the extent that Congress has
    provided budget authority to cover the costs of the loan or loan
    guarantee.

    Does the entity's budget authority available during the audit period for
    direct loan obligations, loan guarantee commitments, or any related
    modifications exceed planning materiality or are provisions of the FCRA of
    1990 otherwise considered to be significant?

    (OMB audit guidance requires auditors of CFO Act agencies to test for
    compliance with this law.)

    Preliminary Final Total appropriations or other budget authority available
    during the fiscal year for costs of FCRA activities (direct loans, loan
    guarantees, and related modifications) Planning materiality If yes,
    complete compliance supplement 808.

    ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 5 Description of Law Yes No
    Provisions Governing Claims of the U. S. Government, Including the Debt
    Collection Improvement Act of 1996 (DCIA) These provisions address the
    collection of amounts owed to the federal government. Interest generally
    accrues from the date that a notice stating the amount due and the
    interest policies is first mailed to the debtor. Interest generally
    accrues at a rate

    established by the Secretary of the Treasury. Administrative costs and
    penalties shall also be charged.

    The provisions also require the entity to take all appropriate steps to
    collect the debt before discharging it and to notify Treasury about
    delinquent debt for administrative offset, collection by a debt collection
    center, or tax refund offset. Entities shall also participate in a
    computer match of delinquent debt with federal employees, and when
    collection actions are terminated, the entity holding delinquent debt
    shall sell it. Provisions also require the entity (or entities making
    loans the government guarantees) to notify credit- reporting agencies
    about delinquent debt and not make or guarantee loans to persons who owe
    delinquent debt.

    Does the cumulative amount of receivables created during the audit period
    that are subject to provisions governing claims of the U. S. government,
    including DCIA, exceed planning materiality; does the amount of
    receivables at the end of the audit period that are subject to provisions
    governing claims of the U. S. government, including DCIA, exceed planning
    materiality; or are provisions governing claims of the U. S. government,
    including the DCIA, otherwise considered to be significant?

    (OMB audit guidance requires auditors of CFO Act agencies to test for
    compliance with this law.)

    (continued on next page) ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 6 Description of Law Yes No
    Provisions Governing Claims of the U. S. Government, Including the Debt
    Collection Improvement Act of 1996 (DCIA) (continued)

    Preliminary Final Cumulative amount of receivables created during the
    audit period that are subject to provisions governing claims of the U. S.
    government, including

    DCIA or: Amount of receivables at the end of the audit period that are
    subject to provisions governing claims of the U. S. government, including
    DCIA Planning materiality If yes, complete compliance supplement 809.

    Note: These provisions of the law generally do not apply to amounts
    payable to the entity under the Internal Revenue Code, the Social Security
    Act, or tariff laws. Those laws contain specific provisions for these
    amounts.

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 7 Description of Law Yes No
    Prompt Payment Act, 31 U. S. C. 3901 et seq. The Prompt Payment Act
    requires federal entities to make payments for property or services by the
    due date specified in the related contract or, if a payment date is not
    specified in the contract, generally 30 days after the invoice for the
    amount due is received. If payments are not made within the appropriate
    period, the entity shall pay an interest penalty. Also, discounts offered
    by vendors may be taken only during the specified

    period. If they are taken after the time period has expired, an interest
    penalty shall be paid.

    Do the entity's payments for property or services subject to the Prompt
    Payment Act for the audit period exceed planning materiality or are
    provisions of the Prompt Payment Act otherwise considered to be
    significant?

    (OMB audit guidance requires auditors of CFO Act agencies to test for
    compliance with this law.)

    Preliminary Final Amount of payments made for property and services
    subject to the Prompt Payment Act Planning materiality If yes, complete
    compliance supplement 810.

    ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 8 Description of Law Yes No Pay
    and Allowance System for Civilian Employees as Provided Primarily in
    Chapters 51- 59 of Title 5, U. S. Code These laws require that employees
    be paid at the appropriate

    rates established by law, including general pay increases, and that
    employees be paid at least minimum wage.

    Does the entity's payroll expense for the audit period exceed planning
    materiality or are related provisions of the Pay and Allowance System for
    Civilian Employees (as provided primarily in Chapters 51- 59 of Title 5,
    U. S. Code) otherwise considered to be significant?

    (OMB audit guidance requires auditors of CFO Act agencies to test for
    compliance with this law.)

    Preliminary Final Payroll expense Planning materiality If yes, complete
    compliance supplement 812. It is not expected that the entity's expense
    for performance awards, cash awards, overtime, travel, transportation,
    subsistence, or allowances for the audit period would exceed planning
    materiality. However, if these items or related provisions of the Pay and
    Allowance System for Civilian Employees are otherwise considered to be
    significant, the auditor should consult with the Office of General Counsel
    (OGC) for specific provisions to be considered for compliance testing.

    ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 9 Description of Law Yes No
    Civil Service Retirement Act, 5 U. S. C. 8331 et seq. This law provides
    retirement benefits to employees who were hired prior to January 1, 1984.
    For each employee, the entity withholds a percentage of basic pay from the
    employee's compensation and contributes an equal amount for retirement.

    The employee and entity amounts are remitted to Treasury. Does the
    entity's expense for retirement costs under the Civil Service Retirement
    Act for the audit period exceed planning materiality or are provisions of
    the Civil Service Retirement Act otherwise considered to be significant?

    Preliminary Final Expense for retirement contributions Planning
    materiality If yes, complete compliance supplement 813. ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 10 Description of Law Yes No
    Federal Employees Health Benefits Act, 5 U. S. C. 8901 et seq. This law
    provides health insurance coverage to employees who

    elect health insurance benefits. For each employee who elects coverage,
    the entity pays an amount set by OPM for insurance costs. The entity
    portion cannot exceed 75 percent of the insurance cost. The employee pays
    the remainder of the total cost. Information on the employee and entity
    cost of the insurance is published by OPM. The entity withholds the amount
    of the employee's portion of the cost from the employee's pay and remits
    this amount, along with its own contribution, to Treasury.

    Does the entity's expense for health insurance costs for the audit period
    exceed planning materiality or are provisions of the Federal Employees
    Health Benefits Act otherwise considered to be significant?

    Preliminary Final Expense for health insurance Planning materiality If
    yes, complete compliance supplement 814. ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 11 Description of Law Yes No
    Federal Employees' Compensation Act, 5 U. S. C. 8101 et seq. This law
    provides for the compensation of employees injured or

    disabled while performing their duties. Claims are paid out of the Federal
    Employees' Compensation Fund. Federal entities are billed annually by the
    fund for claims paid on their behalf. Does the entity's expense for the
    audit period for benefits paid by the Federal Employees' Compensation Fund
    on the entity's behalf exceed planning materiality or are provisions of
    the

    Federal Employees' Compensation Act otherwise considered to be
    significant?

    Preliminary Final Expense for Compensation Fund claims Planning
    materiality If yes, complete compliance supplement 816.

    ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 12 Description of Law Yes No
    Federal Employees' Retirement System Act of 1986, 5 U. S. C. 8401 et seq.
    This law provides retirement benefits for employees who were

    hired after December 31, 1983. For each employee, the entity withholds a
    percentage of basic pay from the employee's compensation and contributes
    an amount equal to the

    employing agency's applicable normal cost percentage less the employee
    deduction rate for retirement. The employee and entity amounts are
    remitted to Treasury.

    Does the entity's expense for retirement costs under the Federal
    Employees' Retirement System Act for the audit period exceed planning
    materiality or are provisions of the Federal Employees' Retirement System
    Act of 1986 otherwise considered to be significant?

    Preliminary Final Expense for retirement contributions Planning
    materiality If yes, complete compliance supplement 817. ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 13 Description of Law Yes No
    Other laws

    Perform the following procedures and include references to supporting
    documentation:

    1. As described in FAM 245.02, read the list of laws and regulations
    identified by the entity as significant to others. (See .)

    2. With OGC assistance, identify any other laws or regulations that have a
    direct effect on determining financial statement amounts. Determine
    whether any such laws or regulations are material to the financial
    statements. (See .)

    3. Consider whether to test compliance with any indirect laws or
    regulations and make inquiries of management as discussed in FAM 245.04-.
    06. (See .)

    4. For all laws or regulations identified for testing above, identify
    significant provisions using the criteria in FAM 245.02. Test compliance
    controls and compliance as described in FAM 300 and 460.

    Are any other laws or regulations identified for compliance testing?

    If yes, attach a list of the laws or regulations identified to this form
    and reference it to control and compliance work performed.

    ____ ____

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 14

    INSTRUCTIONS FOR COMPLIANCE SUPPLEMENTS .07 Each compliance supplement
    consists of (1) a compliance summary, (2) a compliance audit program, and
    (3) notes.

    Compliance Summary .08 For each law identified for compliance testing on
    the General Compliance Checklist, the auditor generally should complete
    the related compliance summary or equivalent. The compliance summary is
    designed to assist the auditor in planning compliance control tests and
    summarizing the results of compliance control tests and compliance tests
    for reporting the results of the

    work performed. .09 The first column contains a description of the
    specific provisions of the law that

    have been identified for compliance testing, the type of provision, and
    the reference to the law.

    .10 The second column contains the objective related to the specific
    provision to be used for both compliance control and compliance testing.

    .11 The auditor should identify the control activities that the entity has
    in place to achieve each objective and document the control activity in
    the third column. If the entity does not have a control activity that
    achieves the objective, the auditor should document this condition in the
    third column.

    .12 The fourth column is used to indicate whether the control activity is
    information system (IS)- related as described in FAM 270.04. IS controls
    are those the effectiveness of which depends on computer processing. They
    can generally be classified into general, application, and user controls.
    Testing of IS controls generally should be performed by an IS auditor,
    although the audit team may assist the IS auditor.

    .13 The auditor should design control tests to determine whether the
    control activities that have been identified in the third column are in
    place and operating effectively. A control activity is considered to be
    effective if it achieves the control objective. The control testing
    program and the control tests should be recorded in the documentation. The
    results of these tests and the auditor's conclusions on the effectiveness
    of the compliance controls should be documented in the fifth column of the
    Compliance Summary. A reference to supporting documentation should be
    included in this column.

    Compliance 802 - General Compliance Checklist April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 802- 15 .14 Compliance tests should
    be performed using the related Compliance Audit

    Program as described below. The results of the compliance tests should be
    indicated in the last column of the Compliance Summary along with a
    reference to the supporting documentation.

    Compliance Audit Program

    .15 A compliance audit program has been developed for the provisions
    identified on the related compliance summary for each law. For each law
    identified for compliance testing on the General Compliance Checklist, the
    auditor generally should perform each step of the related compliance audit
    program. Because the subject matter of some laws is closely related to
    matters the auditor will be planning to test for other parts of the audit,
    the auditor should consider coordinating with that other testing and
    designing multipurpose tests. For example, payroll compliance testing
    could be performed using multipurpose tests of payroll controls and/ or
    substantive payroll testing. The auditor generally

    should initial in the "performed by" column of the compliance audit
    program when he or she performs the procedure. A reference to the
    documentation recording the work performed for each step generally should
    be included in the last column of the compliance audit program.

    [This page intentionally left blank.]

    Compliance 803 - ANTIDEFICIENCY ACT April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 1

    Note: Complete this compliance summary or prepare equivalent documentation
    only if provisions of the Antideficiency Act are considered to be
    significant as indicated on Form 802 - General Compliance Checklist.

    OMB guidance on budget execution, including the Antideficiency Act, is
    included in OMB Circular A- 11, Part 4. Name of entity: Compliance Summary
    Prepared by: Audit period: Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. The entity shall not make
    expenditures or

    obligations that exceed the amount available for expenditure or obligation
    in

    an appropriation or fund. Type: Quantitative- based Ref: 31 U. S. C. 1341(
    a)( 1)( A) and (C) 1. Expenditures or

    obligations do not exceed the amount available for expenditure or
    obligation in an appropriation or

    fund. [Document the control

    activities used by the entity to achieve the

    objective.] (See note 2.) [Is

    con trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 803 Step 3.

    Compliance 803 - Antideficiency Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 2 Name of entity: Compliance Summary Prepared
    by: Audit period: Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. The entity shall not make
    expenditures or

    obligations that exceed (1) the amount of an apportionment; or (2) a
    lesser amount, if any, established by agency regulations (such as the

    allotment level). See note 1. Type: Quantitative- based Ref: 31 U. S. C.
    1517( a) 2. Expenditures or

    obligations do not exceed the legally binding limit on the entity's budget

    authority. (The amount of the apportionment or a lesser amount, if any,
    established by the entity's regulations.) See note 1. (See note 2.) See
    Compliance

    Audit Program 803 Step 4.

    Compliance 803 - Antideficiency Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 3 Note: Complete this program or prepare
    equivalent documentation only if provisions of the Antideficiency Act are
    considered to be significant as indicated on Form 802 - General Compliance
    Checklist. The procedures in this program are designed to test compliance
    with the provisions listed on the Compliance Summary for this law.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 1. List the appropriations or other budget authority and

    the related budget accounts that were identified for compliance testing on
    Form 802 - General Compliance Checklist. Per page 802- 3, the auditor
    should identify all legally binding restrictions on budget execution, from
    sources such as appropriation legislation.

    (The following tests for compliance with the Antideficiency Act should be
    coordinated with tests of the Statement of Budgetary Resources and with
    tests of

    expenses.)

    Compliance 803 - Antideficiency Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 4 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    2. As discussed in FAM 460.03, the auditor needs assurance that the
    summarized budget information (obligations and expenditures) used for
    compliance tests is reasonably accurate and complete. This assurance may
    be provided through effective controls (usually the budget controls) or,
    if the controls are not effective, through substantive testing of budget
    amounts for validity, completeness, cutoff, recording, classification, and
    summarization as described in FAM 495 B.

    For the accounts listed in step 1, document if this assurance is provided
    through effective controls (as indicated on Form 803 - Compliance Summary)
    or if substantive tests of the budget information are necessary. If the
    controls are not considered to be effective in

    meeting some or all of the budget control objectives listed in FAM 395 F,
    perform substantive tests of the budget amounts (obligations and
    expenditures) as discussed in FAM 495 B. These substantive tests

    should be performed only for those potential misstatements for which the
    entity does not have effective budget controls.

    After the auditor is satisfied as to the reasonableness of the budget
    amounts to be used for the compliance tests, perform the compliance tests
    in steps 3 and 4. 3. Compare the actual amounts of budget obligations and

    expenditures with the related appropriation or other budget authority
    listed in step 1. If the entity does not appear to have complied with the
    provision, perform step 5. (31 U. S. C. 1341( a)( 1)( A) and (C))

    Compliance 803 - Antideficiency Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 5 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    4. Determine the entity's legally binding level of budget authority (below
    the appropriation level) that was identified during the planning phase.
    This level is usually the apportionment level unless the entity has
    elected a lower level, such as allotments.

    Compare the amount of actual obligations and expenditures to the legally
    binding level of restrictions on budget authority identified for
    compliance testing (the apportionment or allotment level). If the entity
    does not appear to have complied with the provision, perform step 5. (31
    U. S. C. 1517( a)) 5. If the entity does not appear to be in compliance
    based

    on the results of tests performed, discuss these matters with OGC and,
    when appropriate, the Special Investigator Unit to conclude if
    noncompliance actually has occurred and the implications of such
    noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in controls that allowed the noncompliance to occur,
    if not previously identified during control testing;

    report the nature of any weakness in controls and consider modification of
    the opinion on internal control as appropriate (see FAM 580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75.).

    Compliance 803 - Antideficiency Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 6 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    6. Document conclusions on compliance with each provision on Form 803 -
    Compliance Summary.

    Compliance 803 - Antideficiency Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 803- 7 Note 1: Entities are required to establish
    regulations that provide for a system of

    administrative controls over their execution of budget authority (31 U. S.
    C. 1514( a)). As discussed in FAM 250.03, the entity may elect to lower
    the level at which budget limitations are legally binding in these
    regulations. For example, the entity may elect to reduce the legally
    binding limit on the obligation and expenditure of budget funds from the
    apportionment to the allotment level. The auditor should determine the
    level at which the entity's legally binding limit has been established.

    Note 2: The auditor should consider the results of the evaluation and
    testing of budget controls. These controls relate to the execution of
    budget authority and usually are the same controls that are used to comply
    with the Antideficiency Act. Accordingly, additional consideration of
    controls that achieve the compliance objective generally is not necessary
    if the auditor has assessed whether the entity achieves all of the budget
    control objectives listed in FAM 395 F. The auditor should reference this
    compliance summary

    to the budget control evaluation and testing and perform any additional
    procedures considered necessary to conclude if compliance controls are
    effective.

    [This page intentionally left blank.]

    Compliance 808 - FEDERAL CREDIT REFORM ACT OF 1990

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 808- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Federal Credit Reform Act of 1990 (FCRA) are
    considered to be significant as indicated on Form 802 - General Compliance
    Checklist.

    OMB guidance on FCRA is included in OMB Circular A- 11, part 5, Federal
    Credit Programs. Name of entity: Compliance Summary Prepared by: Audit
    period: Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. Direct loan obligations may be
    incurred on or after October 1, 1991, only to the extent that an
    appropriation or other budget authority is available to cover these costs.

    (See notes 1, 2, and 5- 7.) Type: Quantitative- based Ref: 2 U. S. C.
    661c( b) 1. Direct loan obligations made on or after October 1, 1991, do
    not exceed the available appropriation or

    other budget authority. (See notes 1, 2, and 5- 7.) [Document the control
    activities used by the entity to achieve the objective.]

    (See note 10.) [Is con trol depen dent on

    com puter pro ces

    sing?] [Indicate yes

    or no; include reference to supporting documenta tion.]

    [Indicate yes or no; include reference to supporting documenta tion.]

    See Compliance Audit Program

    808 Steps 3 and 4.

    Compliance 808 - Federal Credit Reform Act of 1990

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 808- 2 Name of
    entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. A direct loan obligation or
    outstanding direct loan shall not be modified in a manner that increases
    its cost unless

    budget authority for the additional cost is available. (See notes 5 and
    8.) (See note

    9 for matters to discuss with OGC prior to testing.) Type: Quantitative-
    based Ref: 2 U. S. C. 661c( e) 2. Modifications made to direct loan
    obligations or outstanding direct loans do

    not exceed the available budget authority. (See

    notes 5, 8, and 9.) (See note 10.) See Compliance Audit Program

    808 Step 3. 3. Loan guarantee commitments may be made on or after October
    1, 1991, only to the extent that an appropriation or other

    budget authority is available to cover these costs. (See notes 3 to 7.)
    Type: Quantitative- based Ref: 2 U. S. C. 661c( b) 3. Obligations for new
    loan guarantee commitments made on or after October 1, 1991, do not exceed
    the

    available appropriation or other budget authority. (See notes 3 to 7.)
    (See note 10.) See

    Compliance Audit Program 808 Steps 3 and 4.

    Compliance 808 - Federal Credit Reform Act of 1990

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 808- 3 Name of
    entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 4. A loan guarantee commitment or
    outstanding loan guarantee shall not be modified in a manner that
    increases its

    cost unless budget authority for the additional cost is available. (See
    notes 5

    and 8.) (See note 9 for matters to discuss with OGC prior to testing.)
    Type: Quantitative- based Ref: 2 U. S. C. 661c( e) 4. Modifications made
    to loan guarantee commitments or outstanding loan guarantees

    do not exceed the available budget authority. (See

    notes 5, 8, and 9.) (See note 10.) See Compliance Audit Program

    808 Step 3.

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 4 Note: Complete this program
    or prepare equivalent documentation only if provisions of the Federal
    Credit Reform Act (FCRA) are considered to be significant as indicated on
    Form 802 - General Compliance Checklist. The procedures in this program
    are designed to test compliance with the provisions listed on the
    Compliance Summary.

    OMB guidance on FCRA is included in OMB Circular A- 11, part 5, Federal
    Credit Programs.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 1. List the appropriations or other budget authority and

    the related budget accounts that were identified for compliance testing on
    Form 802 - General Compliance Checklist.

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 5 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    2. As discussed in FAM 460.03, the auditor needs assurance that the
    summarized budget information (obligations and expenditures) used for
    compliance tests is reasonably accurate and complete. This assurance may
    be provided through effective controls (usually the budget controls) or,
    if the controls are not effective, through substantive testing of budget
    amounts for validity, completeness, cutoff, recording, classification, and
    summarization as

    described in FAM 495 B. For the accounts listed in step 1, document
    whether this assurance is provided through effective controls (as
    indicated on Form 808 - Compliance Summary) or whether substantive tests
    of the budget information are necessary.

    If the controls are not considered to be effective in meeting some or all
    of the budget control objectives listed in FAM 395 F, plus the
    supplemental objectives for FCRA listed in FAM 395 F Sup, perform

    substantive tests of the budget amounts (obligations and expenditures) as
    discussed in FAM 495 B. These substantive tests should be performed only
    for those potential misstatements for which the entity does not have
    effective budget controls.

    After the auditor is satisfied as to the reasonableness of the budget
    amounts to be used for the compliance tests, perform the compliance tests
    in steps 3 and 4.

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 6 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    3. For each appropriation account or other budget authority listed in step
    1, perform the following procedures that are applicable for direct and
    guaranteed loan programs that have a positive subsidy (i. e., cash
    outflows exceed cash inflows); (for direct and guaranteed loan programs
    that have a negative subsidy (i. e., cash inflows exceed cash outflows),
    perform step 4):

    (a) Compare the amount of obligations for direct loans to the amount of
    the available appropriation or other budget authority. (Note: This budget
    restriction is applicable only to obligations for direct loans made on or
    after October 1, 1991.) 3. (b) Compare the amount of obligations for

    modifications of direct loan obligations or outstanding direct loans to
    the amount of available budget authority. (Note: The sale of a

    direct loan is considered a modification. Discuss applicability of this
    budget restriction to direct loans and direct loan obligations that were

    outstanding prior to October 1, 1991, with OGC prior to performing
    compliance test.)

    3. (c) Compare the amount of obligations for loan guarantee commitments to
    the amount of the available appropriation or other budget authority.
    (Note: This budget restriction is only

    applicable to obligations for loan guarantee commitments made on or after
    October 1, 1991.)

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 7 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    3. (d) Compare the amount of obligations for modifications of loan
    guarantee commitments or outstanding loan guarantees to the amount of
    available budget authority. (Note: Discuss

    applicability of this budget restriction to loan guarantees and loan
    guarantee commitments that were outstanding prior to October 1, 1991, with
    OGC prior to performing compliance test.) (2 U. S. C. 661c( b) and (e))

    If the amounts of obligations in any of these comparisons exceed the
    available budget authority, the entity may not be in compliance. Perform
    step 5. 4. Direct and guaranteed loan programs that have a

    negative subsidy (cash inflows exceed cash outflows) do not receive an
    appropriation. However, such programs have a loan limit that cannot be
    exceeded, i. e., a maximum number of loans that can be made or guaranteed.
    For these programs, compare the total number and dollar volume of loans
    made to the loan limit in the applicable Presidents' Budget. Perform step
    5.

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 8 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    5. If the entity does not appear to be in compliance based on the results
    of tests performed, discuss these matters with OGC and, when appropriate,
    the Special Investigator Unit to conclude if noncompliance actually has
    occurred and the implications of such noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in controls that allowed the noncompliance to occur,
    if not previously identified during control testing;

    report the nature of any weakness in controls and consider modification of
    the report on internal control as appropriate (see FAM 580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    6. Document conclusions on compliance with each

    provision on Form 808 - Compliance Summary.

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 9 Note 1: A direct loan is a
    disbursement of funds by the government to a nonfederal borrower under a
    contract that requires the repayment of such

    funds with or without interest. The term also includes the purchase of, or
    participation in, a loan made by another lender. The term does not include
    the acquisition of a federally guaranteed loan in satisfaction of

    default claims or the price support loans of the Commodity Credit
    Corporation. (2 U. S. C. 661a( 1)) Note 2: A direct loan obligation is a
    binding agreement by a federal agency to

    make a direct loan when specified conditions are fulfilled by the
    borrower. (2 U. S. C. 661a( 2))

    Note 3: A loan guarantee is any guarantee, insurance, or other pledge with
    respect to the payment of all or a part of the principal or interest on
    any debt obligation of a nonfederal borrower to a nonfederal lender, but
    does not include the insurance of deposits, shares, or other

    withdrawable accounts in financial institutions. (2 U. S. C. 661a( 3))
    Note 4: A loan guarantee commitment is a binding agreement by a federal

    agency to make a loan guarantee when specified conditions are fulfilled by
    the borrower, the lender, or any other party to the guarantee agreement.
    (2 U. S. C. 661a( 4))

    Note 5: Appropriations or other budget authority to cover the cost of
    budget obligations for direct loan obligations and loan guarantee
    commitments must be made in advance by Congress. For revolving or other
    funds that otherwise would be available for these budget obligations,
    Congress must enact a limit on the use of such funds for these purposes to
    make

    them available for use. (2 U. S. C. 661c( b)) Note 6: Costs are defined as
    the estimated long- term cost to the government of a

    direct loan or loan guarantee, calculated on a net present value basis,
    excluding administrative costs and any incidental effects on governmental
    receipts or outlays. These calculations are described in further detail
    under the valuation control objective for obligations in FAM 395 F. (2 U.
    S. C. 661a( 5))

    Note 7: There is an exemption from this requirement for entitlements
    (mandatory programs such as the guaranteed student loan program and the VA
    home loan guaranty program) and credit programs of the Commodity Credit
    Corporation existing on the date of enactment of the act (November 5,
    1990). (2 U. S. C. 661c( c))

    Compliance 808 - Federal Credit Reform Act of 1990 April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 808- 10 Note 8: Modifications are
    government actions that alter the estimated net

    present value of a direct loan or loan guarantee for which an obligation
    has been recorded, for example, the sale of a direct loan, per SFFAS No.
    2, paragraph 53, or a policy change affecting the repayment period or
    interest rate for a group of existing loans. (Changes within the terms of
    existing contracts or through other existing authorities are not
    considered to be modifications. Also, "work outs" of individual loans,
    such as a change in the amount or timing of payments to be made, are

    not considered modifications.) The effects of these changes should be
    included in the annual reestimates of the estimated net present value of
    the obligations. Permanent indefinite authority is provided by FCRA for

    these reestimates. Note 9: Discuss applicability of this budget
    restriction to direct loans, direct loan

    obligations, loan guarantees, or loan guarantee commitments that were
    outstanding prior to October 1, 1991, with OGC prior to performing control
    or compliance tests.

    Note 10: The auditor should consider the results of the evaluation and
    testing of budget controls and testing of the Statement of Budgetary
    Resources. These controls relate to the execution of budget authority and
    usually are the same controls that are used to comply with the
    Antideficiency Act and the Federal Credit Reform Act. Accordingly,
    additional consideration of controls that achieve the compliance objective
    generally is not necessary if the auditor has assessed whether the entity
    achieves all of the budget control objectives listed in FAM 395 F,
    including the supplemental control objectives for the Federal Credit
    Reform Act. The auditor should reference to the budget control

    evaluation and testing and perform any additional procedures considered
    necessary to conclude if compliance controls are effective.

    Compliance 809 - PROVISIONS GOVERNING CLAIMS OF THE U. S. GOVERNMENT (31
    U. S. C. 3711 3720E) (INCLUDING THE DEBT COLLECTION IMPROVEMENT ACT OF
    1996

    (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 809- 1
    Note: Complete this compliance summary or prepare equivalent documentation
    only if provisions governing claims of the U. S. government, as provided
    primarily in sections 3711- 3720E of Title 31, U. S. Code (including
    provisions of the Debt Collection Improvement Act of 1996), are considered
    significant, as

    indicated on Form 802 - General Compliance Checklist. Name of entity:
    Compliance Summary Prepared by: Audit period: Reviewed by: Provision
    description Objective

    Control activities IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. Interest shall be charged on an
    outstanding debt (or claim) owed to the entity. Interest accrues from the
    date the

    notice of the amount due and interest policies is first mailed to the
    debtor. Interest is charged at the rate established by the Secretary of
    the Treasury that is in effect on that date. The rate remains fixed

    at that rate for the duration of the indebtedness.

    (See notes 1, 2, and 3.) Type: Transaction- based Ref: 31 U. S. C. 3717(
    a), (b), and (c) 1. Interest is properly calculated and charged on past
    due amounts owed to the entity at the correct

    rates. (See notes 1, 2, and 3.) [Document the control activities

    used by the entity to achieve the objective.]

    [Is con

    trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 809 Steps 3 (a), (b), and (c).

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection

    Improvement Act of 1996 (DCIA))

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 809- 2 Name of
    entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. The entity shall assess, on a claim
    owed to it, a charge to cover the cost of processing and handling a
    delinquent claim plus a penalty charge (of not more than 6

    percent a year) for failure to pay a part of a claim more than 90 days
    past due. These additional charges do not accrue interest. (See note 3.)
    Type: Transaction- based

    Ref: 31 U. S. C. 3717( e) and (f) 2. Administrative charges and late
    payment penalties are properly calculated and

    charged on past due amounts. (See note 3.) See Compliance

    Audit Program 809 Step 3( d).

    3. The entity may compromise, terminate, or suspend claims that are not
    more than $100,000. Claims of more than $100,000 (excluding interest,
    penalties, and

    administrative costs) shall be referred to the Justice Department for
    compromise,

    termination, or suspension. (See note 4.) Type: Procedural- based Ref: 31
    U. S. C. 3711( a) 3. Claims of more than $100,000 (excluding interest,
    penalties, and administrative costs) are

    referred to the Justice Department for compromise, termination,

    or suspension. (See note 4.) See Compliance

    Audit Program 809 Step 5( a).

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection

    Improvement Act of 1996 (DCIA))

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 809- 3 Name of
    entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 4. If the entity is owed a valid and
    legally enforceable, nontax debt delinquent over 180 days, and there are
    no bars to collection, it shall notify Treasury about the debt for
    administrative offset and refer the debt to Treasury or a Treasury
    designated debt collection center for collection action. (See notes 5, 6,
    and 7.) Type: Procedural- based Ref: 31 U. S. C. 3711( g)( 1) and (9), 31

    U. S. C. 3716( c)( 6), 31 U. S. C. 3719 (a), 31 U. S. C. 3720A( a), and 5
    U. S. C. 5514( a)( 1). 4. When nontax debt becomes delinquent over 180
    days, it is referred to Treasury for

    administrative offset and collection. (See notes 5, 6, and 7.) See
    Compliance

    Audit Program 809 Step 5( b).

    5. Unless waived by the entity, a person may not obtain any loan (other
    than a disaster loan) or loan insurance or guarantee

    administered by the entity if the person has outstanding nontax delinquent
    federal debt. (Delinquency is determined by Treasury regulations.) Type:
    Transaction- based

    Ref: 31 U. S. C. 3720B 5. Loans and loan insurance or guarantees are not
    granted to persons with delinquent nontax debt. See Compliance

    Audit Program 809 Step 4( b).

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 4 Note: Complete this program or prepare equivalent documentation
    only if provisions governing claims of the United States government as
    provided primarily in sections 3711- 3720E of Title 31, U. S. Code
    (including provisions of the Debt Collection Act of 1996) are considered
    significant, as indicated on Form 802 - General Compliance Checklist. The
    procedures in this program are designed to test compliance with the
    provisions listed on the Compliance Summary.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 1. Based on the preliminary assessment of compliance

    control effectiveness (as documented on Form 809 - Compliance Summary),
    select a sample of amounts owed to the entity during or at the end of the
    audit

    period. (The sample size will vary based on the expected effectiveness of
    compliance controls, as discussed in FAM 460.02). Document the sampling
    approach using the documentation in FAM section 495 E. See note 8
    regarding sampling efficiencies and completeness of the sample population.
    Sample size Sample selection method

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 5 Name of entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    2. For each item selected in step 1 obtain the loan file or other
    supporting documentation and note the following information as of the date
    selected for

    testing:

    due date of debt;

    amount owed;

    date the notice of the amount due and the interest policies is first
    mailed to the debtor;

    amount of interest accrued and other administrative charges and penalties
    charged, if any; and

    number of days the debt is past due, if any. Perform step 3 if the debt is
    past due. Perform step 4 if the debt is not past due. 3. If the amount
    selected is past due:

    (a) Calculate the number of days that interest should be accrued on the
    debt as of the date selected for testing. Interest generally accrues from
    the date that the notice of the amount due is first mailed to the debtor.
    (See note 1.) Compare the auditor's calculation with the calculation
    performed by the entity and obtain explanation and examine support for any
    differences. (31 U. S. C. 3717( b))

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 6 Name of entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    3. (b) Determine the interest rate that should be used to accrue interest
    on the debt. The rate is published in the Federal Register and should be
    the rate that was in effect on the date that the notice of the amount due
    is first mailed to the

    debtor. (The web site for the Federal Register is: http:// www. access.
    gpo. gov/ su_ docs/ aces/ aces14 0. html.) Compare the auditor's
    determination of the rate to the rate used by the entity and obtain
    explanation and examine support for any differences. (31 U. S. C. 3717( a)
    and (c)) 3. (c) Calculate the amount of interest that should be owed as of
    the date selected for testing using the

    number of days tested in (a) and the interest rate tested in (b). Compare
    the auditor's calculation to the amount calculated by the entity and
    obtain explanation and examine support for any differences. See notes 2
    and 3 regarding the waiver of interest. 3. (d) Obtain the entity's
    schedule of administrative

    charges and late payment penalties and determine if the appropriate
    amounts were charged to the debtor. See note 3 regarding the waiver of
    these charges. (31 U. S. C. 3717( e) and (f))

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 7 Name of entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    4. If the debt is not past due, determine through examination of the
    entity's records whether

    (a) interest, administrative charges, or penalties are not being charged;
    and (b) the debtor had no outstanding nontax delinquent federal debt at
    the time the loan was obtained. (31 U. S. C. 3720 B) 5. The objectives
    listed below relate to procedural- based

    provisions. As discussed in FAM 460.06, sufficient procedures usually are
    performed in conjunction with tests of compliance controls for these
    proceduralbased provisions to conclude on the entity's compliance without
    performing additional

    procedures. Additional procedures should not be performed to obtain
    evidence regarding compliance with the provisions related to the following
    objectives unless sufficient evidence regarding compliance was not
    obtained during compliance control tests documented on Form 809 -
    Compliance Summary.

    (a) Claims of more than $100,000 (excluding interest, penalties, and
    administrative costs) are referred to the Justice Department for
    compromise, termination, or suspension. See note 4. (31 U. S. C. 3711 )

    (b) Claims delinquent for a period of 180 days have been referred to
    Treasury for collection. See notes 5, 6, and 7. (31 U. S. C. 3711 (g))

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 8 Name of entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    6. If the entity does not appear to be in compliance based on the results
    of tests performed, discuss these matters with OGC and, when appropriate,
    the Special Investigator Unit to conclude if noncompliance actually has
    occurred and the implications of such noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the conclusion on internal control as appropriate (see FAM
    580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    7. Document conclusions on compliance with each

    provision on Form 809 - Compliance Summary.

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 9 Note 1: Claims are amounts owed to the government, including
    amounts owed

    for loans insured or guaranteed by the government. The term "claim" is
    used interchangeably with the term "debt" in this law. (31 U. S. C. 3701(
    b))

    Interest normally accrues from the date that notice of the debt and the
    agency's interest policies is first mailed to the debtor. If the agency
    sends a bill to the debtor in advance of the due date and that bill states
    the interest policies, interest would accrue from the due date specified
    in

    the bill. The provisions regarding accrual of interest and other charges
    do not apply to the extent that a statute, related regulation, loan
    agreement, or contract provides otherwise, or if a claim is under a
    contract executed before October 25, 1982, that is in effect on October
    25, 1982. (31 U. S. C. 3717( g)) Accrual of interest and penalties under
    this law does not apply to amounts owed by other agencies of the federal
    government, a state government or a unit of general local government or to
    amounts payable to the entity under the Internal Revenue Code, the Social
    Security Act, or tariff laws. (31 U. S. C. 3701 (c) and (d)) This law,
    however, does not preclude the charging of interest to state and local
    governments under authority provided under other laws.

    Note 2: The entity shall waive the collection of interest on a claim (or
    any portion of the claim) that is paid within 30 days after the date on
    which interest began to accrue. The agency may extend this 30- day period.
    (31 U. S. C. 3717( d)) Interest that is either accrued or collected on
    claims that are paid within the 30- day period would usually not be
    material or otherwise significant for purposes of compliance testing. If
    the auditor considers this provision to be significant for compliance
    testing, this form should be tailored to include the appropriate testing
    procedures.

    Note 3: The entity has the authority to waive the collection of interest,
    penalties, and administrative charges. The entity should follow its own
    regulations when determining whether a waiver is appropriate. Such
    regulations

    should be in conformity with the standards set jointly by the Comptroller
    General, the Attorney General, and the Secretary of the Treasury described
    in 31 CFR 901.9. (31 U. S. C. 3717( h))

    The entity may increase an administrative claim (debt not based on an
    extension of government credit through direct loans, guarantees, or
    insurance, including fines, penalties, and overpayments) annually by the

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 10 cost of living adjustment in lieu of charging interest and
    penalties. (31 U. S. C. 3717( i))

    Note 4: Compromise is the term used when an amount less than the total
    amount of the claim is accepted by the entity as payment in full.
    Suspension refers to the temporary deferral of collection activities until
    collection activity is expected to be more successful. Termination refers
    to stopping of collection activities. Only the Justice Department has the
    authority to compromise, terminate,

    or suspend collection on claims that are greater than $100,000 (excluding
    interest, penalties, and administrative charges). Pursuant to 31 CFR Parts
    902.1 and 903.1, entities generally should use a Claims Collection
    Litigation Report (CCLR) to refer such matters to the Justice Department.

    Note 5: Exceptions to the requirement to transfer nontax debt delinquent
    for a period of 180 days to Treasury for collection are

    (a) a debt or claim that (1) is in litigation or foreclosure; (2) will be
    disposed of under an asset sales program within 1 year

    after becoming eligible for sale, or later than 1 year if consistent with
    an asset sales program and a schedule established by the entity and
    approved by OMB; (3) has been referred to a private collection contractor
    for

    collection for a period determined by Treasury; (4) has been referred by,
    or with the consent of, Treasury to a debt

    collection center for a period determined by Treasury; or (5) will be
    collected under internal offset, if such offset is sufficient to collect
    the claim within 3 years after the date the

    debt or claim is first delinquent; and (b) to any other specific class of
    debt or claim, as determined by

    Treasury at the request of an entity. (31 U. S. C. 3711( g)( 2)) Examples
    include (1) debts in bankruptcy meeting the criteria for an automatic stay

    (11 U. S. C. 362), (2) foreign debt considered uncollectable by Treasury
    due to foreign diplomacy considerations and affairs of state,

    (3) debts in forbearance or appeals. Note 6: Exceptions to the requirement
    to notify Treasury of nontax debt

    delinquent over 180 days for administrative offset are a claim that has

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 11 been outstanding for more than 10 years or when a statute
    explicitly prohibits using administrative offset or setoff to collect the
    type of claim involved. (31 U. S. C. 3716( e)) Also, this section does not
    prohibit the use of any other administrative offset authority existing.
    (31 U. S. C. 3716 (d))

    Prior to referring debts to Treasury, an agency shall inform the debtor of
    the amount and nature of the debt (such as overpayment, etc.), and actions
    which may be taken to enforce recovery of a delinquent debt. These include

    (a) offset of any payments which the debtor is due, including tax refunds,
    and salary; (b) referral of the debt to a private collection agency; (c)
    referral of the debt to the Department of Justice or agency counsel

    for litigation; (d) reporting of the debt to a credit bureau; (e)
    reporting of the debt, if discharged, to IRS as a potential taxable

    income. In the future, the agency also will need to inform the debtor that
    the debt may be subject to administrative wage garnishment, his/ her
    identity may be published or publicly disseminated, and/ or the debt may
    be sold.

    The notice must tell the debtor that he/ she has the opportunity (a) to
    inspect and copy records relating to the debt, (b) for a review by the
    agency; and (c) to enter into a written repayment agreement.

    Note 7: Before an entity refers past- due debt to Treasury for reduction
    of tax refund, it must (a) notify the person incurring such debt that the
    entity proposes to

    refer to Treasury for tax refund offset, (b) give such person at least 60
    days to present evidence that all or

    part of the debt is not past due or not legally enforceable, (c) consider
    any evidence presented by such person and determine

    that an amount of such debt is past due and legally enforceable, (d)
    satisfy such other conditions Treasury may prescribe to ensure the

    above determination is valid and that the entity has made reasonable
    efforts to obtain payment, and

    Compliance 809 - Provisions Governing Claims of the U. S. Government (31
    U. S. C. 3711- 3720E) (Including the Debt Collection Improvement Act of

    1996 (DCIA)) April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    809- 12 (e) certify that reasonable efforts have been made by the entity
    to

    obtain payment. (31 U. S. C. 3720A (b)) Treasury issues regulations
    prescribing the times at which entities shall submit notices of past- due
    legally enforceable debts, the manner of submitting them, and the
    information to be contained in them. The regulations also specify the
    minimum amount of debt that may be referred for tax refund offset and the
    fee the entity shall pay to reimburse Treasury for its costs.

    Note 8: If multipurpose testing is used for the compliance test and/ or
    compliance control test and/ or a substantive test of accounts or loans
    receivable details, the sample items for the compliance test and/ or

    compliance control test should be selected using the sampling method used
    for the substantive test as described in FAM 430. Otherwise, the items
    should be selected using attribute sampling as discussed in FAM 460.02.

    As with all sampling applications, the auditor should consider the
    completeness of the test population. For efficiency, the auditor should
    consider using records that were tested for validity, accuracy, and
    completeness (as well as the other financial statement assertions) in
    conjunction with substantive tests of the population.

    Compliance 810 - PROMPT PAYMENT ACT

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 810- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Prompt Payment Act are considered to be significant

    as indicated on Form 802 - General Compliance Checklist. OMB guidance on
    the Prompt Payment Act is included in 5 CFR Part 1315.

    Name of entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description Objective

    Control activities IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. If payment for property or services
    from a

    business concern is not made by the required due date, an interest penalty
    shall be paid to the concern on the amount of the payment due. The
    interest penalty shall be paid for the period beginning on

    the day after the required payment date and ending on the date on which
    payment is made. (See notes 1, 2, 3, 4, and 5.) Type: Transaction- based

    Ref: 31 U. S. C. 3902( a) and (b) 1a. All payments for property or
    services that are not made by the payment due date are identified. (See

    note 1.) 1b. Interest penalties are calculated and paid on the past due
    amount using the appropriate interest rate and period. (See notes 2, 3, 4,
    and 5.) [Document the control activities

    used by the entity to achieve the objective.]

    [Is con

    trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 810 Step 4( a) and (b).

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 2 Name of entity: Compliance Summary Prepared
    by: Audit period: Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. Penalties shall be paid out of
    amounts

    made available to carry out the program for which the penalty is incurred.

    Type: Transaction- based Ref: 31 U. S. C. 3902( f) 2. Interest penalties
    are paid out of the appropriation

    used to pay related program expenditures.

    See Compliance Audit Program

    810 Steps 4( c), 5( c), and 6.

    3. Discounts offered by a business concern may be taken only if payment is
    made within the specified time as determined from the date of the invoice.
    An interest

    penalty shall be paid on improperly taken discounts.

    Type: Transaction- based Ref: 31 U. S. C. 3904

    3a. Discounts taken after the specified time period are identified.

    3b. Interest penalties are properly calculated and

    paid on the amount of any improperly taken discounts using the appropriate
    interest rate and period.

    See Compliance Audit Program 810 Step 5( a) and (b).

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 3 Note: Complete this program or prepare
    equivalent documentation only if provisions of the Prompt Payment Act are
    considered to be significant as indicated on Form 802 - General Compliance
    Checklist. The procedures in this program are designed to test compliance
    with the provisions listed on the Compliance Summary.

    OMB Guidance on the Prompt Payment Act is included in 5 CFR Part 1315.
    Name of entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    1. Based on the preliminary assessment of compliance control effectiveness
    (as documented on Form 810 - Compliance Summary), select a sample of
    payments from throughout the audit period. (The sample size will vary
    based on the expected effectiveness of

    compliance controls as discussed in FAM 460.02.) Document the sampling
    approach using the documentation in FAM section 495 E. See note 6
    regarding sampling efficiencies and completeness of the population. Sample
    size Sample selection method

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 4 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    2. For each item selected in step 1, obtain the supporting documentation
    for the payment such as the invoice voucher package.

    (a) Document the following items in the documentation:

    invoice number;

    payee;

    invoice amount;

    invoice date;

    invoice receipt date (or other date used for determining compliance with
    this law - see step 2 (b));

    payment date;

    amount of interest penalty paid, if any;

    amount of discount taken, if any; and

    appropriation account( s) charged for the expenditure and interest
    penalty, if any.

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 5 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    2. (b) For each item selected, note whether the payment was made by the
    required due date. The required due date may be the date specified in the
    contract or, if a date is not specified, 30 days after receipt of the
    invoice (31 U. S. C. 3903( a)( 1)( A) and (B)). If payment is for meat or
    meat food products, perishable agricultural products, dairy products or
    construction contracts, consult with OGC to determine payment due date.
    Specific payment due dates to avoid interest penalties are established by
    law for these items. (31 U. S. C. 3903( a)( 2), (3), (4), and (6))

    The invoice receipt date is the later of (1) the date the entity's
    designated representative or office actually receives a proper invoice or
    (2) the 7th day after the date on which, in accordance with the terms and
    conditions of the contract, the property is actually delivered or
    performance of the services is actually completed (unless the entity
    accepted the property or services before the 7th day or a longer
    acceptance period is specified in the contract). If the date of actual
    invoice receipt is not indicated, the entity must use the invoice date.
    (31 U. S. C. 3901( a)( 4)( A) and (B))

    If the payment was made prior to the payment due date, perform step 3.

    If the payment was made after the payment due date, perform step 4.

    If a discount was taken, perform step 5.

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 6 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    3. If the payment was made prior to the payment due date, and no discount
    was taken, determine that no interest penalty was paid.

    (Note: If the entity did not take advantage of a discount for which it was
    eligible or if an interest penalty was paid when it was not owed, the
    auditor

    generally should determine the cause of these items for purposes of
    reporting findings.)

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 7 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    4. If the payment was made after the payment due date, determine whether

    (a) an interest penalty was paid; (b) the amount of the interest penalty
    was properly

    calculated; and (c) the interest penalty was paid out of the

    appropriation used to pay the related expenditures. Review the accounting
    codes indicated on the

    expense voucher. Determine whether the accounting codes used to record the
    interest penalty are the same as those used for the

    related expenditure and whether the codes and amounts agree with those
    recorded in the budgetary accounting records. (See step 6 regarding proper
    summarization of amounts.) (31 U. S. C. 3902 (a), (b), and (f))

    Investigate any differences between the amount of interest penalty
    calculated by the auditor and the amount paid by the entity, including any
    instances when an interest penalty was owed but not paid. See note 5.
    Investigate any instances when the proper appropriation account was not
    charged.

    See note 2 regarding the interest rate to be used. See notes 3 and 4
    regarding the period the penalty should cover.

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 8 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    5. If a discount was taken, determine whether it was taken during the
    specified period the discount was available. If the discount was taken
    during the specified period, further consideration is not necessary. If
    any discounts are taken after the appropriate time period, determine
    whether (a) an interest penalty was paid, (b) the amount of the interest
    penalty was properly

    calculated, and (c) the interest penalty was charged against the

    appropriation used for the related expenditures. Review the budget
    accounting codes indicated on the expense voucher. Determine whether the
    budget accounting codes indicated on the voucher for the interest penalty
    are the same as those used for the related expenditure. Determine whether
    the codes and amounts on the voucher agree with those recorded in the
    budgetary accounting records. (See step 6 regarding proper summarization
    of the budgetary amounts.) (31 U. S. C. 3902 (a), (b), and (f), and 31 U.
    S. C. 3904)

    Interest penalties should be calculated on the amount of the discount. The
    penalty accrues on the amount of the discount from the last date specified
    that the discounted amount may be paid (31 U. S. C. 3904). See note 2
    regarding the interest rate to be used to calculate the interest penalty.

    (continued)

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 9 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    5. (continued) Investigate any differences between the amount of interest
    penalty calculated by the auditor and the amount paid by the entity,
    including any instances when an interest penalty was owed but not paid.
    Investigate any instances when the proper appropriation account was not
    charged. 6. Consider the procedures performed on the entity's budget
    controls over summarization of expenditure

    balances as discussed in FAM 395 F. If the auditor has assessed the
    entity's controls as effective in achieving the control objective of
    summarization of expenditure balances, further procedures are not
    necessary to obtain assurance as to whether interest penalties are paid
    out of the proper appropriation account.

    If the auditor has assessed the controls as ineffective, the auditor
    should perform procedures to determine if the entity has properly
    summarized the expenditure balances as described in FAM 495 B.

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 10 Name of entity: Audit period: Reviewed by:
    Audit Procedures Done

    by/ date W/ P ref

    7. If the entity does not appear to be in compliance based on the results
    of tests performed, discuss these matters with OGC and, when appropriate,
    the Special Investigator Unit to conclude if noncompliance actually has
    occurred and the implications of such noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the opinion on internal control as appropriate (see FAM
    580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    8. Document conclusions on compliance with each

    provision on Form 810 - Compliance Summary.

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 11 Note 1: The required due date is generally
    the date specified in the contract or, if

    a date is not specified, 30 days after receipt of the invoice (31 U. S. C.
    3903( a)( 1)( A) and (B)) If payment is for meat or meat food products,
    perishable agricultural products, dairy products or construction
    contracts, consult with OGC to determine payment due date. Specific
    payment due dates to avoid interest penalties are established by law for
    these items. (31 U. S. C. 3903( a)( 2), (3), (4), and (6))

    The invoice receipt date is established as the later of (1) the date the
    entity's designated representative or office actually receives a proper
    invoice or (2) the 7th day after the date on which, in accordance with the
    terms and conditions of the contract, the property is actually delivered
    or performance of the services is actually completed, unless the entity
    accepted the property or services before the 7th day or a longer
    acceptance date is specified in the contract. If the date of actual
    invoice receipt is not indicated, the entity must use the invoice date.
    (31 U. S. C. 3901( a)( 4)( A) and (B))

    Note 2: Interest shall be calculated at the rate set by the Secretary of
    the Treasury under section 12 of the Contract Disputes Act of 1978 (41 U.
    S. C. 611) that is in effect at the time the entity accrues the obligation
    to pay a late payment interest penalty. The rates are published in the
    Federal Register. (31 U. S. C. 3902( a))

    Note 3: The interest penalty shall be paid for the period beginning on the
    day after the required payment date and ending on the date on which
    payment is made. (31 U. S. C. 3902( b))

    An interest penalty not paid after any 30- day period shall be added to
    the principal amount of the debt, and a penalty accrues thereafter on the
    combined amount of principal and interest. (31 U. S. C. 3902( e))

    Note 4: A payment is deemed to be made on the date a check for payment is
    dated or an electronic transfer is made. (31 U. S. C. 3901 (a)( 5))

    Note 5: The temporary unavailability of funds to make a timely payment due
    for property or services does not relieve the entity head of the
    obligation to pay interest penalties under this law. (31 U. S. C. 3902
    (d))

    Note 6: If multipurpose testing is used for the compliance test and/ or
    compliance control test and/ or a substantive test of payments details,
    the sample items for the compliance test and/ or compliance control test
    should be selected using the sampling method used for the substantive

    Compliance 810 - Prompt Payment Act April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 810- 12 test as described in FAM 430. Otherwise, the
    items should be selected using attribute sampling as discussed in FAM
    460.02.

    As with all sampling applications, the auditor should consider the
    completeness of the test population. For efficiency, the auditor should
    consider using records that were tested for validity, accuracy, and
    completeness (as well as the other financial statement assertions) in
    conjunction with substantive tests of the population.

    Compliance 812 - PAY AND ALLOWANCE SYSTEM FOR CIVILIAN EMPLOYEES, AS
    PROVIDED

    PRIMARILY IN CHAPTERS 51- 59 OF TITLE 5, U. S. CODE

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 812- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Pay and Allowance System for Civilian Employees, as

    provided primarily in Chapters 51- 59 of Title 5, U. S. Code, are
    considered to be significant as indicated on Form 802 - General Compliance
    Checklist. Name of entity: Compliance Summary Prepared by: Audit period:
    Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. Pay for a specific position should be
    based

    on the appropriate pay schedule or pay rate. Type: Transaction- based Ref:
    5 U. S. C. 5332, 5343, and 5383

    1. Employees are paid at appropriate rates.

    [Document the control activities used by the entity to achieve the

    objective.] [Is

    con trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 812 Step 4( b).

    2. Employer shall pay employees at least minimum wage. (See note 1.) Type:
    Transaction- based

    Ref: 29 U. S. C. 206 2. Employees are paid at least

    minimum wage. (See note 1.) See Compliance

    Audit Program 812 Step 4( b).

    Compliance 812 - Pay and Allowance System for Civilian Employees, as
    Provided Primarily in Chapters 51- 59 of Title 5, U. S. Code April 2003
    GAO/ PCIE Financial Audit Manual - Part II Page 812- 2 Note: Complete this
    program or prepare equivalent documentation only if provisions of the Pay
    and Allowance System for Civilian Employees, as provided primarily in
    Chapters 51- 59 of Title 5, U. S. Code, are considered to be significant
    as indicated on Form 802 - General Compliance Checklist. The procedures in
    this program are designed to test compliance with the provisions listed on
    the Compliance Summary.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref Note: These tests are closely related to procedures

    performed for substantive tests of payroll expense details. Use of
    multipurpose testing in this situation is strongly encouraged. 1. Based on
    the preliminary assessment of compliance

    control effectiveness (as documented on Form 812 - Compliance Summary),
    select an appropriate sample of disbursements from the payroll records
    throughout the audit period. (The sample size will

    vary based on the expected effectiveness of compliance controls as
    discussed in FAM 460.02). Document the sampling approach using the
    documentation in FAM section 495 E. See note 2 regarding sampling
    efficiencies and completeness of the population. Sample size Sample
    selection method

    Compliance 812 - Pay and Allowance System for Civilian Employees, as
    Provided Primarily in Chapters 51- 59 of Title 5, U. S. Code April 2003
    GAO/ PCIE Financial Audit Manual - Part II Page 812- 3

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 2. For each item selected in 1, note the following

    information:

    employee name;

    pay period (number and dates);

    amount of gross pay for the period;

    pay rate;

    total hours worked; and

    number of hours worked at regular pay and other pay (i. e., overtime,
    premium pay, etc.). 3. For each item selected in 1, obtain the employee's

    personnel file and note the following in effect for the pay period
    selected:

    the employee's grade and step and

    the employee's pay rate. 4. For each item selected in 1, (a) Calculate the
    amount of gross pay using the

    hours worked and the employee's pay rate indicated on the payroll records.
    Compare the amount of gross pay calculated by the auditor to the amount
    shown on the payroll records for the

    selected pay period and obtain explanation and examine support for any
    differences.

    Note: To convert basic annual amount to a daily, weekly or biweekly
    amount, divide the annual rate by 2,087 for an hourly rate. Multiply the
    hourly rate by number of either daily hours, 40 for weekly, or 80 for
    biweekly amounts. (5 U. S. C. 5504)

    Compliance 812 - Pay and Allowance System for Civilian Employees, as
    Provided Primarily in Chapters 51- 59 of Title 5, U. S. Code April 2003
    GAO/ PCIE Financial Audit Manual - Part II Page 812- 4

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 4. (b) Compare the employee's pay rate in the payroll

    records to the appropriate pay rate for the employee's approved grade and
    step on the pay schedules established by executive order. (Use the
    approved grade and step indicated in the employee's personnel records for
    this test.) Obtain explanation and examine support for any differences
    between the actual pay rate for the period selected and the authorized
    amounts. (5 U. S. C. 5332, 5343, and 5383)

    If the employee's pay is not set by these pay schedules, determine whether
    the amount paid is properly authorized and whether the pay rate is at
    least minimum wage. (29 U. S. C. 206)

    Compliance 812 - Pay and Allowance System for Civilian Employees, as
    Provided Primarily in Chapters 51- 59 of Title 5, U. S. Code April 2003
    GAO/ PCIE Financial Audit Manual - Part II Page 812- 5

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 5. If the entity does not appear to be in compliance

    based on the results of tests performed, discuss these matters with OGC
    and, when appropriate, the Special Investigator Unit to conclude if
    noncompliance actually has occurred and the implications of such
    noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the opinion on internal control as appropriate (see FAM
    580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    6. Document conclusions on compliance with each

    provision on Form 812 - Compliance Summary.

    Compliance 812 - Pay and Allowance System for Civilian Employees, as
    Provided Primarily in Chapters 51- 59 of Title 5, U. S. Code April 2003
    GAO/ PCIE Financial Audit Manual - Part II Page 812- 6 Note 1: To convert
    basic annual amount to a daily, weekly, or biweekly amount,

    divide the annual rate by 2,087 for an hourly rate. Multiply the hourly
    rate by number of either daily hours, 40 for weekly, or 80 for biweekly
    amounts. (5 U. S. C. 5504)

    Note 2: If multipurpose testing is used for the compliance test and/ or
    compliance control test and a substantive test of payroll expense details,
    the sample items for the compliance test and/ or compliance control test
    should be selected using the sampling method used for the substantive
    test. Otherwise, the items should be selected using attribute sampling, as
    discussed in FAM 460.02.

    As with all sampling applications, the auditor should consider the
    completeness of the population. For efficiency, the auditor should
    consider using records that were tested for validity and completeness (as
    well as the other financial statement assertions) in conjunction with
    substantive tests of payroll or other payroll related compliance tests.
    Note 3: If the entity outsources payroll processing, the entity remains

    responsible for compliance. Dividing responsibility for payroll processing
    activities between the entity and the service organization could make
    payroll testing more complicated, although the same testing should be
    performed. The auditor may accomplish that testing with the assistance of
    the service organization's auditor, who may issue an internal control
    report on the service organization under AU 324 (SAS 70). Or the service
    organization's auditor may assist the entity auditor by performing agreed-
    upon procedures at the service organization (e. g., substantive testing)
    under AT 201 (see FAM 660).

    Compliance 813 - CIVIL SERVICE RETIREMENT ACT

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 813- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Civil Service Retirement Act are considered to be
    significant as indicated on Form 802 - General Compliance Checklist.

    Name of entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description Objective

    Control activities IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. For each employee employed prior to
    January 1, 1984, the entity shall withhold a

    percent of the basic pay of the employee. (See notes 1 and 2.) Type:
    Transaction- based

    Ref: 5 U. S. C. 8334( a)( 1) 1. The appropriate amount is withheld from
    employee's

    pay. (See notes 1 and 2.) [Document the control activities used by the
    entity to achieve the

    objective.] [Is

    con trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 813 Step 4( b).

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 2 Name of entity: Compliance
    Summary Prepared by: Audit period: Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. An amount equal to the amount
    withheld

    from the employee's pay shall be contributed by the entity from the
    appropriation or fund used to pay the employee. Type: Transaction- based
    and

    Quantitative- based Ref: U. S. C. 5 U. S. C. 8334( a)( 1) 2. The entity
    contribution for employee retirement is calculated properly, summarized
    properly, and

    charged to the proper appropriation account or fund.

    See Compliance Audit Program

    813 Steps 4( c) and 5. 3. Amounts withheld from employees and the sum
    contributed by the entity for

    retirement benefits shall be deposited in the Treasury to the credit of
    the Civil Service Retirement and Disability Fund.

    Type: Procedural- based and Quantitative based

    Ref: 5 U. S. C. 8334( a)( 2) 3. Withholdings from employees and entity

    contributions for retirement benefits are properly summarized and
    deposited in the Treasury to the credit of the Civil Service Retirement
    and Disability Fund.

    See Compliance Audit Program

    813 Steps 6 and 7.

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 3 Note: Complete this program
    or prepare equivalent documentation only if provisions of the Civil
    Service Retirement Act are considered to be significant as indicated on
    Form 802 - General Compliance Checklist. The procedures in this program
    are designed to test compliance with the provisions listed on the
    Compliance Summary.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 1. Based on the preliminary assessment of compliance

    control effectiveness (as documented on Form 813 - Compliance Summary),
    select a sample of expense amounts for individuals' gross pay from the
    payroll disbursement records for the audit period for employees covered by
    the Civil Service Retirement Act system (CSRS). (See note 1.)

    (The sample size will vary based on the expected effectiveness of
    compliance controls, as discussed in FAM 460.02). Document the sampling
    approach using the documentation in FAM section 495 E. See note 3
    regarding sampling efficiencies and completeness of the population.

    These tests should be coordinated with other tests of payroll- related
    expenses and with the agreed- upon procedures agency auditors perform for
    the Office of Personnel Management (OPM), per OMB audit guidance, if
    performed. Sample size Sample selection method

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 4 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    2. For each selection made in 1, document the following for the pay period
    selected:

    the amount withheld for the cost of retirement benefits;

    the amount of basic pay; and

    if indicated in the payroll disbursement records, document the retirement
    plan under which the withholdings were made (CSRS or FERS). (Only
    employees covered by CSRS should be included in this compliance test. See
    FAM 817 for the FERS compliance test.) 3. For each item selected in 1,
    obtain the employee's

    personnel file and note the following:

    employee hire date,

    amount of basic pay, and

    the retirement plan under which the employee is covered. 4. For each
    selection made in 1, (a) Compare the amount of basic pay indicated in

    the employee's personnel file with the amount indicated in the payroll
    records and obtain an explanation and examine support for any differences.
    (This procedure would be performed only if not already performed as part
    of other testing.)

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 5 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    4. (b) Calculate the amount of the withholdings for retirement costs based
    on 7 percent of basic pay for executive branch employees (see note 2 for
    percentages for other employees) for the selected pay period and document
    the amount in the documentation. Compare to the actual amount withheld for
    the selected pay period and

    obtain an explanation and examine support for any differences. (5 U. S. C.
    8334( a)( 1)) 4. (c) Determine whether the entity contributed an

    equal amount for the employee's retirement for the selected pay period.
    Obtain explanation and examine support for any differences between the
    employee and entity contributions. (5 U. S. C. 8334( a)( 1)) 5. Determine
    whether amounts contributed by the entity are charged to the appropriation
    or fund used to pay

    the employee for the selected pay period by performing the following
    procedures:

    (a) Review the accounting codes indicated on the supporting documentation.

    (b) Determine whether the accounting codes used to record the entity
    contribution are the same as those used for the related payroll
    expenditure and whether the codes and amounts agree with those recorded in
    the budgetary accounting records. (This step assumes other payroll testing
    would have included checking that the codes represent the proper
    appropriation.)

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 6 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    5. (c) Consider the procedures performed on the entity's budget controls
    over summarization of expenditure balances as discussed in FAM 395 F.

    If the auditor has assessed the entity's controls as effective in
    achieving the control objective of summarization of expenditure balances,
    further procedures are not necessary to obtain assurance as to whether the
    entity's contributions are paid out of the proper appropriation account.

    If the auditor has assessed the controls as ineffective, the auditor
    should perform procedures to determine whether the entity has

    properly summarized the expenditure balances as described in FAM 495 B. (5
    U. S. C. 8334 (a)( 1)) 6. Determine whether the entity has effective
    controls

    over the proper summarization of (a) the amounts withheld from employees
    for retirement costs under this law and (b) the entity contributions for
    remittance to Treasury. If the entity does not have effective controls for
    summarization, test the summarization of the totals that include the items
    selected for testing in step 1. 7. Compare the combined totals of employee

    withholdings and entity contributions that include each selection made in
    step 1 to the deposit made to Treasury and the remittance sent to OPM and
    obtain an explanation and examine support for any differences. The funds
    should be deposited in the Treasury to the credit of the Civil Service
    Retirement and Disability Fund. (5 U. S. C. 8334( a)( 2))

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 7 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    8. If the entity does not appear to be in compliance based on the results
    of tests performed, discuss these matters with OGC and, when appropriate,
    the Special Investigator Unit to conclude if noncompliance actually has
    occurred and the implications of such noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the opinion on internal control as appropriate (see FAM
    580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    9. Document conclusions on compliance with each provision on Form 813 -
    Compliance Summary.

    Compliance 813 - Civil Service Retirement Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 813- 8 Note 1: Employees may be
    covered by the Civil Service Retirement Act (CSRS)

    or the Federal Employees' Retirement System Act (FERS), generally
    depending on their employment date.

    Note 2: The percentage to be withheld for the service period after
    December 31, 2000, for (1) executive branch employees is 7 percent and (2)
    Congressional employees is 7.5 percent. The percentage to be withheld for
    the service period between January 1, 2001 and December 31, 2002, for
    Members of Congress is 8.5 percent. The percentage withheld for service
    after December 31, 2002, for Members of Congress is 8 percent. (5 U. S. C.
    8334( a)( 1))

    Note 3: If multipurpose testing is used for the compliance test and/ or
    compliance control test and a substantive test of payroll expense details,
    the sample items for the compliance test and/ or compliance control test
    should be selected using the sampling method used for the substantive
    test. Otherwise, the items should be selected using attribute sampling, as
    discussed in FAM 460.02.

    As with all sampling applications, the auditor should consider the
    completeness of the population. For efficiency, the auditor should
    consider using records that were tested for validity and completeness (as
    well as the other financial statement assertions) in conjunction with
    substantive tests of payroll or other payroll related compliance tests.
    Note 4: If the entity outsources payroll processing, the entity remains

    responsible for compliance. Dividing responsibility for payroll processing
    activities between the entity and the service organization could make
    payroll testing more complicated, although the same testing should be
    performed. The auditor may accomplish that testing with the assistance of
    the service organization's auditor, who may issue an internal control
    report on the service organization under AU 324 (SAS 70). Or the service
    organization's auditor may assist the entity auditor by performing agreed-
    upon procedures at the service organization (e. g., substantive testing)
    under AT 201 (see FAM 660).

    Compliance 814 - FEDERAL EMPLOYEES HEALTH BENEFITS ACT

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 814- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Federal Employees Health Benefits Act are considered
    to be significant as indicated on Form 802 - General Compliance Checklist.

    Name of entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description Objective

    Control activities IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. For each full- time employee enrolled
    in a

    health benefits plan, a biweekly contribution shall be made by the entity
    in an amount determined by OPM for each

    type of insurance plan. (See note 1 for part- time career employees.)
    Type: Transaction- based Ref: 5 U. S. C. 8906( b)( 1) 1. The amount of the
    entity contribution for health insurance benefits is

    calculated properly for employees who elect to enroll in a health benefits

    plan. [Document the control activities

    used by the entity to achieve the objective.]

    [Is con

    trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 814 Step 4( b).

    2. For employees generally, the entity contribution for the cost of health
    insurance shall be paid from the appropriation or fund that is used to pay
    the employee.

    Type: Transaction- based and Quantitative- based Ref: 5 U. S. C. 8906( f)
    2. Entity contributions for the cost of employee health insurance are
    summarized properly and charged to the

    proper appropriation account or fund.

    See Compliance Audit Program

    814 Step 4( c).

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 2 Name of entity:
    Compliance Summary Prepared by: Audit period: Reviewed by: Provision
    description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 3. An amount shall be withheld from the
    employee's pay to cover the total cost of enrollment in the health benefit
    plan selected by the employee after the amount

    of the entity contribution is subtracted. Type: Transaction- based

    Ref: 5 U. S. C. 8906( d) 3. Withholdings are made for the employee's share
    of the

    cost of health insurance and are calculated properly. See Compliance

    Audit Program 814 Step 4( a).

    4. Amounts withheld from employees and the sum contributed by the entity
    for health insurance costs shall be deposited in the

    Treasury to the credit of the Employees Health Benefits Fund.

    Type: Procedural- based and Quantitative- based Ref: 5 U. S. C. 8909

    4. Withholdings from employees and entity

    contributions for health insurance costs are properly summarized and

    deposited in the Treasury to the credit of the Employees Health Benefits
    Fund.

    See Compliance Audit Program

    814 Steps 5 and 6.

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 3 Note: Complete this
    program or prepare equivalent documentation only if provisions of the
    Federal Employees Health Benefits Act are considered to be significant as
    indicated on Form 802 - General Compliance Checklist. The procedures in
    this program are designed to test compliance with the provisions listed on
    the Compliance Summary. Name of entity: Audit period: Reviewed by: Audit
    Procedures Done

    by/ date W/ P ref

    1. Based on the preliminary assessment of compliance control effectiveness
    (as documented on Form 814 - Compliance Summary), select a sample of
    expense amounts for individuals' gross pay from the payroll disbursement
    records for the audit period.

    (The sample size will vary based on the expected effectiveness of
    compliance controls, as discussed in FAM 460.02). Document the sampling
    approach using the documentation in FAM section 495 E. See note 2
    regarding sampling efficiencies and completeness of the population.

    These tests should be coordinated with other tests of payroll- related
    expenses and with the agreed- upon procedures agency auditors perform for
    OPM, per OMB audit guidance, if performed.

    Sample size Sample selection method 2. For each selection made in step 1,
    document the employee, the pay period selected, and the amount withheld
    for the pay period selected, if any, for the cost of health insurance. If
    available, document the health plan enrollment code.

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 4 Name of entity: Audit
    period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    3. For each selection made in step 1, obtain the employee's personnel file
    and note whether the employee elected health insurance coverage for the
    period to which payroll disbursement relates. Such coverage should be
    indicated on OPM form SF 2809.

    If the employee did not elect health insurance coverage, ask why amounts
    are being withheld for the cost of insurance and determine whether any
    entity contributions are being made inappropriately as well. 4. If the
    employee identified in step 3 elected coverage,

    perform the following steps: (a) Obtain the schedule of health insurance
    costs

    for all plans published by OPM. Using the enrollment code for the plan
    selected by the employee on OPM form SF 2809, calculate the employee's
    portion of the health insurance cost and record it in the documentation.
    Compare it to the amount actually withheld for the selected pay period and
    obtain an explanation and examine support for any differences. (5 U. S. C.
    8906( d)) 4. (b) For each employee in (a), determine the

    appropriate amount of the entity's contribution for its share of health
    insurance costs by using the OPM schedule of costs. Compare it to the
    amount actually contributed by the entity for the employee's health
    insurance for the selected pay period and obtain an explanation and
    examine support for any differences. (See note 1 for part- time career
    employees.) (5 U. S. C. 8906( b)( 1))

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 5 Name of entity: Audit
    period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    4. (c) For each employee in (b), determine if amounts contributed by the
    entity are charged to the appropriation or fund that is used to pay the
    employee for the selected pay period by performing the following
    procedures:

    (1) Review the accounting codes indicated on the supporting documentation.

    (2) Determine whether the accounting codes used to record the entity
    contribution are the same as those used for the related payroll
    expenditure and whether the codes and amounts agree with those recorded in

    the budgetary accounting records. (This step assumes other payroll testing
    would have included checking that the codes represent the proper
    appropriation.)

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 6 Name of entity: Audit
    period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    4. (c) (3) Consider the procedures performed on the entity's budget
    controls over summarization of expenditure balances as discussed in FAM
    395 F.

    If the auditor has assessed the entity's controls as effective in
    achieving the control objective of summarization of expenditure balances,
    further procedures are not necessary to obtain assurance as to

    whether the entity's contributions are paid out of the proper
    appropriation account.

    If the auditor has assessed the controls as ineffective, the auditor
    should perform procedures to determine whether the entity

    has properly summarized the expenditure balances as described in FAM 495
    B. (5 U. S. C. 8906( f))

    5. Determine whether the entity has effective controls over the proper
    summarization of the amounts withheld from employees for health insurance
    costs

    under this law and the entity contributions for remittance to Treasury. If
    the entity does not have effective controls for summarization, test the
    summarization of the totals that include the items selected for testing in
    step 1. 6. Compare the total cost of health insurance on the

    entity's records (employee and employer portions) for the selected pay
    period to the deposit made to Treasury and the documentation sent to OPM
    and obtain an explanation and examine support for any differences. The
    funds should be deposited in the Treasury to the credit of the Employees
    Health Benefits Fund. (5 U. S. C. 8909)

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 7 Name of entity: Audit
    period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    7. If the entity does not appear to be in compliance based on the results
    of tests performed, discuss these matters with OGC and, when appropriate,
    the Special Investigator Unit to conclude if noncompliance actually has
    occurred and the implications of such noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the opinion on internal control as appropriate (see FAM
    580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    8. Document conclusions on compliance with each provision on Form 814 -
    Compliance Summary.

    Compliance 814 - Federal Employees Health Benefits Act April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 814- 8 Note 1: For part- time
    career employees, the biweekly entity contribution shall be

    calculated on a prorata basis based on the ratio of number of scheduled
    part- time hours to the number of scheduled regular hours for an employee
    serving in a comparable position on a full- time basis. (5 U. S. C. 8906(
    b)( 3))

    Note 2: If multipurpose testing is used for the compliance test and/ or
    compliance control test and a substantive test of payroll expense details,
    the sample items for the compliance test and/ or compliance control test
    should be selected using the sampling method used for the substantive
    test. Otherwise, the items should be selected using attribute sampling, as
    discussed in FAM 460.02.

    As with all sampling applications, the auditor should consider the
    completeness of the test population. For efficiency, the auditor should
    consider using records that were tested for validity and completeness (as
    well as the other financial statement assertions) in conjunction with
    substantive tests of payroll or other payroll related compliance tests.
    Note 3: If the entity outsources payroll processing, the entity remains

    responsible for compliance. Dividing responsibility for payroll processing
    activities between the entity and the service organization could make
    payroll testing more complicated, although the same testing should be
    performed. The auditor may accomplish that testing with the assistance of
    the service organization's auditor, who may issue an internal control
    report on the service organization under AU 324 (SAS 70). Or the service
    organization's auditor may assist the entity auditor by performing agreed-
    upon procedures at the service organization (e. g., substantive testing)
    under AT 201 (see FAM 660).

    Compliance 816 - FEDERAL EMPLOYEES' COMPENSATION ACT

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 816- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Federal Employees' Compensation Act are considered to
    be significant as indicated on Form 802 - General Compliance Checklist.

    Name of entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description Objective

    Control activities IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. If the agency receives a statement
    showing

    the costs of amounts paid from the Employees' Compensation Fund (the
    Fund), the agency shall include a request

    for an appropriation to cover such amounts during the next fiscal year
    when submitting its budget request. (See note

    1.) Type: Procedural- based Ref: 5 U. S. C. 8147 1. The entity's budget
    request

    includes a request for an appropriation for any amounts paid by the Fund
    on the entity's behalf for the prior fiscal year.

    [Document the control activities used by the entity to achieve the

    objective.] [Is

    con trol depen dent on

    com puter pro ces

    sing?] [Indicate

    yes or no; include reference to supporting documenta tion.] [Indicate yes
    or no; include reference to supporting documentation.] See Compliance

    Audit Program 816 Step 1.

    Compliance 816 - Federal Employees' Compensation Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 816- 2 Name of entity: Compliance
    Summary Prepared by: Audit period: Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. Amounts appropriated pursuant to the
    request (described in 1 above) shall be credited to the Fund within 30
    days after

    they are available. (See note 2 for entities that are not dependent on
    annual

    appropriations.) Type: Procedural- based Ref: 5 U. S. C. 8147

    2. Appropriations received for the costs of amounts paid out of the Fund
    on behalf of the entity are credited to the Fund within 30 days after they
    are available.

    See Compliance Audit Program

    816 Step 1.

    Compliance 816 - Federal Employees' Compensation Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 816- 3 Note: Complete this program
    or prepare equivalent documentation only if provisions of the Federal
    Employees' Compensation Act are considered to be significant as indicated
    on Form 802 - General Compliance Checklist. The procedures in this program
    are designed to test compliance with the provisions listed on the
    Compliance Summary for this law.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref Note: The provisions identified for testing are

    procedural- based provisions. As discussed in FAM 460.06, sufficient
    procedures usually are performed in conjunction with tests of compliance
    controls for these procedural- based provisions to conclude on the
    entity's compliance without performing additional procedures. Additional

    procedures should not be performed to obtain evidence regarding compliance
    with the provisions related to the following objectives unless sufficient
    evidence regarding compliance was not obtained during compliance control
    tests documented on Form 816 - Compliance Summary. 1. Reference to
    conclusions on compliance controls on

    Form 816 - Compliance Summary and indicate whether any additional
    procedures are necessary.

    Compliance 816 - Federal Employees' Compensation Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 816- 4 Name of entity: Audit period:
    Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    2. If the entity does not appear to be in compliance based on the results
    of tests performed, discuss these matters with OGC and, when appropriate,
    the Special Investigator Unit to conclude if noncompliance actually has
    occurred and the implications of such noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the opinion on internal control as appropriate (see FAM
    580.32-. 61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).
    3. Document conclusions on compliance with each

    provision on Form 816 - Compliance Summary.

    Compliance 816 - Federal Employees' Compensation Act April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 816- 5 Note 1: A statement showing
    the total cost of benefits and other payments made

    from the Employees' Compensation Fund during the preceding July 1 through
    June 30 expense period on account of the injury or death of employees or
    individuals under the jurisdiction of the entity is required

    to be provided by the Secretary of Labor to the entity by August 15 of
    each year. (5 U. S. C. 8147)

    Note 2: Entities not dependent on an annual appropriation shall make the
    required deposit to Treasury from funds under its control during the first
    15 days of October after receipt of the statement showing the costs paid

    on the entity's behalf. (5 U. S. C. 8147)

    [This page intentionally left blank.]

    Compliance 817 * FEDERAL EMPLOYEES' RETIREMENT SYSTEM ACT OF 1986

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 1 Note:
    Complete this compliance summary or prepare equivalent documentation only
    if provisions of the Federal Employees' Retirement System Act of 1986 are

    considered significant as indicated on Form 802 - General Compliance
    Checklist. Name of entity: Compliance Summary Prepared by: Audit period:
    Reviewed by: Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 1. For each employee employed after
    December 31, 1983, the entity shall withhold 0. 8% of the basic pay of the
    employee. (See notes 1 and 2.) Type: Transaction- based

    Ref: 5 U. S. C. 8401( 11), 5U. S. C. 8422( a)( 1) 1. The appropriate
    amount is withheld from employee's

    pay. (See notes 1 and 2.) [Document the control techniques used by the

    entity to achieve the objective.]

    [Is con

    trol depen dent on

    com puter pro ces

    sing?] [Indicate yes

    or no; include reference to supporting documenta tion.] [Indicate yes or
    no; include reference to supporting documenta

    tion.] See

    Compliance Audit Program 817 Step 4( b).

    Compliance 817 * Federal Employees' Retirement System Act of 1986

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 2 Name of
    entity: Compliance Summary Prepared by: Audit period: Reviewed by:
    Provision description

    Objective Control activities

    IS (Y/ N) Effective

    compliance controls?

    Instances of noncompliance noted? 2. An amount equal to the employing
    agency's

    applicable normal cost percentage less the employee deduction rate shall
    be contributed by the entity from the appropriation or fund used to pay
    the employee. (See note 3.) Type: Transaction- based and

    Quantitative- based Ref: 5 U. S. C. 8423( a)( 1) and 5 U. S. C. 8401( 23)
    2. The entity contribution for employee retirement is calculated properly,
    summarized properly, and

    charged to proper appropriation account or fund. (See note 3.)

    See Compliance Audit Program

    817 Steps 4( c) and 5. 3. Amounts withheld from employees and the sum
    contributed by the entity for

    retirement benefits shall be deposited in the Treasury to the credit of
    the Civil Service Retirement and Disability Fund.

    Type: Procedural- based and Quantitative based Ref: 5 U. S. C. 8422( c) 3.
    Withholdings from

    employees and entity contributions for retirement benefits are properly
    summarized and deposited in the Treasury to the credit of the Civil
    Service

    Retirement and Disability Fund. See

    Compliance Audit Program 817 Steps 6 and 7.

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 3 Note: Complete
    this program or prepare equivalent documentation only if provisions of the
    Federal Employees' Retirement System Act of 1986 are considered
    significant as indicated on Form 802 - General Compliance Checklist. The
    procedures in this program are designed to test compliance with the
    provisions listed on the Compliance Summary.

    Name of entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 1. Based on the preliminary assessment of compliance

    control effectiveness (as documented on form 817 - Compliance Summary),
    select a sample of expense amounts for individuals' gross pay from the
    payroll disbursement records for the audit period for employees covered by
    the Federal Employees' Retirement System (FERS). (See note 1.)

    (The sample size will vary based on the expected effectiveness of
    compliance controls as discussed in FAM 460.02). Document the sampling
    approach using the documentation in FAM section 495 E. See note 4
    regarding sampling efficiencies and completeness of the sample population.

    These tests should be coordinated with other tests of payroll- related
    expenses and with the agreed- upon procedures agency auditors perform for
    OPM, per OMB audit guidance, if performed. Sample size Sample selection
    method

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 4 Name of
    entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 2. For each selection made in 1, document the following

    for the pay period selected:

    the amount withheld for the cost of retirement benefits,

    the amount of basic pay, and

    if indicated in the payroll disbursement records, document the retirement
    plan under which the withholdings were made (CSRS or FERS). (Only
    employees covered by FERS should be included in this compliance test. See
    FAM 813 for the CSRS compliance test.)

    3. For each item selected in 1, obtain the employee's personnel file and
    note the following:

    employee hire date,

    amount of basic pay, and

    the retirement plan under which the employee is covered. 4. For each
    selection made in 1,

    (a) Compare the amount of basic pay indicated in the employee's personnel
    file with the amount indicated in the payroll records and obtain an
    explanation and examine support for any differences. (This procedure would
    be performed only if not already performed as part of other testing.)

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 5 Name of
    entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    4. (b) Calculate the amount of the withholdings for retirement costs based
    on 0.8% of basic pay for most employees (see note 2 for percentages for
    certain employees) for the selected pay period and record the amount in
    the documentation. Compare to the actual amount withheld for the selected
    pay period and obtain an explanation and examine support for any
    differences. (5 U. S. C. 8422( a)( 1))

    4. (c) Determine whether the entity contributed the correct amount for the
    employee's retirement for the selected pay period. Obtain an explanation
    and examine support for any differences between the entity contributions
    and the amount calculated using OPM's normal cost percentage. (5 U. S. C.
    8423( a)( 1) and 5 U. S. C. 8401( 23))

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 6 Name of
    entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 5. Determine if amounts contributed by the entity are

    charged to the appropriation or fund used to pay the employee for the
    selected pay period by performing the following procedures:

    (a) Review the accounting codes indicated on the supporting documentation.

    (b) Determine whether the accounting codes used to record the entity
    contribution are the same as those used for the related payroll
    expenditure and whether the codes and amounts agree to those recorded in
    the budgetary accounting records. (This step assumes other payroll testing
    would

    have included checking that the codes represent the proper appropriation.)

    (c) Consider the procedures performed on the entity's budget controls over
    summarization of expenditure balances as discussed in FAM 395 F. If the
    auditor has assessed the entity's controls as effective in achieving the
    control objective of summarization of expenditure balances, further
    procedures are not necessary to obtain assurance as to whether the
    entity's contributions are paid out of the proper appropriation account.

    If the auditor has assessed the controls as ineffective, the auditor
    should perform procedures to determine whether the entity has properly

    summarized the expenditure balances as described in FAM 495 B. (5 U. S. C.
    8423( a)( 1))

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 7 Name of
    entity: Audit period: Reviewed by: Audit Procedures Done

    by/ date W/ P ref

    6. Determine whether the entity has effective controls over the proper
    summarization of the amounts withheld from employees for retirement costs
    under this law and the entity contributions for remittance to Treasury. If
    the entity does not have effective controls for summarization, test the
    summarization of the totals that include the items selected for testing in
    step 1.

    7. Compare the combined totals of employee withholdings and entity
    contributions that include each selection made in step 1 to the deposit
    made to Treasury and the remittance sent to OPM and obtain explanation and
    examine support for any differences. The funds should be deposited in the
    Treasury to the credit of the Civil Service Retirement and Disability
    Fund. (5 U. S. C. 8422( c) and 5 U. S. C. 8401( 6))

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 8 Name of
    entity: Audit period: Reviewed by: Audit Procedures Done by/ date

    W/ P ref 8. If the entity does not appear to be in compliance based

    on the results of tests performed, discuss these matters with OGC and,
    when appropriate, the Special Investigator Unit to conclude if
    noncompliance actually has occurred and the implications of such
    noncompliance.

    For any noncompliance noted, the auditor should

    identify the weakness in compliance controls that allowed the
    noncompliance to occur, if not previously identified during compliance
    control

    testing;

    report the nature of any weakness in compliance controls and consider
    modification of the conclusion on internal control as appropriate (see FAM
    580.32- .61);

    consider the implications of any instances of noncompliance on the
    financial statements; and

    report instances of noncompliance, as appropriate (see FAM 580.67-. 75).

    9. Document conclusions on compliance with each provision on Form 813 -
    Compliance Summary.

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 9 Note 1:
    Employees may be covered by the Civil Service Retirement Act

    (CSRS) or the Federal Employees' Retirement System Act (FERS), generally
    depending on their employment dates. Note 2: For most employees, the
    percentage to be withheld is 0.8 percent (7

    percent less the Social Security tax rate). For congressional employees,
    Members of Congress, and law enforcement officers, firefighters, air
    traffic controllers, and nuclear materials couriers, the withholding rates
    are higher. (See 5 U. S. C. 8422( a)( 1).).

    Note 3: The Office of Personnel Management (OPM) computes the normal cost
    percentage. For FY 2002, it is 11.5 percent for regular employees. For
    congressional employees, Members of Congress, and law enforcement
    officers, firefighters, air traffic controllers, and nuclear materials
    couriers, the normal cost percentages are higher. OPM lists the
    percentages in its Benefits Administration Letters, accessible on its
    Internet site, http:// www. opm. gov/ asd/ htm/ bal01. htm (where the 2
    digits after "bal" represent the calendar year of the

    letters). (5 U. S. C. 8401( 23)) Note 4: If multipurpose testing is used
    for the compliance test and/ or

    compliance control test and a substantive test of payroll expense details,
    the sample items for the compliance test and/ or compliance control test
    should be selected using the sampling method used for the substantive
    test. Otherwise, the items should be selected using attribute sampling, as
    discussed in FAM 460.02.

    As with all sampling applications, the auditor should consider the
    completeness of the test population. For efficiency, the auditor should
    consider using records that were tested for validity and completeness (as
    well as the other financial statement assertions) in conjunction with
    substantive tests of payroll or other payroll related compliance tests.

    Note 5: If the entity outsources payroll processing, the entity remains
    responsible for compliance. Dividing responsibility for payroll processing
    activities between the entity and the service organization could make
    payroll testing more complicated, although the same testing should be
    performed. The auditor may accomplish that

    testing with the assistance of the service organization's auditor, who may
    issue an internal control report on the service organization under AU 324
    (SAS 70). Or the service organization's auditor may assist the entity
    auditor by performing agreed- upon procedures at the

    Compliance 817 - Federal Employees' Retirement System Act of 1986 April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 817- 10 service
    organization (e. g., substantive testing) under AT 201 (see FAM 660).

    [This page intentionally left blank.]

    Substantive Testing 902 - RELATED PARTIES, INCLUDING

    INTRAGOVERNMENTAL ACTIVITY AND BALANCES

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 1 .01 This
    section provides detailed guidance on the procedures that the auditor
    should

    perform with respect to related parties, as described in FAM sections 280
    and 550. AU 334 (SAS No. 45) provides general guidance on the procedures
    that should be performed to identify related party relationships and
    transactions so that the auditor may satisfy him or herself that they are
    appropriately accounted for and disclosed. In addition, the American
    Institute of Certified Public Accountants (AICPA) has issued a toolkit for
    accountants and auditors titled , Accounting and

    Auditing for Related Parties and Related Party Transactions 1 . This
    toolkit includes selected authoritative accounting and auditing
    literature, an illustrative audit program, disclosure checklist,
    confirmation letter, and letter to other auditors and is available at the
    AICPA's website: http:// www. aicpa. org/ news/ relpty1. htm.

    .02 The federal government in its entirety is an economic entity. Federal
    entities are components of the U. S. government; therefore, transactions
    between federal entities are considered intragovernmental. Within the
    federal government, many reporting entities rely on other federal entities
    to help them achieve their missions and fulfill their operating
    objectives. These arrangements may be voluntary, stipulated by law, or
    established by mutual agreement of the entities involved and may not be
    carried out on an arm's- length basis. In many cases, the entity receiving
    goods or services will reimburse the providing entity in accordance with
    some agreed- upon price, which may or may not represent market value.
    Often, however, one entity provides goods or services to another entity
    free of charge (without reimbursement). For example, the General Services
    Administration, in some cases, provides property management services and
    contract award and administration to other entities without charge.

    .03 In addition, certain federal entities can significantly influence the
    operating policies of the transacting entities. For example, the Office of
    Management and Budget (OMB) provides policy and/ or general management
    guidance to other federal entities, and the Office of Personnel Management
    (OPM) helps federal entities recruit nationwide and sets human resources
    management rules with the

    1 These tools are based on the best practices guidance received from the
    participating accounting and auditing firms and the AICPA publication,
    Practice Alert No. 95- 3, Auditing Related Parties and Related Party
    Transactions, which is available at http:// www. aicpa. org/ members/ div/
    secps/ lit/ practice/ 953. htm .

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 2 federal
    entities' involvement; administers the systems for setting federal

    compensation and benefits; manages federal employee health and life
    insurance programs; and operates the retirement program for federal
    employees. .04 Thus, in the federal government, the most significant
    related parties are other

    federal government entities. Other possible related parties outside of the
    federal government include states, members of the entity's management, and
    individuals and firms with which members of management may be related.

    .05 The auditor should consider the possible existence of related parties
    with material activity and balances that could affect the financial
    statements, including intragovernmental activity and balances. The
    identification of related parties and activity and balances is important
    because of (1) the requirement under U. S. generally accepted accounting
    principles to disclose material related- party transactions and certain
    control relationships, (2) the instances of fraudulent financial reporting
    and misappropriation of assets that have been facilitated by

    the use of an undisclosed related party, and (3) the potential for
    distorted or misleading financial statements in the absence of adequate
    disclosure.

    .06 The reason for disclosing related party information is that financial
    statement users may need that information to make informed judgments. As
    stated above, if parties are related, the transactions between them may
    not be based on an arm'slength relationship. For example, certain goods or
    services may be donated or be at an amount that does not represent market
    value, thus affecting the cost of the receiving entity's operations. In
    addition, if the entity has transactions with another entity based on a
    common control situation, such as when the entity controls or can
    significantly influence the management or operating policies of the
    transacting entity, the users of financial statements should know the
    nature of the relationship since this control relationship could result in
    operating results or

    financial positions significantly different from those that would have
    been achieved in the absence of such relationship.

    .07 Disclosures generally should include the nature of the relationship
    between the entity and its related parties, a description of the
    transactions, including donations, dollar amounts of transactions that
    occurred during the period, and amounts due to or from related parties as
    of the end of the period. Disclosures could include aggregation of similar
    transactions by type. In cases of common

    control relationships, the nature of the control relationship generally
    should be disclosed even if there are no transactions between the
    entities. Disclosure of related party transactions is not required for
    transactions between components of the audited entity that are eliminated
    in consolidation. However, if separate

    statements of the components are issued, the disclosures should be
    presented in the separate component statements.

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 3 .08 The
    following paragraphs discuss intragovernmental activity and balances, then

    other related parties. INTRAGOVERNMENTAL ACTIVITY AND BALANCES

    .09 Intragovernmental amounts represent activity and balances within or
    between federal entities. Intradepartmental amounts are activity and
    balances within the same department (a department here means any
    department, agency, administration or other entity designated by OMB as a
    financial reporting entity that is not part of a larger financial
    reporting entity other than the government as

    a whole). Interdepartmental amounts are activity and balances between two
    different departments. The intradepartmental and interdepartmental amounts
    are subsets of intragovernmental activity and balances.

    .10 Intragovernmental activity includes:

    Intragovernmental fiduciary transactions such as * Transactions with the
    Department of Labor (Labor) relating to the Federal

    Employee's Compensation Act, including routine payments to Labor;
    Transactions with the OPM relating to employee benefit programs (the

    Federal Employees' Retirement System, the Civil Service Retirement System,
    and federal employees' life insurance and health benefits programs)
    including routine payments, imputed financing, and accruals;

     Investments in federal securities issued by Treasury's Bureau of the
    Public Debt, including interest accruals, interest income and expense, and
    amortization of premiums and discounts; and

     Borrowings from the Treasury and the Federal Financing Bank, including
    interest accruals, interest income, and expenses;

    Goods and services provided from one federal entity to another (trade
    transactions) including any related revenues earned, costs incurred, and
    reimbursable costs (including both interdepartmental and intradepartmental
    activity);

    Transfers between entities based on agreements or legislative authority,
    expended appropriations, taxes and fees collected, collections for others,
    accounts receivable from appropriations, transfers payable, and custodial

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 4 revenue
    (including both interdepartmental and intradepartmental activity);

    and

    Imputed costs such as fiduciary transactions with OPM and Labor mentioned
    above and costs of litigation paid by the judgment fund (including both
    interdepartmental and intradepartmental activity).

    .11 Activity and balances between federal entities (interdepartmental
    transactions) should be eliminated at the U. S. Government's Consolidated
    Financial Statements level, while the activity and balances within the
    same department

    (intradepartmental) should be eliminated at the department's consolidated
    financial statements level.

    Accounting and Reporting Guidance .12 In accounting for and reporting of
    related parties, including intragovernmental activity and balances, the
    entity should refer to Statements of Federal Financial Accounting
    Standards (SFFAS), Statements of Financial Accounting Standards, OMB
    guidance, and Treasury guidance. The following paragraphs illustrate these

    relevant documents. .13 SFFAS No. 4, Managerial Cost Accounting Concepts
    and Standards, and related

    interpretations address the accounting standards for interentity cost
    activities. SFFAS No. 5, Accounting for Liabilities of the Federal
    Government, addresses interentity liabilities, including federal debt,
    pensions and retirement benefits. Also, SFFAS No. 7, Accounting for
    Revenue and Other Financing Sources and Concepts for Reconciling Budgetary
    and Financial Accounting, addresses interentity revenue and requires
    disclosure of the nature of intragovernmental exchange transactions in
    which an entity provides goods or services at a price less than full cost
    or does not charge a price at all. The reporting entities should also
    consult with the funding and administering agencies, such as OPM, for
    information needed to properly record interentity costs. Note that SFFAS
    No. 4 directs OMB to designate the costs of goods and services received
    from other departments that should be recognized, which it has done in the
    guidance mentioned below.

    .14 Statement of Financial Accounting Standards No. 57, Related Party
    Disclosures, defines related parties and provides examples of related
    party transactions and general guidance on disclosures of transactions
    between related parties. Footnote disclosures generally should include
    disclosure of the nature of the relationship between the entity and its
    related parties, a description of the transactions, including donations,
    dollar amounts of transactions that occurred during the period, and
    amounts due to or from related parties as of the end of the period.

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 5 .15 The
    OMB bulletin titled Form and Content of Agency Financial Statements
    indicates that federal entities should:

    Present intragovernmental amounts by trading partner (reciprocal federal
    entity) as required supplementary information (RSI). Intragovernmental
    asset and liability categories reported as RSI should agree with the

    intragovernmental asset and liability line items reported on the balance
    sheet. The intragovernmental RSI may be limited to the consolidated
    departmentwide financial statements of the Chief Financial Officers (CFO)
    Act departments and agencies covered by the form and content bulletin. The

    intragovernmental RSI reporting requirement does not extend to federal
    components that are required to prepare financial statements. All amounts
    should be net of intraentity transactions.

    Reconcile intragovernmental asset, liability, and revenue amounts reported
    as RSI with their trading partners; and

    Report intragovernmental gross cost to generate earned revenue from trade
    transactions, as well as total entity gross cost and earned revenue, by
    budget functional classification.

    OMB also has issued a memorandum titled Business Rules for
    Intragovernmental Transactions that requires agencies to use the same
    methodology in accounting for certain intragovernmental transactions,
    which should help in reconciliation.

    .16 To emphasize the agency management's responsibility for identifying
    intragovernmental activity and balances and reconciling data with relevant
    trading partners, the entity should include specific representations in
    the management representation letter that intragovernmental, including
    intradepartmental, transactions have been properly accounted for,
    reconciled with trading partners, and disclosed (see FAM section 1001). If
    such disclosure is included in the financial statements and the auditor
    believes that the disclosure is not supported by management, or if
    management refuses to disclose related party transactions, the auditor
    generally should give a qualified or adverse opinion because of the
    inadequate disclosure, depending on materiality, and include the necessary
    disclosures in a separate paragraph in the audit report.

    .17 Treasury Financial Manual (TFM) section "Federal Intragovernmental
    Transactions Process" and the Federal Intragovernmental Transactions
    Accounting Policies Guide (Guide) provide governmentwide procedures for
    federal entities to account for and reconcile transactions occurring
    within and between each other. The procedures in these guides do not apply
    to transactions

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 6 between
    federal entities and nonfederal entities. The TFM and the Guide are

    available at the Treasury/ Financial Management Service's (FMS) websites
    (http:// fms. treas. gov/ tfm/ vol1/ v1p2c400. html and http:// www. fms.
    treas. gov/ cfs/ dev/ index. html).

    .18 The TFM includes procedures for CFO Act departments to reconcile and
    confirm with their trading partners intragovernmental activity and
    balances as of and for the fiscal year ended September 30. Each
    department's CFO is to provide the department Inspector General (IG) with
    representations indicating whether the department completed the
    reconciliation. In addition, the department is to describe noncompliance
    with the reconciliation requirements. (See TFM.) These CFO representations
    should be included in the management representation letter (see above).

    .19 The Guide provides detailed guidance on accounting and reconciling
    intragovernmental balances. According to the Guide, federal entities
    should identify trading partners 2 for all intragovernmental transactions
    and accumulate detail and summary information for each activity by trading
    partner from their accounting records. The trading partner code may be
    incorporated (1) as part of account coding classification or (2) in the
    customer/ vendor identification code in

    accounts receivable and payable systems. These codes are the same as the
    Treasury index agency code used by the Treasury to prepare the
    governmentwide consolidated financial statements. If the two- digit
    Treasury index agency code is not adequate to identify the trading
    partner, entities may expand the partner code to components below the
    department level and communicate these codes to their trading partners.

    .20 Federal entities also should use Standard General Ledger (SGL) account
    attributes to indicate the nature of account balances and to identify
    intragovernmental transactions. For example, the federal "F" and
    nonfederal "N" attributes used in conjunction with an SGL account in the
    Federal Agencies' Centralized Trial Balance System (FACTS) I submissions
    enable Treasury/ FMS to prepare elimination entries for the governmentwide
    financial statements. When the federal attribute "F" is used with an SGL
    account, a trading partner should be designated for each transaction
    posted to the account.

    Audit History .21 Prior years' audits of several federal entities'
    financial statements have identified instances where entities did not
    identify, summarize, or reconcile 2 Trading partners are agencies,
    bureaus, programs or other entities (within or

    between entities) participating in transactions with each other.

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 7
    intragovernmental activity and balances by trading partner. Controls over
    the

    intragovernmental transactions were not adequate. For example, one
    department instructed its components to make buyer's intragovernmental
    transaction amounts agree with seller's information without requiring an
    adequate reconciliation or verification if goods or services were
    provided. Similar issues were also identified concerning activity and
    balances within the same entity

    (intradepartmental). Accordingly, there was no assurance that the entity
    records contained fairly stated balances.

    Intragovernmental Payment and Collection (IPAC) System 3 .22 IPAC is the
    primary method used by most federal entities to electronically bill and/
    or pay for services and supplies within the government, and to communicate
    to the Treasury and the trading partner agency that the online billing
    and/ or payment for services and supplies has occurred. IPAC, however, is
    not intended to be a control over the intragovernmental transactions
    (reciprocal accounts). The auditor should understand that IPAC was not
    designed as an accounting system and does not require trading partners to
    record transactions at the same time or in the same amounts. In addition,
    unreconciled IPAC differences could affect the existence and completeness
    of intragovernmental activity and balances.

    .23 The IPAC billing entity initiates an IPAC transaction either as a
    collection or a payment. The IPAC customer entity receives an IPAC
    transaction either as a payment or a collection. Monthly, the Treasury
    compares the customer and billing entities' Statement of Transactions with
    the IPAC data. If there is a difference, a Statement of Differences,
    including a detailed list of all transactions charged or credited to a
    particular agency location code, is generated monthly. Entities should
    investigate the differences and make any necessary corrections on their
    next Statement of Transactions.

    .24 The auditor should examine the entity's IPAC reconciliation procedures
    to determine if the entity performs the reconciliation and researches and
    resolves differences reflected on the statement of differences properly
    and timely. The

    auditor may coordinate with the Fund Balance with Treasury (FBWT)
    procedures to assess the effectiveness of the entity's IPAC
    reconciliation. .25 The auditor should also design procedures to
    understand whether the entity uses other systems (standard forms used to
    transfer funds between appropriations,

    credit cards, and others) in addition to the IPAC system to process
    intragovernmental activity and balances. The auditor should determine
    whether

    3 The Intragovernmental Payment and Collection (IPAC) system replaced the
    Online Payment and Collection (OPAC) system in December 2001.

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 8 these
    systems affect the fairness of intragovernmental activity and balances.
    (See

    audit procedures below and FAM section 902 C.)

    Audit Procedures .26 The auditor should consider audit risk and
    materiality in determining the nature, timing, and extent of procedures
    for auditing intragovernmental activity and balances and in evaluating the
    results of these procedures. Throughout the audit, the auditor should
    consider the possible existence of material intragovernmental activity and
    balances that could affect the financial statements. The auditor should
    evaluate all the information available concerning material
    intragovernmental activity and balances and determine that the financial
    statement disclosures are adequate and appropriate.

    .27 During the planning phase, the auditor should assess inherent, fraud,
    and control risk. In assessing the inherent risk related to
    intragovernmental activity and balances, there are several conditions that
    the auditor should consider. For example, inherent risk may exist because
    of the nature of the intragovernmental activity, such as a significant
    volume of transactions and number of trading partners or complex
    transactions. The auditor should assess the impact of inherent and control
    risk on control testing and substantive testing. The auditor

    should determine whether similar conditions continue to exist and
    understand management's response to such conditions.

    .28 In assessing inherent and control risk, the auditor should obtain an
    understanding of management responsibilities and the relationship of each
    component to the total department and of each department to other
    departments. The auditor should obtain an understanding of the entity's
    operations to identify, respond to, and resolve accounting and auditing
    problems early in the audit. For example, the auditor should know what
    trading partners the entity has, the nature of intragovernmental
    transactions that occur, the volume and dollar amount of transactions, and
    management's attitude and awareness with respect to

    reconciliations of intragovernmental activity and balances. .29 The
    auditor should assess the effectiveness of the entity's internal control
    over

    intragovernmental activity and balances. The auditor should identify the
    policies and procedures that pertain to the entity's ability to record,
    process, summarize, and report intragovernmental activity and balances by
    trading partner. The agency should emphasize the importance of identifying
    and classifying intragovernmental transactions by trading partner when
    they are initiated and on all documentation thereafter; without this
    initial identification, the system will not be able to keep track of them.

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 9 .30
    Without proper and timely reconciliation of intragovernmental activity and

    balances, misstatements in these account balances at the component and/ or
    department level could materially affect the balances at the
    governmentwide level (as well as at the department or component level). In
    addition, when preparing consolidated financial statements, the preparer
    must eliminate intragovernmental activity and balances within and between
    departments or components. Because the amounts reported for entity trading
    partners for certain intragovernmental

    accounts could be significantly out of balance, the preparer would not be
    able to eliminate these accounts in the consolidated financial statements.
    The auditor may advise the entity about the need for monthly confirmation
    and reconciliation of these transactions with trading partners. Annual or
    quarterly reconciliations are generally not sufficient to detect and
    resolve misstatements promptly.

    .31 If the auditor determines that the entity's reconciliation control for
    intragovernmental transactions is not effectively designed and placed in
    operation, the auditor should consider the effect on the financial
    statements. Where intragovernmental transactions are or could be material,
    significant additional work is usually necessary to express an unqualified
    opinion. In some cases where the auditor finds material weaknesses in the
    intragovernmental

    reconciliation control and no other mitigating controls exist, the auditor
    may decide to modify the audit opinion (see FAM section 580).

    .32 The TFM contains agreed- upon procedures for the department inspectors
    general to perform for federal intragovernmental activity and balances.
    These procedures are intended to assist with accounting for and
    eliminating intragovernmental activity and balances in the preparation of
    department and governmentwide financial statements and reports. The IG
    should perform these procedures regardless of the opinion on the
    department consolidated financial statements.

    .33 To avoid duplicate procedures, the auditor should consider the agreed-
    upon procedures contained in the TFM when designing the tests for
    intragovernmental activity and balances. Examples of the account risk
    analysis (ARA), specific control evaluation (SCE), and audit procedures
    for the audit of intragovernmental activity and balances are in sections
    902 A, 902 B, and 902 C. The ARA, SCE( s), and audit procedures generally
    should be customized for the particular entity. For example, if the
    auditor determines that the intragovernmental accounts receivable line
    item is significant, the auditor generally should prepare a separate

    ARA, SCE( s), and audit procedures for the intragovernmental accounts
    receivable account and its related accounting applications. (Note that a
    single SCE for a line- item/ account- related accounting application is
    presented. There are likely transaction- related accounting applications
    listed on the ARA that also would have SCEs.) In addition, to improve
    efficiency, the auditor may coordinate tests

    Substantive Testing 902 - Related Parties, Including Intragovernmental
    Activity and Balances

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902- 10 of
    intragovernmental activity and balances with tests of nonfederal activity
    and

    balances.

    OTHER RELATED PARTIES

    .34 To effectively plan and perform an audit, the auditor should
    understand the entity's organization and its characteristics. The auditor
    should consider the possible existence of other related parties and other
    related party transactions throughout the audit to satisfy him or herself
    that they are properly accounted for

    and disclosed (see paragraph 902.07). Other related parties may include
    states that federal entities made payments to in carrying out or executing
    their federal programs. Examples of these programs are Department of
    Health and Human Services grants to states for Medicaid, 4 Department of
    Transportation Federal Highway Administration programs such as federal aid
    for highways and highway safety construction programs, and Department of
    Labor State Unemployment Insurance and Employment Service Operations.

    .35 The auditor may attempt to detect these relationships by inquiry of
    management, reviewing major contracts/ agreements, and reading financial
    disclosure statements. The documentation generally should include the
    names of related parties so all audit staff may become aware of
    transactions with them. Work done to test transactions with such parties
    may be coordinated with sensitive payments work, as discussed in paragraph
    280.05.

    .36 In addition to the procedures on related parties, the auditor also
    generally should inquire about other parties that may not be related
    parties, but that the agency may wish to disclose because of a public
    perception that they might be related, although professional standards do
    not require disclosure if the parties are not related (as defined in AU
    334). Section 902 C shows examples of audit

    procedures for other related parties as well as for intragovernmental
    activity and balances. The steps should be customized for the particular
    audited entity.

    PRACTICE AIDS

    .37 The following practice aids are appended:

    Section 902 A * Example Account Risk Analysis (ARA),

    Section 902 B * Example Specific Control Evaluation (SCE), and

    Section 902 C * Example Audit Procedures 4 Medicaid assists states in
    providing medical care to their low- income populations by granting
    federal matching payments under the Social Security Act to states with
    approved plans.

    Substantive Testing 902 A - EXAMPLE ACCOUNT RISK ANALYSIS FOR
    INTRAGOVERNMENTAL ACTIVITY AND

    BALANCES

    Entity: Agency Date of Financial Statements: September 30, 20xx

    Line Item: Intragovernmental balances Preparer: . ACCOUNT RISK ANALYSIS
    FORM

    Region: .

    File: Date: Page 1 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part
    II Page 902 A- 1

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance Intragov ernmental assets,

    liabilities, revenues,

    expenses Existence or occurrence Recorded intragovernmental balances do
    not exist. Inherent risk arises from (1) the nature of intra governmental
    transactions,

    which is susceptible to errors because of the signi ficant high volume of
    trans

    actions (and dollar amounts) and number of multiple reporting entities/

    trading partners, and (2) prior years' significant

    Cycles Revenues,

    Expenses, various Accounting applications Receipts,

    Disburse ments,

    Accounts Receivable,

    F Confirm balances with trading partners.

    Review the reconciliation of intragovernmen tal accounts by trading
    partners and reconciling items. Verify that

    III. A & B. 1. c III. A

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances Entity: Agency

    Date of Financial Statements: September 30, 20xx Line Item:
    Intragovernmental balances

    Preparer: .

    ACCOUNT RISK ANALYSIS FORM

    Region: . File: Date: Page 2 of 7 April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 902 A- 2

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance audit adjustments relating to intragovernmental transactions.
    Control risk arises from

    (1) prior years' material weaknesses in accounting and reporting where the
    agency was not able to identify, classify, and summarize intragovern
    mental transactions by trading partners, and (2) management's attitude in
    not enforcing the recon

    ciliation procedures. Accounts

    Payable, various the reconciliation

    was reviewed. Determine if adjustments

    made to accounts are proper and

    timely. Review

    elimination entries and verify

    that they were reviewed. Review pre

    arranged trading partner

    agreements. III. E I. 4

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances Entity: Agency

    Date of Financial Statements: September 30, 20xx Line Item:
    Intragovernmental balances

    Preparer: .

    ACCOUNT RISK ANALYSIS FORM

    Region: . File: Date: Page 3 of 7 April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 902 A- 3

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance Completeness

    Same as existence above, and control risk also arises

    from the lack of management's oversight relating to the

    intragovernmental transactions and balances adjustments made to the
    financial statements and required supplementary information.

    Same as existence above

    F Same as existence above.

    Review customer and vendor files and receipt/ disbursement records for

    related parties. Test cut- off:

    search for unre corded trans

    actions (e. g., review trans

    actions after yearend to Same as above.

    I. 4 & III. B to D

    III. B. 1. d

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances Entity: Agency

    Date of Financial Statements: September 30, 20xx Line Item:
    Intragovernmental balances

    Preparer: .

    ACCOUNT RISK ANALYSIS FORM

    Region: . File: Date: Page 4 of 7 April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 902 A- 4

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance determine if they were recorded in

    the correct fiscal year). Review the results of FBWT

    accounts recon ciliation, specifi

    cally with unre conciled IPAC

    transactions and suspense accounts.

    Review results of AUP related to III. B. 1. d

    IV. 5

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances Entity: Agency

    Date of Financial Statements: September 30, 20xx Line Item:
    Intragovernmental balances

    Preparer: .

    ACCOUNT RISK ANALYSIS FORM

    Region: . File: Date: Page 5 of 7 April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 902 A- 5

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance employee benefits and

    FACTS I verification. Valuation or allocation Intragovernmental balances
    are not valued accurately or on an appropriate basis in the financial
    statements.

    Same as existence above Same as existence

    above F Same as

    existence and completeness. Review basis of pricing signifi

    cant intragovern mental transac

    tions for approp riate disclosure.

    Same as above.

    I. 4. a. ii & iii & IV. 1 &

    2

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances Entity: Agency

    Date of Financial Statements: September 30, 20xx Line Item:
    Intragovernmental balances

    Preparer: .

    ACCOUNT RISK ANALYSIS FORM

    Region: . File: Date: Page 6 of 7 April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 902 A- 6

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance Rights and obligations

    The agency does not have rights to recorded intragovernmental balances.
    Same as existence above Same as existence

    above F Review confirma tions for indica

    tion of any disputes. Review pre

    arranged agree ments between trading partners.

    Review manage ment and legal representation

    letters to determine if any obligations are

    not properly disclosed. I. 4. a. ii & III. A B

    I. 4. a. iv IV. 3

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances Entity: Agency

    Date of Financial Statements: September 30, 20xx Line Item:
    Intragovernmental balances

    Preparer: .

    ACCOUNT RISK ANALYSIS FORM

    Region: . File: Date: Page 7 of 7 April 2003 GAO/ PCIE Financial Audit
    Manual - Part II Page 902 A- 7

    PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account Financial
    statement

    assertions / risks Inherent, fraud, and control

    risk factors Cycle/ accounting application Effective- ness of control

    activities Con trol risk Com

    bined risk Tim- ing I/ F

    Nature & extent W/ P

    ref.& audit step

    Name Balance Presentation and disclosure Intragovernmental balances are
    not properly classified or disclosed in the

    financial statements, or based on a consistent application

    of accounting guidance. Same as existence and completeness above Same as
    existence

    above F Determine if the agency approp riately classifies,

    summarizes, and discloses, intra

    governmental accounts in finan cial statements,

    related disclo sures, and RSI, in

    accordance with SFFAS (GAAP) and OMB and

    Treasury gui dance for intra

    governmental accounting. I. 2 & IV

    [This page intentionally left blank.]

    Substantive Testing 902 B - EXAMPLE SPECIFIC CONTROL EVALUATION FOR
    INTRAGOVERNMENTAL

    ACCOUNTS

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 1 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 1 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Existence or occurrence

    various various Substantiation

    1. Recorded intragovernmental assets and liabilities do not exist at a
    given date.

    1a. Recorded intragovernmental assets and liabilities should exist at a
    given date.

    1. Quarterly, intragovernmental balances recorded in the agency's general
    ledgers are confirmed and reconciled with trading partners.

    2. The agency and trading partners work together to exchange data/ correct
    errors promptly concerning the intragovernmental balances. N

    N II. 1. g- i

    II. 1. g- i

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 2 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 2 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various 3. Reconciliation adjustments and

    supporting documents are reviewed and approved by authorized personnel
    before being entered in the general ledgers. 4. Reconciliation between
    intragovernmental general ledger balances and subsidiary ledger balances
    are performed quarterly

    and reviewed by supervisory personnel. N

    Y III. A. 1- 7

    III. A. 1- 7

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 3 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 3 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various 1b. Recorded intragovernmental assets and liabilities
    of the entity, at a given date, should be supported by appropriate
    detailed

    records that are accurately summarized and reconciled to the account
    balance. 1. Same as 1a. above.

    2. The agency maintains the transaction logs and detailed

    records of transactions to facilitate the reconciliation process and to
    provide sufficient information for the location of the supporting
    documents.

    Y Same as above.

    II. 1. l 1c. Access to intragovernmental assets, critical forms,

    records, and processing and storage areas should be permitted only in

    accordance with laws, regulations, and

    management's policy. 1. The agency's critical forms and records are
    protected by safes

    and locks, guards, cameras, alarm systems, and backup of electronic data.
    2. Changes made to the trading

    partner codes file are restricted to authorized accounting personnel. Y

    Y Example

    control tests are

    omitted from the

    example audit pro cedures.

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 4 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 4 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Complete ness

    various various Account Completeness

    2. Intragovernmental assets and liabilities of the entity exist but are
    omitted from the

    financial statements. 2. All intragovernmental accounts that belong in the
    financial state ments should be so

    included. There should be no undisclosed

    assets or liabilities. Same as existence above.

    1. The agency reviews all transac tions to identify and properly code
    intragovernmental transactions.

    2. The agency reconciles and resolves IPAC differences (and differences
    from other systems/ methods, if any, used to process intragovernmental
    transactions) promptly and records

    adjustments properly. 3. Supervisory personnel review and approve monthly
    account analyses of intragovernmental accounts and examine budget- to

    actual and trend analyses. Y

    Y Y

    Same as above. II. 1. a- f

    II. 2 & III. B. 1. c

    II. 1. m

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 5 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 5 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various 4. Elimination journal entries and

    supporting documentation are reviewed and approved by authorized
    personnel. 5. Elimination entries are supported

    by schedules summarizing the SGL accounts that are combined to total the
    amounts eliminated. N

    Y II. 1. k &

    III. E II. 1. k & III. E

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 6 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 6 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Valuation or

    allocation Valua tion or

    alloca tion

    Valua tion or

    alloca tion

    Valuation

    3. Intragovernmental assets and liabilities included in the financial
    statements

    are valued on an inappropriate basis. 3. Intragovernmental assets and
    liabilities

    included in the financial statements should be valued on

    appropriate valuation bases.

    Same as existence and completeness above.

    1. The agency periodically evaluates the condition and marketability of
    intragovernmental assets, for example receivables are

    evaluated for collectibility. 2. The agency accounting records

    are compared with the assessed values such as independent appraisals or
    assets. N

    N Same as above.

    I. 4. a. ii & iii I. 4. a. ii & iii

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 7 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 7 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Measurement

    4. Intragovernmental revenues and expenses included in

    the financial statements are measured improperly. 4. Intragovernmental
    revenues and

    expenses included in the financial

    statements should be properly measured. Same as existence and completeness

    above. Same as above.

    Rights and obligations Rights and

    obliga tions

    Rights and obliga

    tions

    Ownership

    5. Recorded intragovernmental assets are owned by others because of sale,
    or other contractual

    arrangements. 5. Recorded intragovernmental assets should be owned by the
    entity. Same as existence and completeness

    above. Same as above.

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 8 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 8 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Rights

    6. The entity does not have certain rights to recorded intragovernmental
    assets because of certain restrictions. 6. Intragovernmental assets should
    be the entity's rights at a

    given date. Same as existence and completeness

    above. Same as above.

    Obligations

    7. The entity does not have an obligation for recorded intragovernmental
    liabilities at a given date. 7. Intragovernmental liabilities should be
    the entity's obligations at a given date.

    Same as existence and completeness above.

    Same as above.

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 9 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 9 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Presentation and

    disclosure Presen tation and dis closure Presen

    tation and dis closure Account classification

    8. Intragovernmental accounts are not properly classified and described in
    the financial statements. 8. Intragovernmental accounts should be properly
    classified and described in the financial statements.

    1. The agency uses trading partner codes to identify and track trading
    partners when the intragovernmental transactions are initiated and on all

    documentation thereafter. 2. The agency uses SGL account

    attributes to identify the nature of account balances and to identify
    intragovernmental transactions by trading partner. 3. The agency
    classifies, summarizes, and reports

    intragovernmental accounts by trading partner and presents them as
    required supplementary information (RSI). Y Y

    Y II. 1

    II. 1 IV. 1

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 10 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 10 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various 4. The CFO staff checks that the

    intragovernmental asset and liability categories reported as RSI agree
    with the intragovern mental asset and liability line items reported on the
    balance sheet.

    5. The agency discloses intragovern mental gross cost and earned revenue
    by budget functional

    classification as required by OMB N Y

    IV. 1 IV. 1

    Consistency

    9. The financial state ment components are based on accounting principles
    different from those used in

    prior periods. 9. The financial statement

    components should be based on accounting principles that are applied
    consistently from period to period.

    See # 8 above. Same as above.

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application:

    Intragovernmental accounts

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 11 of 11 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 902 B- 11 Accounting application

    assertions Relevant

    assertions in line items Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effective ness of control

    activities W/ P ref,

    control testing

    step various various Disclosure

    10. Required information is not disclosed in the financial statements or
    in the notes thereto. 10. The financial statements or notes

    should contain all information required to be disclosed.

    See # 8 above. Same as above.

    [This page intentionally left blank.]

    Substantive Testing 902 C - EXAMPLE AUDIT PROCEDURES FOR INTRAGOVERNMENTAL
    AND OTHER RELATED

    PARTIES' ACTIVITY AND BALANCES April 2003 GAO/ PCIE Financial Audit Manual
    - Part II Page 902 C- 1 Entity
    __________________________________________________________________ Period
    of financial statements ____________________________________________ Job
    code _______________________________________________________________ Audit
    Procedures 1 Done

    by/ date W/ P ref. I. Planning Phase

    Obtain an understanding of the entity's operations that are significant to
    the audit of intragovernmental and other related party activity and
    balances (see FAM section 220). 1. To obtain an understanding of
    significant accounting

    and auditing issues, read the entity's prior year's accountability and
    auditors' reports. 2. To identify the entity's accounting and reporting

    requirements and applicable auditing standards for intragovernmental and
    other related party activity and balances, read the following: a. SFFAS
    No. 4, Managerial Cost Accounting Concepts

    and Standards; SFFAS No. 5, Accounting for Liabilities of the Federal
    Government; SFFAS No. 7, Accounting for Revenue and Other Financing

    Sources and Concepts for Reconciling Budgetary and Financial Accounting;
    Statement of Financial Accounting Standards No. 57, Related Party
    Disclosures; AU Section 334, Related Parties; AU Section 558, Required
    Supplementary Information; OMB bulletin on Form and Content of Agency
    Financial Statements; Treasury/ Financial

    Management Service's (FMS) Federal Intragovernmental Transactions
    Accounting Policies Guide; and Treasury Financial Manual section "Federal
    Intragovernmental Transactions Process."

    1 These procedures are applicable for intragovernmental (including
    interdepartmental and intradepartmental) and other related parties'
    activity and balances.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 2

    Audit Procedures 1 Done by/ date

    W/ P ref. b. The entity's internal procedures for identifying,

    accounting, reconciling and reporting intragovernmental and other related
    party activity and balances. c. The entity's process for identifying,
    classifying, and

    reporting intragovernmental activity and balances requiring elimination at
    the consolidated departmentwide or governmentwide level. 3. To identify
    the impact of systems/ methods for

    processing, accounting and financial reporting of intragovernmental and
    other related party activity and balances, a. Interview the entity's key
    management about, for

    example, the systems/ methods that are used to process intragovernmental
    and other related party activity and balances (e. g., IPAC, credit cards,
    standard forms used to transfer funds between appropriations, and others).
    b. Obtain estimates of the approximate number and

    dollar amount of intragovernmental and other related party activity and
    balances (this could be based on the prior year) that are processed by
    each significant system/ method (see FAM section 270). c. Consider
    coordinating this work with the audit of like nonfederal activity and
    balances (i. e., similar

    transactions by the entity with parties other than other federal
    entities). 4. To identify the intragovernmental and other related

    party activity and balances a. Ask the entity management:

    i. Names of all related parties (intragovernmental and others) and whether
    there were transactions with them during the period. Other possible
    related parties outside of government might be states, management, and
    individuals and firms

    with which members of management may be related or otherwise be able to
    significantly influence the management or operating policies.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 3

    Audit Procedures 1 Done by/ date

    W/ P ref. ii. The nature and terms of all significant activities

    and balances. For example,

    for a seller entity, * Obtain information on the types of significant
    revenues, any markup

    percentage( s) over full cost, and the settlement/ payment due date.
    Inquire as to how the full cost of products

    and services sold is determined.

    for a buyer entity,  Inquire about the minimum requirements

    (business rules) that must be met before an intragovernmental trading
    partner may provide goods or services.

    Inquire as to amounts, if any, that are in dispute at year- end. iii.
    Whether the audited entity receives services

    without reimbursement or for less than full reimbursement, for example,
    donated services, such as space or detailed employees. If so, ask if the
    entity is complying with GAAP and/ or OMB requirements with respect to
    accounting and reporting treatment of these transactions. Also, if
    applicable, ask about the approximate fair value and/ or financial
    statement disclosure for such goods and/ or services. iv. Whether the
    entity centrally maintains contracts,

    agreements, and support for the terms of all significant transactions with
    related parties. b. Review, if any:

    i. The entity policy for advance approval of related party transactions by
    senior management. ii. The entity policy for requiring disclosure by

    employees to appropriate officials of potential conflicts of interest,
    such as related party transactions by employees of the entity. Also
    determine if summaries of such transactions are communicated to financial
    management for its consideration.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 4

    Audit Procedures 1 Done by/ date

    W/ P ref. iii. Vendor and customer master file listings, major

    contracts, and IPAC activity for intragovernmental or other related
    parties. c. Ask Treasury/ FMS regarding entities historically

    reporting intragovernmental transactions with the audited entity. 5.
    Provide audit staff with the names of known

    intragovernmental and other related party trading partners, a description
    of the nature of significant transactions with each, and such other
    information as

    considered necessary to assist them in planning and performing other
    sections of the audit. 6. Summarize the results. 7. Document the auditor's
    preliminary assessment of risks

    related to the intragovernmental and other related party activity and
    balances in the ARA form or equivalent. II. Internal Control Phase
    Understand the internal control the entity has in place for

    identifying, accounting for, eliminating, and reporting intragovernmental
    and other related party activity and balances (existence, completeness,
    valuation, rights and obligations, presentation and disclosure) (see FAM
    section 320). 1. Determine through inquiry of management,

    walkthroughs, review of prior years' documentation and other means, how
    and when the entity identifies intragovernmental and other related party
    transactions. a. Whether the entity identifies the transactions by

    trading partner when they are initiated and on all documentation
    thereafter. b. If the entity uses trading partner codes, the

    relationship of such codes to other document identifiers such as vendor
    codes. For example, trading partner codes may be integral to each vendor
    code, or it may be necessary to crosswalk vendor codes to a file of
    trading partner codes.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 5

    Audit Procedures 1 Done by/ date

    W/ P ref. c. If the entity does not use trading partner codes,

    determine how the entity identifies, analyzes, and accumulates
    intragovernmental activity and balances. For example, the entity may
    derive such amounts through off- line manual processes after the fact. d.
    When the entity recognizes each significant category

    of intragovernmental and other related party transactions. For example,
    when an invoice is received, when processed through IPAC, 2 when goods or
    services are received, when notified by the seller that an agreed- upon
    stage of completion has been achieved. Consider whether the entity's
    policy

    in recording intragovernmental and other related party transactions is
    appropriate. e. Whether the entity and its trading partners use consistent
    reciprocal ledger accounts 3 and

    categories of activity and balances for recording and reconciling such
    amounts. If so, ask what processes are in place to provide management with
    reasonable assurance that trading partners are recognizing reciprocal
    transactions in the same period, for the same amount, and by consistent or
    compatible accounting methods.

    2 Intragovernmental Payment and Collection (IPAC) system replaced the
    Online Payment and Collection (OPAC) system in December 2001. 3 Reciprocal
    accounts are corresponding SGL accounts that should be used by seller

    and buyer entities to record like intragovernmental transactions. For
    example, the seller entity's accounts receivable would normally be
    reconciled to the reciprocal account, accounts payable, on the buyer
    entity's records. Examples of these accounts are in FMS' Federal
    Intragovernmental Transactions Accounting Policies Guide.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 6

    Audit Procedures 1 Done by/ date

    W/ P ref. f. If the entity complies substantially with the SGL at

    the transaction level as it applies to intragovernmental activity and
    balances. (Note: The SGL accounts used should include attributes for
    intragovernmental activity and balances that identify (a) that these
    accounts contain intragovernmental transactions (e. g., attribute "F") and
    (b) the trading partner (e. g., Treasury trading partner code "20").) g.
    Policies and procedures for confirming

    intragovernmental and other related party activity and balances with
    trading partners. h. How often the entity reconciles its related party

    activity and balances with its trading partners. Also inquire as to
    whether adjustments identified as necessary through the reconciliation
    process have

    been properly recognized in the financial records. If not, ask why. If the
    entity did not perform reconciliations, ask why not. i. Whether the
    selling and buying entities have

    established processes to facilitate the timely reconciliation of activity
    and balances. (Note: The selling entity is typically responsible for
    furnishing detailed transaction information to facilitate reconciliation.)
    j. What the entity's year- end cut- off procedures related

    to the intragovernmental and other related party activity are. Determine
    if procedures provide assurance that intragovernmental activities
    occurring in the current period are recorded in the current period. (Since
    the reconciliation process should detect cutoff errors, see above for

    reconciliation procedures with trading partners.) k. What the entity's
    policies and procedures are for

    intraentity elimination. l. Whether the entity maintains transaction logs
    or detailed records of transactions to identify the postings to SGL
    accounts and to facilitate the reconciliation process. The logs should
    include sufficient information to enable identification and location of
    the supporting documents.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 7

    Audit Procedures 1 Done by/ date

    W/ P ref. m. Whether the entity reviews and approves monthly

    account analyses of intragovernmental accounts and examines budget- to-
    actual and trend analyses. 2. Coordinate with the results of audit
    procedures for

    other cycles to determine if the entity has internal control issues
    related to intragovernmental and other related party activity and
    balances. For example, to determine if the entity has control issues
    related to intragovernmental activity and balances, coordinate with the
    results of FBWT audit procedures to determine if the entity has issues on
    its FBWT/ IPAC reconciliation such as material unreconciled amounts and
    aged

    unreconciled IPAC differences. 3. Perform walk- throughs of processes for
    identifying,

    accounting, reconciling, confirming, eliminating, and reporting
    intragovernmental and other related party activity and balances to obtain
    or update the auditor's understanding of these procedures and
    preliminarily

    assess the effectiveness of these controls. a. Walkthrough the process
    from initiation to recording in the general ledger and inclusion in the

    financial statements or elimination for each significant type of
    intragovernmental and other related party activity and balances. b. Walk
    through the management/ entity approval process of payments to trading
    partners. (Note:

    Prior audits have identified instances where payment controls for
    intragovernmental transactions were not sufficient, for example, the
    seller entity made payments to trading partners without verifying whether
    goods or services were provided.) c. Identify and document differences in
    process for

    nonfederal and intragovernmental and other related party activities and
    balances. d. If the entity performs reconciliations of

    intragovernmental activity and balances with trading partners during the
    year, the auditor should walk through both interim and year- end
    reconciliation processes.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 8

    Audit Procedures 1 Done by/ date

    W/ P ref. 4. Prepare or update the cycle memorandum, flowchart,

    and ARA and SCE forms (See FAM sections 390, 395 H and I, and 902 A and B)
    or equivalents.

    III. Testing Phase

    A. For intragovernmental accounts, if the auditor preliminarily determines
    that the entity's reconciliation and confirmation controls with trading
    partners are effectively designed and placed in operation, test the
    entity's policies and procedures to determine if the reconciliation and
    confirmation controls are effective and if intragovernmental balances
    appear reasonable. 1. Obtain final yearend reconciliations/ confirmations
    of

    intragovernmental activity and balances for each trading partner and
    supporting documentation; or obtain the entity CFO responses for
    intragovernmental activity and balances and the supporting documentation
    for the final reconciliation/ confirmations. (See the Treasury Financial
    Manual (TFM) sections on CFO procedures/ representations and on IG Agreed-
    Upon Procedures for Federal Intragovernmental Activity and Balances) 2.
    Compare the amounts in the reconciliations to

    supporting documentation. 3. Trace the adjustments, if any, identified in
    the

    reconciliation process to the entity's financial records. 4. Compare the
    amounts, excluding intra- departmental activity and balances, in the
    audited department consolidated financial statements to such amounts in
    the department's final FACTS I or FACTS Notes reports to FMS. 5. Prepare
    an agreed- upon procedures report. (Note: The

    procedures in steps 1 to 4 above are agreed- upon procedures for
    intragovernmental activity and balances. See the TFM, volume 1, section on
    IG Agreed- Upon Procedures for Federal Intragovernmental Activity and
    Balances. Also see FAM section 660.)

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 9

    Audit Procedures 1 Done by/ date

    W/ P ref. 6. Consider whether these agreed- upon procedures are

    sufficient to achieve financial statement audit objectives. For example,
    whether the agreed upon procedures are applied to all significant
    assertions for all significant intragovernmental activity and balances.
    Typically these procedures alone will not be sufficient for financial
    statement audit purposes. 7. If the agreed- upon procedures are not
    sufficient, then

    design additional procedures that in combination with the agreed- upon
    procedures will be sufficient. For example:

    Reconciliation/ confirmation (existence, completeness, valuations, rights
    and obligations, and classification) OMB's bulletin on Form and Content of
    Agency

    Financial Statements requires an entity to reconcile and confirm
    intragovernmental activity and balances with trading partners
    semiannually, beginning with the six- month period ending March 31, 2002
    and quarterly, beginning with the three- month period ending December 31,
    2002. If the entity performed monthly, quarterly, or semiannual
    reconciliations, test reconciliations to determine if the entity's
    reconciliation control

    is effective throughout the year.

    There should be a separate reconciliation/ confirmation for each trading
    partner.

    This reconciliation/ confirmation also may be used for within entity
    reconciliation/ confirmation (intraentity).

    a. Determine the completeness of population: Determine if the entity
    performed reconciliations and confirmations for all trading partners by

    comparing the trading partners on the reconciliations and confirmation
    forms to subsidiary records or the entity's trading partner list obtained
    during the planning phase. b. For each reconciliation/ confirmation:

    i. Determine if the reconciliation/ confirmation was reviewed and approved
    by the appropriate personnel.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 10

    Audit Procedures 1 Done by/ date

    W/ P ref. ii. Compare the total amounts and SGL accounts of the activity
    and balances reported on the

    reconciliation/ confirmation form with the general and subsidiary ledger
    accounts, and the total amounts to audited financial statements and
    footnote disclosures. If differences are

    found, document each such difference. Consider potential impact on
    financial statements and post the differences identified to summary of
    unadjusted misstatements.

    iii. Test whether the entity used appropriate SGL accounts and whether
    these SGL accounts include the proper attribute( s) to indicate that

    they result from intragovernmental transactions. (Note: For example, when
    the federal attribute "F" is used with an SGL account, a trading partner
    should be designated for each transaction posted to the account.) Entities
    can modify SGL accounts listed on the form to be more specific. iv.
    Consider whether the entity is using the

    reciprocal accounts delineated in the FMS Guide. Entities should use these
    accounts to account for intragovernmental activity and balances in the
    specified categories. Use of these reciprocal accounts will facilitate the
    reconciliation and confirmation process.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 11

    Audit Procedures 1 Done by/ date

    W/ P ref. v. For fiduciary activity and balances, compare

    amounts on the reconciliation forms to amounts on the Intragovernmental
    Fiduciary Confirmation System. (Note: Fiduciary activity and balances
    include loans from the Federal Financing Bank and Bureau of Public Debt,
    investments with Bureau of Public Debt, Federal Employees Compensation Act
    transactions with Labor, and employee benefit transactions with OPM. The
    seller entity* Bureau of Public Debt, Treasury, Federal Financing Bank,
    Labor, and OPM* will make balances information and other

    details available through the Intragovernmental Fiduciary Confirmation
    System for the buyer entities' use in reconciling amounts to their
    records. The Intragovernmental Fiduciary Confirmation System is the
    official confirmation system for federal entities that engage in fiduciary
    intragovernmental transactions with Bureau of Public Debt, Federal
    Financing Bank,

    OPM, and Labor.) vi. For transfers, test whether

    the classification of transfers as expenditure or nonexpenditure is
    proper, and

    the accounting and reporting are appropriate. vii. For trust fund
    transfers such as highway and airport trust funds, also test whether the
    trust fund amounts are properly accounted for and maintained in accordance
    with laws that established these funds. (Note: Test either by the trust
    fund auditor or as agreed- upon procedures by the auditor who audits the
    entity that collects the revenue for it.)

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 12

    Audit Procedures 1 Done by/ date

    W/ P ref. Reconciliation adjustments and differences (all

    intragovernmental categories) (Note: Exhibit I to FAM 902 C provides an
    illustration of a reconciliation tool that may be used to summarize
    reconciling items and prove amounts between a buyer and a seller entity.)

    c. Determine whether adjustments, if any, are supported and timely: i.
    Trace the adjustments and reconciling items

    identified in the reconciliation process to the entity general and
    subsidiary ledgers. ii. Examine the adjustments and supporting

    documents to determine if The entity timely and properly performed the
    research and identified causes for differences.

    The adjustments are agreed upon by both entities and made to proper SGL
    accounts. (Note: Examples of adjustments and

    reconciling items are:

     Adjustments in estimated accruals: For example, the seller entity has
    recorded unbilled revenue and the buyer entity was not timely advised of
    the estimated

    accrual.

     Adjustments due to timing differences: For example, timing differences
    caused by a buyer entity's delay in recording IPAC transactions into
    proper SGL accounts.

     Reconciling item for capitalization of assets: For example, the buyer
    entity purchased property and equipment or inventory and recorded them as
    assets.) iii. Obtain or prepare aging of outstanding

    unadjusted reconciling amounts for all significant intragovernmental
    balance sheet accounts. Identify old and/ or unusual reconciling items and
    obtain explanations from the entity.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 13

    Audit Procedures 1 Done by/ date

    W/ P ref. iv. Review final yearend reconciliation for any

    accounting policy differences and determine if the entity explains the
    causes of these differences on the final reconciliation. The causes of
    these differences might be differences in accounting standard
    requirements, for example, amortization methods for discounts and
    premiums. For example, one trading partner

    uses the interest method and the other trading partner uses the straight-
    line method to amortize discounts/ premiums. (Note: There should be no
    material unresolved differences on the final yearend reconciliation forms.
    The entity should resolve all differences with trading partners.) v.
    Determine the extent of unadjusted differences at year- end. Assess their
    materiality on the

    financial statement line item and the overall financial statements. vi. If
    adjustments are made subsequent to the

    completion of the confirmations (during the audit period), determine if
    the entity revised the reconciliation and confirmation and submitted the
    updated data to FMS.

    8. Summarize the results of testing: (1) conclude on the effectiveness of
    the entity's reconciliation and confirmation controls and (2) propose
    adjustments, if necessary.

    9. Determine whether the results of testing and the nature of
    misstatements indicate that combined risk should be assessed differently
    and whether the audit procedures should be revised.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 14

    Audit Procedures 1 Done by/ date

    W/ P ref. B. For intragovernmental activity and balances, if the auditor

    preliminarily determines that the entity's reconciliation/ confirmation
    control with trading partners is not effective, or if the reconciliations
    and/ or confirmations are not performed by the entity, the auditor should
    consider the effect on substantive tests and on the audit report. In some
    cases, the auditor may decide to modify the audit opinion

    when no reconciliation and other mitigating controls existed. However,
    when intragovernmental activity and balances are material, significant
    additional work may be necessary to express an unqualified opinion such
    as: 1. Coordinate work with other related line items to test existence,
    completeness, valuation, rights and

    obligations, and classification of intragovernmental activity and
    balances. For example, a. In conjunction with cash receipts, revenues, and

    accounts receivable testing, determine if intragovernmental accounts
    receivable were collected subsequent to test date. Examine supporting
    documentation for the posting of collections to the cash records;
    determine if

    intragovernmental revenues and receivables are included in nonfederal
    balances. b. Test completeness of intragovernmental activity and

    balances by reviewing vendor and customer master files to determine if
    intragovernmental vendors and customers are properly included in
    intragovernmental accounts. c. Consider sending confirmation requests to
    trading

    partners for both balance sheet and net cost activity and balances.
    Especially if combined risk is assessed as high, consider applying similar
    confirmation procedures as to the nonfederal accounts.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 15

    Audit Procedures 1 Done by/ date

    W/ P ref. Cut off test (existence and completeness) d. Determine if there
    are unrecorded transactions and

    if the transactions are recorded in the correct period. i. Coordinate with
    the FBWT audit team to review

    results of the FBWT reconciliation tests. For example, review IPAC
    transactions reconciliations and the recording of IPAC transactions in
    accounting systems; consider how timely and whether appropriate; review
    IPAC transactions after 9/ 30* subsequent billing and collecting
    transactions* to determine unrecorded transactions as of 9/ 30. ii. Search
    for unrecorded sales revenue, accounts receivable, purchases, and accounts
    payable

    (completeness). For example,

    To search for unrecorded sales revenue and accounts receivable, select
    sales invoices for trading partners recorded in the xx- day period
    subsequent to year- end. Trace the selected invoices to shipping records
    or evidence of service performance. Determine whether the sales revenue
    and accounts receivable were recorded in the correct period.
    Alternatively, select from shipping records to trading partners prior to
    year- end and trace to sales invoices.

    To test the completeness of amounts recorded as accounts payable at the
    balancesheet date, select disbursements after the end of the audit period
    and test if the amounts were recorded in accounts payable.

    2. Review the test results of other related line items to determine if
    there are issues related to existence, completeness, valuation, rights and
    obligations, and classification in the tested accounts and transactions
    and the impact on the intragovernmental activity and

    balances. In testing these other accounts, consider whether items tested
    were from trading partners.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 16

    Audit Procedures 1 Done by/ date

    W/ P ref. 3. Summarize the results and propose adjustments, if necessary.
    4. Determine if the results of testing and the nature of

    misstatements indicate that combined risk should be assessed differently
    and whether the audit procedures should be revised.

    Control and substantive tests of details* other related parties C. Attain
    satisfaction about the purpose, nature, and extent of material other
    related party transactions and their effect on the financial statements.
    Coordinate with sensitive payments work, including the review of executive
    compensation, travel, official entertainment funds, unvouchered expenses,
    and consulting services (see FAM section 280.05). 1. Based on the work
    performed during the planning and

    internal control phases, determine and document the methodology used to
    select the transactions for testing.

    Examine all transactions,

    Dollar unit sampling (DUS),

    Classical variables estimation sampling, or

    Other (describe). 2. For the selected transactions,

    a. examine documentation such as invoices, contracts, agreements, and
    receiving and shipping reports; b. determine whether the transactions have
    been properly approved;

    c. confirm transaction terms and amounts with the other party to the
    transaction; and d. test the compilation of amounts that may be

    disclosed in the financial statements for reasonableness. 3. Summarize the
    results. 4. Determine if the results of testing and the nature of

    misstatements indicate that combined risk should be assessed differently
    and if the audit procedures should be revised.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 17

    Audit Procedures 1 Done by/ date

    W/ P ref. Substantive analytical procedures (FAM 475) D. Substantive
    analytical procedures: Perform analytical

    procedures to assess whether balances are reasonable and reflect
    appropriate activities (existence and completeness). If the entity
    performs reconciliation and confirmation of intragovernmental activity and
    balances and the auditor places reliance on those tests of details, less
    rigorous, supplemental analytical procedures may be used to increase the
    auditor's understanding of intragovernmental

    activity and balances after performing tests of details in Testing, step
    III. A, above. However, in the absence of adequate reconciliation and
    confirmation controls, some or

    all of these procedures may be necessary to obtain sufficient evidence, if
    possible. For example, 1. Develop expectations of the accounts payable and

    receivable balances overall or for all significant trading partners in
    light of the payment cycle during the year. Then, compare the recorded
    balance overall or by trading partner to the expected amount and
    investigate differences in the recorded balance if differences exceed
    ______ (insert an amount such that the total uninvestigated difference for
    all trading partners, including those not selected, does not exceed the
    limit). 2. Develop expectations of recorded intragovernmental

    sales overall or for all significant trading partners based on independent
    data; for example, consider using trading partners' orders. Then compare
    the expectations to the recorded sales amounts and investigate differences
    in the recorded balance if differences exceed ______ (insert an amount
    such that the total uninvestigated difference for all trading partners,
    including those not selected, does not exceed the limit).

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 18

    Audit Procedures 1 Done by/ date

    W/ P ref. 3. Examine accounting records, for example, accounts receivable
    and payable, for large, unusual, or

    nonrecurring activity or balances. For example, consider expectations as
    to the types of intragovernmental activity and balances and trading
    partners based on the planning work. Then, examine significant unexpected/
    unusual intragovernmental activity and balances and intragovernmental
    activity or balances with unexpected trading partners. Document the
    definition of significant. 4. Summarize the results of testing and
    determine if

    adjustments are necessary. Elimination (existence, completeness, and
    valuation) E. Test consolidation/ elimination for transactions occurring
    within the entity (intraentity) to determine whether the elimination is
    appropriate and supportable. 1. Obtain a list of each component entity's
    intraentity

    transactions identified for elimination and each component entity's
    reconciliation of its intraentity activity and balances with its
    respective trading partners. This step may be done in conjunction with the
    test of reconciliation (see step III. A above). 2. Review the entity's
    eliminating journal entries and

    supporting documentation for elimination entries of the entitywide
    consolidated financial statements. Determine whether elimination journal
    entries are a. approved by management and b. supported by schedules
    summarizing the SGL

    accounts that are combined to total the amounts eliminated. 3. Summarize
    the results. 4. Determine if the results of testing and the nature of

    misstatements indicate that combined risk should be assessed differently
    and if the audit procedures should be revised.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 19

    Audit Procedures 1 Done by/ date

    W/ P ref. IV. Reporting Phase

    To determine if the presentation and disclosures of intragovernmental and
    other related party balances comply with GAAP and OMB requirements: 1.
    Determine whether financial reports are prepared in

    accordance with the OMB bulletin on Form and Content of Agency Financial
    Statements. For example, a. Review the balance sheet and determine whether
    it

    is properly classified and line items are correctly reported as
    intragovernmental or nonfederal. b. Read the required supplementary
    information (RSI)

    to determine if intragovernmental amounts and the related federal trading
    partners for assets, liabilities, earned revenue from trade (buy/ sell)
    transactions

    and nonexchange revenue are presented as RSI. The gross cost to generate
    earned revenue from trade transactions should be presented by budget
    functional classification in the notes to the financial

    statements. c. Read disclosures for the Statement of Net Cost in

    the notes to the departmentwide financial statements and determine if the
    department includes a separate disclosure of intragovernmental gross cost
    and earned revenue by budget functional classification as required by
    OMB's form and content bulletin. Gross cost and earned revenue should be
    net of intradepartment transactions (consolidated).

    2. Read the entitywide financial statements, notes, and RSI; compare the
    reported intragovernmental and other related party (if any) activity and
    balances with the test results. 3. Request that the entity's management
    include, in the

    representation letter, representations related to intragovernmental and
    other related party activity and balances. (See FAM section 1001 for
    guidance.) 4. Communicate with trading partner entities' auditors

    (with auditee's permission) to consider whether issues identified by the
    other auditors affect the auditor' s conclusions on intragovernmental
    transactions.

    Substantive Testing 902 C * Example Audit Procedures for Intragovernmental
    and Other Related Parties' Activity and Balances April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 902 C- 20

    Audit Procedures 1 Done by/ date

    W/ P ref. 5. Read the various current period Agreed- Upon Procedures (AUP)
    reports to consider whether the

    findings will affect the auditor's conclusion and/ or if additional
    procedures need to be performed. For example, a. The AUP report on
    employee withholdings and

    employer contributions that are reported on the Report of Withholdings and
    Contributions for Heath Benefits, Life Insurance and Retirements. This AUP
    report is to assist OPM in assessing the reasonableness of the Retirement,
    Health Benefits, and Life Insurance Withholdings/ Contributions and
    Supplemental Semiannual Headcount report submitted to OPM (see OMB audit
    guidance). b. The AUP report on FACTS I verification. This AUP

    report is to evaluate the department's management assertion that it
    compared the department's summarized FACTS I data to its consolidated
    financial statements and to determine whether such data is in agreement.
    6. Summarize the results and determine if adjustments are

    necessary. 7. Conclude whether intragovernmental and other related

    party activity and balances have been adequately accounted for and
    properly disclosed in the financial statements.

    Substantive Testing 902 C - Example Audit Procedures for Intragovernmnetal
    and Other Related Parties' Activity and Balances

    Exhibit I Seller Entity - Trading Partner 1

    200,000 Less adjustment for timing difference Cash received but revenue
    unearned at end of the current year (20,000)

    Add adjustment for timing difference Earned revenue recognized on unbilled
    work at the end of the current year 50,000

    230,000 Buyer Entity - Trading Partner 2

    190,000 Add:

    10,000 Adjustment for completed but unbilled work at the end of the
    current year 50,000

    Less: Cash paid in the current year, but amount prepaid at end of current
    year (20,000)

    General ledger after adjustment for Trading Partner 1 230,000

    Less: Reconciling item for purchases inventoried at end of the current
    year (50,000)

    180,000 Reconciliation of Seller Entity Intragovernmental

    Earned Revenue with Buyer Entity Cost

    Adjustment for cutoff error identified during reconciliation process [Cash
    sent to Trading Partner 1, but not recorded]

    Intragovernmental purchases included in cost - accrual basis, FY 200X,
    from Trading Partner 1 Intragovernmental earned revenue - accrual basis,
    FY 200X, from

    Trading Partner 2 (General ledger after adjustment) Intragovernmental cash
    received for earned revenue, FY 200X, from

    Trading Partner 2 (General ledger before adjustment) Intragovernmental
    purchases - cash basis, FY 200X, from Trading Partner 1 (General ledger
    before adjustment)

    When reconciled, Seller Revenue and Buyer Cost must agree after
    adjustments are recorded to correct for errors.

    When reconciled and adjusted, Seller Revenue and Buyer Cost may not agree
    because of timing differences. Here, the Buyer has inventoried a portion
    of the purchases for the year.

    The contra accounts for timing items should also reconcile.

    The Seller's unearned revenue account (liability) should reconcile with
    the Buyer's prepaid (asset) account.

    Seller's earned but unbilled receivable (asset) should reconcile with the
    Buyer's accounts payable for unbilled work (liability) account.

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 902 C- 21

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    Substantive Testing 903 - AUDITING COST INFORMATION

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 903- 1 .01 This
    section provides general guidance for considering cost information and

    planning audit procedures. The auditor should coordinate these procedures
    with procedures on auditing various line items and accounts. The auditor
    is concerned about cost information for a number of reasons. First, the
    auditor

    should obtain sufficient evidence to determine whether the costs are
    fairly stated in the financial statements and appropriately classified.
    Proper classification at the agency level also contributes to proper
    classification of costs in the consolidated financial statements of the U.
    S. government. Second, for CFO Act agencies and components designated by
    OMB, the auditor is concerned about the entity's financial management
    systems' substantial compliance with the three requirements of FFMIA.
    Third, cost information is important to the MD& A, although the auditor
    does not opine on the MD& A. The most relevant accounting standard for
    cost information is Statement of Federal Financial Accounting Standards
    (SFFAS) No. 4, Managerial Cost Accounting. This standard has relevance
    both to external financial reporting and to cost information for internal
    management reporting. STATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS

    NO. 4, MANAGERIAL COST ACCOUNTING .02 SFFAS No. 4 establishes the concepts
    and standards for providing reliable and timely information on the full
    cost of federal programs, their activities, and outputs. The objectives of
    managerial cost information specified in SFFAS No. 4 are:

    To provide program managers with relevant and reliable information
    relating costs to outputs and activities. With this information, program
    managers should understand the costs of the activities they manage. The
    cost information should assist them in improving operational efficiency.

    To provide relevant and reliable cost information to assist Congress and
    executives in making decisions about allocating federal resources,
    authorizing and modifying programs, and evaluating program performance.

    To provide consistency between costs reported in general purpose financial
    reports and costs reported to program managers. This includes
    standardizing terminology to improve communication among federal
    organizations and users of cost information.

    .03 The first two objectives primarily address the managerial use of cost
    information in improving operating efficiency and cost effectiveness,
    making planning and

    Substantive Testing 903 - Auditing Cost Information

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 903- 2
    budgeting decisions, and measuring performance. The third objective
    primarily

    addresses external financial reporting. That objective can be achieved by
    reporting cost information in financial statements that is consistent with
    costs generated by the cost accounting process. Because of the differences
    in the three objectives, some requirements in SFFAS No. 4 are relevant to
    managerial decision making and operations improvement, while some
    requirements are relevant to external financial reporting.

    .04 The cost accounting concepts section of SFFAS No. 4 (paragraphs 41-
    66) establishes the overall goals of cost accounting for federal agencies.
    Managerial cost accounting should be a fundamental part of the financial
    management system and, to the extent practicable, be integrated with the
    other parts of the

    system. Managerial costing should use a basis of accounting, recognition,
    and measurement that is appropriate for the intended purpose. Cost
    information developed for various purposes should be drawn from a common
    data source, and output reports should be reconcilable to each other.

    .05 The five fundamental standards for managerial cost accounting set
    forth in SFFAS No. 4 (paragraphs 67- 162) are important for the auditor.
    These standards will lead to the development of accurate and consistent
    cost information for internal and external reporting by federal agencies.
    The five standards are:

    Requirement for cost accounting: Each reporting entity should accumulate
    and regularly report the cost of its activities for management
    information.

    Responsibility segments: Management of each reporting entity should define
    and establish responsibility segments and report the costs of each
    segment's outputs. Full costs: Reporting entities should report the full
    costs of outputs, which is the total amount of resources used to produce
    the output, including direct and indirect costs.

    Interentity costs: Each entity's costs should incorporate the full cost of
    goods and services received from other entities. As directed by SFFAS No.
    4, paragraph 110, OMB has designated, in its bulletin, Form and Content of
    Agency Financial Statements, the costs of goods and services received from
    other entities that should be recognized.

    Costing methodology: The costs of resources that directly or indirectly
    contribute to the production of outputs should be accumulated and assigned
    to outputs using appropriate methodologies. (See paragraph 903.07.)

    Substantive Testing 903 - Auditing Cost Information

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 903- 3

    AUDIT PROCEDURES FOR FINANCIAL STATEMENT OPINION .06 As part of
    understanding the entity's operations, the auditor should obtain an
    overview of how the entity meets these standards. This may be done by
    inquiry, observation, and walkthrough procedures. Substantive tests of the
    cost accounting system are usually necessary. The auditor should consider
    coordinating tests with other control and substantive tests. Based on the
    auditor's understanding of the agency's operations, the auditor should
    determine whether the statement of net costs is designed to include all
    the costs of the agency's programs. Also, in testing the statement of net
    costs, the auditor should test the financial statement assertions related
    to costs including whether expenses are properly classified in the
    statement of net costs, and in the notes by budget functional
    classification, as required by OMB's form and content guidance. The
    following (see FAM section 395 B) are examples of subassertions related to
    costs:

    Existence or occurrence: * Validity*( 1) Recorded costs, underlying goods
    and services used, and

    related processing procedures are authorized by federal laws, regulations,
    and management policy. (2) Recorded costs are approved by appropriate
    individuals in accordance with management's general or specific criteria.
    (3) Recorded costs represent goods and services that were actually used
    and are properly classified.  Cutoff* Costs recorded in the current
    period represent goods and

    services used during the current period.  Summarization*( 1) The
    summarization of recorded costs is not overstated. (2) Costs are assigned
    to appropriate classifications in the

    financial statements.

    Completeness:  Transaction completeness* All valid costs are recorded
    and properly classified.  Cutoff* All goods and services used in the
    current period should be

    recorded in the current period.  Summarization* The summarization of
    recorded costs is not understated.

    Valuation or allocation:  Accuracy*( 1) Costs are recorded at correct
    amounts. (2) Costs are recorded using appropriate assignment
    methodologies.  Measurement* Costs included in the financial statements
    are properly measured.

    Substantive Testing 903 - Auditing Cost Information

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 903- 4

    Presentation and disclosure:

     Account classification* Cost accounts are properly classified and
    described in the financial statements.

     Consistency* The financial statement costs are based on accounting
    principles that are applied consistently from period to period.

     Disclosure* The financial statements and footnotes contain all
    information required to be disclosed.

    .07 SFFAS No. 4 discusses three methods of assigning costs: directly
    tracing costs, assigning costs on a cause- and- effect basis, and
    allocating costs on a reasonable and consistent basis. Although the
    standard discusses these three methods in relation to assigning costs to
    responsibility segments and outputs, the methods are also applicable to
    assigning costs to financial statement line items in the

    statement of net costs, generally by program, and in the notes by budget
    functional classification. The different methods of assigning costs may
    require different auditing procedures for determining whether costs are
    properly classified in the statement of net costs by program and in the
    notes by budget functional classification.

    .08 For example, for directly traced costs (such as materials used in
    production or employees who worked on an output), the auditor generally
    should test whether costs were assigned to the appropriate program and/ or
    budget functional classification.

    .09 Costs may be assigned on a cause- and- effect basis, by grouping costs
    into cost pools where an intermediate activity may be a link between the
    cause and the effect. For example, an information technology department
    may provide support to other departments. The information technology
    department may assign costs to other departments on a cause- and- effect
    basis by first assigning costs to an intermediate activity, such as
    hardware installation or software design. Then the costs in these pools
    may be further assigned to other departments based on their use of these
    technical services. In auditing these types of costs, the auditor should
    test whether costs are assigned to the appropriate cost pool (hardware
    installation, software design), but also whether the costs are
    appropriately summarized in the pool. Then, when costs are assigned to
    other departments, the auditor should test whether costs assigned are
    based on appropriate usage information, whether the cost assignments are
    reasonable and consistent, and whether they are mathematically accurate.

    .10 Costs may be allocated if it is not economically feasible to directly
    trace or assign costs on a cause- and- effect basis. This is commonly done
    with costs such as general management, depreciation, rent, maintenance,
    security, and utilities used in common by various segments. These costs
    are generally accumulated in cost

    Substantive Testing 903 - Auditing Cost Information

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 903- 5 pools
    and allocated to segments or outputs (or programs or budget functional

    classifications) based on a relevant common denominator such as number of
    employees, square footage of office space, or amount of direct costs
    incurred in segments. In auditing these allocated costs, the auditor
    should test whether the costs are assigned to the appropriate cost pool
    and summarized appropriately. The auditor also should determine whether
    the allocation basis is reasonable and consistent and test the
    mathematical allocation. In addition, the auditor should determine whether
    an allocation rather that directly tracing costs or assigning them on a
    cause- and- effect basis is appropriate in the circumstances.

    .11 The entity exercises judgment in determining the line item/ programs
    included in its statement of net costs. The auditor should consider
    whether classifications are reasonable in the circumstances.

    FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT OF 1996 (FFMIA)

    .12 For audits of the CFO Act agencies and components identified by OMB
    audit guidance, the auditor should determine whether the agency's
    financial management systems comply substantially with the three
    requirements of FFMIA (see paragraph 100.02 and FAM section 701). To
    determine compliance with SFFAS No. 4 for the purposes of FFMIA, the
    auditor should ask these questions, which relate to the standards
    discussed in paragraph 903.05:

    Does the agency regularly accumulate and report the costs of its
    activities to management?

    Has the agency defined its major programs and responsibility segments for
    the purpose of delineating costs?

    Does the agency properly accumulate costs by those programs and segments?

    Has the agency accounted for the full costs (including interentity costs)
    of products, services, or outputs to be externally reported at the
    entitywide level?

    Has the agency accounted for the costs of resources that contribute to the
    production of outputs by individual responsibility segment using
    appropriate costing methodologies? Has the agency reported those costs in
    the year- end financial statements on the accrual basis of accounting?

    Substantive Testing 903 - Auditing Cost Information

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 903- 6

    Are the costs reported for external financial reporting and those reported
    for internal management reporting consistent and reconcilable?

    Is the reported management cost information consistent, timely, and
    comprehensive?

    Is the cost information reported in such a manner that management can
    determine answers to appropriate questions about costs of outputs?

    How does management determine whether costs are appropriate?

    How does management determine the entity's compliance with FFMIA? This
    inquiry is frequently combined with the procedures in paragraph 903.06,
    the outcome of which should be considered in concluding about the entity's
    compliance with the cost accounting requirements under FFMIA. Also, the

    auditor should review evidence supporting management's assertions in
    response to these questions, as further discussed in section 701,
    Assessing Compliance of Agency Systems with the Federal Financial
    Management Improvement Act (FFMIA).

    MANAGEMENT'S DISCUSSION AND ANALYSIS (MD& A)

    .13 The auditor does not provide an opinion on the MD& A. Thus, the main
    concern is consistency of information, rather than testing the reliability
    of the cost data in the MD& A. The auditor should read the MD& A for
    consistency with the financial statements and with the auditor's knowledge
    of the entity. Testing generally should be limited to data in the
    financial statements, as discussed in paragraph 903.06, not the MD& A.
    Analytical procedures may be used to consider the reasonableness of cost
    data in the MD& A. Based on this comparison, the auditor should consider
    whether additional testing is needed.

    .14 Although costs reported in internal and external reports should be
    consistent, they may differ in the degree of detail and reporting
    frequency. Cost information for management may require more frequent and
    timely reporting. It also may require more specific and detailed
    information regarding the costs of specific activities or outputs. By
    comparison, external reports could be less frequent, and the cost
    information more aggregated, such as on a suborganization or program
    basis.

    Substantive Testing 921 - AUDITING FUND BALANCE WITH TREASURY (FBWT) April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 921- 1 .01 This
    section provides guidance in auditing the Fund Balance with Treasury

    (FBWT) account. It explains key agency and Treasury processes and
    procedures related to FBWT accounts and discusses audit issues. Practice
    aids, including example Account Risk Analysis (ARA) and Specific Control
    Evaluation (SCE) forms and suggested audit procedures for the FBWT line
    item, are included in appendices.

    .02 The FBWT account (SGL account 1010) is an asset account representing
    the unexpended spending authority in agencies' appropriations. Federal
    agencies record their budget spending authority in FBWT accounts and
    increase or decrease these accounts as they collect or disburse funds.
    Most agencies maintain several fund balance accounts funded by different
    types of

    appropriations, such as annual 1- year appropriations and/ or multiyear
    appropriations that are included in the financial statement FBWT line
    item. The FBWT account also serves as one of several mechanisms to prevent
    agencies' disbursements from exceeding appropriated amounts. .03 In the
    federal government, Treasury serves as the central banker. Most agencies

    use the banking services provided by Treasury's Financial Management
    Service (FMS) and do not keep cash in separate bank accounts. Some
    agencies have authority to disburse funds on their own behalf. These
    agencies still maintain FBWT accounts and follow Treasury's reporting and
    reconciliation requirements.

    .04 Unlike commercial banking institutions, Treasury does not keep
    independent accounting records of each agency's FBWT accounts. Instead,
    Treasury uses monthly data reported by the agencies to calculate agencies'
    FBWT balances and

    requires agencies to perform detailed reconciliations of FBWT accounts to
    maintain the accuracy and reliability of agencies' fund balance records.
    Effective reconciliations also serve as a detection control for
    identifying

    unauthorized and unrecorded transactions at the agencies and Treasury. .05
    Treasury requires agencies to maintain FBWT accounts and to perform a
    twopart reconciliation process each month.

    First, agencies should reconcile differences identified by Treasury
    between cash receipts and disbursements transactions reported by agencies
    to those reported by other sources of financial data, such as the Federal
    Reserve,

    Substantive Testing 921 * Auditing Fund Balance with Treasury (FBWT) April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 921- 2

    commercial banks, other federal agencies, and the FMS regional financial
    centers. Treasury reports differences identified to agencies each month on
    "Statements of Differences." 1 Second, agencies should reconcile
    differences between their records and

    Treasury records of the monthly activity recorded in the FBWT accounts.
    Each month Treasury provides appropriation, fund, and receipt account
    ledgers, which include a rollforward of the previous month's balance, the
    current month's cash activity reported by the agency and other account
    activity (supplemental appropriations, recissions, nonexpenditure
    transfers, entries reported by other agencies) to compare to their
    records.

    Differences remain until reconciled by the agencies and represent
    potential misstatements in agencies' financial statements and budget
    execution reports.

    AUDIT ISSUES

    .06 Many agencies have problems in reconciling the transaction activity in
    their FBWT accounts. Ineffective FBWT reconciliations contribute to
    agencies' inability to prepare auditable financial statements. Without
    effective agency reconciliations of receipt and disbursement activity, the
    agency FBWT balance * the amount of funds available to it for expenditure
    in each appropriation * may contain material misstatements, and auditors
    generally would be unable to determine whether FBWT is fairly stated.

    .07 Prior audits of agencies' financial statements identified instances in
    which agencies were not timely reconciling their FBWT accounts. Instead,
    some agencies adjusted their accounts to show the amounts reported by
    Treasury and/ or recorded differences in suspense accounts without
    adequately researching the causes of the differences. Unreconciled
    differences recorded in suspense accounts could represent transactions
    that have not been recorded by the agency to the appropriate accounts.
    Only after researching its accounting records and reports can an agency
    determine the cause of the problem and make the proper adjustments to its
    FBWT accounts (and related asset, liability, expense, or revenue accounts)
    or advise Treasury to correct its records. .08 There were instances in
    which agencies did not receive Statements of

    Differences from Treasury, even though unreconciled differences existed.
    Some 1 The banking system data is reported via CASHLINK, other federal
    agencies via

    IPAC (which replaced OPAC in December 2001), and FMS regional financial
    centers via GOALS. See FAM section 921 A for more detail on the Treasury
    processes and reports related to FBWT reconciliation.

    Substantive Testing 921 * Auditing Fund Balance with Treasury (FBWT) April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 921- 3

    agencies did not use their accounting records to prepare monthly reports
    to Treasury. Instead, they reported the same amounts recorded in OPAC and
    CASHLINK to avoid Statements of Differences; generally these agencies
    tracked differences in suspense accounts. Because Treasury uses these
    sources to compare with the amounts reported by the agency, Treasury did
    not identify differences; thus, no Statements of Differences were issued.
    Also, some agencies cleared Statements of Differences by reporting
    adjustments to Treasury before researching and resolving differences.
    Therefore, amounts reported on Statements of Differences might not always
    be an adequate indicator of reconciliation problems or an adequate measure
    of the extent of outstanding unreconciled differences. Auditors should
    design tests to obtain an understanding of the agency's reconciliation
    procedures in order to assess the effect of its reconciliation process on
    the financial statements and to determine the level of audit procedures
    required after considering the materiality of unreconciled differences.

    .09 Because Treasury's record of an agency's FBWT is the result of the
    activity reported to Treasury by the agency itself, and is not obtained
    from another source, the reconciliation process is a key control over FBWT
    accounts. .10 One year's successful audit of the reconciliation of FBWT
    activity will generally

    not result in an auditable balance because the auditor faces the issue of
    auditing the beginning balance. Except for the first year of an
    appropriation, the balances in most FBWT accounts are included in the FBWT
    line item rollforward from year to year until the account is closed, which
    can be 5 years or more, depending on the type of appropriation.

    .11 In an initial audit, the auditor should design tests to obtain
    assurance on the FBWT beginning balance. This may require testing of FBWT
    reconciliations performed in prior years or other audit procedures that
    provide assurance on the FBWT line item. For example, in some instances
    detailed audit procedures over beginning balances related to other
    financial statement accounts that affect FBWT could provide assurance. In
    tests of other account balances, the auditor

    may be able to determine that old errors were written off or other
    appropriate adjustments were made to FBWT and that the fund balances from
    prior years and remaining unadjusted reconciling differences are
    immaterial.

    AUDIT APPROACH

    .12 Because Treasury relies on the monthly data reported by the agencies
    to calculate agencies' FBWT balances, confirmation of FBWT account
    balances with Treasury does not provide competent evidence. Therefore, the
    auditor

    Substantive Testing 921 * Auditing Fund Balance with Treasury (FBWT) April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 921- 4

    needs to obtain competent evidence through tests of the agency's FBWT
    reconciliation process. .13 Since most assets, liabilities, revenues, and
    expenses stem from or result in cash

    transactions, misstatements in the receipt or disbursement activity
    recorded in the FBWT accounts affect the balances of various financial
    statement accounts. Even though net FBWT account balances may be
    immaterial as of the date of the

    financial statements, the gross receipt and disbursement transactions
    flowing through the FBWT account during the fiscal year are usually
    material. Therefore, the auditor should test the reconciliation of the
    transaction activity flowing through the account. In addition, the auditor
    should assess the impact of gross unreconciled differences on the FBWT and
    other financial statement line items. .14 The auditor should design an
    audit program that includes steps to determine

    whether the agency

    prepares monthly reports to Treasury using the same detailed accounting
    records of collection and disbursement transactions that are used to
    prepare the agency's financial statements;

    researches and resolves the underlying causes of differences between
    amounts reported by Treasury and agency records each month and makes the
    proper adjustments; and

    monitors suspense account activity * including maintaining detailed
    records of unreconciled differences charged to the account and maintaining
    records that age the differences * and performs procedures to timely and
    properly clear the account. .15 The auditor also should design procedures
    to determine the magnitude of the

    agency's gross unreconciled differences at year- end by analyzing the
    Treasury Statements of Differences reports and agency suspense account
    items in terms of their aggregate absolute values and resulting impact on
    the financial

    statements. (Since each difference represents a potential misstatement,
    the rollup and netting of charges and credits can significantly understate
    the total outstanding differences.)

    Substantive Testing 921 * Auditing Fund Balance with Treasury (FBWT) April
    2003 GAO/ PCIE Financial Audit Manual - Part II Page 921- 5

    PRACTICE AIDS

    .16 The following practice aids are appended to this section:

    Section 921 A * Treasury Processes and Reports Related to FBWT
    Reconciliation.

    Section 921 B * Example Account Risk Analysis (ARA).

    Section 921 C - Example Specific Control Evaluation (SCE). (Note that a
    single SCE of the line item/ account- related accounting application for
    FBWT is presented. There are transaction- related accounting applications
    listed on the ARA that affect FBWT, such as cash receipts and cash
    disbursements, that would require transaction related SCEs.)

    Section 921 D - Example Audit Procedures. .17 These aids are not all
    inclusive. They do not include tests of other accounts, such as Other Cash
    on Deposit bank accounts and Imprest Funds. Also, for

    agencies that write their own checks, the aids do not discuss or include
    tests of controls over check stock. If material, the auditor should apply
    appropriate additional tests. The aids provide the auditor with a
    framework for designing

    tests of FBWT accounts. Auditors should use professional judgment in
    designing audit programs for their particular agency after considering
    materiality, audit risks, and internal control.

    .18 The auditor should use judgment in determining the most effective and
    efficient method to achieve the audit objectives. When possible, the FBWT
    audit procedures should be coordinated with other tests. For example, many
    procedures may be performed in conjunction with tests of agency cash
    receipts and cash disbursements. Others may be included as part of
    compliance testing.

    [This page intentionally left blank.]

    Substantive Testing 921 A - TREASURY PROCESSES AND REPORTS

    RELATED TO FBWT RECONCILIATION April 2003 GAO/ PCIE Financial Audit Manual
    - Part II Page 921 A- 1

    A. Verification of Collections and EFT Disbursements Reports submitted by
    agencies

    Reports/ data submitted by other sources

    Treasury FMS action Resulting

    Treasury reports to agencies

    Agencies report collections monthly on Statements of

    Transactions (SF 224) or Statements of Accountability/ Transactions (SF
    1218/ 1221 or 1219/ 1220) by ALC.

    Note: For agencies which report on SF 1218 or 1219, electronic
    disbursements are netted against collections.

    CASHLINK system data (CASHLINK is used by the

    banking system to report collections and EFTs received from and on behalf
    of government agencies). Note: In CASHLINK, electronic disbursements are
    reported as

    "negative collections," or debit vouchers.

    FMS compares monthly collection totals reported on agency SF 224s,

    SF 1218/ 1221s, or SF 1219/ 1220s to transaction data available in
    CASHLINK.

    Month- end Statements of Differences (FMS 6652) via GOALS

    for each month until the difference is cleared.

    Monthly detailed support list of transactions

    reported in CASHLINK. Reporting of FBWT accounts activity and balances FMS
    reports agency FBWT

    accounts activity and balances based on data reported by

    agencies. Monthly

    appropriation and receipt account ledgers (FMS 6653 and 6655) showing
    account activity and net balances for each

    appropriation, fund, and receipt account.

    Monthly appropriation and receipt account trial balances (FMS 6654/ 6655)
    by department.

    Substantive Testing 921 A * Treasury Processes and Reports Related to FBWT
    Reconciliation April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    921 A- 2

    B. Verification of Disbursement Data Reports submitted by agencies

    Reports/ data submitted by other sources

    Treasury FMS action Resulting

    Treasury reports to agencies

    1. Verification of Treasury Disbursement Office agency disbursements
    Agencies for which FMS regional financial centers disburse money submit
    monthly

    Statements of Transactions (SF 224) by ALC.

    Agencies for which FMS regional finance centers disburse money report net
    interagency

    transactions on SF 224.

    FMS regional finance center Agency Confirmation Reports (include checks
    issued and electronic disbursements accomplished on

    behalf of the agency).

    The Interagency Payment and Collection system (IPAC) data are used by

    agencies and FMS to accomplish interagency transactions).

    FMS compares monthly disbursement totals reported on agency SF

    224s to disbursement data on regional

    finance center reports or IPAC.

    Monthly Statements of Differences (FMS 6652) for each month until the
    difference is cleared.

    Monthly detailed support listings of transactions

    reported by regional finance centers, and IPAC.

    Reporting of FBWT accounts activity and balances FMS reports agency FBWT
    accounts activity and balances based on

    monthly data reported by agencies.

    Monthly appropriation account ledgers (FMS 6653)

    showing account activity and net balances for each appropriation and fund
    account.

    Monthly appropriation account trial balances (FMS 6654) by department.

    Substantive Testing 921 A * Treasury Processes and Reports Related to FBWT
    Reconciliation April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    921 A- 3

    B. Verification of Disbursement Data Reports submitted by agencies

    Reports/ data submitted by other sources

    Treasury FMS action Resulting

    Treasury reports to agencies

    2. Verification of Non- Treasury Disbursing Office (NTDO) agency
    disbursements

    Verification of interagency transactions: NTDO agencies report net
    interagency

    transactions on SF 1218/ 1221 or SF 1219/ 1220 by ALC.

    Interagency payment and collection system data.

    FMS compares monthly net disbursement totals reported on

    agency SF 1218/ 1221s or SF 1219/ 1220s to disbursement data in IPAC.
    Monthly

    Statements of Differences (FMS 6652) for each

    month until the difference is cleared.

    Monthly detailed support lists of transactions

    reported by IPAC. Verification of checks paid

    NTDOs submit tapes detailing checks issued and Month- end Checks Issued
    Summary reports (SF 1179).

    Federal Reserve Banks submit tapes detailing

    checks paid. FMS performs a

    check by check comparison of checks issued to

    checks paid by the banking system (dollar amount).

    Advice of Check Issue Discrepancies (FMS 5206).

    Verification of checks issued: NTDOs submit monthly Statements of
    Accountability/ Transactions (SF 1218/ 1221 or SF 1219/ 1220).

    SF 1179, MonthEnd Checks Issued Summary

    report submitted by NTDO agencies and checks paid by the banking system.

    FMS compares SF 1179 data (adjusted for FMS 5206 dollar differences) to
    the agency

    disbursements reported on SF 1218/ 1221 or SF 1219/ 1220 (total checks
    issued to total checks paid).

    Two-, 4-, 6-, & 8- month letters notifying agencies

    of any outstanding discrepancies over $50.

    Substantive Testing 921 A * Treasury Processes and Reports Related to FBWT
    Reconciliation April 2003 GAO/ PCIE Financial Audit Manual - Part II Page
    921 A- 4

    B. Verification of Disbursement Data Reports submitted by agencies

    Reports/ data submitted by other sources

    Treasury FMS action Resulting

    Treasury reports to agencies

    2. Verification of Non- Treasury Disbursing Office (NTDO) agency
    disbursements

    Reporting of FBWT accounts activity and balances FMS reports agency FBWT
    accounts activity and balances based on monthly

    data reported by agencies.

    Monthly appropriation account ledger (FMS 6653)

    showing account activity and net balances for each appropriation and fund
    account.

    Monthly appropriation trial balance (FMS 6654) by department.

    Substantive Testing 921 B - EXAMPLE ACCOUNT RISK ANALYSIS FOR FUND BALANCE
    WITH TREASURY

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 B- 1

    Entity: Agency Date of Financial Statements: September 30, 20xx Line Item:
    Fund Balance with Treasury Preparer: .

    ACCOUNT RISK ANALYSIS FORM Region: .

    File: Date: . PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account

    Name Balance Financial statement assertions / risks Inherent, fraud, and

    control risk factors Cycle/ accounting application

    Effectiveness of control

    activities 1

    Control risk Combined risk Tim

    ing I/ F Nature &

    extent W/ P ref & audit step Fund Balance with Treasury $xx, xxx m
    Existence or occurrence

    Recorded Fund Balance with Treasury (FBWT) does not

    exist. Control risk arises from the (1) highly decentralized structure of
    the agency, which reduces management's knowledge of and control

    over operations, (2) signifi cant weaknesses in general controls over the
    automated

    systems the agency relies extensively upon to process transactions and (3)
    lack of adequate management over sight of the reconciliation

    process. Inherent risk arises from the high volume of transactions flowing
    through the account.

    Cycles :

    Revenue Payroll Budget Treasury Applications:

    FBWT Cash receipts Cash disbursements I/ F

    Test FBWT reconciliations.

    Analyze impact of unresolved reconciling items at year- end. FBWT program
    FB- 1

    through FB- 7

    1 Omitted from this example.

    Substantive Testing 921 B - Example Account Risk Analysis for Fund Balance
    with Treasury

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 B- 2

    Entity: Agency Date of Financial Statements: September 30, 20xx Line Item:
    Fund Balance with Treasury Preparer: .

    ACCOUNT RISK ANALYSIS FORM Region: .

    File: Date: . PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account

    Name Balance Financial statement assertions / risks Inherent, fraud, and

    control risk factors Cycle/ accounting application

    Effectiveness of control

    activities 1

    Control risk Combined risk Tim

    ing I/ F Nature &

    extent W/ P ref & audit step Completeness FBWT is omitted from the
    financial statements or is incomplete.

    Control risk arises from the (1) highly decentralized structure of the
    agency, which reduces management's knowledge of and control over
    operations, (2) signifi

    cant weaknesses in general controls over the automated systems the agency
    relies

    extensively upon to process transactions and (3) lack of adequate
    management over sight of the reconciliation

    process. Inherent risk arises from the high volume of transactions flowing
    through the account. Cycles :

    Revenue Payroll Budget Treasury Applications:

    FBWT Cash receipts Cash disbursements I/ F

    Test FBWT reconciliations.

    Analyze impact of unresolved reconciling items at year- end. Prepare lead
    schedule of GL accounts that constitute FBWT,

    analytically review with prior- year data, and resolve reasons for
    unexpected changes. FBWT program FB- 1

    through FB- 7

    FB- 2 and FB- 10

    Substantive Testing 921 B - Example Account Risk Analysis for Fund Balance
    with Treasury

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 B- 3

    Entity: Agency Date of Financial Statements: September 30, 20xx Line Item:
    Fund Balance with Treasury Preparer: .

    ACCOUNT RISK ANALYSIS FORM Region: .

    File: Date: . PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account

    Name Balance Financial statement assertions / risks Inherent, fraud, and

    control risk factors Cycle/ accounting application

    Effectiveness of control

    activities 1

    Control risk Combined risk Tim

    ing I/ F Nature &

    extent W/ P ref & audit step Valuation/ Accuracy Fund Balance with
    Treasury is not recorded accurately. No significant inherent, fraud or
    control risk factors identified.

    Cycles :

    Revenue Payroll Budget Treasury Applications:

    FBWT Cash receipts Cash disbursements I/ F

    Test FBWT reconciliations.

    Analyze impact of unresolved reconciling items at year- end. FBWT program
    FB- 1

    through FB- 7

    Substantive Testing 921 B - Example Account Risk Analysis for Fund Balance
    with Treasury

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 B- 4

    Entity: Agency Date of Financial Statements: September 30, 20xx Line Item:
    Fund Balance with Treasury Preparer: .

    ACCOUNT RISK ANALYSIS FORM Region: .

    File: Date: . PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account

    Name Balance Financial statement assertions / risks Inherent, fraud, and

    control risk factors Cycle/ accounting application

    Effectiveness of control

    activities 1

    Control risk Combined risk Tim

    ing I/ F Nature &

    extent W/ P ref & audit step Rights Agency does not have certain rights to
    Fund Balance with

    Treasury because of transfers, rescissions, and restrictions. Inherent
    risk arises from the high number of appropriation, fund and

    receipt accounts, including certain special funds and trust funds that do
    not

    belong to the agency. Because these nonentity accounts are maintained
    within the same system used to maintain entity accounts and financial
    activity, there is a risk that these accounts will be inappropriately
    charged and be included in the FBWT line item. Same control risks as for

    existence and completeness. Treasury F Review support for recorded
    appropriation, fund,

    and receipt accounts included in the FBWT line item. Review footnote
    disclosure. FBWT program FB- 8 and FB- 10

    Substantive Testing 921 B - Example Account Risk Analysis for Fund Balance
    with Treasury

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 B- 5

    Entity: Agency Date of Financial Statements: September 30, 20xx Line Item:
    Fund Balance with Treasury Preparer: .

    ACCOUNT RISK ANALYSIS FORM Region: .

    File: Date: . PLANNING PHASE INTERNAL CONTROL PHASE TESTING PHASE Account

    Name Balance Financial statement assertions / risks Inherent, fraud, and

    control risk factors Cycle/ accounting application

    Effectiveness of control

    activities 1

    Control risk Combined risk Tim

    ing I/ F Nature &

    extent W/ P ref & audit step Presentation and disclosure Fund Balance with
    Treasury is not properly classified and disclosed in the financial

    statements. No significant inherent or fraud risk factors identified. Same
    control risks as for

    existence and completeness. Treasury F Review FBWT related financial

    statement line item and footnote disclosures for conformance with

    applicable standards, and trace amounts reported in financial statement

    line items and footnote disclosures to general ledger and supporting
    detailed records.

    FBWT program FB- 9 and FB- 10

    [This page intentionally left blank.]

    Substantive Testing 921 C - EXAMPLE SPECIFIC CONTROL EVALUATION FOR FUND
    BALANCE WITH TREASURY

    Entity: Agency Date of Financial Statements:

    September 30, 20xx Accounting application: Fund

    Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 1 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 1 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step Existence or Occurrence

    Existence Existence Substantiation

    1. Recorded FBWT

    does not exist as of a given date. 1a. Recorded FBWT

    amounts should exist as of a

    given date. (See note 1.) 1.

    Agency staff performs monthly reconciliation between agency general ledger
    (G/ L) and Treasury

    records (appropriation and receipt account ledgers,

    FMS 6653 and FMS 6655). Y FB- 5

    & FB- 6

    2. Agency staff resolves receipt and disbursement differences reported by
    Treasury via the FMS 6652,

    Statements of Differences for collections and disbursements.

    N FB- 4 & FB- 6

    Substantive Testing 921 C * Example Specific Control Evaluation for Fund
    Balance with Treasury Entity: Agency

    Date of Financial Statements: September 30, 20xx

    Accounting application: Fund Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 2 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 2 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step 3.

    Agency staff resolves disbursement differences reported by Treasury via
    the

    Advice of Check Issued Discrepancy Report (FMS 5206) and Difference

    Notification to the Disbursing Office (NTDO

    agencies). N FB- 4 & FB- 6

    1b. Recorded FBWT, at a given date,

    should be supported by appropriate detailed records that are

    accurately summarized and reconciled to the account balance. 1. Agency
    staff reconciles the

    monthly Statement of Transactions (SF 224) submitted to Treasury, to the
    applicable G/ L accounts. 2. Agency staff reconciles the

    monthly Statement of Ac countability/ transactions

    (SF1219/ 1220 or SF1218/ 1221) submitted to Treasury, to the applicable G/
    L accounts (NTDO agencies). 3. Same as 1.1a. 1

    Y N

    FB- 3 FB- 3

    Substantive Testing 921 C * Example Specific Control Evaluation for Fund
    Balance with Treasury Entity: Agency

    Date of Financial Statements: September 30, 20xx

    Accounting application: Fund Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 3 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 3 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step 1c. Access to FBWT,

    critical forms, records, and processing and

    storage areas should be permitted only in

    accordance with laws, regulations, and management

    policy. 1. Not covered in this example.

    Note: For agencies that disburse funds on their own behalf (NTDOs), and
    maintain cash

    and/ or check stock on hand, auditors will need to document and test the
    effectiveness of the

    control activities in place. Completeness Complete

    ness Complete ness

    Account completeness

    2. FBWT balance exists but is omitted

    from the financial statements. 2a. FBWT balance

    should be included in the financial statements.

    1. Same as 1.1a. 1, 1.1a. 2, 1.1a. 3. 2. Agency staff reconciles the

    FBWT line item crosswalk that includes all G/ L FBWT accounts to the
    Treasury Appropriation and Receipt Trial Balances.

    N FB- 8

    FB- 9

    Substantive Testing 921 C * Example Specific Control Evaluation for Fund
    Balance with Treasury Entity: Agency

    Date of Financial Statements: September 30, 20xx

    Accounting application: Fund Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 4 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 4 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step Valuation or

    allocation Valuation Valuation

    Accuracy

    3. FBWT receipt and disbursement transactions are

    recorded incorrectly. 3a. FBWT

    transactions should be recorded accurately. 1. Same as 1.1a. 1.

    2. Same as 1.1a. 2. 3. Same as 1.1a. 3.

    N N

    FB- 4 FB- 5 &

    FB- 6 Rights and obligations:

    Rights Rights Ownership 4. Recorded FBWT is owned by others. 4a. Agency
    should

    own recorded FBWT. 1. Agency staff reconciles

    Treasury appropriation warrants, appropriation

    recissions, and nonexpenditure transfers to FBWT accounts.

    2. Agency staff reconciles expenditure (cash receipts

    and disbursements) activity to the FBWT accounts. N FB- 8

    FB- 4, FB- 5,

    FB- 6

    Substantive Testing 921 C * Example Specific Control Evaluation for Fund
    Balance with Treasury Entity: Agency

    Date of Financial Statements: September 30, 20xx

    Accounting application: Fund Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 5 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 5 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step

    Rights 5. Agency does not have certain rights to recorded FBWT

    because of appropriation restrictions. 5a. Recorded FBWT

    should be agencies' rights at a given date.

    1. Same as 4.4a. 1. N

    FB- 8

    Substantive Testing 921 C * Example Specific Control Evaluation for Fund
    Balance with Treasury Entity: Agency

    Date of Financial Statements: September 30, 20xx

    Accounting application: Fund Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 6 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 6 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step Presentation and disclosure Disclosure Disclosure Account
    classification 6. FBWT is not properly classified and described in the
    financial

    statements. 6a. FBWT should be properly classified and described in the
    financial

    statements. 1. Agency staff reconciles

    Treasury Undisbursed Appropriation Account and

    Receipt Account trial balances to the G/ L accounts.

    2. The Chief Accountant reviews the FBWT account analysis and crosswalk to
    the FS against the Treasury Financial Management

    Supplement* U. S. Government Standard

    General Ledger (section V). N FB- 6

    FB- 9

    Substantive Testing 921 C * Example Specific Control Evaluation for Fund
    Balance with Treasury Entity: Agency

    Date of Financial Statements: September 30, 20xx

    Accounting application: Fund Balance with Treasury

    SPECIFIC CONTROL EVALUATION

    Preparer: . (Line Item/ Account- Related) Region: . File:

    Date: Page 7 of 7 April 2003 GAO/ PCIE Financial Audit Manual - Part II
    Page 921 C- 7 Relevant assertions in line

    items Accounting application assertions

    FBWT Various Potential misstatements in accounting application

    assertions Control objectives Internal control activities IS (Y/ N)
    Effectiveness

    of control activities

    W/ P ref. & control

    testing step Presentation Presentation Consistency

    7. The financial state ments components

    of FBWT are based on accounting principles different from those used in

    prior periods. 7a. FBWT should be based on

    accounting principles that are applied consistently from

    period to period. 1. The CFO, Reports and

    Analysis Branch Chief, and the Chief Accountant review the financial
    statements for consistently applied accounting principles.

    N FB- 10

    Disclosure Disclosure Disclosure 8. Required information is not disclosed
    in the financial statements

    or in the footnotes thereto. 8a. The financial statements or footnotes
    thereto should contain

    all information required to be disclosed.

    1. The CFO, Reports and Analysis Branch Chief, and the Chief Accountant
    review the financial statements for consistently applied

    accounting principles and required disclosure.

    N FB- 10

    Note 1: The internal control activities 1.1a. 1 and 1.1b. 1 generally rely
    on system outputs that are dependent on IS general controls, which may be
    ineffective at some agencies. (Tests of controls over agencies' general
    ledger systems should be included as part of computer control tests.) The
    control activity 1.1a. 2 validates receipt and disbursement balances with
    Treasury records that are obtained from third parties (banks, Treasury
    regional finance centers, other agencies).

    [This page intentionally left blank.]

    Substantive Testing 921 D - EXAMPLE AUDIT PROCEDURES FOR FUND

    BALANCE WITH TREASURY April 2003 GAO/ PCIE Financial Audit Manual - Part
    II Page 921 D- 1 Entity
    _______________________________________________________________ Period of
    financial statements ____________________________________________ Job code
    _____________________________________________________________

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref I. Planning Phase FB- 1 A. To obtain an understanding of the agency's
    accounting

    and reporting requirements for Fund Balance with Treasury (FBWT) accounts,
    read the following documents:

    Treasury Financial Manual, Volume I, part 2, chapter 5100 - Reconciling
    Fund Balance with Treasury accounts, http:// fms. treas. gov/ fundbalance.

    Current OMB bulletin, Form and Content of Agency Financial Statements.
    Statements of Federal Financial Accounting Standards (SFFAS No. 1).

    Agency accounting policies and procedures for the Fund Balance with
    Treasury Accounts.

    B. Read prior year documentation, financial statements, and related
    auditor's reports to determine if there were any audit issues/ reportable
    conditions related to FBWT.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    2

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref II. Internal Control Phase FB- 2 A. To obtain an understanding of the
    agency's internal

    controls over FBWT accounts, perform the following: 1. Interview key
    agency staff about the FBWT

    procedures and controls in place at the agency. a. Determine what method
    the agency uses to

    disburse funds (FMS regional finance centers, on its own behalf, and/ or
    both methods). b. Obtain an understanding of the significant

    accounting systems and controls used in reporting and accounting for FBWT
    transactions. c. Identify FBWT line item general ledger accounts. d.
    Obtain an understanding of the agency's FBWT reconciliation procedures.
    Ask

    if and how the agency tracks differences between the agency's and Treasury
    FBWT records;

    what suspense accounts, if any, are used by the agency to track
    unreconciled differences;

    if the agency has a process/ system for aging unreconciled differences;
    and

    how the agency reports and handles differences.

    B. Walk through the FBWT reconciliation process and determine whether
    reconciliation controls have been placed in operation.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    3

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref III. Testing Phase FB- 3 A. To determine whether the agency's
    reconciliation of the

    monthly SF 224, 1219/ 1220 or 1218/ 1221 Statement of Transactions/
    Accountability report submitted to Treasury, to the applicable general
    ledger (G/ L) accounts is effective (existence): 1. Obtain a list of the
    agency's Agency Location Codes

    (ALCs). Agency ALCs can be obtained through the GOALS. ALCs indicate the
    agency*s method of disbursement. Four digit ALCs indicate a nonTreasury

    disbursing agency. Eight digit ALCs indicate a Treasury disbursing agency.
    2. Obtain the monthly Statements of Transactions (SF

    224) or Statements of Accountability/ Transactions (SF 1219/ 1220 or 1218/
    1221) for each ALC for the fiscal year, or for the period being audited if
    testing at an interim date. 3. Select the individual Statements of
    Transactions (SF

    224) or Statements of Accountability/ Transactions (SF 1219/ 1220 or 1218/
    1221) to be tested (use separate forms to document the sampling plan).
    Indicate selection method.

    Dollar unit sampling (DUS),

    Classical Variables Estimation Sampling, or

    Other (describe) ___________________________

    For each statement selected: a. Compare the ALC on the SF 224 or SF 1219/
    1220

    or 1218/ 1221 to the agency's list of ALCs. b. Trace monthly collection
    and disbursement

    amounts reported on the SF 224, SF 1219/ 1220 or SF 1218/ 1221 to amounts
    recorded in the agency's official accounting records (G/ L). c. Trace any
    prior period adjustment amounts reported on the SF 224, SF 1219/ 1220 or
    SF

    1218/ 1221 to supporting documentation and the agency's G/ L. d. Examine
    supporting documentation for any

    differences.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    4

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref

    B. Summarize the results of testing. C. Determine whether the results of
    testing indicate that combined risk should be assessed differently and
    whether the audit procedures should be revised.

    FB- 4 A. To determine whether the agency is properly reconciling
    collection and disbursement differences identified by Treasury (existence
    and completeness): 1. Obtain the following Treasury reports for each ALC

    for each month of the fiscal year, or for the period being audited if
    testing at an interim date.

    Final month- end Statements of Differences (FMS 6652). Note: To obtain the
    population of Statements of Differences, obtain the initial month- end
    Statements of Differences issued by Treasury. Treasury issues month- end
    Statements of Differences for each accounting month (when differences are
    identified) and continues to send statements for that month until the
    difference is cleared. To obtain the initial differences reports for the
    period being audited, obtain the reports that show the same

    accounting date and audit date on the statement, indicating that this is
    the initial statement of differences issued for that month.

    Advice of Check Issued Discrepancy reports (FMS 5206). (Note: This step
    applies only for agencies that disburse their own funds * NonTreasury
    Disbursing Offices (NTDO) agencies.) Treasury letters notifying the agency
    of

    outstanding differences between amounts reported on the SF 1219/ 1220 or
    SF 1218/ 1221 and its check issued summary reports. (Note: This step
    applies only for NTDO agencies.)

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    5

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref

    Select the individual statements/ letters to be tested (use separate forms
    to document the sampling plan). Indicate selection method:

    Dollar unit sampling (DUS),

    Classical variables estimation sampling, or

    Other (describe). _____________________________ For each statement/ letter
    selected: a. Compare the ALC number on the

    statement/ report to the agency's list of ALCs. b. Examine the agency's
    reconciliation

    files/ documentation supporting the reconciliation of the difference, and
    determine if differences were adequately researched and resolved. c. Trace
    resulting adjustments, if any, to

    subsequent month Treasury reporting (SF 224, 1219/ 1220, or 1218/ 1221)
    and/ or the agency general ledger accounts to determine if adjustments
    were properly recorded. (Note: reconciling items do not always result in
    adjustments to the G/ L and/ or Treasury records. The resulting
    adjustment, if any, depends on the cause of the difference. For example,
    an adjustment to the agency's G/ L is not necessary when a bank error
    caused the difference. The bank is responsible for reporting the
    adjustment to Treasury.)

    B. Summarize the results of testing and conclude on the effectiveness of
    the agency's reconciliation controls. C. Determine if the results of
    testing indicate that

    combined risk should be assessed differently and if the audit procedures
    should be revised.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    6

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref FB- 5 A. To determine if the agency's monthly reconciliation of

    its G/ L to Treasury records is effective (existence and completeness): 1.
    For the months that correspond to the Statements of Differences selected
    above, obtain the

    Undisbursed Appropriation Account ledgers (FMS 6653) and Receipt Account
    ledgers (FMS 6655) sent by Treasury and the agency's reconciliation.

    Trace the FMS 6653/ 6655 balance per the agency reconciliation to the FMS
    6653/ 6655 reports sent by Treasury.

    Trace the G/ L account balances per the reconciliation to the appropriate
    G/ L accounts.

    Trace account activity per the FMS 6653/ 6655 to the agency G/ L. (Note:
    Typical activity, other than agency disbursements and receipts, may

    include supplemental appropriations, nonexpenditure transfers, and entries
    reported by other agencies.)

    Examine supporting documentation for reconciling items.

    Determine if the appropriate adjustments were made to the general ledger
    or that Treasury had been notified of needed corrections.

    B. Summarize the results of testing and conclude on the effectiveness of
    the agency's reconciliation controls. C. Determine if the results of
    testing indicate that

    combined risk should be assessed differently and if the audit procedures
    should be revised.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    7

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref FB- 6 A. To determine whether the agency's year- end

    (September) reconciliation of FBWT accounts is effective (existence and
    completeness): 1. Obtain the Agency's year- end (September) FBWT

    reconciliation and Treasury's September Undistributed Appropriation
    Account Ledger (FMS 6653) and Receipt Account Ledger (FMS 6655).

    Trace appropriation, fund, and receipt account balances reported on the
    Treasury account ledgers to the agency's reconciliation.

    Trace the appropriation, fund, and receipt account balances reported on
    the Treasury account ledgers to the agency general ledger. Examine
    supporting documentation for

    reconciling items.

    Determine if appropriate adjustments were made to the G/ L and/ or
    reported to Treasury. 2. Obtain the year- end (September) Statements of

    Differences reports issued by Treasury (FMS 6652, and/ or FMS 5206 and
    Treasury notification letters).

    Trace reported differences to the agency's reconciliation to determine if
    all differences were included in the FBWT reconciliation.

    Examine supporting documentation and determine if differences were
    adequately resolved.

    Trace resulting adjustments to supplemental Statements of Transactions/
    Accountability or subsequent month Treasury reporting (SF 224, 1219/ 1220,
    or 1218/ 1221) and/ or the agency general ledger. 3. Summarize the results
    of testing.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    8

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref FB- 7 A. To determine the extent of unreconciled differences at

    year- end and the potential impact on the agency FBWT account balance: 1.
    Determine if unresolved differences reported by

    Treasury on Statements of Differences as of September 30 for the fiscal
    year being audited were subsequently resolved and properly accounted for.

    Obtain the Statements of Differences for the months subsequent to year-
    end (October through end of fieldwork).

    Identify unreconciled differences outstanding at 9/ 30 that were
    subsequently resolved.

    Determine if the differences were adequately researched and resolved.

    Determine if the appropriate adjustments were made to the agency FBWT
    accounts or that Treasury had been notified of needed corrections.

    2. Determine the extent of unreconciled differences included in suspense
    accounts that are not included on Statements of Differences.

    Obtain suspense account transaction detail report as of 9/ 30 for the year
    being audited.

    Obtain suspense account transaction detail report for months subsequent to
    year- end (October through end of fieldwork).

    Identify unreconciled differences outstanding at 9/ 30 that were
    subsequently resolved.

    Determine if the differences were adequately researched and resolved.

    Determine if the appropriate adjustments were made to the agency FBWT
    accounts or that Treasury had been notified of needed corrections.

    3. Assess the materiality of all unreconciled differences outstanding (at
    absolute value).

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    9

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref

    4. Summarize test results. 5. Document the potential effect of material
    unreconciled differences on the FBWT line item and other financial
    statement accounts. FB- 8 A. To determine if the agency recorded warrants,

    appropriation transfers, and rescissions properly, perform the following
    (rights and obligations): 1. For first year appropriations, obtain copies
    of the

    appropriation legislation and U. S. Treasury Appropriation Warrants (FMS
    6200) for the fiscal year.

    Compare the warrants to the appropriation legislation.

    Trace amounts reported on the appropriation warrants to beginning
    appropriation balances recorded in the general ledger FBWT accounts.

    Examine supporting documentation for any differences/ reconciling items.

    2. For other than first year appropriations, trace the beginning balances
    recorded in the general ledger to audited ending balances of the prior
    fiscal year financial statements. (Note: If this is a first year audit,
    additional work may be necessary to substantiate the beginning FBWT
    account balance. For example, the auditor may need to consider if the
    reconciliation process has been effective over the life of the
    appropriations. This may require review of prior year reconciliations.)

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    10

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref

    3. For appropriation activity occurring during the fiscal year being
    audited (supplemental appropriations, rescissions, and nonexpenditure
    transfers), obtain copies of related legislation for supplemental
    appropriation and rescission warrants and U. S. Treasury Non- Expenditure
    Transfer

    Authorizations form (FMS 1151) for the fiscal year.

    Compare supplemental appropriations and rescissions recorded in the
    agencies' FBWT account to appropriation legislation and to U. S. Treasury
    warrants.

    Compare non- expenditure transfer amounts recorded in the agencies' FBWT
    account to approved Non- Expenditure Transfer Authorizations form (FMS
    1151).

    4. Examine supporting documentation for any differences/ reconciling
    items.

    FB- 9 A. To determine the existence and completeness of the appropriation,
    fund, and receipt accounts included in the FBWT financial statement
    balance (existence, completeness, presentation and disclosure): 1. Obtain
    the agency "crosswalk" of G/ L accounts included in the FBWT line item and
    the September

    Treasury Undisbursed Appropriation Account Trial Balance and Receipt
    Account Trial Balance.

    Trace account balances listed on the Treasury trial balances to the agency
    crosswalk of G/ L accounts included in the FBWT line item.

    Determine the status of accounts (i. e., open, expired, canceled) and
    assess whether the account is appropriately included in the FBWT line
    item.

    Obtain an explanation and determine the appropriateness of accounts
    omitted from or included in the crosswalk that were not included in the
    Treasury trial balance.

    Substantive Testing 921 D * Example Audit Procedures for Fund Balance with
    Treasury April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 921 D-
    11

    FBWT Example Audit Procedures: Description of Procedure Done by/ date W/ P

    ref IV. Reporting Phase FB- 10

    A. To determine if the FBWT balance appears reasonable (analytical
    procedure): 1. Compare the G/ L accounts that constitute the FBWT

    with expectations and obtain explanation for any unexpected changes (e.
    g., credit balances, new accounts, closed accounts) or the absence of
    expected changes. 2. Determine if additional testing is necessary. B. To
    assess whether the presentation of the financial

    statements and footnote disclosures for the FBWT line item are in
    accordance with U. S. generally accepted accounting principles (SFFAS No.
    1) (presentation and disclosure) (see GAO/ PCIE FAM, Part II, section
    1004- Financial Reporting: Checklist for Reports Prepared under the CFO
    Act): 1. Determine if the agency has presented and disclosed FBWT in the
    notes to the financial statements in

    accordance with U. S. generally accepted accounting principles. 2.
    Determine if material unreconciled differences are

    disclosed and explained in the notes to the financial statements. 3.
    Determine if material unreconciled differences that

    were written off by the agency during the fiscal year being audited are
    disclosed in the notes to the financial statements. 4. Determine if
    material restrictions, if any, have been

    properly disclosed.

    FB- 11

    A. Prepare proposed audit adjustments, if any. B. Conclude if the FBWT
    line item is fairly stated and if the controls over FBWT are effective.

    [This page intentionally left blank.]

    Reporting 1002 * INQUIRIES OF LEGAL COUNSEL

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 1 .01
    This section provides guidance on procedures for the auditor to perform to

    obtain evidence that the financial accounting and reporting of
    contingencies 1 regarding litigation, claims, and assessments conform with
    U. S. generally accepted accounting principles (GAAP), as described in FAM
    sections 280 and 550. This section discusses the accounting and reporting
    guidance and audit procedures for inquiries of legal counsel concerning
    litigation, claims, and assessments, and includes examples of a legal
    representation letter request, a legal representation letter response,
    including the Department of Justice's standard forms for legal
    contingencies, and management's schedule for

    summarizing the information contained in the legal response.

    ACCOUNTING AND REPORTING GUIDANCE

    .02 Entity management is responsible for implementing policies and
    procedures to identify, evaluate, account for, and disclose litigation,
    claims, and assessments as a basis for the preparation of financial
    statements in conformity with GAAP.

    .03 Statement of Federal Financial Accounting Standards (SFFAS) No. 5,
    Accounting for Liabilities of the Federal Government, as amended by SFFAS
    No. 12, Recognition of Contingent Liabilities Arising from Litigation: An
    Amendment of SFFAS No. 5, Accounting for Liabilities of the Federal
    Government, contains accounting and reporting standards for loss
    contingencies, including those

    arising from litigation, claims, and assessments. 2 The Federal Accounting
    Standards Advisory Board (FASAB) Interpretation No. 2, Accounting for
    Treasury Judgment Fund Transactions, clarifies GAAP related to claims to
    be

    1 Environmental and disposal liabilities are a type of contingency that is
    often a significant issue. 2 SFFAS No. 7 has guidance for reporting claims
    for tax refunds. Rather than

    recognizing probable claims and disclosing other claims in the notes to
    the financial statements, SFFAS No. 7 indicates that other claims for
    refunds that are probable should be included as supplementary information.

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 2 paid
    through the Treasury Judgment Fund. 3 Statement of Financial Accounting

    Standards No. 5, Accounting for Contingencies, also provides guidance for
    financial accounting and reporting for loss and gain contingencies for
    those entities following GAAP for nongovernmental entities. The definition
    of probable for legal contingencies is now essentially the same in
    Statement of Financial Accounting Standard No. 5 and SFFAS No. 5, since
    SFFAS No. 12 has amended the latter.

    .04 A contingency is an existing condition, situation, or set of
    circumstances involving uncertainty as to possible gain or loss to an
    entity. The uncertainty will ultimately be resolved when one or more
    future events occur or fail to occur. When a loss contingency exists, the
    likelihood that the future event or events will confirm the loss or
    impairment of an asset or the incurrence of a liability can range from
    probable to remote. SFFAS Nos. 5 and 12 use the terms probable, reasonably
    possible, and remote to identify three areas within the range of potential
    loss, as follows:

    Probable* For pending or threatened litigation and unasserted claims, the
    future confirming event or events are likely to occur. (For other
    contingencies, the future event or events are more likely than not to
    occur.)

    Reasonably possible* The chance of the future event or events occurring is
    more than remote but less than probable.

    Remote* The chance of the future event or events occurring is slight. 3 A
    permanent, indefinite appropriation, commonly known as the Judgment Fund,

    is available to pay final judgments, settlement agreements, and certain
    types of administrative awards against the United States when payment is
    not otherwise provided for. The Secretary of the Treasury certifies all
    payments from the fund. (See 31 U. S. C. 1304, Judgments, awards, and
    compromise settlements.) FASAB Interpretation No. 2 clarifies how federal
    entities should report the costs and liabilities arising from claims to be
    paid by the Judgment Fund and how the Judgment Fund should account for the
    amounts that it is required to pay on behalf of federal entities.

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 3 .05 A
    liability and the related cost for an estimated loss from a loss
    contingency

    should be recognized (accrued by a charge to income) when 4 a. a past
    event or exchange transaction has occurred, b. a future outflow or other
    sacrifice of resources is probable, and c. the future outflow or sacrifice
    of resources is measurable. .06 Disclosure of the nature of an accrued
    liability for loss contingencies, including

    the amount accrued, may be necessary for the financial statements not to
    be misleading. For example, if the amount recognized is large or unusual,
    disclosure should be considered. However, if no accrual is made for a loss
    contingency because one or more of the conditions in paragraph 1002.05 are
    not

    met, disclosure of the contingency should be made when there is at least a
    reasonable possibility that a loss has been incurred. The disclosure
    should include the nature of the contingency, and an estimate of the
    possible liability or range of possible liability, if estimable, or a
    statement that such an estimate cannot be made. In addition, if the
    Judgment Fund might be involved in the payment of the possible loss, the
    federal entity involved in the litigation should discuss the Judgment
    Fund's role in a note to the financial statements.

    .07 Although management often relies on advice of legal counsel about the
    (a) likelihood of an unfavorable outcome and (b) estimates of the amount
    or range of potential loss for litigation, claims, and assessments,
    management is ultimately responsible for determining whether these
    contingencies are probable, reasonably possible, or remote. Management
    does this to decide whether they should be recognized as liabilities and/
    or disclosed in the notes to the financial statements. Thus, the Office of
    Management and Budget's (OMB) audit guidance requires CFO Act agency
    management to prepare a schedule summarizing legal contingencies including
    whether they are probable, reasonably possible, or remote, and whether
    (and in what amounts) they have been accrued or disclosed in the financial
    statements (see example summary schedule in FAM section 1002 D).

    4 If the Judgment Fund will pay the claim, the entity should still
    recognize the liability and cost at this time. Once the claim is settled
    or a court judgment is assessed and the Judgment Fund is determined to be
    the appropriate source for

    payment, the entity should reduce the liability by recognizing an
    (imputed) financing source. Note that for Judgment Fund payments made
    under the Contract Disputes Act and in employment discrimination cases,
    the entity should instead establish a payable to reimburse the Judgment
    Fund.

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 4

    AUDIT PROCEDURES

    .08 The auditor should design procedures to test the entity's accounting
    for and disclosure of litigation, claims, and assessments. AU 337 (SAS 12)
    provides guidance on the procedures to identify litigation, claims, and
    assessments so that the auditor may obtain evidence that they are
    appropriately accounted for and disclosed. AU 9337 provides auditing
    interpretations of AU 337. OMB guidance for audits of federal financial
    statements also contains procedures for inquiries of legal counsel. (See
    FAM section 1002 A for example audit procedures.)

    .09 The auditor should obtain evidence relevant to the following factors
    with respect to litigation, claims, and assessments:

    a. The existence of a condition, situation, or set of circumstances
    indicating uncertainty as to the possible loss to an entity arising from
    litigation, claims, and assessments.

    b. The period in which the underlying causes for legal action occurred. c.
    The likelihood of an unfavorable outcome (probable, reasonably possible,
    or

    remote). d. The amount or range of potential loss, if estimable. .10 The
    auditor should discuss with management the events or conditions that
    should

    be considered in the accounting for and reporting of litigation, claims,
    and assessments. The auditor should perform audit procedures to
    corroborate the information provided by management, including requesting
    that management send a legal letter request to the entity's legal counsel.
    An example audit program is in FAM section 1002 A. The audit procedures
    should be modified, as appropriate, for the particular entity.

    .11 A letter from legal counsel to the auditor, in response to a legal
    letter request from management to legal counsel, is the auditor's primary
    means of corroborating the information furnished by management concerning
    the accuracy and completeness of litigation, claims, and assessments. The
    legal letter request may include a list of pending or threatened
    litigation, claims, and assessments or a request by management that legal
    counsel prepare the list. The legal letter request also may include a list
    of unasserted claims and assessments considered probable of assertion, and
    that, if asserted, would have at least a reasonable possibility of an
    unfavorable outcome, to which legal counsel has devoted substantive
    attention on the entity's behalf in the form of legal

    consultation or representation (or a statement that management is not
    aware of

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 5 any
    matters meeting the criteria). Legal counsel then would supplement

    management's information about those unasserted claims and assessments,
    including an explanation of matters where his or her views differ from
    those expressed by management in the legal letter request. In the federal
    government, where the general counsel may be part of management, the
    general counsel may instead provide the list of unasserted claims or
    assessments meeting the above criteria. The legal letter request should
    also include a request for legal counsel to make a statement that he or
    she will advise management about unasserted claims and assessments that
    should be considered for disclosure. (See the example

    request and response in FAM sections 1002 B and 1002 C.)

    Timing of Legal Letter Request and Responses .12 The audit procedures for
    inquiries of legal counsel concerning litigation, claims, and assessments
    should be performed on a timely basis to give priority to the resolution
    of potential problem areas and to complete other procedures. To meet
    deadlines, the auditor, entity management, and legal counsel should
    coordinate the timing of legal letter requests, responses (including
    interim responses), and related management schedules. The auditor and the
    entity management should consider the due dates for providing legal letter
    responses for the entity financial statements as well as for the U. S.
    Government's

    Consolidated Financial Statements. (OMB sometimes provides these dates for
    the governmentwide audit.) The due dates should enable the auditors to
    timely complete their work, including the potential need for management to
    inquire of Department of Justice legal counsels on a case- specific basis.
    .13 In addition, when an entitywide audit team uses the work of entity
    component

    audit teams, the entitywide and component audit teams should coordinate
    the timing of legal letter requests, responses, and management schedules
    and consider the due dates for the component financial statements as well
    as the entitywide financial statements. The entitywide team generally
    should receive copies of the component letters.

    .14 The legal counsel's response should include matters that existed at
    the balance sheet date and through the end of fieldwork. The effective
    date (the latest date covered by the legal counsel's review) should be as
    close as feasible to the

    completion of fieldwork. If the effective date is substantially in advance
    of the end of fieldwork (for example, earlier than 2 weeks before end of
    fieldwork), the auditor should contact the legal counsel for an updated
    response. To avoid this situation, the legal letter request should clearly
    specify the period the legal

    counsel's response should cover and the date the auditor should receive
    the response.

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 6 .15 To
    assist the auditor in completing the review of legal matters in a timely
    manner

    (and to assist management in preparing the financial statements), the
    auditor may ask management to request legal counsel to submit a
    preliminary or interim response covering matters that existed at the
    balance sheet date and through a point in time reasonably before the end
    of fieldwork so that a preliminary evaluation of the significance of
    material legal matters can be made. Then, the legal counsel should submit
    a final or updated response covering matters through the end of fieldwork.
    The updated response generally should contain only changes or a statement
    indicating there are no changes from the interim response. (See FAM
    section 1002 B for an example legal letter request that includes requests
    for interim and updated responses from legal counsel.)

    Determining a Materiality Level .16 The auditor may limit the inquiry to
    matters that are considered individually or collectively material to the
    financial statements, provided the entity and the auditor have reached an
    understanding and agreement on the materiality level. The materiality
    level, if used, should be documented in the legal letter request and in
    the response.

    .17 In determining a materiality level for the legal letter, the auditor
    should set the level sufficiently low that the cases not included in the
    legal letter would not be material to the financial statements taken as a
    whole when aggregated with (1) other cases not included in the letter, (2)
    all other types of contingencies, (3) all other items that would not be
    adjusted because they are judged immaterial (unadjusted misstatements),
    (4) all other amounts in the financial statements that would not be tested
    directly because they were judged to be immaterial, and

    (5) all other items resolved on the basis of materiality considerations.
    For example, 2.5 percent of design materiality is used for individual
    cases in the U. S Government's Consolidated Financial Statements and 5
    percent of design materiality is used for the aggregate of all cases.

    .18 In aggregating cases, the auditor and the entity may use two levels of
    aggregation. First, similar cases (such as employment discrimination
    cases, harbor maintenance fee cases, spent nuclear fuel cases, or military
    promotion board challenges) should be aggregated and treated as a group
    and compared with the individual materiality level. The aggregation
    generally should include a list of the individual cases that are
    aggregated and a discussion of the items of information requested to be
    included in the legal letter for the aggregated cases (see FAM sections
    1002 B and 1002 C). Second, all cases not included in the legal letter
    individually or as part of a group of similar cases should be aggregated.
    A higher materiality level may be used for such an aggregation; however,
    this higher materiality level should be set sufficiently low that the
    cases not included in the

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 7 legal
    letter would not be material to the financial statements taken as a whole

    when aggregated with the other items listed in the previous paragraph. .19
    Where the entity engages more than one legal counsel, the auditor should

    exercise caution so that matters considered not material individually
    would not, when aggregated, exceed the materiality limit. In addition,
    when separate legal representation letters are issued on individual
    components/ bureaus of a consolidated entity because of individual
    component audits, the auditor may determine materiality levels for each
    component/ bureau.

    Legal Counsels from Whom Information Should Be Requested

    .20 Most federal agencies have a general counsel who has primary
    responsibility for and knowledge about the entity's litigation, claims,
    and assessments. The auditor should request entity management to send a
    legal letter request to the general counsel. In addition, the auditor
    should ask the management and/ or general counsel whether the entity used
    outside legal counsel whose engagement may be limited to particular
    matters (e. g., specific litigation).

    .21 In the federal government, the main legal counsel outside of the
    entity is the Department of Justice. 5 The entity's management, its legal
    counsel, or the auditor may consult with Justice as well as other outside
    legal counsel to assure completeness and accuracy of the presentation of
    matters related to litigation, claims, and assessments. Such consultation
    may include requesting a list of pending litigation, claims, and
    assessments from Justice or other outside legal counsel, or discussion of
    specific cases.

    .22 The legal response should cover all litigation, claims, and
    assessments pertaining to the federal reporting entity, including matters
    handled by Justice and other outside legal counsel on behalf of the
    entity. If the general counsel has overall responsibility for handling and
    evaluating litigation, claims, and assessments, his or her evaluation and
    responses ordinarily would be considered adequate.

    5 The Accounting and Auditing Policy Committee (AAPC) guidance (Technical
    Release No. 1) clarifies FASAB Interpretation No. 2, with respect to the
    Department of Justice's role related to legal letters in cases in which
    Justice's legal counsels are handling legal matters on behalf of other
    federal reporting entities. The letter from the entity's general counsel
    may provide sufficient evidence for the auditor. If the auditor determines
    that additional evidence is

    needed about a specific case, the auditor may request entity management
    and legal counsel to send a legal letter request to Justice, directed to
    the lead Justice legal counsel handling the case, asking that person to
    provide a description and evaluation directly to the auditor.

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 8
    However, evidential matter obtained from inside legal counsel is not a
    substitute

    for information that outside legal counsel refuses to furnish to the
    auditor. .23 Where there is no general counsel and management has not
    consulted legal

    counsel, the auditor should obtain a written representation from
    management that legal counsel has not been consulted. Such representation
    may be incorporated as an item in the management representation letter.
    (See FAM sections 550 and 1001.) (An example item is: "We are not aware of
    any pending or threatened litigation, claims, or assessments or unasserted
    claims or assessments that are required to be accrued or disclosed in the
    financial statements in accordance with SFFAS No. 5. We have not consulted
    legal counsel concerning litigation, claims, or assessments.")

    Evaluation of Responses

    .24 Written responses from legal counsel will vary considerably in the
    scope of information provided and in the opinion expressed. In preparing
    the responses, legal counsels should consider the guidance contained in
    the American Bar Association's Statement of Policy Regarding Lawyers'
    Responses to Auditors' Requests for Information (ABA Policy Statement)
    (included in its entirety in AU 337 C). If legal counsel does not follow
    the ABA Policy Statement in responding to the auditor, the legal counsel's
    response nevertheless should meet the requirements of AU 337.

    .25 The response should cover all components included in the financial
    statements being audited. Legal counsel generally should indicate the
    disposition of cases included in the prior year's letter that are no
    longer contingencies. .26 The auditor should evaluate each response in
    terms of sufficiency as evidence

    and consider (a) the possible limitations on the scope of legal counsel's
    responses and (b) the lack of sufficient opinion on the resolution of a
    case. AU 9337 provides guidance in evaluating legal counsel's responses.
    The auditor also should consider the legal counsel's response in light of
    any other information that comes to the auditor's attention. Possible
    Limitations on the Scope of Legal Counsel's Responses .27 When legal
    counsel limits his/ her responses, the auditor should determine

    whether the limitation affects the auditor's report. A legal counsel may
    appropriately limit responses to certain matters; for example, to matters
    that (a) the legal counsel has given substantive attention to in the form
    of legal

    consultation or representation and (b) are considered individually or
    collectively material to the financial statements, provided the entity and
    the auditor have

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 9 reached
    an understanding on materiality levels. These limitations are acceptable

    and not limitations on the scope of the audit. .28 The following are
    examples of limitations on legal counsel's responses that are not
    acceptable to the auditor and that would ordinarily result in a scope
    limitation:

    a. Legal counsel refuses to furnish the requested information. When legal
    counsel refuses to furnish the information requested in the legal letter
    request, the auditor should consider this matter as a scope limitation
    sufficient to preclude an unqualified opinion.

    b. Legal counsel excludes matters requested. The legal counsel's responses
    may not address all information requested. The auditor should compare
    legal counsel's response with the legal letter request and determine
    whether legal counsel has addressed all the information requested. If
    legal counsel excluded any of the requested matters, the auditor should
    obtain responses for those matters from legal counsel. If the auditor is
    unable to obtain all the information needed, the auditor should consider
    this a scope limitation that could be sufficient to preclude an
    unqualified opinion.

    c. Legal counsel indicates that certain information is being withheld due
    to attorney- client privilege. Under the American Bar Association (ABA)
    Code of Professional Responsibility, legal counsel is required to preserve
    the confidences and secrets of the client. Legal counsel may disclose
    confidences to the auditor only with the consent of the client. If the
    legal letter request is

    prepared in accordance with AU 337, the auditor should expect that legal
    counsel would be responsive; otherwise the scope of the audit would be
    restricted. (On the other hand, explanatory language in the legal letter
    request or in legal counsel's response emphasizing that management or
    legal counsel does not intend to waive attorney- client privilege or
    attorney work- product privilege does not result in a scope limitation.)

    Lack of Sufficient Opinion on the Resolution of a Case .29 The following
    are examples of the legal counsel's responses that lack sufficient opinion
    on the resolution of a case. a. Uncertainties. A legal counsel may be
    unable to respond concerning the

    likelihood of an unfavorable outcome of litigation, claims, and
    assessments or the amount or range of potential loss, because of inherent
    uncertainties. In these circumstances, the auditor ordinarily will
    conclude that the financial statements are affected by an uncertainty
    concerning the outcome of a future

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 10 event,
    which is not susceptible to reasonable estimation. The auditor should

    follow the guidance in FAM section 580 for reporting on uncertainties. b.
    Unclear responses. Legal counsels sometimes use general terms to indicate

    their evaluation of the outcome of a case. The ABA Policy Statement states
    that legal counsel may, in the appropriate circumstances, communicate to
    the auditor his/ her view that an unfavorable outcome is "probable" or
    "remote." The legal letter responses may include phrases that mean remote
    or probable. The phrases below are examples of opinions that provide
    sufficient clarity that the likelihood of an unfavorable outcome is
    remote:

    "We are of the opinion that this action will not result in any liability
    to the entity."

    "We believe that the plaintiff's case against the entity is without
    merit." The following are examples of opinions that indicate significant
    uncertainty as to whether the entity will prevail:

    "In our opinion, the entity has a substantial chance of prevailing in this
    action." (A "substantial chance," a "reasonable opportunity," and similar
    terms indicate more uncertainty than an opinion that the entity will
    prevail.)

    "It is our opinion that the entity will be able to assert meritorious
    defenses to this action." (The term "meritorious defenses" indicates that
    the court will not summarily dismiss the entity's defenses; it does not
    indicate legal counsel's opinion that the entity will prevail.)

    .30 To avoid unclear and incomplete responses, the auditor generally
    should ask management to request legal counsel to use Justice's standard
    forms to describe legal contingencies (see pages 1002 C- 4 to 6 for
    examples of these forms). When legal counsel does not indicate whether the
    unfavorable outcome is probable or remote, management and the auditor
    should conclude that the outcome is reasonably possible and the case
    should be considered for disclosure.

    (Management, with legal counsel's advice, determines whether cases are
    probable, reasonably possible, or remote, to decide whether they should be
    recognized as liabilities and/ or disclosed in the notes to the financial
    statements.)

    .31 If the auditor is not certain about the legal counsel's evaluation,
    the auditor should discuss the matters with the legal counsel and entity
    management (and document the oral discussion) and/ or obtain written
    clarification in a follow- up letter. Sometimes legal counsel may give a
    clearer indication of likelihood orally. If legal counsel is unable to
    give a clear evaluation of the likelihood of an

    Reporting 1002 - Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002- 11
    unfavorable outcome, management should disclose the uncertainty and the

    auditor should consider the uncertainty's effect on the audit report.
    Example Legal Letter Request

    .32 The legal letter request, which the auditor may assist management to
    draft, should be on the audited entity's letterhead, signed by the Chief
    Financial Officer (CFO), or equivalent, and request a reply directly to
    the auditor and a copy to management by specified due dates. FAM section
    1002 B shows an example legal letter request that includes requests for
    interim and updated responses from legal counsel and matters that should
    be covered in the letter.

    Example Legal Counsel's Responses and Management's Schedule

    .33 The General Counsel should respond on General Counsel letterhead to
    the auditor with a copy to management by the agreed- upon due dates. The
    response should indicate that it is provided for the auditor's use in
    connection with the audit. .34 FAM section 1002 C shows an example of a
    legal counsel response, including the

    legal representation letter and Justice's legal contingency standard forms
    for each case or group of cases, respectively. Justice's forms (pages 1002
    C- 4 to 6) are on Justice's website: http:// www. usdoj. gov/ civil/
    forms/ forms. htm.

    .35 FAM section 1002 D shows an example of management's schedule that
    documents how the information contained in the legal counsel's responses
    was considered in preparing the financial statements. Management should
    include

    each case discussed in the legal letter and indicate (1) the amount
    accrued for probable cases and (2) note disclosure for reasonably possible
    cases, probable cases where the amount cannot be estimated, and probable
    cases where a range of amounts above the accrued amount is estimated. The
    electronic templates for FAM sections 1002 C (pages 1002 C- 1 to 3) and
    1002 D are on OMB's website: http:// www. whitehouse. gov/ omb/ bulletins/
    index. html.

    PRACTICE AIDS

    .36 The following practice aids are appended: Section 1002 A * Example
    Audit Procedures; Section 1002 B * Example Legal Letter Request; Section
    1002 C * Example Legal Representation Letter, including Justice's

    Example Legal Contingencies Forms; and Section 1002 D * Example Management
    Summary Schedule.

    [This page intentionally left blank.]

    Reporting 1002 A * EXAMPLE AUDIT PROCEDURES FOR

    INQUIRIES OF LEGAL COUNSEL

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 A- 1
    Entity ______________________________________________________________

    Period of financial statements _________________________________________
    Job code ___________________________________________________________

    Example Audit Procedures Done by/ date W/ P ref I. Testing Procedures 1.
    Ask management about the entity's policies and

    procedures for identifying, evaluating, and accounting for litigation,
    claims, and assessment.

    2. Obtain from management a description and evaluation of litigation,
    claims, and assessments existing as of the balance sheet date and through
    the date of management's response (which should be near the end of
    fieldwork). (This may instead be obtained from the entity's legal
    counsel.)

    3. To determine whether an outside legal counsel is performing services
    for the entity, inquire of management whether outside legal counsel has
    been used by the entity and matters handled. Ask management for a list of
    pending litigation, claims, and assessments from the Department of Justice
    and/ or examine correspondence and invoices from other outside legal
    counsel (e. g., for legal fees), if any.

    Reporting 1002 A * Example Audit Procedures for Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 A- 2

    Example Audit Procedures Done by/ date W/ P ref

    4. Ask whether the entity has changed its general counsel or outside legal
    counsel or the general counsel or outside legal counsel has resigned or
    has indicated an intention to resign. If so, determine if there are
    matters that may affect the financial statements. For example, in
    appropriate circumstances, a legal counsel may be

    required by the ABA Code of Professional Responsibility to resign the
    engagement if the legal counsel's advice concerning disclosures is
    disregarded by the entity.

    5. To identify litigation, claims, and assessments read minutes of
    management meetings, contracts, loan agreements, leases, and
    correspondence from other government entities and discuss pertinent items
    with management.

    6. If information comes to the auditor' s attention that may indicate a
    potential contingency with respect to litigation, claims, or assessments
    that may require adjustment to or disclosure in the financial statements,
    discuss with the entity its possible need to consult legal counsel.
    Depending on the severity of the matter, refusal by the entity to consult
    legal counsel in those circumstances may result in a scope limitation.
    Consider the effect of such a limitation on the auditor's report.

    Reporting 1002 A * Example Audit Procedures for Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 A- 3

    Example Audit Procedures Done by/ date W/ P ref

    7. Request entity management to send a legal letter request to the general
    counsel asking counsel to respond directly to the auditor. (Obtain a copy
    of the legal letter request.) Consider whether to also request legal
    letters from any outside legal counsel. The legal letter should cover
    litigation, claims, and assessments pertaining to the reporting entity,
    including matters handled by the Department of Justice or other outside
    legal counsel. (See Sections 1002 B for an example legal letter request.)
    Coordinate with management and legal counsel to

    determine the timing of legal letter requests and responses and related
    management's summary/ schedules of information contained in legal

    responses and

    determine a materiality level to be included in the legal representation
    letter.

    8. Read the legal letter responses and management's schedules to identify
    litigation, claims, and assessments. 9. Compare the description and
    evaluation of the current

    year's legal letter responses to the prior year's audit documentation. If
    this comparison indicates that certain legal matters in the prior year are
    no longer included, discuss these matters with management or legal counsel
    to obtain an understanding of the reasons for the changes.

    10. Determine whether the information in the legal representation letter
    is consistent with management's schedule summarizing the information in
    the letter and

    related supporting documentation. 11. Discuss with legal counsel if the
    information obtained is

    not complete, clear, or consistent. 12. Evaluate legal counsel's responses
    and determine the

    effects of the responses on liabilities and related note disclosures in
    the financial statements and on the auditor's report.

    Reporting 1002 A * Example Audit Procedures for Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 A- 4

    Example Audit Procedures Done by/ date W/ P ref

    13. If a response date is substantially in advance of the audit report
    date, for example, earlier than 2 weeks prior to date of auditors' report,
    obtain a written or oral update response. (The longer the period between
    the legal letter

    and the audit report date, the more important a written update becomes.)

    II. Reporting Procedures Obtain a representation from management in the
    management representation letter (see FAM sections 550 and 1001) that the
    entity has disclosed all unasserted claims that legal counsel has advised
    are probable of assertion that, if asserted, would have at least a
    reasonable possibility of an unfavorable outcome and must be disclosed. 1.
    Discuss the description and evaluation of litigation,

    claims, and assessments obtained with management to determine if,
    subsequent to the date of legal counsel's response, there have been any
    changes in status of the matters, changes in management's evaluation of
    the outcome, or additional matters to be considered.

    2. If there are significant changes in the status of the matters or new
    matters, obtain a written confirmation or updated response from legal
    counsel.

    3. Have management include in the management representation letter
    representations related to contingencies and determine if they are
    appropriately

    accrued and disclosed as required by SFFAS No. 5, as amended. If
    management has not consulted legal counsel, obtain a written
    representation from management that legal counsel has not been consulted.

    This representation may be incorporated in the management representation
    letter (see FAM sections 550 and 1001).

    Reporting 1002 A * Example Audit Procedures for Inquiries of Legal Counsel

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 A- 5

    Example Audit Procedures Done by/ date W/ P ref

    4. Read the entity's financial statements and notes and a. consider the
    adequacy of financial statement

    disclosure for contingencies with respect to litigation, claims, and
    assessments;

    b. determine if the financial statement disclosures for contingencies with
    respect to litigation, claims, and assessments are prepared in accordance
    with the OMB guidance on form and content of agency financial statements;
    and

    c. for federal entities involved in litigation for which the Judgment Fund
    is a likely source of judgment or settlement, determine if a note to the
    financial statements discusses the Judgment Fund's role in the

    payment of a possible loss, as required by FASAB Interpretation No. 2,
    Accounting for Treasury Judgment Fund Transactions.

    5. Document conclusions reached concerning the accounting for and
    disclosure of litigation, claims, and assessments, determine if
    adjustments are necessary, and consider whether modification of the
    auditor's report is appropriate (see FAM section 580).

    [This page intentionally left blank.]

    Reporting 1002 B * EXAMPLE LEGAL LETTER REQUEST

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 B- 1
    [Audited Entity Letterhead]

    Date: [date] To: General Counsel From: Chief Financial Officer [signed]
    Subject: [Auditor 's] Audits of the Fiscal Years 20X1 and 20X0 Financial

    Statements Pursuant to 31 U. S. C. 3515, [Auditor name] is performing
    audits of the financial statements of [entity] as of and for the fiscal
    years ended September 30, 20X1, and 20X0. In performing audits of
    government entities, auditors comply with Government Auditing Standards,
    issued by the Comptroller General of the United

    States (the "yellow book"). For financial statement audits, Government
    Auditing Standards incorporate the fieldwork and reporting standards of
    the American Institute of Certified Public Accountants (AICPA) and the
    Statements on Auditing Standards that interpret them. Consistent with the
    procedures contained in AU 337 of the AICPA's Codification of Statements
    on Auditing Standards, [Auditor]

    has inquired about litigation, claims, and assessments to obtain evidence
    as to the financial accounting and reporting of such matters with respect
    to the financial statements. The purpose of this letter is to request your
    assistance in responding to that inquiry. The American Bar Association
    Statement of Policy Regarding Lawyers' Responses to Auditors' Request for
    Information (December 1975)

    provides relevant guidance for the lawyer 's response to the auditor 's
    request. In accordance with Statement of Federal Financial Accounting
    Standards (SFFAS) Number 5, Accounting for Liabilities of the Federal
    Government, as amended by SFFAS Number 12, and Interpretation Number 2 of
    SFFAS Numbers 4 and 5, [entity] reports certain information in its
    financial statements and notes concerning contingent liabilities for
    litigation, claims, and assessments. We request that you provide [Auditor]
    (with a copy to me) with information on matters with respect to which you
    have been engaged and to which you have

    devoted substantive attention on behalf of the [entity] in the form of
    legal consultation or representation. You should furnish an interim
    response by [agreed- upon date], including matters that existed as of
    September 30, 20X1, and from that date through at least [interim date].
    You should furnish an updated response by [agreed- upon date], that is
    effective no earlier than [agreed- upon date], that includes any changes
    from the interim response or furnish a statement that there are no
    changes.

    Reporting 1002 B * Example Legal Letter Request April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 1002 B- 2 Include any cases with
    respect to which you have been engaged and to which you have devoted
    substantive attention on behalf of the [entity] in the form of legal
    consultation or representation, even those cases for which you believe the
    Judgment Fund or some financing source other than [entity] 's budgetary
    resources will pay any potential loss. Under generally accepted accounting
    principles, these amounts should be included as liabilities or disclosure
    items in the [entity] 's financial statements. Cases similar in nature
    should be aggregated where appropriate. It would be helpful if you could
    list the matters in order of the amount of potential loss, starting with
    the largest. Pending or Threatened Litigation (excluding unasserted
    claims)

    We and [Auditor] have determined that any matters for which the amount of
    potential loss exceeds $XX, individually or in the aggregate, could be
    material to the financial statements. Please provide to [Auditor] the
    information described below about pending or threatened litigation where
    the amount of potential loss exceeds $XX:

    1. The nature of the matter. Include a description of the case or cases
    and amount claimed, if specified. 2. The progress of the case to date. 3.
    The government's response or planned response (for example, to contest the

    case vigorously or to seek an out- of- court settlement). 4. An evaluation
    of the likelihood of unfavorable outcome. Please categorize

    likelihood as probable (an unfavorable outcome is likely to occur),
    reasonably possible (the chance of an unfavorable outcome is less than
    probable but more than remote), or remote (the chance of an unfavorable
    outcome is slight). 5. An estimate of the amount or range of potential
    loss, if one can be made, for

    losses considered to be probable or reasonably possible. 6. The name of
    the [entity] 's legal counsel handling the case and names of any

    outside legal counsel/ other lawyers representing or advising the
    government in the matter (Department of Justice or outside law firms).

    Unasserted Claims and Assessments

    [If legal counsel is a part of management use this paragraph.] Please
    provide the following information for all unasserted claims and
    assessments that you consider to be probable of assertion and which, if
    asserted, would have at least a reasonable possibility (more that remote)
    of an unfavorable outcome in an amount over $XX, individually or in the
    aggregate, involving matters to which you have devoted substantive
    attention.

    [If the legal letter request will be sent to a legal counsel that is not
    part of management, such as an outside legal counsel, use this paragraph.]
    We have

    Reporting 1002 B * Example Legal Letter Request April 2003 GAO/ PCIE
    Financial Audit Manual - Part II Page 1002 B- 3 provided an attachment to
    this request that lists the unasserted claims and assessments that we
    believe are probable of assertion and which, if asserted, would have at
    least a reasonable possibility (more than remote) of an unfavorable
    outcome in an amount over $XX, individually or in the aggregate, involving
    matters to which you have devoted substantive attention. Please provide
    the following information for each matter and for any additional matters
    that you believe meet these criteria.

    1. A description of the nature of the matter. 2. The government's planned
    response if the claim is asserted. 3. An evaluation of the likelihood of
    an unfavorable outcome. (Categorize

    likelihood as probable (likely to occur) or reasonably possible (less than
    probable but more than remote).) 4. An estimate of the amount or range of
    potential loss, if one can be made.

    Please specifically confirm to [Auditor] that our understanding of the
    following is correct: Whenever, in the course of performing legal services
    for us, with respect to a matter recognized to involve an unasserted
    possible claim or assessment that may call for financial statement
    disclosure, if you have formed a professional conclusion that we should
    disclose or consider disclosure concerning such possible claim or
    assessment, as a matter of professional responsibility to us, you will (1)
    advise us of your conclusion and (2) consult with us concerning the
    question of such disclosure and the applicable requirements of SFFAS No.
    5, as amended.

    Please separately identify any cases with respect to which you have been
    engaged and to which you have devoted substantive attention on behalf of
    the [entity] in the form of legal consultation or representation for which
    you believe another government entity will be responsible for any
    potential liability.

    Please specifically identify the nature of and reasons for any limitations
    on your response to this request. Please address your reply to [Auditor],
    and contact him/ her at (phone number),

    when your reply is available for pick up, and send a copy of your reply to
    me. Do not hesitate to contact me or [Auditor] if you have any questions
    about this request.

    [This page intentionally left blank.]

    Reporting 1002 C * EXAMPLE LEGAL REPRESENTATION

    LETTER

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 C- 1
    [General Counsel Letterhead]

    [Date] [Auditor] [Title] [Agency or Firm Name] [City]

    Subject: Legal Response in Connection with the Fiscal Years 20X1 and 20X0
    Financial Statement Audits of [entity name] Dear [Auditor]:

    As General Counsel of [entity], I am writing in response to the legal
    letter request from the [entity] 's Chief Financial Officer (CFO) dated
    [date], in connection with the audit of [entity] 's financial statements
    as of and for the fiscal years ended September 30, 20X1 and 20X0. [In an
    interim response, add "I will, as further requested by the CFO, provide an
    updated response by [date]."] I call your attention to the fact that as
    General Counsel for [entity], I have general

    supervision of [entity] 's legal affairs. [If the general legal
    supervisory responsibilities of the person signing the letter are limited,
    set forth a clear description of those legal matters over which such
    person exercises general supervision, indicating exceptions to such
    supervision and situations where primary reliance should be placed on
    other sources.] In such capacity, I have reviewed litigation and claims
    threatened or asserted involving [entity] and have consulted with outside
    legal counsel about them when I have deemed appropriate.

    Subject to the foregoing and to the last paragraph of this letter, I
    advise you that since [insert date of beginning of fiscal year period
    under audit] neither I, nor any of the lawyers over whom I exercise
    general legal supervision, have given substantive attention to, or
    represented [entity] in connection with loss contingencies [over the
    amount of (state materiality level agreed to with auditor

    and stated in request letter)] coming within the scope of clause (a) of
    Paragraph 5 of the Statement of Policy referred to in the last paragraph
    of this letter, except as follows:

    [Describe litigation and claims that fit the foregoing criteria as follows
    (it is recommended that general counsels use the attached Department of
    Justice forms

    Reporting 1002 C * Example Legal Representation Letter April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 1002 C- 2 (one for pending or
    threatened litigation, another for unasserted claims) to describe the
    cases):] 1 Pending or Threatened Litigation (excluding unasserted claims)
    1. Nature of the matter (include a description of the case or cases and
    amount claimed, if specified).

    2. Progress of the case to date. 3. Current or intended response. 4.
    Evaluation of the likelihood of an unfavorable outcome (categorize
    likelihood

    as probable, reasonably possible, or remote). 5. Estimated amount or range
    of potential loss, if determinable, for losses considered to be probable
    or reasonably possible. 6. Name of [entity] 's legal counsel handling the
    case and names of any outside

    legal counsel representing or advising the government in the matter. With
    respect to matters that have been specifically identified as contemplated
    by clauses (b) or (c) of paragraph 5 of the ABA Statement of Policy, I
    advise you, subject to the last paragraph of this letter, as follows:

    Unasserted Claims and Assessments (considered to be probable of assertion
    and which, if asserted, would have at least a reasonable possibility of an
    unfavorable outcome) 1. Nature of the matter.

    2. Intended response if claim would be asserted. 3. Evaluation of the
    likelihood of an unfavorable outcome. (Categorize

    likelihood as probable or reasonably possible.) 4. Estimated amount or
    range of potential loss, if determinable.

    The information set forth herein is [( as of the date of this letter) or
    (as of (insert date), the date on which we commenced our internal review
    procedures for purposes of preparing this response)], except as otherwise
    noted. [If an interim response, add "Upon submission of the updated
    response, which is due on [date],"] I disclaim any undertaking to advise
    you of changes that, thereafter, may be brought to my attention or the
    attention of our lawyers over whom I exercise general legal supervision.

    This response is limited by, and in accordance with, the ABA Statement of
    Policy Regarding Lawyers' Responses to Auditors' Requests for Information
    (December 1975); without limiting the generality of the foregoing, the
    limitations set forth in such statement on the scope and use of this
    response (Paragraphs 2 and 7) are specifically incorporated herein by
    reference, and any description herein of any

    1 It is expected that cases or matters will be aggregated where
    appropriate.

    Reporting 1002 C * Example Legal Representation Letter April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 1002 C- 3 "loss contingencies"
    is qualified in its entirety by Paragraph 5 of the statement and the
    accompanying commentary (which is an integral part of the statement).
    Consistent with the last sentence of Paragraph 6 of the ABA Statement of
    Policy, this will confirm as correct [entity] 's understanding that
    whenever, in the course of performing legal services for [entity] with
    respect to a matter recognized to

    involve an unasserted possible claim or assessment that may call for
    financial statement disclosure, I have formed a professional conclusion
    that the entity must disclose or consider disclosure concerning such
    possible claim or assessment, I, as a matter of professional
    responsibility to [entity], will so advise [entity] and will consult with
    [entity] concerning the question of such disclosure and the applicable
    requirements of Statement of Federal Financial Accounting Standards
    (SFFAS) Number 5, Accounting for Liabilities of the Federal Government, as
    amended by SFFAS Number 12, and Interpretation Number 2 of SFFAS Numbers 4
    and 5. [Describe any other or additional limitation as indicated by
    Paragraph 4 of the statement.]

    Sincerely yours, _______________________________________ [Name of General
    Counsel] [Title]

    cc: Chief Financial Officer

    Reporting 1002 C * Example Legal Representation Letter April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 1002 C- 4

    SUGGESTED DEPARTMENT OF JUSTICE FORM PENDING OR THREATENED LITIGATION
    AGENCY/ COMPONENT: _____________________________ Amount of potential loss
    exceeds the agency/ component materiality

    threshold of: _____________________________ 1. Case name. (Include case
    citation, case number, and other names by

    which the case or group of cases is commonly known.) 2. Nature of matter.
    (Include a description of the case or cases and

    amount claimed, if specified.) 3. Progress of the case. 4. The
    government's response or planned response. (For example, to contest the
    case vigorously or to seek an out- of- court settlement.) 5. An evaluation
    of the likelihood of unfavorable outcome. (Choose one.) _______ PROBABLE *
    An unfavorable outcome is likely to occur. _______ REASONABLY POSSIBLE *
    the chance of an unfavorable outcome is less than probable but more than
    remote. _______ REMOTE * the chance of an unfavorable outcome is slight.

    6. An estimate of the amount or range of potential loss (if one can be
    made, for losses considered to be probable or reasonably possible).

    Reporting 1002 C * Example Legal Representation Letter April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 1002 C- 5

    7. The name and phone number of the government attorney handling the case
    (and names and phone numbers of any outside legal counsel/ other lawyers
    representing or advising the government in the matter.) 8. The sequence
    number (based on the total number of pending or

    threatened cases in litigation, claims, and assessments the agency/
    component is submitting. e. g., Number ___ of ___) (#) (total)

    Reporting 1002 C * Example Legal Representation Letter April 2003 GAO/
    PCIE Financial Audit Manual - Part II Page 1002 C- 6

    SUGGESTED DEPARTMENT OF JUSTICE FORM UNASSERTED CLAIMS AND ASSESSMENTS
    AGENCY/ COMPONENT: _____________________ Amount of Potential Loss Exceeds
    the agency/ component materiality threshold of: _____________________

    1. Name of Matter. (Include name by which the matter is commonly known.)
    2. Nature of the Matter. (Include a description of the matter.) 3. The
    Government's Planned Response (if the claim is asserted). 4. An Evaluation
    of the likelihood of Unfavorable Outcome. (Choose one.) _______ PROBABLE *
    (An unfavorable outcome is likely to occur.)

    _______ REASONABLY POSSIBLE * (the chance of an unfavorable outcome is
    less than probable but more than remote.)

    5. An Estimate of the Amount or Range of Potential Loss (if one can be
    made, for losses considered to be probable or reasonably possible).

    6. The Name and phone number of the Government Attorney Handling the
    Matter (and names and phone numbers of any outside legal counsel/ other
    lawyers representing or advising the government in the matter).

    7. The Sequence Number (based on the total number of Unasserted Claims and
    Assessments the agency/ component is submitting. e. g., Number ___ of
    ____). (#) (total)

    Reporting 1002 D - Example Management Summary Schedule

    Management should prepare this schedule (or equivalent) summarizing the
    information contained in the legal letters. In particular, management
    should conclude as to the likelihood of loss about each case to determine
    whether an amount should be recorded in

    the financial statements and/ or if note disclosure is necessary for the
    financial statements to conform with GAAP. Although most information comes
    directly from the legal letter, the financial staff should add the
    information in the last two columns

    to indicate the disposition of each case in the financial statements.

    Management's Schedule of Information Contained in Legal Letter Responses
    for Financial Reporting Purposes

    Amounts in thousands

    1 2 3 4 5 6 7 (a) P (b) R/ P (c) Upper Amt. recorded Note disclosure

    **** insert rows here as necessary**** *** insert rows here as
    necessary*** *** insert rows here as necessary***

    TOTALS - $ - $ - $ - $ - $ - $ Guidance for Preparation:

    1. Matters should be listed on this schedule in order of the amount or
    range of potential loss, starting with the largest. 2. The level of
    aggregation should generally be at the same level as in the general
    counsel's letter. However, there may be instances

    where the level of aggregation is too high to be able to prepare this
    schedule in a way that is meaningful. In such cases, the CFO should work
    with legal counsel to provide further disaggregation of dissimilar cases.
    There may also be other instances in which a

    higher level of aggregation is desirable. CFOs should use professional
    judgment, considering the purpose of this schedule when determining the
    level of aggregation.

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1002 D- 1

    Reference key

    Amount claimed

    Name of case/ related cases

    Likelihood of loss

    Amount or range of potential l

    oss Disposition in

    financial statements

    Reporting 1002 D - Example Management Summary Schedule

    Column: 1

    Reference key:

    Page number of legal representation letter obtained from General Counsel
    discussing the case, or other reference information.

    2 Amount claimed:

    Amount claimed in the litigation, claim, or assessment (if specified)

    3 Name of case or related cases:

    Where appropriate, provide name of case or aggregated cases which meet
    materiality threshold.

    4 Likelihood of loss:

    Indicate management's evaluation of the likelihood of loss on individual
    or aggregated cases. Options:

    P:

    probable (loss likely to occur);

    R/ P:

    reasonably possible (the chance of loss is less than probable, but more
    than remote); or

    R:

    remote (the chance of loss is slight).

    5 Amount or range of potential loss:

    Options:

    5a:

    Probable (P) -- Provide single estimate or lower end of range, if known.
    Enter "U" if unknown. (Also provide column totals.)

    5b:

    Reasonably possible (R/ P) -- Provide single estimate or lower end of
    range, if provided. Enter "U" if unknown. Also provide column totals.

    5c:

    If amounts in P or R/ P are ranges, provide upper end of range; otherwise,
    enter "n/ a."

    6 Disposition in financial statements - amount recorded:

    If applicable, provide corresponding dollar amount recorded as a liability
    in the financial statements. (Also provide column totals.)

    7 Disposition in financial statements - note disclosure:

    If applicable, indicate by note reference number where case information is
    separately disclosed or included in amounts disclosed in notes to the
    financial statements.

    (Also provide column totals.) April 2003 GAO/ PCIE Financial Audit Manual
    - Part II Page 1002 D- 2

    Reporting 1006 - RESERVED

    April 2003 GAO/ PCIE Financial Audit Manual - Part II Page 1006- 1 [For
    related parties, see FAM section 902]

    [This page intentionally left blank.]

    GLOSSARY April 2003 GAO/ PCIE Financial Audit Manual Glossary- 1

    Accountability report An agency*s accountability report integrates the (1)
    Federal Managers* Financial Integrity Act (FMFIA) Report; (2) Chief
    Financial Officers* (CFO) Act Annual Report, including audited financial
    statements; (3) Management*s Report on Final Action as required by the
    Inspector General Act; (4) the Debt Collection Improvement Act, Civil
    Monetary Penalty Act and Prompt Payment Act reports; and (5) available

    information on agency performance compared with the agency*s stated goal
    and objectives. Accounting

    applications The procedures and records used to identify, record, process,
    summarize, and report a class of trans

    actions. Common accounting applications are (1) billings, (2) accounts
    receivable, (3) cash receipts, (4) purchasing and receiving, (5) accounts
    payable,

    (6) cash disbursements, (7) payroll, (8) inventory control, and (9)
    property and equipment.

    Accounting system The methods and records established to identify,
    assemble, analyze, classify, record, and report an entity's transactions
    and to maintain accountability for the related assets and liabilities.
    Activity In cost accounting, an activity is the actual work task or step
    performed in producing and delivering

    products and services. An aggregation of actions performed within an
    organization that is useful for purposes of activity- based costing.

    Analytical procedures The comparison of recorded account balances with
    expectations developed by the auditor, based on an analysis and
    understanding of the relationships between the recorded amounts and other
    data, to form a conclusion on the recorded amount. A basic

    premise underlying the application of analytical procedures is that
    plausible relationships among data may reasonably be expected to continue
    unless there

    are known conditions that would change the relationships.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 2

    Annual financial statement As defined by OMB, the annual financial
    statement comprises

    an overview of the reporting entity (or Management*s Discussion and
    Analysis, MD& A),

    the financial statements and related notes,

    required supplementary stewardship information,

    required supplementary information, and

    other accompanying information.

    Application controls Management*s control activities that are incorporated
    directly into individual computer applications to provide reasonable
    assurance of accurate and reliable procession. Application controls
    address (1) data input, (2) data processing, and (3) data output.

    FISCAM categories of application controls that more closely tie into the
    FAM methodology are (1) authorization control, (2) completeness control,
    (3) accuracy control, and (4) control over integrity of processing and
    data files. Appropriation The most common form of budget authority; an

    authorization by an act of the Congress that permits federal agencies to
    incur obligations and to make payments out of the Treasury for specified
    purposes. Appropriations do not represent cash actually set aside in the
    Treasury for purposes specified in the

    appropriation acts. They represent limitations of amounts that agencies
    may obligate during the period specified in the appropriation acts.

    Assertions Management's representations that are embodied in the account
    balance, transaction class, and disclosure components of the financial
    statements. The primary assertions (described in paragraph 235.02) are

    Existence or occurrence

    Completeness

    Rights and obligations Valuation or allocation

    Presentation and disclosure

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 3

    Assessing control risk The process of evaluating the effectiveness of an
    entity's internal control in preventing or detecting misstatements in
    financial statement assertions.

    Assurance, level of The complement of audit risk, which is an auditor
    judgment. This is not the same as confidence level, which relates to an
    individual sample.

    Attributes sampling Statistical sampling that reaches a conclusion about
    the population in terms of a rate of occurrence.

    Audit risk The overall risk that the auditor may unknowingly fail to
    appropriately modify his or her opinion on financial statements that are
    materially misstated. This is an auditor judgment.

    Back door authority Any type of budget authority that is provided by
    legislation outside the normal appropriations process. (See contract
    authority.)

    Base data Data used to develop the expectation in an analytical procedure.

    Borrowing authority Statutory authority that permits obligations to be
    incurred but requires that funds be borrowed to liquidate the obligations
    (see title 7 of the GAO Policies and Procedures Manual for Guidance of
    Federal

    Agencies). Usually, the amount that may be borrowed and the purposes for
    which the borrowed funds must be used are stipulated by the authorizing
    statute.

    Borrowing authority sometimes is referred to as back door authority.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 4

    Budget authority Authority provided by law (1) to enter into obligations
    that will result in immediate or future outlays involving government funds
    or (2) to collect offsetting receipts (2 U. S. C. 622( 2)). The Congress
    provides an entity with budget authority and may place restrictions on the
    amount, purpose, and timing of the obligation or expenditure of such
    authority. The three forms of budget authority are

    appropriations borrowing authority

    contract authority

    Budget controls Management's policies and procedures to manage and control
    the use of appropriated funds and other forms of budget authority. (These
    are considered part of

    financial reporting and compliance controls.)

    Budget functional classification A way of grouping budgetary resources so
    that all budget authority and outlays of on- budget and off budget federal
    entities and tax expenditures can be presented according to national needs
    being addressed. To the extent feasible, functional classifications are
    made without regard to entity or organizational distinctions.

    Case study See nonsampling selection.

    Cause and effect basis In cost accounting, a way to group costs into cost
    pools in which an intermediate activity may be a link between the cause
    and the effect.

    Classical probability proportional to size sampling A sampling approach
    where the sample is selected proportional to the size (usually dollar
    amount) of an item and the evaluation is performed using variables methods
    (not dollar unit sampling).

    Classical variables estimation sampling A sampling approach that measures
    precision using

    the variation of the underlying characteristic of interest. This method
    includes mean per unit sampling, difference estimation, ratio estimation,
    and regression estimation.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 5

    Closed account A budget account for which the expired budget authority has
    been canceled.

    Combined precision A judgment of precision for all tests in the audit.
    Used at the end of the audit to evaluate the results of all tests.

    Combined risk The auditor*s judgment of the combined inherent and control
    risk (high, moderate, or low); the risk that the financial statements
    contain material misstatements before audit. Common data source In cost
    accounting, this includes all financial and nonfinancial

    data, such as environmental data, that are necessary for budgeting and
    financial reporting, as well as evaluation and decision information
    developed as a result of prior reporting and feedback.

    Compliance control A process, effected by management and other personnel,
    designed to provide reasonable assurance that transactions are executed in
    accordance with (1) laws governing the use of budget authority and other
    laws and regulations that could have a direct and material effect on the
    financial statements or

    required supplementary stewardship information and (2) any other laws,
    regulations, and governmentwide policies identified in OMB audit guidance.

    Compliance tests Tests to obtain evidence on the entity's compliance with
    significant laws and regulations.

    Confidence interval The projected misstatement or point estimate plus or
    minus precision at the desired confidence level.

    Confidence level The probability associated with the precision; the
    probability that the true misstatement is within the confidence interval.
    This is not the same as level of assurance.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 6

    Contingency An existing condition, situation, or set of circumstances
    involving uncertainty as to possible gain or loss.

    Contract authority Statutory authority that permits obligations to be
    incurred before appropriations or in anticipation of receipts to be
    credited to a revolving fund or other

    account (offsetting collections). By definition, contract authority is
    unfunded and must subsequently be funded by an appropriation to liquidate
    the obligations incurred under the contract authority or by the collection
    and use of receipts.

    Control environment A component of internal control, in addition to risk
    assessment, monitoring, information and communication, and control
    activities. The control environment sets the tone of an organization,
    influencing the control consciousness of its people. It is the foundation
    for all other components of internal

    control, providing discipline and structure. The control environment
    represents the collective effect of various factors on establishing,
    enhancing, or mitigating the effectiveness of specific control activities.
    Such factors include (1) integrity and ethical values, (2) commitment to
    competence, (3) management's philosophy and operating style, (4)
    organizational structure, (5) assignment of authority and responsibility,
    (6) human resource policies and practices, (7) control methods over budget
    formulation and execution, (8) control methods over compliance with laws
    and regulations, and (9) oversight groups.

    Control risk The risk that a material misstatement that could occur in an
    assertion will not be prevented or detected on a timely basis by the
    entity's internal controls (classified as high, moderate, or low). This is
    an auditor judgment.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 7

    Control activities (techniques) A component of internal control, in
    addition to the control environment, risk assessment, monitoring, and
    information and communication. The policies and procedures that help
    ensure that management directives are carried out.

    Control tests Tests of a specific control activity to assess its
    effectiveness in achieving control objectives.

    Core financial management system (CFMS) As developed by JFMIP, a system
    that consists of six

    functional areas: general ledger management, funds management, payment
    management, receivable management, cost management, and reporting, and
    affects all financial event transaction processing because it maintains
    reference tables used for editing and classifying data, controls
    transactions, and maintains security.

    Cost The monetary value of resources used or sacrificed or liabilities
    incurred to achieve an objective, such as to acquire or produce a good or
    to perform an activity or service.

    Costing methodology Methodology for accumulating the costs of resources
    that directly or indirectly contribute to the production of outputs and
    assigning those costs to outputs. Department (per FASAB Interpretation No.
    6)

    Any department, agency, administration, or other financial reporting
    entity (see SFFAC No. 2) that is not part of a larger financial reporting
    entity other than the government as a whole. Used in distinguishing inter-
    and intradepartmental activity and balances.

    Design materiality The portion of planning materiality that the auditor
    allocates to line items or accounts. This amount should be the same for
    all line items or accounts (except for certain offsetting balances as
    discussed in

    paragraph 230.10). The auditor should set design materiality for the audit
    as one- third of planning materiality. (See discussion in paragraph
    230.12.)

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 8

    Detection risk The risk that audit procedures will not detect a material
    misstatement that exists in the financial statements. The auditor
    determines the desired detection risk based on combined risk and audit
    risk. (In statistical terms, beta risk or type II risk.)

    Errors Unintentional misstatements or omissions of amounts or disclosures
    in financial statements.

    Expectation The auditor's estimate of an account balance in an analytical
    procedure.

    Expected misstatement The dollar amount of misstatements the auditor
    expects in a population.

    Expired account A budgetary account in which the balances are no longer
    available for incurring new obligations because the time available for
    incurring such obligations has expired. After 5 years, these accounts are
    canceled and are then considered to be closed accounts. Federal financial

    management systems requirements One of the three requirements of FFMIA.
    They

    include the requirements of OMB Circulars A- 127, A- 123, and A- 130 and
    the JFMIP Federal Financial Management Systems Requirements series.

    Financial reporting control A process, effected by management and other
    personnel, designed to provide reasonable assurance that transactions are
    properly recorded, processed, and summarized to permit the preparation of
    the financial statements and required supplementary stewardship
    information in accordance with GAAP, and that assets are safeguarded
    against loss from unauthorized acquisition, use, or disposition.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 9

    Financial statements (also called principal statements) The components of
    a federal entity's annual financial

    statement (also referred to as the Accountability report), which are

    Balance Sheet

    Statement of Net Cost

    Statement of Changes in Net Position

    Statement of Budgetary Resources

    Statement of Financing

    Statement of Custodial Activity (if applicable)

    Related Notes

    Fraud Although fraud is a broad legal concept, the auditor is interested
    in fraudulent acts that cause a material misstatement of financial
    statements. Fraud is distinguished from error because fraud is intentional
    whereas error is unintentional. Two relevant types of misstatements are
    those arising from fraudulent financial reporting and those arising from
    misappropriation of assets.

    Fraudulent financial reporting Intentional misstatements or omissions of
    amounts or

    disclosures in financial statements to deceive financial statement users.
    This may involve acts such as manipulation, falsification, or alteration
    of accounting records or supporting documents; misrepresentation or
    intentional omission of events, transactions, or other significant
    information in the financial statements; or intentional misapplication of
    accounting principles relating to amounts, classification, manner of
    presentation, or disclosure.

    Full cost In cost accounting, the sum of all costs required by a cost
    object including the costs of activities performed by other entities
    regardless of funding sources.

    Fund Balance with Treasury account (FBWT) An asset account representing
    the unexpended

    spending authority in agencies' appropriations. Also serves as a mechanism
    to prevent agencies' disbursements from exceeding appropriated amounts.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 10

    General controls Management*s policies and procedures that apply to an
    entity*s overall computer operations and that create the environment in
    which application controls and certain user controls (which are control
    activities) operate. They are classified in the FISCAM as (1) entitywide
    security management program, (2) access control, (3) application software
    development and change control, (4) system software, (5) segregation of
    duties, and (6) service continuity control.

    Generally accepted accounting principles (GAAP)

    The accounting principles that the entity should use. For federal
    executive agencies, these are federal accounting standards following the
    hierarchy listed in SAS 91. The standards issued by FASAB are the first
    level of the hierarchy. For government corporations, generally accepted
    accounting principles are commercial generally accepted accounting
    principles issued by FASB. Haphazard sample A sample consisting of
    sampling units selected

    without any conscious bias, that is, without any special reason for
    including or omitting items from the sample. It does not consist of
    sampling units selected in a careless manner, but is selected in a manner
    that can be expected to be representative of the population. Information
    and

    communication A component of internal control in addition to the control
    environment, risk assessment, monitoring, and

    control activities. The identification, capture, and exchange of
    information in a form and time frame that enable people to carry out their
    responsibilities. The accounting system and accounting manuals are
    examples of this component.

    Information systems (IS) auditor A person with specialized technical
    knowledge and

    skills who can understand the IS concepts discussed in the manual and
    apply them to the audit.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 11

    IS controls Controls whose effectiveness depends on computer processing,
    including general, application, and user controls (described in section
    295 F).

    Inherent risk The susceptibility of an assertion to a material
    misstatement, assuming there are no related specific control activities.
    This is an auditor judgment.

    Interdepartmental amounts

    Activity and balances between two different departments. (See department.)
    The intradepartmental and interdepartmental amounts are subsets of
    intragovernmental activity and balances.

    Interentity Activities or balances between two or more agencies,
    departments, or bureaus. (See inter- and intradepartmental.)

    Internal control A process, effected by an entity's management and other
    personnel, to provide reasonable assurance that the entity's specific
    objectives are achieved.

    Following are the types of internal controls:

    financial reporting (including safeguarding and budget)

    compliance (including budget)

    operations Intradepartmental amounts

    Activity and balances within the same department. (See department.) The
    intradepartmental and interdepartmental amounts are subsets of
    intragovernmental activity and balances.

    Intragovernmental amounts

    Activity and balances occurring within or between federal departments.
    Intragovernmental Payment and Collection System (IPAC) The primary method
    used by most federal agencies to

    electronically bill and/ or pay for services and supplies within the
    government. Used to communicate to the Treasury and the trading partner
    agency that the online billing and/ or payment for services and supplies
    has occurred.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 12

    Joint Financial Management Improvement Program (JFMIP) The joint
    undertaking of the U. S. Department of the

    Treasury, the U. S. General Accounting Office, the Office of Management
    and Budget, and the Office of Personnel Management to improve financial
    management in the federal government. The source of governmentwide
    requirements for financial

    management systems software functionality that describes the basic
    elements of an integrated financial management system (including the core
    financial system).

    Judgment fund A permanent and indefinite appropriation that is available
    to pay final judgments, settlement agreements, and certain types of
    administrative awards against the United States when payment is not
    otherwise provided for. The Secretary of the Treasury certifies all
    payments from the fund.

    Known misstatement The amount of misstatement found by the auditor.

    Likely misstatement The auditor's best estimate of the amount of the
    misstatement in the tested population (including known misstatement). For
    sampling applications, this amount is the projected misstatement. Limit
    Used in performing substantive analytical procedures,

    the limit is the amount of difference between the expectation and the
    recorded amount that the auditor will accept without investigation.
    Therefore, the auditor should investigate amounts that exceed the limit
    during analytical procedures.

    Materiality The magnitude of an item's omission or misstatement in a
    financial statement that, in the light of surrounding circumstances, makes
    it probable that the judgment of a reasonable person relying on the
    information would have been changed or influenced by the inclusion or
    correction of the item (FASB Statement of Financial Concepts No. 2). See
    planning materiality, design materiality, and test materiality.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 13

    Misappropriation of assets Theft of an entity's assets causing the
    financial

    statements not to be presented in conformity with GAAP.

    Monitoring A component of internal control in addition to the control
    environment, risk assessment, information and communication, and control
    activities. The process by which management assesses internal control
    performance over time. It may include ongoing activities, separate
    evaluations, or a combination of both.

    Multipurpose testing Performing several tests, such as control tests,
    compliance tests, and substantive tests, on a common selection, usually a
    sample.

    Nonsampling selection A selection of items to reach a conclusion only on
    the items selected. Sometimes called a case study, the auditor using a
    nonsampling selection may not project the results to the population, but
    should be satisfied

    that there is a low risk of material misstatement in the untested items.
    Obligation ceiling A limit set by the Congress on the amount of
    obligations and expenditures the entity may incur

    even though the budget authority (such as an appropriation) is greater
    than this limit.

    Offsetting collections Collections of a business- or market- oriented
    nature and intragovernmental transactions. If, pursuant to law, they are
    deposited to receipts accounts and are available for obligation, they are
    considered budget authority and referred to as offsetting receipts.
    Contract authority and immediate availability of offsetting receipts for
    use are the usual forms of budget authority for revolving funds.

    Operations controls Management's policies and procedures to carry out
    organizational objectives, such as planning, productivity, programmatic,
    quality, economy, efficiency, and effectiveness objectives.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 14

    Output Any product or service generated from the consumption of resources.
    This can include information generated by the completion of a task or
    activity.

    Overall analytical procedures Analytical procedures performed as an
    overall financial statement review during the audit reporting phase.

    Performance measures controls Policies and procedures management uses to
    assure

    data that support performance measures reported in the MD& A of the
    Accountability report are properly recorded, processed, and summarized to
    permit preparation of performance information in accordance with criteria
    stated by management.

    Planning materiality The auditor's judgment of the total amount of
    misstatements that would be material in relation to the financial
    statements to be audited; used for planning the audit scope. The auditor
    determines an appropriate base (usually the greater of assets,
    liabilities, revenues, or expenses); then the auditor multiplies by a
    percent, usually 3 percent.

    Point estimate Most likely amount of the population characteristic based
    on the sample.

    Population The items comprising a financial statement line item, account
    balance, or class of transactions from which selections are made for audit
    testing.

    Precision The difference between the point estimate and the upper or lower
    limit. Thus, precision tells the auditor how close the point estimate
    could be from the true population amount.

    Preliminary analytical procedures Analytical procedures performed during
    the audit planning phase.

    Principal statements See financial statements.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 15

    Probable The chance of the future confirming event( s) occurring is
    likely, for pending or threatened litigation and unasserted claims. (For
    other contingencies, the future event or events are more likely than not
    to occur.)

    Projected misstatement An estimate of the misstatement in a population,
    based on the misstatements found in the examined sample items; represents
    misstatements that are probable. The projected misstatement includes the
    known misstatement. Providing agency The agency providing services,
    products, goods,

    transfer funds, investments, debt, and/ or incurring the reimbursable
    costs. This includes bureaus, departments, and/ or programs within
    agencies. The providing agency is the seller. The providing agency is the
    agency transferring out funds to another agency (transfers- out) when
    appropriations are transferred without the exchange of goods or services.

    Random sample A sample selected so that every combination of the same
    number of items in the population has an equal chance of selection. A
    random sample should be selected by using computer software or a random
    number table. A systematic sample with a random start, although not
    technically meeting the definition,

    may generally be evaluated as if it were a random sample.

    Reasonably possible The chance of the future event or events occurring is
    more than remote but less than probable.

    Receiving agency The agency receiving services, products, goods, transfer
    funds, purchasing investments, and/ or borrowing from Treasury (or other
    agency). This includes bureaus, departments, and/ or programs within
    agencies. The receiving agency is the

    purchaser. The receiving agency is the agency receiving transfers of funds
    (transfers in) when appropriations are transferred without the exchange of
    goods or services.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 16

    Reciprocal accounts Corresponding SGL accounts that should be used by a
    providing and receiving agency to record like intragovernmental
    transactions. For example, the providing entity's accounts receivable
    would normally be reconciled to the reciprocal account, accounts payable,
    on the receiving entity's records.

    Recorded amount The financial statement amount being tested by the auditor
    in the specific application of substantive tests.

    Reimbursable activity In intragovernmental activity, similar to goods or
    services, except the amounts billed to the receiving entity by the
    providing entity are based on actual costs incurred instead of on fees.

    Related parties Affiliates, management of the entity, their immediate
    families, and other parties the entity deals with if one party controls or
    can significantly influence the management or operating policies of the
    other to an extent that one of the parties might be prevented from fully
    pursuing its own separate interests.

    Remote The chance of the future event or events occurring is slight.

    Responsibility segment In cost accounting, a significant organizational,
    operational, functional, or process component that has the following
    characteristics: (a) its manager

    reports to the entity's top management, (b) it is responsible for carrying
    out a mission, performing a line of activities or services, or producing
    one or a group of products, and (c) for financial reporting and cost
    management purposes, its resources and results of operations can be
    clearly distinguished, physically and operationally, from those of other
    segments of the entity.

    Risk See audit risk, inherent risk, control risk, detection risk.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 17

    Risk assessment A component of internal control in addition to the control
    environment, monitoring, information and communication, and control
    activities. The entity's identification and analysis of relevant risks to
    achievement of its objectives, forming a basis for determining how the
    risks should be managed.

    Safeguarding controls Internal controls to protect assets from loss from
    unauthorized acquisition, use, or disposition arising from misstatements
    in processing transactions and handling the related assets. Safeguarding
    controls are considered part of financial reporting controls. Some
    safeguarding controls are operations controls.

    Sample Items selected from a population to reach a conclusion about the
    population as a whole. (Compare with nonsampling selection.)

    Sampling The application of audit procedures to fewer than all items
    composing a population to reach a conclusion about the entire population.
    The auditor selects sample items in such a way that the sample and its

    results are expected to be representative of the population. Each item
    must have an opportunity to be selected, and the results of the procedures
    performed must be projected to the entire population. Sampling interval
    The amount between two consecutive sample items, used in selecting the
    items in systematic sampling. In

    dollar- unit sampling, this amount may be determined by dividing the test
    materiality by a statistical risk factor.

    Sampling risk The risk that the auditor's conclusion based on a sample
    might differ from the conclusion that would be reached by applying the
    test in the same way to the entire population.

    Specific control evaluation (SCE) Evaluating the effectiveness of the
    design and

    operation of specific control activities. This process is documented on
    the SCE worksheet.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 18

    Standard General Ledger (SGL) A uniform chart of accounts and guidance for

    standardizing federal agency accounting. Composed of five major sections:
    (1) chart of accounts, (2) account descriptions, (3) accounting
    transactions,

    (4) SGL attributes, and (5) report crosswalks. Prescribed by the
    Department of the Treasury in its Treasury Financial Manual. Standard
    General

    Ledger (SGL) at the transaction level One of the three requirements of
    FFMIA.

    Implementing the SGL at the transaction level means that the entity's
    general ledger is in full compliance with the SGL chart of accounts
    descriptions and posting rules, that transactions from feeder systems are
    fed into the general ledger following SGL requirements through an
    automated or, in certain cases, a manual interface, that detail supporting
    these transactions can be traced back to the source transactions in the
    feeder systems, and that the feeder systems process transactions
    consistent with SGL account descriptions and posting rules. Statistical
    sampling Sampling that uses the laws of probability for

    selecting and evaluating a sample from a population for the purpose of
    reaching a conclusion about the population.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 19

    Stewardship information

    Required supplementary stewardship information includes (1) stewardship
    property, plant, and equipment (property owned by the federal government
    including: heritage assets [PP& E of historical, natural, cultural,
    educational, or artistic significance], national defense PP& E [weapons
    systems and vessels], and stewardship land [land

    other than that acquired for, or in connection with, general PP& E]), (2)
    stewardship investments (items treated as expenses in calculating net cost
    but meriting special treatment to highlight their substantial investment
    and long- term- benefit nature, including: nonfederal physical property
    [grants provided for properties financed by the federal

    government but owned by the state and local governments], human capital
    [education and training programs financed by the federal government for
    the benefit of the public], and research and development [basic and
    applied]), (3) stewardship responsibilities (current services assessment
    showing receipt and

    outlay data on the basis of projections of future activities* required in
    the consolidated statements of the U. S. government only* and social
    insurance information), and (4) risk- assumed information on insurance and
    guarantee programs (generally, the present value of unpaid expected losses
    net of associated premiums).

    Stratification Separation of a population into what the auditor believes
    are relatively homogeneous groups, each of which is referred to as a
    stratum, usually to improve sampling efficiency in a classical variables
    estimation sample.

    Stratified sample A classical variables estimation sample where the
    auditor first stratifies the population then selects a random sample from
    each stratum.

    Substantive analytical procedures Analytical procedures used as
    substantive tests.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 20

    Substantive assurance The auditor*s judgment that the assurance provided
    by all substantive tests of an assertion will detect misstatements that
    exceed materiality. Not the same as confidence level.

    Substantive tests Specific tests to detect material misstatements in an
    assertion relating to the account balance, transaction class, and
    disclosure components of financial statements.

    Suitable criteria In agreed upon procedures engagements, suitable
    standards that have the attributes of objectivity, measurability,
    completeness, and relevance.

    Supplemental analytical procedures Analytical procedures to increase the
    auditor's understanding of account balances and transactions when detail
    tests are used as the sole source of substantive

    assurance.

    Systematic sampling A method of selecting a sample in which every nth item
    is selected. See random sample.

    Test materiality (tolerable misstatement) The maximum misstatement that
    the auditor can tolerate in a population. This materiality is used in
    determining the extent of a specific substantive test. (In statistical
    terms, margin or bound of error.) Test materiality is design materiality,
    reduced when

    the audit is being performed at some, but not all, entity locations
    (requiring increased audit assurance for those locations visited);

    the area tested is deemed to be sensitive to the users of the financial
    statements; or

    the auditor expects to find a significant amount of misstatements

    Tolerable misstatement See test materiality.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 21

    Tolerable rate In attribute sampling for control testing, the maximum rate
    of deviation from a prescribed control that the auditor would be willing
    to accept without altering the assessment of the effectiveness of the
    control. For tests of compliance with laws and regulations, the tolerable
    rate is the maximum rate of noncompliance that the auditor would accept in
    the population without reporting the noncompliance. (In statistical terms,
    margin or bound of error.)

    Top stratum item An item in a dollar- unit sample that equals or exceeds
    the amount of the sampling interval or implicit sampling interval. Top
    stratum items are tested

    100 percent.

    Trading partner code As assigned by the U. S. Department of the Treasury,
    trading partner code is the attribute defined within the accounting for a
    transaction used to identify the trading partner entity. The trading
    partner code is illustrated next to the SGL account and is a two- digit
    number.

    Trading partners As defined by the U. S. Department of the Treasury,
    trading partners are agencies, bureaus, programs, or other entities
    (within or between agencies/ departments) participating in transactions
    with each other.

    Transfers Funding moved from one entity to another based on an agreement
    between the providing entity and the receiving entity

    Treasury Financial Manual (TFM) The Treasury Financial Manual (TFM) is
    Treasury's

    official publication for financial accounting and reporting of all
    receipts and disbursements of the federal government. Provides procedures
    for federal agencies to account for and reconcile transactions occurring
    within and between each other. Includes

    procedures for CFO Act agencies to reconcile and confirm with their
    trading partners intragovernmental activity and balances.

    Glossary April 2003 GAO/ PCIE Financial Audit Manual Glossary- 22

    Universe See population.

    User controls Manual comparisons of computer output (generally totals) to
    source documents or other input (including control totals). Walkthroughs
    Audit procedures to help the auditor understand the

    actual operation of significant aspects of accounting system processing
    and control techniques. Walkthroughs of financial reporting controls
    consist of tracing one or more transactions from initiation,

    through all processing, to inclusion in the general ledger; observing the
    processing and applicable controls in operation; making inquiries of
    personnel applying the controls; and examining related documents.

    FISCAM has a glossary of IS terms.

    ABBREVIATIONS

    April 2003 GAO/ PCIE Financial Audit Manual Abbrev- 1

    AAPC Accounting and Auditing Policy Committee

    ABA American Bar Association

    AcSEC Accounting Standards Executive Committee of the AICPA

    AICPA American Institute of Certified Public Accountants ALC agency
    locator code

    ARA Account Risk Analysis AT Reference to Statements on Standards for
    Attestation Engagements in the sections of the Codification of Statements
    on Auditing Standards AU Reference to Statements on Auditing Standards in
    the sections of the Codification of Statements on Auditing Standards AUP
    agreed- upon procedures CFO Chief Financial Officer

    COSO Committee of Sponsoring Organizations of the Treadway Commission CSRS
    Civil Service Retirement System

    DUS dollar- unit sampling

    DCIA Debt Collection Improvement Act

    FACTS Federal Agencies' Centralized Trial Balance System

    FAM GAO/ PCIE Financial Audit Manual FASAB Federal Accounting Standards
    Advisory Board

    FASB Financial Accounting Standards Board

    FBWT fund balance with Treasury

    Abbreviations

    April 2003 GAO/ PCIE Financial Audit Manual Abbrev- 2

    FCRA Federal Credit Reform Act FERS Federal Employees' Retirement System

    FISCAM Federal Information System Controls Audit Manual

    FFMIA Federal Financial Management Improvement Act of 1996

    FMFIA Federal Managers' Financial Integrity Act of 1982

    FMS Financial Management Service

    GAAP generally accepted accounting principles GAAS generally accepted
    auditing standards

    GAGAS generally accepted government auditing standards

    GAO General Accounting Office

    G/ L general ledger

    GRA General Risk Analysis

    IG Inspector General

    IPAC Intragovernmental Payments and Collection System

    IS Information Systems JFMIP Joint Financial Management Improvement
    Program

    MD& A management*s discussion and analysis

    NTDO Non- Treasury Disbursing Office

    OGC Office of General Counsel

    OMB Office of Management and Budget

    OPM Office of Personnel Management PCIE President*s Council on Integrity
    and Efficiency

    Abbreviations

    April 2003 GAO/ PCIE Financial Audit Manual Abbrev- 3

    PP& E property, plant, and equipment RSI required supplementary
    information

    RSSI required supplementary stewardship information

    SAS Statement on Auditing Standards SCE Specific Control Evaluation

    SF standard form

    SFFAC Statement of Federal Financial Accounting Concepts SFFAS Statement
    of Federal Financial Accounting Standards SGL U. S. Government Standard
    General Ledger

    SSAE Statement on Standards for Attestation Engagements

    TFM Treasury Financial Manual

    W/ P workpaper

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