Financial Audit: Guidance for Auditing Federal Employee and
Veteran Benefit Payable Actuarial Estimates (29-JUN-06,
GAO-06-768R).
In our role as principal auditor of the consolidated financial
statements of the U.S. government (CFS), we plan to use the work
of the inspectors general and contracted independent public
accountants who audit the agency-level financial statements. The
development of the joint PCIE/GAO Financial Audit Manual (FAM)
has provided a common framework and methodology for federal
financial statement auditing. Adherence to the FAM will enable us
to readily review the work of other auditors as a basis for using
that work under auditing standards. We want to all be on the same
page so that we are in the position to use the work of the
inspectors general. Certain CFS line items that will be subject
to our concurrent review because of their significance, such as
the federal employee and veteran benefits payable line item,
involve federal agencies' significant actuarial estimations.
Statement on Auditing Standards (SAS) No. 57, Auditing Accounting
Estimates applies to such estimations. In addition, Statement of
Federal Financial Accounting Standard (SFFAS) No. 5 requires that
federal agencies disclose specific information in their financial
statements for pensions, other retirement benefits, and other
postemployment benefits. Additional related audit guidance was
provided in November 2004 when the American Institute of
Certified Public Accountants (AICPA) issued its Statement of
Position (SOP) 04-1, Auditing the Statement of Social Insurance
effective for periods beginning after September 30, 2005. This
audit guidance discusses the auditor's responsibility under SAS
No. 57 and includes specific illustrative control and audit
procedures that are applicable to auditing actuarial estimates to
achieve SAS No. 57 objectives. Actuarial estimates for both
social security and the federal employee and veteran benefit
payable line item are developed by methods which calculate for
the projection period covered by an actuarial valuation, the
excess of (a) the present value of projected benefits of the
group included in an actuarial valuation over (b) the actuarial
value of program-related assets. Although the SOP 04-1 was
specifically developed for use in auditing federal agencies'
statements of social insurance, we consider the internal control
and audit procedures discussed in SOP 04-1 to be appropriate for
auditing the significant actuarial estimates in the federal
employee and veteran benefit payable line item as well. Beginning
in fiscal year 2006, we plan to use SOP 04-1 as criteria in
determining the extent to which we can use audit work performed
by agency auditors in this area. To the extent that the concepts
and objectives of SOP 04-1 are found to be appropriate to other
audit areas in the future, we will consider its use in such
areas.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-768R
ACCNO: A56160
TITLE: Financial Audit: Guidance for Auditing Federal Employee
and Veteran Benefit Payable Actuarial Estimates
DATE: 06/29/2006
SUBJECT: Auditing procedures
Financial statement audits
Financial statements
Internal audits
Internal controls
Veterans benefits
Federal employees
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GAO-06-768R
* https://www.cpa2biz.com
United States Government Accountability Office Washington, DC 20548
June 29, 2006
Inspectors General
Subject: Financial Audit: Guidance for Auditing Federal Employee and
Veteran Benefit Payable Actuarial Estimates
In our role as principal auditor of the consolidated financial statements
of the U.S. government (CFS), we plan to use the work of the inspectors
general and contracted independent public accountants who audit the
agency-level financial statements. The development of the joint PCIE/GAO
Financial Audit Manual (FAM) has provided a common framework and
methodology for federal financial statement auditing. Adherence to the FAM
will enable us to readily review the work of other auditors as a basis for
using that work under auditing standards. We want to all be on the same
page so that we are in the position to use your work.
Certain CFS line items that will be subject to our concurrent review
because of their significance, such as the federal employee and veteran
benefits payable line item, involve federal agencies' significant
actuarial estimations. Statement on Auditing Standards (SAS) No. 57,
Auditing Accounting Estimates applies to such estimations. In addition,
Statement of Federal Financial Accounting Standard (SFFAS) No. 5 requires
that federal agencies disclose specific information in their financial
statements for pensions, other retirement benefits, and other
postemployment benefits. Additional related audit guidance was provided in
November 2004 when the American Institute of Certified Public Accountants
(AICPA) issued its Statement of Position (SOP) 04-1, Auditing the
Statement of Social Insurance,1 effective for periods beginning after
September 30, 2005. This audit guidance discusses the auditor's
responsibility under SAS No. 57 and includes specific illustrative control
and audit procedures that are applicable to auditing actuarial estimates
to achieve SAS No. 57 objectives. Actuarial estimates for both social
security and the federal employee and veteran benefit payable line item
are developed by methods which calculate for the projection period covered
by an actuarial valuation, the excess of (a) the present value of
projected benefits of the group included in an actuarial valuation over
(b) the actuarial value of program-related assets. Although the SOP 04-1
was specifically developed for use in auditing federal agencies'
statements of social insurance, we consider the internal control and audit
procedures discussed in SOP 04-1 to be appropriate for auditing the
significant actuarial estimates in the federal employee and veteran
benefit payable line item as well. Beginning in fiscal year 2006,
1
This document is available from the AICPA at https://www.cpa2biz.com (last
visited May 22, 2006). Once at this site, search on SOP 04-1.
we plan to use SOP 04-1 as criteria in determining the extent to which we
can use audit work performed by agency auditors in this area. To the
extent that the concepts and objectives of SOP 04-1 are found to be
appropriate to other audit areas in the future, we will consider its use
in such areas.
The purpose of this letter and the enclosure is to alert you to (1) our
plan to use SOP 04-1 audit guidance in our review of agency auditors' work
on federal employee and veteran benefits payable estimates that are
significant to the CFS and (2) observations made during our review of
selected agency auditors' work regarding such actuarial estimations as
outlined in enclosure I and what additional work would need to be done to
be consistent with SOP 04-1 audit guidance. We look forward to continuing
to work with the federal audit community as we collectively strive to
ensure the highest quality audits of federal financial statements.
We are sending copies of this letter to the Controller of the Office of
Management and Budget, the Fiscal Assistant Secretary of the Department of
the Treasury (Treasury), and the Chief Financial Officers of the 35
federal executive agencies required by OMB to verify and submit a closing
package to Treasury.2 If you have any questions regarding the information
in this letter, please contact me at (202) 512-2600, or Gary Engel,
Director, Financial Management and Assurance at (202) 512-3406 or
[email protected] . Major contributors to this letter are Linda P. Garrison,
Assistant Director, and Vera M. Seekins, Auditor-in-charge.
Sincerely yours,
Jeffrey C. Steinhoff Managing Director Financial Management and Assurance
Enclosure
The closing package is a methodology developed by Treasury to directly
link information from federal agencies' audited financial statements to
amounts reported in the CFS. A complete closing package consists of the
special purpose audit opinion, the management representation letter for
the closing package, audit trail report (reclassification journal voucher
report), closing package financial statement report, trading partner
summary report, notes reports, and other data reports.
Page 2 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits
Payable
ADDRESSEES
The Honorable Donald A. Gambatesa Inspector General Agency for
International Development
The Honorable Phyllis Fong Inspector General Department of Agriculture
The Honorable Johnnie E. Frazier Inspector General Department of Commerce
Mr. Thomas Gimble Acting Inspector General Department of Defense
The Honorable John P. Higgins, Jr. Inspector General Department of
Education
The Honorable Gregory H. Friedman Inspector General Department of Energy
Mr. Bill Roderick Acting Inspector General Environmental Protection Agency
Mr. Carl A. Clinefelter Inspector General Farm Credit Administration
Mr. Kent R. Nilsson Acting Inspector General Federal Communications
Commission
Ms. Patricia Black Acting Inspector General Federal Deposit Insurance
Corporation
The Honorable Brian D. Miller Inspector General General Services
Administration
The Honorable Daniel Levinson Inspector General Department of Health and
Human Services
The Honorable Richard L. Skinner Inspector General Department of Homeland
Security
The Honorable Kenneth M. Donohue Inspector General Department of Housing
and Urban Development
The Honorable Earl E. Devaney Inspector General Department of the Interior
The Honorable Glenn Fine Inspector General Department of Justice
The Honorable Gordon S. Heddell Inspector General Department of Labor
The Honorable Robert W. Cobb Inspector General National Aeronautics and
Space Administration
Mr. William DeSarno Inspector General National Credit Union Administration
Ms. Christine C. Boesz Inspector General National Science Foundation
The Honorable Hubert T. Bell Inspector General Nuclear Regulatory
Commission
The Honorable Patrick E. McFarland Inspector General Office of Personnel
Management
Mr. Robert Emmons Inspector General Pension Benefit Guaranty Corporation
The Honorable Martin J. Dickman Inspector General Railroad Retirement
Board
Mr. Walter Stachnik Inspector General
Page 4 GAO-06-768R Guidance for Auditing Federal Employee and Veteran
Benefits Payable
Securities and Exchange Commission
The Honorable Eric M. Thorson Inspector General Small Business
Administration
Ms. A. Sprightley Ryan Acting Inspector General Smithsonian Institution
The Honorable Patrick P. O'Carroll Inspector General Social Security
Administration
The Honorable Howard J. Krongard Inspector General Department of State
The Honorable Richard Moore Inspector General Tennessee Valley Authority
Mr. Todd J. Zinser Acting Inspector General Department of Transportation
The Honorable Harold Damelin Inspector General Department of the Treasury
The Honorable Dave Williams Inspector General
U.S. Postal Service
The Honorable George Opfer Inspector General Department of Veterans
Affairs
ENCLOSURE 1
CERTAIN AGENCY AUDIT PROCEDURES OVER ACTUARIAL ESTIMATIONS WOULD NEED TO BE
EXPANDED IN FUTURE AUDITS TO BE CONSISTENT WITH SOP 04-1 GUIDANCE
We reviewed the nature and extent of fiscal year 2004 audit work performed
on the $4 trillion consolidated financial statements of the U.S.
government's (CFS) federal employee and veteran benefits payable (FEVBP)
line item by independent public accountants contracted by agency
inspectors general. For this effort, we compared the fiscal year 2004
audit documentation related to actuarial estimations for six selected
postemployment benefit program liabilities to Statement of Position (SOP)
04-1 audit guidance. In general, we concluded that future years' audit
work would need to be expanded to be consistent with SOP 041 audit
guidance.
Specifically, for each of the six selected benefit program liabilities, we
noted that
audit documentation for the following areas were not consistent with SOP
04-1
S:19 guidance:
x specific audit procedures performed with the assistance of an
independent
actuary,
x the relationship between the procedures performed with the assistance of
an independent actuary and the auditor's assessments of audit risk and
materiality, and
x any other significant matters related to the objectives and scope of the
independent actuary's work, including any limitations on the independent
actuary's procedures.
Without a clear understanding of the independent actuary's procedures and
the level of assurance provided by the independent actuary's work, the
auditor may inappropriately use and rely on the independent actuary's
report. For example, for one of the selected benefit programs, agency
audit officials informed us that they were unaware of any written program
detailing the work planned by the independent actuary. The auditor advised
us that they had relied on their independent actuary's professional
judgment to design and perform appropriate procedures. In addition,
although the agency actuary for the same agency used the concept of
materiality in developing the estimate, the auditor was not aware of what
the agency actuary's materiality level was and had not discussed the audit
materiality with the agency actuary.
In addition, SOP 04-1 illustrative procedures refine Statement on Auditing
Standards (SAS) No. 57 audit guidance. As stated in SAS No. 57, the
auditor should obtain an understanding of how management developed the
estimate and use one or a combination of the following approaches to
evaluate the reasonableness of that estimate:
x review and test the process used by management to develop the estimates,
Page 6 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits
Payable
x
develop an independent expectation of the estimate to corroborate the
reasonableness of management's estimate, and
x
review subsequent events or transactions occurring prior to the completion
of fieldwork. SOP 04-1 provides more specific guidance and illustrative
procedures to fulfill these SAS No. 57 requirements.
In accordance with SOP 04-1 S:9, if controls over the estimation process
are effective, the most practicable and efficient approach to fulfilling
the auditor's responsibility under SAS No. 57 may be to review and test
the estimation process used by management. SOP 04-1 S:6 describes
management's process as ordinarily consisting of the following activities:
1. identifying the relevant factors that affect the estimates;
2. developing assumptions that represent management's best estimate of
circumstances and events with respect to the relevant factors;
3. accumulating relevant, sufficient, and reliable data on which to base
the estimates;
4. determining the estimated amounts based on assumptions and other
relevant factors; and
5. determining that the estimates are presented in conformity with GAAP
and that disclosure is adequate.
SOP 04-1S:9 specifies that if the auditor finds that controls over the
estimation process are ineffective, the auditor should develop an
independent expectation of the estimate, or portions of the estimate, to
corroborate management's estimate, or obtain competent evidence from
outside the audited agency's process that would be sufficient to support
the financial statement assertions.
The five activities in management's estimation process relate to the
elements in figure 1 of SOP 04-1 that depicts the process of developing
social insurance estimates. We consider these same five elements to be
appropriate for auditing other actuarial liability estimates. As such,
during our review of fiscal year 2004 audit documentation, we looked for
evidence that auditors understood the agencies' process for developing and
evaluating actuarial estimates, internal control procedures, and test
procedures over these five actuarial estimate elements using the
illustrative controls and audit procedures. For the six selected benefit
programs, audit documentation made available for our review did not
include evidence that the auditors performed certain procedures
illustrated in the appendix to SOP 04-1 or equivalent procedures. The
following table shows the illustrative procedures by liability element
that we did not see documented in our review of fiscal year 2004 audit
documentation for the six selected programs.
Table 1: Number of Selected Programs Without Documented Procedures
Included in the SOP 04-1's Illustrative Procedures
Liability SOP 04-1 Illustrative procedure not Affected number of
element documented selected programs
Factors Understand management's process for 5
monitoring the environment to determine
the effect that changes in the
environment, such as legislation or
health, might have on the variables
selected for use in the actuarial
estimate.
Factors Understand management's procedures to 3
prevent and detect the inadvertent
omission of factors that should be
considered in developing the actuarial
estimate.
Assumptions Understand the source of assumptions and 3
how management considers and determines
the effect that variation in the
underlying assumptions will have on the
estimates.
Assumptions Understand how the agency generates, 3
evaluates, and reviews assumptions.
Assumptions Understand how the agency compares 4
assumptions made in the current period
with those of prior periods and explains
or reconciles any differences.
Assumptions Consider the aggregate effect of 4
individually insignificant assumptions.
Model Understand how management and other 3
knowledgeable personnel design or select
the model and how they document that model
and the programs used to determine the
actuarial estimate.
Model Understand procedures for assigning 3
responsibility to individuals in a manner
that ensures that no single individual has
the authority to read, add, change, or
delete information without an independent
review of that activity.
Model Understand procedures for designating 3
responsibility for significant information
resources within the agency and
establishing and maintaining security over
such resources.
Model Review documentation that describes the 4
instructions, rules, or procedures used by
the model to calculate estimates.
Model Reperform calculations used in the model 5
to translate the assumptions, data, and
factors into the estimate.
Model Review management's documentation of its sensitivity analysis 4
and consider whether the results were consistent with the
auditor's expectations.
Estimate Inquire to determine who has final authority for reviewing and 4
approving estimates.
Estimate Understand controls related to review of estimates and the 6
related supporting documentation.
Estimate Understand controls related to the supervision of individuals 6
who develop estimates.
Estimate Compare the estimated future expenditures predicted by the 5
actuarial model to actual expenditures for the previous fiscal
year.
Estimate Evaluate the reasonableness of the time period covered by the 4
actuarial liability estimate.
Estimate Determine whether the information in the actuarial liability 3
estimate, including related disclosures, is supported by
sufficient competent evidential matter.
Source: GAO.
(198454)
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