    Financial Audit Manual: Volume Two, Exposure Draft--October 2007
    (01-OCT-07, GAO-08-82G).

    The U.S. Government Accountability Office (GAO) and the
    President's Council on Integrity and Efficiency (PCIE) maintain
    the GAO/PCIE Financial Audit Manual (FAM). The FAM provides
    guidance for performing financial statement audits of federal
    entities. The FAM is a key tool for enhancing accountability over
    taxpayer-provided resources.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-08-82G
        ACCNO:   A77128
      TITLE:     Financial Audit Manual: Volume Two, Exposure
    Draft--October 2007
         DATE:   10/01/2007
      SUBJECT:   Auditing procedures
    	     Auditing standards
    	     Auditors
    	     Audits
    	     Financial statement audits
    	     Federal agencies
    	     Internal auditors
    	     Internal audits

    ******************************************************************
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    ** GAO Product.                                                 **
    **                                                              **
    ** No attempt has been made to display graphic images, although **
    ** figure captions are reproduced.  Tables are included, but    **
    ** may not resemble those in the printed version.               **
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    ** Please see the PDF (Portable Document Format) file, when     **
    ** available, for a complete electronic file of the printed     **
    ** document's contents.                                         **
    **                                                              **
    ******************************************************************
    GAO-08-82G

         * [1]GAOHQ-1807469-v5-FAM_601.pdf

              * [2]601 - Introduction to Part II - Tools

         * [3]GAOHQ-1739135-v5-FAM_650.pdf

              * [4]650 - Using the Work of Others

                   * [5]Types of Reporting
                   * [6]Evaluating the Other Auditors' or Specialists'
                     Independence
                   * [7]Evaluating Other Auditors' or Specialists' Qualifications
                   * [8]Planning the Review and Testing of Other Auditors' or
                     Specia
                   * [9]Review of Audit Documentation
                   * [10]Discussions and/or Supplemental Tests for a High Level
                     of Re
                   * [11]Subsequent Events Review and Dating of the Auditor's
                     Report
                   * [12]Staffing the Review of the Other Auditors' or
                     Specialists' W
                   * [13]Evaluating the Work of Other Auditors or Specialists
                   * [14]Documenting the Review of Other Auditors' or
                     Specialists' Wo
                   * [15]Using Internal Audit Staff to Provide Direct Assistance
                     to t
                   * [16]Using Federal Entity Specialists
                   * [17]Multiple Levels of Other Auditors
                   * [18]Reports on Other Auditors' Work

         * [19]GAOHQ-1739327-v5-FAM_650_A.pdf

              * [20]650 A - Summary of Audit Procedures and Documentation for Re

         * [21]GAOHQ-1739338-v5-FAM_650_B.pdf

              * [22]650 B - Example Audit Procedures for Using the Work of Other

                   * [23]1. EVALUATING INDEPENDENCE, OBJECTIVITY, AND
                     QUALIFICATIONS
                   * [24]General

                        * [25]Independence and objectivity:
                        * [26]Qualifications:

                   * [27]2. EVALUATING INDEPENDENCE, OBJECTIVITY, AND
                     QUALIFICATIONS

                        * [28]Independence And Objectivity:
                        * [29]Qualifications:

                   * [30]3. MONITORING THE WORK (FOR ALL TYPES OF OTHER AUDITORS
                     AND

         * [31]GAOHQ-1739466-v5-FAM_650_C.pdf

              * [32]650 C - Example Reports when Using the Work of Others

                   * [33]Example 1 - Transmittal Letters
                   * [34]Example 2 - Report Concurring with Other Auditors'
                     Opinion (

                        * [35]Objectives, Scope, and Methodology

         * [36]GAOHQ-1809309-v5-FAM_660.pdf

              * [37]660 - Agreed-Upon Procedures

                   * [38]Written Representations
                   * [39]Documentation
                   * [40]Reporting
                   * [41]Other Report Issues

         * [42]GAOHQ-1809352-v5-FAM_660_A.pdf

              * [43]660 A - Example Agreed-Upon Procedures Engagement Letter

                   * [44]Agreed-Upon Procedures for Tax Receipts and Refunds
                     (Enclosu

                        * [45]General
                        * [46]Sampling

         * [47]GAOHQ-1809372-v5-FAM_660_B.pdf

              * [48]660 B - Example Representation Letter from Responsible Entit

         * [49]GAOHQ-1809394-v5-FAM_660_C.pdf

              * [50]660 C - Agreed-Upon Procedures Completion Checklist

                   * [51]SECOND PARTNER'S (OR EQUIVALENT) CONCURRENCE ON
                     AGREED-UPON
                   * [52]TECHNICAL ACCOUNTING AND AUDITING EXPERT'S CONCURRENCE
                     ON AG

         * [53]GAOHQ-1809401-v5-FAM_660_D.pdf

              * [54]660 D - Example Agreed-Upon Procedures Report

                   * [55]Procedures

                        * [56]Results

         * [57]GAOHQ-1797774-v5-FAM_701.pdf

              * [58]701 - Assessing Compliance of Agency Systems with the Federa

                   * [59]FFMIA Requirements
                   * [60]Audit Issues

         * [61]GAOHQ-1798018-v5-FAM_701_A.pdf

              * [62]701 A - Example Audit Procedures for Testing Compliance with

                   * [63]III. Testing for Compliance with the Federal Account
                   * [64]IV. Testing for Compliance with the SGL
                   * [65]V. Summary

         * [66]GAOHQ-1798482-v5-FAM_701_B.pdf

              * [67]701 B - Summary Schedule of Instances of Noncompliance with

         * [68]GAOHQ-1813629-v5-FAM_802.pdf

              * [69]802 - General Compliance Checklist

                   * [70]Instructions For General Compliance Checklist
                   * [71]Other Laws
                   * [72]Instructions For Compliance Supplements

                        * [73]Compliance Summary
                        * [74]Compliance Audit Program

         * [75]GAOHQ-1764101-v5-FAM_803_.pdf

              * [76]803 - Antideficiency Act

         * [77]GAOHQ-1773824-v5-FAM_808.pdf

              * [78]808 - Federal Credit Reform Act of 1990

         * [79]GAOHQ-1813732-v5-FAM_809.pdf

              * [80]809 - Provisions Governing Claims of the U.S. Government (31

         * [81]GAOHQ-1773897-v5-FAM_810.pdf

              * [82]810 - Prompt Payment Act

         * [83]GAOHQ-1773899-v5-FAM_812.pdf

              * [84]812 - Pay and Allowance System for Civilian Employees, as Pr

         * [85]GAOHQ-1813743-v5-FAM_813.pdf

              * [86]813 - Civil Service Retirement Act, 5 U.S.C. Chapter 83

         * [87]GAOHQ-1773903-v5-FAM_814.pdf

              * [88]814 - Federal Employees Health Benefits Act, 5 U.S.C. Chapte

         * [89]GAOHQ-1773905-v5-FAM_816.pdf

              * [90]816 - Federal Employees' Compensation Act (FECA), 5 U.S.C. C

         * [91]GAOHQ-1773915-v5-FAM_817.pdf

              * [92]817 - Federal Employees' Retirement System Act of 1986 (FERS

         * [93]GAOHQ-1964524-v5-FAM_902.pdf

              * [94]902 - Related Parties, Including Intragovernmental Activity
              * [95]Intragovernmental Activity and Balances

                   * [96]Accounting and Reporting Guidance
                   * [97]Continuing Issues from Prior Year Audits
                   * [98]Intragovernmental Payment and Collection (IPAC) System
                   * [99]Audit Procedures

              * [100]Other Related Parties
              * [101]Practice Aids

         * [102]GAOHQ-1964530-v5-FAM_902_A.pdf

              * [103]902 A - Example Account Risk Analysis for Intragovernmental
              * [104]Cycles

         * [105]GAOHQ-1969301-v5-FAM_902_B.pdf

              * [106]902 B - Example Specific Control Evaluation for Intragovernm

         * [107]GAOHQ-1964537-v5-FAM_902_C.pdf

              * [108]902 C - Example Audit Procedures for Intragovernmental and O

                   * [109]Audit Procedures for Intragovernmental and Other
                     Related Par

                        * [110]I. Planning Phase
                        * [111]II. Internal Control Phase
                        * [112]III. Testing Phase

                             * [113]A. Intragovernmental accounts

                                  * [114]Reconciliation/confirmation (existence,
                                    completeness, valuat
                                  * [115]Reconciliation adjustments and
                                    differences (all intragovernm

                             * [116]B. Intragovernmental activity and balances

                                  * [117]Cut off test (existence and
                                    completeness)

                             * [118]C. Control and substantive tests of
                               details--other related pa
                             * [119]D. Substantive analytical procedures (FAM
                               475)
                             * [120]E. Elimination (existence, completeness, and
                               valuation)

                        * [121]IV. Reporting Phase

         * [122]GAOHQ-1964541-v5-FAM_903.pdf

              * [123]903 - Auditing Cost Information
              * [124]The Impact of SFFAS No. 4 and SFFAS No. 30
              * [125]Audit Procedures for Financial Statement Opinion
              * [126]Federal Financial Management Improvement Act of 1996 (FFMIA)
              * [127]Management's Discussion and Analysis (MD&A)

         * [128]GAOHQ-1967628-v5-FAM_921.pdf

              * [129]921- Auditing Fund Balance with Treasury (FBWT)

         * [130]GAOHQ-2010989-v5-FAM_921_A.pdf

              * [131]921 A - Treasury Processes and Reports Related to FBWT Recon

                   * [132]A. Verification of Collections and EFT Disbursements

                        * [133]Reporting of FBWT accounts activity and balances

                   * [134]B. Verification of Disbursement Data

                        * [135]1. Verification of Treasury Disbursement Office
                          entity disbu

                             * [136]Reporting of FBWT accounts activity and
                               balances

                        * [137]2. Verification of Non-Treasury Disbursing Office
                          (NTDO) en

                             * [138]Verification of interagency transactions:
                             * [139]Verification of checks paid
                             * [140]Verification of checks issued:
                             * [141]Reporting of FBWT accounts activity and
                               balances

         * [142]GAOHQ-2011015-v5-FAM_921_B.pdf

              * [143]921 B - Example Account Risk Analysis for Fund Balance with

         * [144]GAOHQ-2011025-v5-FAM_921_C.pdf

              * [145]921 C - Example Specific Control Evaluation for Fund Balance

         * [146]GAOHQ-1964543-v5-FAM_931.pdf

              * [147]931 - Auditing Heritage Assets and Stewardship Land

         * [148]GAOHQ-1964545-v5-FAM_941.pdf

              * [149]941 - Auditing the Statement of Social Insurance

         * [150]GAOHQ-1773918-v5-FAM_1001.pdf

              * [151]1001 - Management Representations

                   * [152]Representations Relating to the Financial Statements

                        * [153]General
                        * [154]Cash
                        * [155]Financial instruments
                        * [156]Receivables
                        * [157]Inventories
                        * [158]Deferred charges and unearned revenues
                        * [159]Debt
                        * [160]Contingencies
                        * [161]Pension and postretirement benefits
                        * [162]Sales

                   * [163]Representations Relating to Internal Control
                   * [164]Representations Relating to Financial Management
                     Systems' Su
                   * [165]Representations Relating to Compliance with Laws and
                     Regulat
                   * [166]Effect of Change in Management on Representation Letter

         * [167]GAOHQ-1773955-v5-FAM_1001_A.pdf

              * [168]1001 A - Example Management Representation Letter

         * [169]GAOHQ-1773957-v5-FAM_1002.pdf

              * [170]1002 - Inquiries of Legal Counsel

                   * [171]Accounting and Reporting Guidance
                   * [172]Audit Procedures
                   * [173]Timing of Legal Letter Request and Responses
                   * [174]Determining a Materiality Level
                   * [175]Legal Counsels from Whom Information Should be
                     Requested
                   * [176]Evaluation of Responses
                   * [177]Possible Limitations on the Scope of Legal Counsel's
                     Respons
                   * [178]Lack of Sufficient Opinion on the Resolution of a Case
                   * [179]Example Legal Letter Request
                   * [180]Example Legal Counsel's Responses and Management's
                     Schedule
                   * [181]Practice Aids

         * [182]GAOHQ-1825413-v5-FAM_1002_A.pdf

              * [183]1002 A - Example Audit Procedures for Inquiries of Legal Cou

                   * [184]Example Audit Procedures

                        * [185]I. Testing Procedures

                   * [186]Example Audit Procedures
                   * [187]Example Audit Procedures

                        * [188]II. Reporting Procedures

         * [189]GAOHQ-1773962-v5-FAM_1002_B.pdf

              * [190]1002 B - Example Legal Letter Request

         * [191]GAOHQ-1773967-v5-FAM_1002_C.pdf

              * [192]1002 C - Example Legal Representation Letter

                   * [193]Pending or Threatened Litigation
                   * [194](Excluding unasserted claims and assessments, which are
                     disc

         * [195]1002 D - Example Management Summary Schedule
         * [196]GAOHQ-2023208-v5-FAM_1003.pdf

              * [197]1003 - Financial Statement Audit Completion Checklist

                   * [198]Instructions

         * [199]GAOHQ-1821808-v5-FAM_1005.pdf

              * [200]1005 - Subsequent Events Review

                   * [201]Audit Procedures
                   * [202]Subsequent Events Review Program --Audit Procedures
                   * [203]I. Read Interim Financial Statements
                   * [204]II. Make Inquiries of Management as to:
                   * [205]III. Read Minutes
                   * [206]IV. Cover in Lawyers' Letters
                   * [207]V. Cover in Management Representation Letter
                   * [208]VI. Other

    October 2007

    TO AUDIT OFFICIALS, AGENCY CFOS, AND OTHERS INTERESTED IN FEDERAL
    FINANCIAL AUDITING AND REPORTING

    This letter transmits the exposure draft of Volume 2 of the Government
    Accountability Office (GAO) and the President's Council on Integrity and
    Efficiency (PCIE) Financial Audit Manual (FAM) for your review and
    comment. The FAM presents a methodology for performing financial statement
    audits of federal entities in accordance with professional standards, and
    was originally issued in July 2001. We have updated the FAM for
    significant changes affecting audits of financial statements in the
    federal government since the last major changes to the FAM in July 2004.

    To continue to meet the needs of the federal audit community and the
    public it serves, GAO and the PCIE created a joint FAM Working Group. The
    group comprises auditors from GAO and several offices of the inspectors
    general experienced in conducting audits of federal entity financial
    statements. Through a highly collaborative effort, the FAM Working Group
    prepared the enclosed exposure draft for FAM Volume 2 which contains audit
    tools. The exposure draft for FAM Volume 1 is being issued separately. A
    new FAM Volume 3 containing checklists for Federal Accounting (FAM 2010)
    and Federal Reporting and Disclosures (FAM 2020) was issued on August 24,
    2007 (GAO-07-1173G) for use in the fiscal year 2007 audits of federal
    financial statements.

    Summary of Major Revisions to FAM Volume 2

    The exposure draft includes changes based on (1) AICPA Statement of
    Auditing Standards (SAS) Nos. 100 through 114, which include the audit
    risk standards; (2) Government Auditing Standards (July 2007 edition); (3)
    audit guidance in Office of Management and Budget (OMB) Bulletin No.
    07-04, Audit Requirements for Federal Financial Statements (September 4,
    2007); and (4) financial reporting guidance in OMB Circular No. A-136,
    Financial Reporting Requirements (June 29, 2007). The exposure draft also
    includes the effects of Federal Accounting Standards Advisory Board
    (FASAB) accounting concepts and standards issued through May 31, 2007, on
    financial audits, particularly with respect to accounting, reporting, and
    disclosure requirements for social insurance, heritage assets and
    stewardship land, and earmarked funds. Finally, throughout the updated FAM
    Volume 2, revisions were made for new terminology, changes in the federal
    audit environment, and effects of applicable laws and regulations. A table
    of major changes to FAM Volume 2 is presented in an attachment to this
    letter.

    Instructions for Commenting on the Exposure Draft

    The exposure draft of FAM Volume 2 is available only in electronic form on
    GAO's Web page at [209]http://www.gao.gov/special.pubs/gaopcie/. We
    request comments from federal audit officials, CFOs, financial managers,
    the public accounting profession, and other interested parties. Please
    associate your comments with specific references to section, paragraph,
    and page number. Also, please provide the rationale for your comments and
    proposed changes, along with suggested revised language. Please send your
    comments electronically to [210]FAM@gao.gov no later than January 31,
    2008. This exposure period is expected to provide adequate time for review
    and comment after auditors have completed fiscal year 2007 financial
    statement audits for federal agencies and the consolidated U.S.
    government. We anticipate that the final version of FAM Volume 2 will be
    issued in the early spring of 2008 for use in conducting fiscal year 2008
    federal financial statement audits.

    Should you need additional information, please call GAO's Financial
    Management and Assurance Assistant Directors Roger Stoltz, at (202)
    512-9408; or Janet Krell, at (202) 512-4716; Director Steve Sebastian at
    (202) 512-9521; or PCIE Working Group Leaders Alex Biggs, at (202)
    693-5258; or Joel Grover, at (202) 927-5768.

    Sincerely yours,

    Jeffrey C. Steinhoff                    The Honorable John P. Higgins, Jr.
    Managing Director                           Chairman, Audit Committee
    Financial Management and Assurance     President's Council on Integrity
    U.S. Government Accountability Office  and Efficiency
    Attachment and enclosures

    Attachment

    Table of Major Changes to FAM Volume 2

    FAM section                          Major change
    650         Some clarifications and new terminology were added for using
                   the work of others.
    802         The general compliance checklist in FAM 802.06 lists five
                   general laws for compliance consistent with OMB audit guidance
                   while four other laws commonly assessed by auditors are now
                   presented in FAM 802.07.
    803         FAM 803 was revised to add new audit procedures for checking
                   on Antideficiency Act violations.
    903         FAM 903.02 expanded the discussion of full costing per SFFAS
                   No. 30.
    921         New FAM 921.11-.12 discuss Treasury development and
                   implementation of a new Government Wide Accounting system that
                   will have a significant impact on auditing Fund Balance with
                   Treasury (FBWT). A new FAM 921.13 discusses Treasury plans to
                   discontinue use of certain suspense accounts. Because these
                   changes are to occur over several years, auditors should
                   reevaluate FBWT audit procedures, some examples of which are
                   now presented in FAM 921.17-.22. The FAM 921 D audit program
                   has been eliminated.
    931         This new section provides guidance on auditing heritage assets
                   and stewardship land as a result of SFFAS No. 29.
    941         This new section provides guidance on auditing the Statement
                   of Social Insurance as a result of SFFAS Nos. 17, 25, 26, and
                   28.
    1001        FAM 1001 on management representation letters has been revised
                   to be consistent with changes in professional standards, and a
                   new FAM 1001.19 was added to discuss the effect of a change in
                   management on representation letters.
    1001 A      The example management representation letter was changed to
                   group representations by category (financial statements,
                   internal control, fraud, etc.) and added representations for
                   Antideficency Act violations (FAM 1001 A.27), Statement of
                   Social Insurance (FAM 1001 A.28-.36), consistency of budget
                   information required by OMB audit guidance (FAM 1001 A.37),
                   and earmarked funds (FAM 1001 A.38).

                                       Attachment

    FAM section                          Major change
    1002        A table for analyzing contingent losses was added to FAM
                   1002.06 and a new FAM 1002.12 was added for legal claims where
                   no monetary damages are being sought. FAM 1002.16
                   expands the discussion and timing of interim and final legal
                   letters.
    1003        The audit completion checklist was revised to be consistent
                   with the revised FAM and new professional standards.

                                   CONTENTS - PART II

                         [This page intentionally left blank.]

                               CONTENTS - PART II - TOOLS

      600 PLANNING AND GENERAL

    601 Introduction to Part II - Tools

    650 Using the Work of Others

    650 A Summary of  Audit Procedures and Documentation  for Review of  Other
    Auditors' Work

    650 B Example Audit Procedures for Using the Work of Others

    650 C Example Reports When Using the Work of Others

    660 Agreed-Upon Procedures

    660 A Example Agreed-Upon Procedures Engagement Letter

    660 B Example Representation Letter from Responsible Entity on Agreed-Upon
    Procedures Engagement

    660 C Agreed-Upon Procedures Completion Checklist

    660 D Example Agreed-Upon Procedures Report

      700 INTERNAL CONTROL (See also section 900)

    701 Assessing  Compliance of  Agency Systems  with the  Federal  Financial
    Management Improvement Act (FFMIA)

    701 A Example Audit Procedures for Testing Compliance with FFMIA

    701 B Summary Schedule of Instances of Noncompliance with FFMIA

      800 COMPLIANCE

    802 General Compliance Checklist

    803 Antideficiency Act

    808 Federal Credit Reform Act of 1990

    809 Provisions Governing Claims of the U.S. Government (31 U.S.C.
    37113720E) (Including the Debt Collection Improvement Act of 1996) (DCIA)

    810 Prompt Payment Act

    813 Civil Service Retirement Act, 5 U.S.C. Chapter 83

    814 Federal Employees Health Benefits Act, 5 U.S.C. Chapter 89

    816 Federal Employees' Compensation Act, 5 U.S.C. Chapter 81

    817 Federal  Employees' Retirement  System Act  of 1986  (FERS), 5  U.S.C.
    Chapter 84

    Contents -Part II - Tools

    900 SUBSTANTIVE TESTING

    902 Related Parties, Including Intragovernmental Activity and Balances 902
    A Example Account Risk Analysis for Intragovernmental Activity and

    Balances 902 B Example Specific Control Evaluation for Intragovernmental
    Accounts 902 C Example Audit Procedures for Intragovernmental and Other
    Related

    Parties' Activity and Balances 903 Auditing Cost Information 921 Auditing
    Fund Balance with Treasury (FBWT) 921 A Treasury Processes and Reports
    Related to FBWT Reconciliation 921 B Example Account Risk Analysis for
    Fund Balance with Treasury 921 C Example Specific Control Evaluation for
    Fund Balance with Treasury 931 Auditing Heritage Assets and Stewardship
    Land 941 Auditing the Statement of Social Insurance

      1000 REPORTING

    1001 Management Representations 1001 A Example Management Representation
    Letter 1002 Inquiries of Legal Counsel 1002 A Example Audit Procedures for
    Inquiries of Legal Counsel 1002 B Example Legal Letter Request 1002 C
    Example Legal Representation Letter 1002 D Example Management Summary
    Schedule 1003 Financial Statement Audit Completion Checklist 1005
    Subsequent Events Review

                                      SECTION 600

                                  Planning and General

      650 - Using the Work of Others

    .01 In many financial statement audits, the auditor uses the work and
    reports of other auditors and specialists that may include CPA firms,
    inspectors general ^[211]1 (IG), state auditors, and internal auditors.
    Specialists include actuaries and information technology (IT) personnel.
    The auditor may contract with a CPA firm to perform parts of an audit, or
    to perform the entire audit. The auditor expressing the opinion on the
    financial statements is usually "the principal auditor" as defined by AU
    543.02, but this is a matter of professional judgment.

    .02 FAM 650 provides guidance to auditors on designing and performing
    oversight and other procedures when using the work of other auditors and
    specialists. Various professional standards also 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;" ^[212]2 and AU 315 "Communications
    Between Predecessor and Successor Auditors." These standards have
    different requirements depending on whether the auditor is using the work
    of an independent auditor, an internal auditor, or a specialist.

    .03 In the federal environment, the auditor may use the work of other
    auditors and specialists in various situations. For example:

         o Audits of federal entity financial statements, either consolidated or
           individual bureaus, agencies, funds, or other components, by IGs or
           CPA firms in accordance with GAGAS (which includes U.S. GAAS) and OMB
           audit guidance.
         o CPA firms, IGs, or specialists engaged to do parts of an audit (for
           example, review IT systems controls, review actuarial calculations, or
           test specific accounts).
         o Reports on the processing of transactions by service organizations
           (i.e. SAS No. 70 reviews under AU 324).
         o Single audits or audits of federal funds provided to units of state
           and local governments performed by state auditors and CPA firms.
         o Work performed by internal auditors (or equivalent, such as a program
           review office or those performing A-123 internal control reviews).
         o Work performed by internal audit staff who provide direct assistance
           to the auditor.

    When IG audits are used by GAO as principal auditor of the U.S. government
    consolidated financial statements. For the GAO audit of the Bureau of
    Public Debt (BPD), GAO is the other auditor and the Treasury IG is the
    principal auditor when it includes BPD into the Treasury Department
    consolidation. ^2 The AICPA also issued Practice Alert 2002-02, Use of
    Specialists.

    .04 AU 543.13 states that in some circumstances the auditor may find 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. The determination of the extent of additional procedures, if
    any, to be applied rests with the auditor alone in the exercise of
    professional judgment and in no way constitutes a reflection on the
    adequacy of the other auditor's work.

    An auditor transmitting the other auditor's opinion is not a principal
    auditor; neither is the auditor expressing negative assurance on the other
    auditor's work. However, if the auditor assumes responsibility for the
    opinion on the financial statements on which the auditor reports without
    making reference to the audit performed by the other auditor, the
    professional judgment of the auditor must determine the extent of
    procedures to be undertaken.

    .05 FAM 650 provides guidance in making the judgments necessary for the
    auditor to use the work of others, including

         o the type of reporting (FAM 650.09-.10),
         o the evaluation of the other auditors' or specialists' independence and
           objectivity (FAM 650.11-.24),
         o the evaluation of the other auditors' or specialists' qualifications
           (FAM 650.25-.35), and
         o the auditor's determination of the level of review (FAM 650.36-.41 and
           FAM 650 A).

    .06 The auditor should coordinate with the other auditor whose work is to
    be used. In turn, the other auditor should determine the needs of the
    auditor who plans to use the work being performed so that the professional
    judgments exercised by both auditors can 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 federal entity) are likely to plan to use the work of other auditors of
    subsidiary entities (such as individual departments, agencies, bureaus,
    funds, or other components). This coordination can result in more economy,
    efficiency, and effectiveness of government audits and avoid duplication
    of effort.

    In addition, both auditors should coordinate throughout the audit so that
    the timing needs of the auditor and the other auditor are met. The auditor
    should provide instructions on audit procedures to be performed,
    materiality considerations, reporting format, and any other information
    deemed appropriate. The other auditor should perform the requested
    procedures in accordance with these instructions and report the findings
    solely for use by the auditor (AU 9543.03). The other auditor should also
    provide full and timely access to appropriate individuals and audit
    documentation for review by the auditor on an ongoing basis during the
    audit (GAGAS par. 4.23), although this work may not be completely
    reviewed.

    .07 In this coordination, the auditor should inform other auditors on how
    their work and report will be used. AU 543.07 indicates that if the
    auditor's report will name the other auditor, the principal auditor should
    obtain permission to do so and should present the other auditor's report
    together with its report. For CPA firms, this permission may be obtained
    as part of the contracting process. As a professional courtesy, the
    auditor generally should also provide other auditors with a draft of its
    report to avoid surprises before final issuance.

    .08 When there is a difference of opinion, the auditor should confer with
    the other auditor in an attempt to reach an agreement as to the procedures
    that would be necessary to satisfy both auditors' professional judgments.
    If both auditors are unable to reach agreement, see FAM 650.54-.56. FAM
    650 B contains example audit procedures for using the work of others,
    which depend on the professional 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 the other auditors and
    specialists will perform. Factors for the auditor to evaluate in deciding
    which type of reporting to use include the degree of assurance to provide,
    legal requirements, and cost-benefit considerations. The amount of
    resources required varies by type of report and generally increases in the
    order presented below.

    The auditor generally should decide the type of reporting in planning the
    engagement. The auditor generally should discuss type of reporting with
    the other auditors or specialists early in the audit. The auditor
    exercises professional judgment in making these decisions and should
    document the basis for the decisions. AU 504.03 indicates that an auditor
    is associated with financial statements when the auditor has consented to
    the use of its name in a report, document, or written communication
    containing the financial statements. The type of reporting will depend on
    the auditor's association with the report:

    a.
               No association with report. In this situation, the other auditors
               or specialists provide the report directly to the audited entity
               and/or to significant users. The auditor may use this method when
               procuring the audit but not acting as "the auditor." Examples are
               when there is no legal requirement for a separate audit report, or
               the user does not need a separate audit report, or a separate
               audit report would provide no additional information. When the
               auditor is required by law to perform the audit, the auditor
               should not use this option as the auditor is associated with the
               report.

    b.
               Association with report. In this situation, there are two possible
               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 was amended by SAS No. 113 to state "In all cases where
               an auditor's name is associated with financial statements, the
               auditor should clearly indicate the character of the auditor's
               work, if any, and the degree of responsibility the auditor is
               taking, in the auditor's report."

    Because the auditor did not perform the audit, the auditor should disclaim
    an opinion and should not express its concurrence with the other auditors'
    opinion. The auditor may use this approach when the auditor did not
    perform the audit but wants to issue a report or letter. The auditor may
    also want to expand the letter to highlight certain findings or
    information or to indicate that certain procedures were performed. See
    example 1 of FAM 650 C for wording for both types of transmittal letters
    which

         o Express no assurance. For this letter, the auditor issues a
           transmittal letter without reviewing the other auditors' audit
           documentation. In these situations, the transmittal should be clear as
           to the limitations of the work of the auditor who generally has the
           responsibility to monitor audit contracts, as applicable, to meet the
           requirements of the IG Act, CFO Act, or Accountability of Tax Dollars
           Act of 2002.
         o Express negative assurance. This letter indicates that the auditor
           reviewed the other auditors' or specialists' report and related audit
           documentation, inquired of their representatives, and found no
           instances where the other auditors did not comply, in all material
           respects, with U.S. GAAS or 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 will
    refer to the work of the other auditors (AU 543.01-.10). For [213]audits
    of federal entities, auditors may be designated by law. ^3 The auditor
    exercises professional judgment in making these decisions and should
    document the basis for the decisions. One consideration in deciding
    whether the auditor is the principal auditor is 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 the auditor has
    not audited.

    IGs are designated by the CFO Act to audit their agencies, but may use
    contract authority to perform the audits. Likewise, GAO is mandated by 31
    U.S.C. 331(e) to audit the U.S. government's consolidated financial
    statements.

    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
    principal auditor is reporting on and (2) the principal 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 that are organizationally independent [see FAM 650.14] and
    should not be used for internal auditors or specialists.)

    However, a reader of the report could question the basis for the principal
    auditor issuing the opinion because of the significant materiality and
    importance of the portion of the financial statements audited by the other
    auditors. In this case, the principal auditor should determine whether
    there is a need to issue a report that does not mention the other
    auditors' work, which may require additional work (see FAM 650.09 e).

    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 principal
    auditor needs or wants to provide more assurance than what is provided in
    the transmittal letter. 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 its opinion. In the absence of such a
    requirement, a report expressing concurrence is generally not
    cost-effective because of the resources required.

    Expressing concurrence means that the auditor would have reached the same
    opinion or conclusion had it done the audit. Therefore, the auditor should
    do the same level of work it would have done to take responsibility for
    the other auditor's work. 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.

    The auditor usually accomplishes this by reviewing the audit documentation
    of the other auditor, having discussions with entity management, and/or
    performing supplemental tests, (see example 2 in FAM 650 C for report
    wording).

    This approach may be used only for CPA firms or for other auditors who are
    organizationally independent (see FAM 650.14). The auditor should not use
    this report 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. The
    auditor also should not use this approach for internal auditors. AU 322.19
    states that the responsibility to report on the financial statements rests
    with the auditor and cannot be shared with internal auditors. ^[214]4

    e. The auditor issues a report that does not mention the other auditors'
    or specialists' work. In this situation, the auditor issues the example
    report in FAM 595 A and/or FAM 595 B (as if no other auditors or
    specialists were involved). This means the auditor takes responsibility
    for the other auditors' or specialists' work. (See FAM 650.09 c for a
    discussion of principal auditor issues.) The auditor may use this approach
    when the other auditors have done part of the audit. (This approach also
    may be used when the other auditors have done substantially the entire
    audit.) 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 use this approach if the auditor
    has sufficient knowledge of the entire entity and does additional work
    (see FAM 650.10).

    The auditor generally should accomplish this by reviewing the audit
    documentation, 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 specialists'
    work). GAO uses this approach in the audit of the consolidated financial
    statements of the U.S. government.

    .10 Table 650.1 presents an overview of the work the auditor generally
    should perform for each type of report or letter. "Yes" means that the
    auditor should perform some of that category of work. "No" means that the
    auditor need not perform that category of work. The extent of work in each
    category depends on the auditor's professional judgment. See FAM 650.36
    for discussion on the level of review.

    There may be situations where the auditor is asked to provide a separate
    opinion in addition to presenting the other auditors' report, or serves as
    the contracting officer's technical representative (COTR). In these
    situations, the auditor should follow the wording in FAM 595 A and/or FAM
    595 B, and should add the following in lieu of the introduction to the
    first paragraph on FAM 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, extent, and timing of the
    work, monitored progress throughout the audit, reviewed the audit
    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)."

           Table 650.1: Overview of Work Performed for Each Type of Reporting

                                                                    Hold
           Type of       Evaluate the  Evaluate the      Level of   discussions
          reporting         other      other auditors' review (FAM     and/or
                          auditors'    qualifications  650.36-.42)     perform
                         independence       (FAM                    supplemental
                             and         650.25-.35)                 tests (FAM
                         objectivity                                 650.43-.47)
                             (FAM
                         650.11-.24)
    No association   Noa            No              None         No
    with report
    (FAM 650.09 a)
    Auditor          Yes            Yes             Low or none  No
    transmittal
    letter expresses
    no assurance
    (FAM 650.09 b,
    first bullet)
    Auditor          Yes            Yes             Moderate or  No
    transmittal                                     low
    letter expresses
    negative
    assurance (FAM
    650.09 b, second
    bullet)
                        Yes            Yes             Low or none  No
    Report refers to
    the other
    auditors' report
    and indicates a
    division of
    responsibilities
    (FAM 650.09 c)
    Report concurs   Yes            Yes             High,        Yes for
                                                                    internal
    with the other                                  moderate, or auditors'
                                                                    work
    auditors' report                                low          (should
                                                                    include
    or does not                                                  supplemental
                                                                    tests);
    mention the                                                  yes for
                                                                    auditors'
    other auditors'                                              work for high
                                                                    level
    work (FAM                                                    of review; no
                                                                    for
    650.09 d and e)                                              auditor's
                                                                    work for
                                                                    moderate or
                                                                    low
                                                                    level of
                                                                    review

    a

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

        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 auditor, the auditor generally should update the previous
    evaluation. Under GAGAS, chapter 3, audit organizations and individual
    auditors should be free both in fact and appearance from personal,
    external, and organizational impairments to independence. 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 auditor may use a contracting
    process that is part of its organization or a procurement function within
    the entity to be audited. The auditor should determine whether the firm
    selected represented [in the statement of work (SOW) or request for
    proposal (RFP)] that it (and the assigned engagement team)

         o is independent and objective with respect to the audited entity;
         o will remain independent throughout the audit;
         o will disclose any independence issues discovered; and
         o will immediately notify the COTR if it considers submitting a proposal
           on any contracts involving the audited entity to permit evaluation of
           whether their auditors' independence could be impaired.

    Firms should be asked to describe in their proposals all work, including
    nonaudit services, they have done for the audited entity in the last
    several years. See GAGAS, chapter 3, and Government Auditing Standards:
    Answers to Independence Questions (GAO-02-870G, July 2002).

    The auditor generally should determine whether the SOW or RFP indicate
    that "The government will determine whether a firm is independent for the
    purpose of performing an audit of financial statements of the federal
    entity." This avoids a potential argument where, for example, the firm
    does substantial nonaudit work for the entity to be audited that the
    auditor views as a conflict. The technical evaluation panel should
    evaluate whether the nature and extent of nonaudit services or other
    factors causes an independence or objectivity issue, either in fact or in
    appearance. In this evaluation, the panel generally should determine
    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 The auditor generally should have a role in contracting for the CPA
    firm or specialist. ^[215]5 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, including

         o reading the SOW or RFP,
         o reviewing the proposal of the firm selected, and
         o 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 AICPA or the Public Company Accounting
    Oversight Board (PCAOB), as to the firm's professional reputation and
    standing.

    .14 For government auditors, the auditor should decide whether the other
    auditor is organizationally independent to report externally or whether to
    consider it as 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.
    The auditor generally should perform more extensive review and supervision
    when dealing with internal auditors. The auditor should obtain written
    representations from appropriate officials ^[216]6 of the government audit
    organization that to the best of their 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 auditor is free from external
    impairments and is organizationally independent (see GAGAS, chapter 3).

    The representation letter may indicate the general criteria for
    determining independence, such as "under the criteria in GAGAS." The
    auditor should obtain representations for the period of the financial
    statements to the date of the other auditors' report. Since the auditor
    decides on the independence and objectivity of the other auditors to plan
    its work, the auditor generally should obtain oral representations early
    in the audit and written representations at the end of the audit.

    .15 Government auditors may be presumed to be free from organizational
    impairments to independence when reporting externally to third parties if
    they are organizationally independent of the audited entity. Government
    auditors may meet the requirement for organizational independence in a
    number of ways. There is a presumption that a government auditor is

    5

    Under the CFO Act, if the IG is not doing the audit, it is required to
    determine the independent external auditor (CPA firm) that will do the
    work.

    6

    Obtaining a representation from an appropriate official of the audit
    organization is similar to the procedure for CPA firms under AU 543.10b.

    organizationally independent (GAGAS, chapter 3) if the auditor is assigned
    to

    a.
               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.
               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 government audit organization (GAGAS, chapter 3) meets one of the
    following criteria:

    a.
               directly elected by voters of the jurisdiction being audited;

    b.
               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.
               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.
               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 auditor or its head meets one of the above criteria, the
    auditor need not perform any procedures concerning organizational
    independence other than to obtain a representation letter from an
    appropriate official of the government audit organization as noted in FAM
    650.14 (see FAM 650.23 for tests of personal independence). However, if
    the auditor encounters evidence that the other auditor might not be
    organizationally independent, the auditor should determine the need for
    inquiries and other procedures, and then evaluate the results of these
    procedures.

    .18 In addition to the presumptive criteria, GAGAS recognizes that there
    may be other organizational structures under which a government audit
    organization could be free from organizational impairments. The auditor
    should determine whether these other structures provide sufficient
    safeguards to prevent the audited entity from interfering with the
    government auditor's ability to perform the work and report the results
    impartially. For the auditor to determine that the government audit
    organization is free from organizational impairments to report externally
    under a structure different from the ones listed above, the auditor
    (GAGAS, chapter 3) should have all of the following safeguards:

    a.
               statutory protections that prevent the audited entity from
               abolishing the government audit organization;

    b.
               statutory protections that require that if the head of the
               government audit organization is removed from office, the head of
               the federal entity 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 government audit organization's reports;

    e.
               statutory protections that require the government audit
               organization to report to a legislative body or other independent
               governing body on a recurring basis;

    f.
               statutory protections that give the government audit organization
               sole authority over the selection, retention, and dismissal of its
               staff; and

    g.
               statutory access to records and documents related to the federal
               entity, program, or function being audited, and access to
               government officials or other individuals as needed to conduct the
               audit.

    .19 If the auditor concludes that the government audit organization has
    all the safeguards listed in FAM 650.18, the auditor may determine that
    the governmental auditor is free from organizational impairments to
    independence when reporting externally. The auditor should document the
    statutory provisions in place that provide these safeguards.

    .20 When using the work of other government auditors that meet these
    requirements, the auditor should request a representation letter (see FAM
    650.14) from an appropriate official of the audit organization. The
    auditor should review this document and as necessary discuss it with
    appropriate officials of the audit organization, the external quality
    assurance reviewer, legal counsel for the audit organization, and the
    auditor's 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 auditor is organizationally independent to
    report internally. Such auditors are internal auditors. The Institute of
    Internal Auditors' (IIA), International 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
    federal entity. 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 determine the organizational status of the head of the
    audit organization. For the audit organization to be considered free from
    organizational impairments to report internally to management, the head of
    the audit organization (GAGAS, chapter 3) should meet all criteria:

    a.
               accountable to the head or deputy head of the government entity,
               or those charged with governance;

    b.
               required to report the results of the audit organization's work to
               the head or deputy head of the government entity and those charged
               with governance;

    c.
               located organizationally outside the staff or line management
               function of the unit under audit;

    d.
               accessible to those charged with governance; and

    e.
               sufficiently removed from political pressures to conduct audits
               and report findings, opinions, and conclusions objectively without
               fear of political reprisal.

    .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 audited entity 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 should 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.

    .25 After evaluating the other auditors' or specialists' independence and
    objectivity, the auditor should evaluate their 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, the auditor generally should evaluate
    qualifications through the contracting process, usually by using a
    technical evaluation panel to select a qualified firm. A firm submits
    resumes for its audit team members, demonstrates why its team is qualified
    to do the work, and submits its plan for doing the audit. Each CPA firm
    should submit its latest peer review report, letter of comments, and
    response to the peer review report. The firm should also agree to submit
    updated peer review reports during the period of the contract. If the peer
    review report was issued more than three years earlier, the evaluation
    panel may obtain documentation relating to the internal quality control
    policies and procedures of the selected firm, or read the firm's
    inspection report and

    [217]7

    response.

    A CPA firm may also be asked to submit its latest public inspection report
    prepared by the PCAOB, but these reports pertain to audits of publicly
    traded companies and related quality controls. However, to the extent they
    raise issues about quality controls or methodology, they may be applicable
    to audits of federal entities. ^[218]8

    .27 Where the auditor did not participate in the contracting process, the
    auditor should determine how the qualifications of a firm were evaluated.
    For example, did the technical evaluation panel review:

         o Resumes of the team members?
         o The audit approach?
         o The peer review report and related letter of comments (if any)?
         o 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,

    ^7 Some CPA firms consider internal inspection reports as proprietary
    documents not subject to auditor

    review. This issue can be resolved by either allowing the auditor access
    to inspection reports or providing

    the auditor with a summary or representation about inspection results as a
    condition of the contract. Further information on the PCAOB inspection
    report process is available at www.pcaobus.org.

    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 2 years ago), the auditor generally need not perform
    further review of the audit organization's qualifications.

    .29 Where the peer review report is not recent, the auditor generally
    should review the results of the audit organization's internal inspection
    program for any new quality control issues. The inspection generally
    should include reviews of audit 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,
    the auditor generally need not perform further review of the audit
    organization's qualifications.

    .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 and inspection results in determining whether quality
    controls have improved since the peer review. The auditor should evaluate
    the effect of remaining weaknesses in determining the nature and extent of
    procedures to be performed.

    .31 Where the latest peer review was completed more than 3 years earlier
    and there is no inspection program, the auditor should obtain an overview
    of the important quality control policies and procedures of the other
    auditor. The overview generally should cover the functional areas of

         o independence, integrity, and objectivity (FAM 650.11-.24);
         o personnel management (includes recruiting and hiring, advancement,
           professional development and training, and assigning personnel to
           assignments);
         o audit performance (includes supervision and consultation);
         o acceptance and continuance of assignments; and
         o monitoring programs.

    .32 The auditor may obtain this information through interviews of the
    other auditor's management and staff and through reading its quality
    control summary document. The auditor also may read the other auditor's
    manuals and other guidance for conducting audits.

    .33 In addition to evaluating the other auditor's qualifications, the
    auditor also should evaluate the overall qualifications of the team
    assigned to do the work. The auditor may review resumes of key team
    members to accomplish this. The auditor should review the specific
    education, training, certifications, and experience of key team members.
    In evaluating qualifications, the auditor should review the specific role
    of staff members on the job. When the auditor has knowledge of
    qualifications from prior experience for key team members, the auditor
    should inquire about their experience in the time since the last audit.

    .34 Where the auditor is not satisfied as to the qualifications of the
    other auditor, the auditor generally should perform a more detailed review
    of the documentation and/or perform supplemental tests of key line items
    (see FAM 650.36).

    The auditor should document the work performed and the conclusions reached
    as to the other auditors' qualifications. The documentation should
    indicate the auditor's conclusion as to whether the other auditors are
    qualified to perform the tasks required and the basis for that conclusion.
    The auditor should consult with the reviewer if there are questions about
    the other auditors' qualifications.

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

         o contract with another firm;
         o ask the other auditors to substitute more highly qualified or
           objective staff members;
         o do the audit without using the other auditors' work, treating any work
           done by the other auditors as prepared by the audited entity;
         o 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
         o issue a disclaimer of opinion.

        Planning the Review and Testing of Other Auditors' or Specialists' Work

    .36 After evaluating the other auditors' or specialists' independence,
    objectivity, and qualifications, the auditor should develop an audit
    strategy and audit plan for reviewing and, if necessary, testing the work
    done. In this strategy, the auditor generally should document the level of
    review as high, moderate, or low. In some situations, the auditor should
    perform significantly more work than the work shown for the high level to
    include performing significant supplemental tests. In other 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.

    The auditor should reevaluate the audit strategy and plan as the work
    progresses. If serving as the COTR, the auditor should determine whether
    the terms and conditions of the contract are complied with. In addition,
    the IG Act requires that the IG determine whether work performed by
    nonfederal auditors complies with GAGAS. The level of review is a
    professional judgment the auditor generally should make for each material
    line item considering the following factors:

    a.
               The type of report or letter the auditor will issue, as less
               review is needed for a transmittal letter than for reports in
               which the auditor takes responsibility for the other auditors'
               work (see FAM 650.10).

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

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

    d.
               The other auditors' independence, objectivity, and integrity (both
               for the audit organization and its audit team) are impaired, as
               the level of review increases as independence, objectivity, and
               integrity decreases.

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

    f.
               The auditors' prior experience with the other auditors (both for
               its audit organization and its audit team), as the level of review
               tends to decrease as the auditor's confidence increases from
               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, as the
               level of review increases as the line item becomes more material.

    h.
               The risk of material misstatement, including the risk of material
               fraud for the line item and assertion in the financial statements
               the other auditors are auditing, as the level of review increases
               as the risk of material misstatement increases.

    .37 If the other auditors' work has 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 also issue a
    disclaimer of opinion, unless the financial statements the other auditors
    audited are not material to the financial statements the auditor is
    auditing. The auditor generally need not perform extensive procedures to
    be satisfied that this disclaimer is appropriate. Additionally, the
    auditor generally need not hold discussions with entity management and/or
    perform supplemental tests in this situation, and may limit the review of
    documentation to summary documentation. Thus, the level of review is
    usually low or no review (see FAM 650.10). However, the auditor may do
    additional work to learn about the entity, to help the other auditor plan
    future audits, or to help entity management correct the causes of the
    scope limitation.

    .38 If the other auditors' work had a scope limitation that results in a
    qualified opinion, the auditor generally should perform 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 FAM 650.37, 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 FAM 650.10). However, the
    auditor may do additional work to learn about the entity, to help the
    other auditor plan future audits, or to help entity management correct the
    causes of the scope limitation.

    .40 If there is a scope limitation on the auditor's work that results in a
    qualified opinion, the auditor should perform a similar amount of work as
    for an unqualified opinion.

    .41 FAM 650 A illustrates the audit work that the auditor generally should
    perform for each level of review on each significant line item, as well as
    what to retain in audit documentation.

        Review of Audit 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
    professional judgment based on the factors in FAM 650.36.

         o For a low level of review, the auditor may limit the review of
           documentation to key summary planning and completion documentation.
         o For a moderate level of review, the auditor generally should review
           more of the other auditors' or specialists' documentation, especially
           those evidencing important decisions. For financial statement audits,
           this includes the audit strategy and audit procedures (or equivalent
           documents); the ARA (or equivalent documentation) for significant
           accounts; the SCE (or equivalent documentation) for significant
           applications; the documentation for accounts, estimates, and judgments
           with high risk of material misstatment; the analytical procedures; the
           audit completion checklist at FAM 1003 (or equivalent documentation);
           the audit summary memorandum; and the summary of uncorrected
           misstatements (see FAM 595 C).
         o For a 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 for a High Level of Review

    .43 AU 543.13 states that "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." The auditor may interpret "in some circumstances"
    to mean when the level of review is high. Thus, where the level of review
    is high, the auditor generally should (1) review audit documentation, and

    (2) hold discussions with audited entity 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
    supported by sufficient appropriate evidence. For example, the auditor
    generally should discuss key items with entity 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. For key items that have high risk of material misstatement,
    discussions with entity management may not provide sufficient evidence,
    and the auditor should perform supplemental tests.

    .44 The auditor may perform supplemental tests on a selection of the other
    auditors' work, additional tests of the accounting records, or both. To
    perform supplemental tests, the auditor should obtain access to the
    entity's personnel and its 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 perform supplemental tests in
    other situations to learn about the entity, to help the other auditor plan
    future audits, or to help entity management correct problems.

    .45 Where the other auditor is an internal auditor, the auditor should
    perform supplemental tests. The extent of this testing depends on
    circumstances and should be sufficient for the auditor to make an
    evaluation of the overall quality and effectiveness of the internal
    control work done by the internal auditor (see AU 322.26).

    .46 The auditor generally should limit discussions with entity management
    and/or supplemental tests to line items that have a high risk of material
    misstatement. This is especially true 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 tested by
    the other auditor, particularly any that appear to be exceptions, in order
    to determine whether they were appropriately evaluated in formulating an
    opinion. The auditor generally should plan to perform supplemental tests
    while the other auditors are at the entity and have access to records, as
    this can minimize the inconvenience for everyone.

    .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 determine the need to
    obtain another specialist.

        Subsequent Events Review and Dating of the Auditor's Report

    .48 The auditor should date the report when the auditor has obtained
    sufficient appropriate audit evidence to support the opinion on the
    financial statements (SAS No. 103.23 and SAS No. 113.07). If the other
    auditors' or specialists' report is dated earlier and the auditor's report
    does not mention the other auditors' report or concurs with the other
    auditors' report as in example 2 of FAM 650 C, the auditor should update
    the subsequent events review to the date of the auditor's report.

    The auditor may ask the other auditors to update the subsequent events
    review to the required date, or the auditor may update the subsequent
    events review. However, since this requires additional work, the auditor
    should attempt to complete audit work when the other auditors complete
    their work. The auditor should evaluate this issue and coordinate with the
    other auditor when planning the audit. The auditor need not update the
    subsequent events review when the auditor issues a transmittal letter, as
    in example 1 of FAM 650 C.

        Staffing the Review of the Other Auditors' or Specialists' Work

    .49 When staffing the review, the auditor should determine the extent to
    which the other auditors or specialists have reviewed their work. The
    other auditor should have performed at least one level of review for all
    audit work, with more material or sensitive areas having multiple reviews.
    In some cases, before the audit is complete, the other auditor may not
    have completed all levels of review, particularly at its top level, and
    may be reluctant for the auditor to access the audit documentation before
    these reviews are done.

    The auditor's staff reviewing the work generally should have enough
    experience in financial statement auditing to understand the professional
    judgments that need to be made and to interact with the higher levels of
    the other auditor. An assistant director or a senior manager who has
    significant experience in performing and reviewing financial statement
    audit work should perform most of the review. Less qualified staff members
    may perform supplemental tests when supervised by more qualified auditors.

    The assistant director, audit manager, or auditor-in-charge should review
    the documentation of any supplemental tests performed by less experienced
    staff members. Except for key areas or issues, the audit director may
    designate another qualified auditor to perform the primary review of audit
    documentation prepared by the assistant director.

    .50 When the other auditors' work involves the review of IT controls, an
    IT specialist should participate in the auditor's review. This team should
    determine if IT controls were adequate, audit work was properly
    documented, and related audit objectives were achieved.

        Evaluating the Work of Other Auditors or Specialists

    .51 After the auditor has completed the review of the other auditors' or
    specialists' work, and, if necessary, any supplemental testing, the
    auditor should determine whether the work is sufficient and acceptable for
    the auditors' use. The auditor should document this evaluation.

    .52 Sometimes, other auditors use methodologies or audit approaches that
    are different from those the auditor would have used. Auditing requires a
    great deal of professional judgment and there often are alternative ways
    to achieve audit objectives. Many CPA firms have developed, at
    considerable expense, proprietary audit methodologies to use on a wide
    range of public and private sector clients. Many of these audit
    methodologies utilize electronic technology where the entire audit
    documentation exists on a CD ROM. Thus, the auditor should understand the
    other auditors' audit methodology and basis for the nature, extent, and
    timing of audit procedures. This may require obtaining permission to use
    proprietary software to review the audit work performed. Additionally,
    where the CPA software is retained, the auditor should develop a process
    to maintain the operability of the software to access the audit
    documentation in the future.

    The auditor should evaluate whether sufficient appropriate evidence
    ^[219]9 has been obtained to meet the audit objectives, particularly for
    line items with a high risk of material misstatement. If the auditor has
    concerns about whether the other auditors' work provides sufficient
    appropriate evidence, the auditor generally should discuss the matter with
    the audit director and the reviewer before formally discussing the issue
    with the other auditors.

    .53 The auditor should determine the significance of the test results to
    the audit of the financial statements the auditor is reporting on. As an
    example, the other auditors may have selected a nonstatistical sample
    and/or the sample size may be smaller than the sample size the auditor
    would have selected. The auditor may decide that this provides sufficient
    evidence in an area that is less material or has low or moderate risk of
    material

    In accordance with AICPA SAS No. 106, Audit Evidence, sufficiency is the
    measure of the quantity of evidence. Appropriateness is the measure of the
    quality of audit evidence, that is, its relevance and reliability in
    providing support for, or detecting misstatements in, the classes of
    transactions, account balances, and disclosures and related assertions.
    SAS No. 106 supersedes SAS No. 31, Evidential Matter, and will be included
    in the AICPA Professional Standards at AU 326. SAS No. 106 is effective
    for audits of financial statements for periods beginning on or after
    December 25, 2006.

    misstatement. However, if the risk of material misstatement is high, the
    auditor may conclude that sufficient appropriate 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 this additional
    testing is not done, the auditor should determine the effect on the
    auditor's report of the scope limitation. Since reaching this conclusion
    after the work is performed is inefficient, especially when the level of
    review is high, the auditor generally should coordinate or concur with
    major planning decisions of the other auditor 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 evaluate the other
    auditors' work as well as any other evidence or testing necessary to
    determine the appropriate conclusion.

    .55 The auditor should discuss any issues of disagreement with the other
    auditors to attempt to resolve the disagreement. The auditor should
    attempt to resolve professional disagreements early to reduce confusion
    that may arise from differing auditor views. Once identified, the auditor
    should discuss the issues with the other auditors to resolve them in a
    timely manner and before the completion of the audit.

    .56 If the auditor does not reach agreement with the other auditors, the
    auditor should determine 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 an appropriate opinion. For 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 generally should contain the items listed in FAM
    650 A under "documentation," either electronically or in hard copy.

    .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 There is a difference between the auditor's responsibilities to review
    the documentation of other auditors and what the auditor may copy and
    retain from that documentation. The auditor uses professional judgment in
    deciding which of the other auditors' or specialists' documents to copy
    and retain. However, many audits utilize electronic technology to retain
    documentation for the entire audit on a CD-ROM. The auditor may cite this
    documentation as part of the review to include any supplemental testing
    performed on the other auditors' work. The auditor may print out any
    documents as necessary.

    .60 The auditor may 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), audit strategy,
    audit procedures, ARA and SCE forms (or equivalent), trial balance or lead
    schedules, management representation letter, and attorney representation
    letter. Auditors often find it helpful to keep copies of documents (either
    electronically or in hard copy) in case questions are raised in review but
    not to include those copies in the audit documentation unless they are
    needed to document the work performed.

    The auditor should retain documents in accordance with the contract or
    other legal requirements, but not less than 5 years from the report
    release date (SAS No. 103.32). Audit procedures may indicate which
    documents to retain. The auditor may not discard documents after 60 days
    from the report release date (SAS No. 103.27-.30). In documenting the
    review, auditors may indicate the document number or index number used by
    the other auditor in order to locate the document at a later date.

    Ownership and confidentiality of audit documentation is determined by
    contract and legal requirements (see SAS No. 103.31).

        Using Internal Audit Staff to Provide Direct Assistance to the Auditor

    .61 Sometimes, the auditor or the audited entity requests that internal
    auditors provide direct assistance to the auditor. Before this is done,
    the auditor should be 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, such as possible accounting and auditing
    issues."

    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 Federal Entity Specialists

    .62 Many federal entities have actuaries, security specialists,
    statistical specialists, and other specialists whose work the auditor
    would like to use. However, unless these specialists are part of an entity
    that is organizationally independent or are under contract to such an
    entity, the auditor should evaluate their work as the work of an employee
    of the entity under audit. The auditor should use the specialists of other
    auditors 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, an
    IG may hire a CPA firm to perform an audit of a federal entity's financial
    statements. The IG may issue a report concurring with the firm's report or
    a letter transmitting the firm's report. GAO auditors may then use the
    work of the IG as part of the consolidated audit of the U.S. government.

    .64 When there are multiple levels of other auditors, each audit
    organization should follow the guidance in FAM 650. IG auditors should
    evaluate the independence (see FAM 650.11-.24) and qualifications of the
    CPA firm (see FAM 650.25-.35); should review the audit documentation (see
    FAM 650.42); and may need to have discussions with entity management
    and/or perform supplemental tests of key accounts depending on the level
    of review deemed appropriate (see FAM 650.43-.47).

    GAO auditors 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 FAM 650.25) and the qualifications
    of the IG team doing the monitoring of the CPA firm. GAO auditors should
    also review the IG auditor's documentation of its review of the CPA firm
    work and may perform supplemental tests as deemed necessary. If GAO
    auditors find that the IG auditor has completed and documented adequate
    work, including discussions with entity management and/or supplemental
    tests, further discussions and/or supplemental tests would be quite
    limited, perhaps a walk-through of work done in areas with high-risk of
    material misstatement. Often, GAO auditors will attend fewer meetings than
    the IG auditor attends and would concentrate the review on the IG
    auditor's documentation. GAO auditors may then issue a report on the
    financial statements.

    .65 Because of the potential for inefficiency, there generally should be
    close coordination between the various auditors. The IG and GAO may
    perform the review jointly. Sometimes, a memorandum of understanding may
    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 of the audit).

                                                   Procedures
    Phase of the audit     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 may be asked to evaluate an
    audit done by a CPA firm. While AU 543, 322, and 336 are not directed
    toward these situations, the guidance in FAM 650 is helpful in planning
    and reporting on these assignments.

    650 A - Summary of Audit Procedures and Documentation for Review of  Other
    Auditors' Work

    650 A - Summary of Audit Procedures and Documentation for Review of  Other
    Auditors' Work

      650 B - Example Audit Procedures for Using the Work of Others

    These example procedures are appropriate when using the work of other
    auditors or the work of specialists to perform a full or partial audit of
    financial statements and are applicable to GAO financial statement audits.
    Auditors may use these procedures or a monitoring tool for financial
    audits developed by the Federal Audit Executive Council, a subcommittee of
    the President's Council on Integrity and Efficiency that can be found at
    [220]www.ignet.gov/pande/faec/fsan0906.xls.

    As stated in FAM 650.08, these procedures depend upon the professional
    judgments that the auditor makes. The auditor should tailor the procedures
    to the circumstances and the planned level of review (high, moderate, or
    low) as discussed in FAM 650.36. The auditor should modify or add
    procedures as necessary, and delete them if not applicable. When other
    auditors or specialists have done only part of an audit, the auditor may
    delete many of the procedures below. The auditor may also delete
    procedures for the low level of review or when the auditor plans to issue
    only a transmittal letter as discussed in FAM 650.09 b.

    The audit procedures are presented in three sections: (1) evaluating
    independence, objectivity, and qualifications for CPA firms and
    specialists; (2) evaluating independence, objectivity, and qualifications
    for government audit organizations; and (3) monitoring the work (for all
    types of other auditors and for specialists). The auditor should use the
    applicable one of the first two sections and the third section. The
    auditor generally should use a separate form for each other auditor or
    specialist.

    Entity:________________________________________________________________

    Job code:_____________________________________________________________

    Period of audit:________________________________________________________

                               Step                          Done by/date W/P ref
    1. EVALUATING INDEPENDENCE, OBJECTIVITY, AND
    QUALIFICATIONS FOR CPA FIRMS AND SPECIALISTS General
    1. Read the statement of work or request for proposal
    to determine whether this contracting document
    provides sufficient background on the audited entity
    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.
    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 determine 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. Review the selected firm's peer review report,
    letter of comments, and response letter. If the peer
    review report was issued more than three years
    earlier, obtain documentation relating to the firm's
    internal quality control policies and procedures or
    review the firm's inspection program.
    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.

                               Step                          Done by/date W/P ref
    2. EVALUATING INDEPENDENCE, OBJECTIVITY, AND
    QUALIFICATIONS FOR GOVERNMENT AUDITORS Independence
    And Objectivity: 1. For all government audit
    organizations, obtain written representation from an
    appropriate official that the organization and its
    individual auditors are independent of the entity
    being audited.
    2. Determine whether the government audit
    organization meets ONE of the criteria in FAM 650.15,
    or the head meets ONE of the criteria in FAM 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
    the criteria met and document the evaluation of any
    other evidence obtained. (Go to step 6.)
    3. If the government audit organization (or its head)
    does not meet any of the criteria in step 2,
    determine whether it meets ALL of the criteria in FAM
    650.18.
    4. Review the government audit organization's
    documentation of how it meets the requirements of
    step 3. Discuss with an appropriate official of the
    organization and consider discussions with peer
    control reviewer, legal counsel for the organization,
    and auditor's legal counsel. (Go to step 6.)
    5. If the government 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. For the audit organization to be
    considered free from organizational impairments,
    determine if the head of the audit organization meets
    all of the criteria indicated in FAM 650.21.

                               Step                          Done by/date W/P ref
    6. For government auditors, obtain an understanding
    of the organization's policies to enhance the
    objectivity of individual auditors as discussed in
    FAM 650.23, including  o policies to prohibit
    auditors from auditing areas where relatives are
    employed,  o 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  o policies to
    require representations as to objectivity and lack of
    conflicts of interest from each auditor.
    7. Prepare a memorandum documenting work performed
    and conclusions reached as to government audit
    organization's independence and objectivity.
    Qualifications: 8. Read the latest peer review
    report, letter of comments, and the audit
    organization's response as discussed in FAM 650.28.
    Note the date of the report and whether it is
    unqualified. If the 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 as discussed in FAM 650.29.
    Note the date of the report and whether it is
    unqualified. If the inspection is recent (usually in
    the past year) and unqualified, go to step 12.
    10. If the organization has not had a recent peer
    review or inspection as discussed in FAM 650.31,
    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 the reviewer on the potential effect of using
    work with no recent peer review or inspection 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 as
    discussed in FAM 650.30. Review the organization's
    action plan for strengthening its quality control
    system. Evaluate the effect of remaining weaknesses
    in determining the level of review.

                                  Step                             Done   W/P ref
                                                                  by/date
    12. Inquire how the government audit organization
    determined staffing of the audit. Evaluate the overall
    qualifications of the team performing the work as
    discussed in FAM 650.33. Review resumes for key team
    members and consider:
    o educational level, professional certifications, and
    professional experience;
         o continuing professional education, especially training
    and current knowledge in the type of work done;
    o supervision and review of work;
    o 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
    o quality of documentation, reports, and
    recommendations.
    13. As discussed in FAM 650.35, if the auditor has
    significant
    concerns about the government audit organization or its
    team's objectivity or qualifications, the auditor, in
    developing the audit plan, may either
         o ask the other auditors to substitute more objective or
    highly qualified staff members;
    o do the work, treating any work done by the other
              auditors as prepared by the audited entity;
    o 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
    o issue a disclaimer of opinion.

                               Step                          Done by/date W/P ref
    3. MONITORING THE WORK (FOR ALL TYPES OF OTHER
    AUDITORS AND SPECIALISTS) 1. As discussed in FAM
    650.36, develop a strategy and 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 ALL LEVELS
    OF REVIEW)  o Review the entity profile.  o Review
    the audit strategy or equivalent document and audit
    plan. (FOR MODERATE AND HIGH LEVEL OF REVIEW)  o
    Attend entrance meeting and key planning meetings.  o
    Review the determination of planning materiality and
    design materiality.  o Have an IT specialist
    participate with the auditor in reviewing the
    information resource management background
    information and the documentation for review of
    general and application controls.  o Document line
    items and applications to be reviewed.  o For each
    such line item, review the Account Risk Analyses, the
    Specific Control Analyses, the cycle flowcharts, the
    cycle memoranda, the determination of tolerable
    misstatement, and the audit plan or equivalent
    documents.
    3. Monitor the execution of the audit for reports
    following example 2 of FAM 650 C or FAM 595 A and/or
    FAM 595 B WHERE LEVEL OF REVIEW IS HIGH.  o Attend
    key meetings, especially those discussing highrisk
    areas, significant estimates and judgments, fraud
    brainstorming, and the other auditors' conclusions.
    o Discuss key items with audited entity management,
    especially significant estimates and judgments.  o
    Perform supplemental tests of the accounting records:
    -- Generally for high risk and material line items,
    especially in areas involving estimates and judgments
    or ones which users rely on extensively. -- Generally
    while the other auditors are at the audited entity
    location and have access to the records.

                               Step                          Done by/date W/P ref
             -- 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.
    4. Monitor the completion of the audit (items with *
    are usually not necessary for LOW level of review) :
    o *Review the overall analytical procedures.  o
    *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?)  o *Determine whether the subsequent
    events review was updated to the date of the
    auditor's report.  o Review the audit summary
    memorandum, conclusions about line items, and the
    summary of uncorrected misstatements.  o *Review the
    audit completion checklist (or equivalent document).
    o Review the management representation letter and the
    legal representation letter.  o *Attend key exit
    conference(s).  o Read the other auditors' report,
    the financial statements, the notes, the other
    accompanying information, and management's response.
    5. Prepare a summary memorandum.
    6. Write the auditor's report or transmittal letter.

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      660 - Agreed-Upon Procedures

    .01 In an engagement to apply agreed-upon procedures, a client engages an
    auditor to perform specific procedures on a subject matter and report on
    the results to assist users in evaluating a subject matter or an
    assertion. Agreed-upon procedures should be performed in accordance with
    GAGAS which incorporates the financial audit and attestation standards
    established by the AICPA. The auditor should read appropriate sections of
    the AICPA Standards for Attestation Engagements (SSAE), specifically AT
    101, Attest Engagements, and AT 201, Agreed-Upon Procedures Engagements,
    and thoroughly understand them before performing agreedupon procedures.

    .02 An agreed-upon procedures engagement may be applied to a variety of
    subject matters. 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:

         o compare the Retirement, Health Benefits, and Life Insurance
           Withholdings/Contributions and Supplemental Semiannual Head Count
           Report Submitted to the Office of Personnel Management with the
           entity's payroll records and general ledger; (refer to OMB audit
           guidance for additional information);
         o 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); (refer to OMB audit guidance for additional
           information);
         o 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;
         o 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
         o 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, extent, and timing of agreed-upon procedures
    also may differ. Therefore, the users, and not the auditor, assume the
    responsibility for the sufficiency of the 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, extent, and timing of agreed-upon
           procedures
           to be performed. The auditor may document this understanding using an
           engagement letter to the users, an example of which is provided in FAM
           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 entity 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 (such as 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 may nonetheless be a useful means of documenting the responsible
    entity's representations. FAM 660 B provides 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:

         o disclose in the report the inability to obtain representations from
           the responsible entity,
         o withdraw from the engagement, or
         o change the engagement to another form of engagement (such as to 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. The documentation should contain
    sufficient information to enable an experienced auditor having no previous
    connection with the engagement to ascertain from the documentation the
    nature, extent, timing, and results of procedures performed and the
    evidence that supports the auditors' agreed-upon procedures report,
    including its sources and the auditors' conclusions.

    .11 Although the quantity, type, and content of documentation varies with
    the circumstances, it should be sufficient to demonstrate that the work
    was adequately planned and supervised and the evidential matter that
    provides a reasonable basis for the report as discussed in GAGAS chapter
    6.

    .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. FAM
    660 C provides 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 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 660
    D.

    .14 The auditor should report all results arising from application of the
    agreedupon 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 at FAM 660 A. 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:

         o stipulated facts, assumptions, or interpretations (including the
           source);
         o description of the condition of records, controls, or data to which
           the procedures were applied;
         o explanation that the auditor has no responsibility to update the
           report; and
         o 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.

    Examples of appropriate/inappropriate description of findings
                                            Description of findings
    Procedures agreedupon         Appropriate              Inappropriate
    Based on the total tax  Recomputed amounts for   Nothing came to our
    liability, select and   the selected excise tax  attention as a result of
    recompute the 50        returns agreed with the  applying this procedure.
    largest excise tax      amounts in the certified
    returns from the        audit file.
    quarter ended September
    30, 20XX, and compare
    these amounts with the
    certified audit file.

    Examples of appropriate/inappropriate description of findings
                                              Description of findings
    Procedures agreedupon             Appropriate           Inappropriate
    Select a random sample of   Revenue receipts        The revenue receipts
    45 Treasury SF-224          selected randomly from  approximated the
    reconciliations; determine  the monthly Treasury    amount shown in the
    if XYZ reported revenue     SF-224 reconciliation   Treasury FMS records.
    receipts were properly      process were properly
    classified and reconciled   classified and agreed
    to Treasury FMS records.    with Treasury FMS
                                   records.
    Examine personnel files of  Thirty of the selected  Some of the personnel
    40 individuals randomly     files contained a       files did not contain
    selected from the           current and approved    a current and approved
    timekeeping records for the Notification of         Notification of
    year; determine if all the  Personnel Action. Ten   Personnel Action.
    selected files contain a    files did not contain a
    current and approved        current and approved
    Notification of Personnel   Notification of
    Action (SF-50).             Personnel Action (list
                                   and identify
                                   exceptions).

                                  Other Report Issues

    .19 The report should be addressed to the users who have agreed upon the
           procedures to be performed (see FAM 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 the engagement may be
           stated in the report (such as "We completed the agreed-upon procedures
           on [date].").
    .20 Entity comments should be obtained from the entity responsible for the
           subject matter. If time constraints present problems, oral comments
           may
           be obtained and documented in a memo.

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                                      SECTION 700

                                    Internal Control

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                                      SECTION 800

                                       Compliance

      802 - General Compliance Checklist

    .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
    executive departments, agencies and government corporations to test for
    (see FAM 295.01 H) and other laws of general applicability auditors may
    consider during federal financial audits (see FAM 295.02 H). 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 auditor generally should complete the General Compliance Checklist
    (Form 802), or equivalent, for federal financial audits. With the
    exception of the Antideficiency Act which has no materiality limit, if an
    auditor considers an individual law to have a direct and material effect
    on the financial statements it is significant for purposes of compliance
    testing and the auditor should complete the related compliance supplement.
    The auditor should complete compliance supplements only for laws required
    to be tested (FAM 802.06) and for other laws (FAM 802.07) 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 have a direct and material effect on the financial
    statements for purposes of testing compliance, as discussed in FAM 245.
    The auditor should indicate whether each law meets the criteria for direct
    and material by placing a check mark in the appropriate column (yes or
    no). As noted in FAM 295 H, auditors are required to test certain laws and
    may also test for other laws if they have determined they are direct and
    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.

    .06 Laws  required  for  testing  (if  applicable)  ^[221]1  contained  in
    supplements to the General Compliance Checklist (Form 802) are:

                                Law                               Supplement
                                                                    number
    Antideficiency Act                                           FAM 803
    Federal Credit Reform Act of 1990 (FCRA)                     FAM 808
    Provisions Governing Claims of the U.S.                      FAM 809
    Government as provided primarily in 31 U.S.C.
    3711-3720E (Including the Debt Collection
    Improvement Act of 1996 (DCIA)
    Prompt Payment Act                                           FAM 810
    Pay and Allowance System for Civilian Employees              FAM 812
    as Provided Primarily in Chapters 51-59 of Title 5,
    U.S. Code

    .07 Other frequently encountered laws contained in supplements to the
    General Compliance Checklist (Form 802) that the auditor may test are:

                                Law                               Supplement
                                                                    number
    Civil Service Retirement Act                                 FAM 813
    Federal Employees Health Benefits Act                        FAM 814
    Federal Employees' Compensation Act                          FAM 816
    Federal Employees' Retirement System Act of                  FAM 817
    1986

    ^1 FFMIA is discussed in FAM 701.

    Entity _________________________________________________________________ Period
          of financial statements ____________________________________________

        Job code _______________________________________________________________

                               Description of Law                         Yes  No
    Civil Service Retirement Act,
    5 U.S.C. Chapter 83
    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 determined to be significant?
                                                        Preliminary Final
    Expense for retirement
    contributions Planning materiality
    If yes, complete compliance supplement FAM 813.
    Federal Employees Health Benefits Act,
    5 U.S.C. Chapter 89
    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
    determined to be significant?
                                                        Preliminary Final
    Expense for health insurance
    Planning materiality
    If yes, complete compliance supplement FAM 814.

                              Description of Law                         Yes  No
    Federal Employees' Compensation Act (FECA),
    5 U.S.C. Chapter 81
    This law provides for the compensation of employees injured
    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 FECA
    otherwise determined to be significant?
                                                       Preliminary Final
    Expense for Compensation
    Fund claims Planning materiality
    If yes, complete compliance supplement FAM 816.
    Federal Employees' Retirement System Act of 1986
    (FERS), 5 U.S.C. Chapter 84
    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 FERS
    Act for the audit period exceed planning materiality or are
    provisions of the FERS Act otherwise determined to be
    significant?
                                                       Preliminary Final
    Expense for retirement
    contributions _ Planning materiality _
    If yes, complete compliance supplement FAM 817.

        Instructions For Compliance Supplements

    .08 Each compliance supplement in FAM 803-817 consists of (1) a compliance
    summary, (2) a compliance audit program, and (3) notes.

    Compliance Summary Compliance Audit Program

    .09 For each law identified for compliance testing on the General
           Compliance
           Checklist, the auditor generally should complete the related
           compliance
           summary or prepare equivalent documentation. 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.
    .10 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.
    .11 The second column contains the objective related to the specific
           provision
           to be used for both compliance control and compliance testing.
    .12 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.
    .13 The fourth column is used to indicate (Yes or No) whether the control
           activity is information technology (IT) system related as described in
           FAM
           270.04. IT system controls are those the effectiveness of which
           depends on
           computer processing. They can generally be classified into general,
           application, and user controls. Testing of IT system controls
           generally
           should be performed with assistance from an IT specialist.
    .14 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.
    .15 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 sixth and last column of the Compliance Summary along
           with a reference to the supporting documentation.

    .16 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 in column 1. 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 coordinate with that other testing and
    design multipurpose tests. For example, payroll compliance testing could
    be performed using multipurpose tests of payroll controls and/or
    substantive payroll testing.

    The auditor should initial and date in column 2 of the compliance audit
    program when the procedure is performed. A reference to the documentation
    recording the work performed for each step should be included in the third
    and last column of the compliance audit program.

    Notes

    .17 Notes are provided for each compliance supplement to assist the
    auditor in understanding criteria, definitions, exemptions, and
    restrictions of law. The notes also provide guidance to the auditor in
    testing and evaluating controls to achieve the compliance objective.

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    Compliance 803 - Antideficiency Act

      803 - Antideficiency Act

    Note: Complete this compliance summary or prepare equivalent documentation
    as provisions  of  the  Antideficiency  Act  are  applicable  to  entities
    receiving federal funds. with no limit on materiality.

    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                        Control
    description       Objective    activities      IT         Effective     Instances of
                                                    (Y/N)     compliance      noncompliance
                                                                 controls?        noted?
    1. The entity      1.
    shall not make     Expenditures  [Document                                [Indicate yes
    expenditures       or            the         [Is control  [Indicate       or
        or obligations  obligations  control     dependent                    no; include
    that exceed the    do not     activities               yes or no;
                amount
         available for  exceed the   used by the              include         reference to
        expenditure or    amount     entity to   on computer
            obligation
    in an              available for achieve the processing?] reference to    supporting
    appropriation or   expenditure   objective.]              supporting      documentation.]
    fund.              or obligation
                       in an
    Type:              appropriation (See note                documenta-      See Compliance
    Quantitative-based   or fund.    2.)
    Ref: 31 U.S.C.                                            tion.]          Audit Program
    1341(a)(1)(A) and
    (C)
                                                                              FAM 803 Step 3
    2. The entity      2. Legal      [Document   [Is control                  [Indicate yes
    shall not involve  obligations   the control dependent on                 or no; include
    the government in  do not occur  activities  computer                     reference to
    a contract or      before an     used by the processing?]                 supporting
    obligation for the appropriation entity to                [Indicate yes   documentation.]
    payment of money   is made or    achieve the              or no; include  See Compliance
    before an          otherwise     objective.]              reference to    Audit Program
    appropriation is   authorized by (See note                supporting      FAM 803 Step 3.
    made unless        law.          2.)                      documentation.]
    authorized by law.
    Type:
    Quantitative-based
    Ref:31 U.S.C
    1341(a)(1)(B)

                    DRAFT GAO/PCIE Financial Audit Manual Page 803-1

    Compliance 803 - Antideficiency Act

    Name of entity:       Compliance Summary          Prepared by: Reviewed
    Audit period:                                     by:
    _____
           Provision                       Control
          description       Objective   activities  IT   Effective  Instances of
                                                   (Y/N) compliance noncompliance
                                                         controls?     noted?
                          3.            (See note
                          Expenditures     2.)
    3. The entity      or
    shall not make     obligations                               See
    expenditures or    do not exceed                             Compliance
    obligations that   the legally                               Audit Program
    exceed (1) the     binding limit                             FAM 803 Step
    amount of an       on the                                    4.
    apportionment; or  entity's
                          budget
                          authority.
    (2) a lesser       (The amount
    amount, if any,    of the
    established by     apportionment
    agency regulations or a lesser
    (such as the       amount, if
    allotment level).  any,
    See note 1.        established
                          by the
    Type:              entity's
    Quantitative-based regulations.)
    Ref: 31 U.S.C.     See note 1.
    1517(a)

                    DRAFT GAO/PCIE Financial Audit Manual Page 803-2

    Compliance 803 - Antideficiency Act

    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 at FAM 802-3. 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   W/P ref
                                                                  by/date
    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 FAM 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 Compliance 803 - Antideficiency Act
    Compliance 803 - Antideficiency Act

    Name of entity:
    Audit period:
    Reviewed by:
                            Audit Procedures                       Done   W/P ref
                                                                  by/date
    2. As discussed in FAM 460.03, the auditor should
    determine assurance that the summarized budget information
    (obligations and expenditures) used for compliance tests
    are 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
    6. (31 U.S.C. 1341(a)(1)(A) .

    Name of entity:
    Audit period:
    Reviewed by:
                            Audit Procedures                       Done   W/P ref
                                                                  by/date
    4. Compare timing of legal obligations (contractual or
    otherwise) with available appropriation or other budget
    authority listed in step 1. If the entity does not appear
    to
    have complied with the provision, perform step 6 (31
    U.S.C. 1341(a)(1)(B).
    5. 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))
    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
    o identify the weakness in controls that allowed the
    noncompliance to occur, if not previously identified
    during control testing;
    o report the nature of any weakness in controls and
    consider modification of the opinion on internal control
    as appropriate (see FAM 580.32-.61);
    o consider the implications of any instances of
    noncompliance on the financial statements; and
    o report instances of noncompliance, as appropriate (see
    FAM 580.67-.75.).

    Name of entity:
    Audit period:
    Reviewed by:
                            Audit Procedures                       Done   W/P ref
                                                                  by/date
    7. Contact the entity office responsible for submitting
    ADA violations to the President, Congress, and GAO and:
    o Obtain a listing of violations for the year under audit.
    o Inquire if all known violations have been included on
    the list and reported.
    o For each ADA violation determine if it was reported to
    the President, the Congress, and GAO.
    8. Check GAO'S ADA reporting website :
    http:/www.gap.gov/ada/antideficiencyrpts.htm to identify
    and obtain background about ADA violations reported by
    the entity and compare audit evidence with what the entity
    reported in ADA violation reports. Be aware that there may
    be time lags as to when violations are reported,
    particularly at year end.
    9. Document conclusions on compliance with each provision
    on Form 803 - Compliance Summary.

    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 (FAM 370.11). 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
    determinations 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 determined to be
    necessary to conclude if compliance controls are effective.

    DRAFT GAO/PCIE Financial Audit Manual Page 808-1 DRAFT GAO/PCIE Financial Audit
                                   Manual Page 808-2

    Compliance 808 - Federal Credit Reform Act of 1990

    Compliance 808 - Federal Credit Reform Act of 1990

    DRAFT GAO/PCIE Financial Audit Manual Page 809-1 DRAFT GAO/PCIE Financial Audit
        Manual Page 809-2 DRAFT GAO/PCIE Financial Audit Manual Page 809-3 DRAFT
                       GAO/PCIE Financial Audit Manual Page 810-1

                    DRAFT GAO/PCIE Financial Audit Manual Page 810-2

    DRAFT GAO/PCIE Financial Audit Manual Page 812-1 DRAFT GAO/PCIE Financial Audit
        Manual Page 813-1 DRAFT GAO/PCIE Financial Audit Manual Page 813-2 DRAFT
                       GAO/PCIE Financial Audit Manual Page 814-1

                    DRAFT GAO/PCIE Financial Audit Manual Page 814-2

                    DRAFT GAO/PCIE Financial Audit Manual Page 814-3

                    DRAFT GAO/PCIE Financial Audit Manual Page 814-4

    Compliance
    816 - Federal Employees' Compensation Act (FECA), 5 U.S.C. Chapter 81

                    DRAFT GAO/PCIE Financial Audit Manual Page 816-1

    Compliance
    816 - Federal Employees' Compensation Act (FECA), 5 U.S.C. Chapter 81

                    DRAFT GAO/PCIE Financial Audit Manual Page 816-2
    DRAFT GAO/PCIE Financial Audit Manual Page 817-1 DRAFT GAO/PCIE Financial Audit
                                   Manual Page 817-2

    817 - Federal Employees' Retirement System Act of 1986 (FERS), 5 U.S.C.
    Chapter 84

    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. Employees hired after January 1, 1984
    are in FERS.

    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 example: for FY 2006 it is 11.2 percent for regular
    employees. OPM lists the percentages in its Benefits Administration
    Letters, accessible on its Internet site,
    [222]http://www.opm.gov/asd/htm/bal06.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 service organization (e.g., substantive
    testing) under AT 201 (see FAM 660).

                                      SECTION 900

                                  Substantive Testing

      902 - Related Parties, Including Intragovernmental Activity and Balances

    .01 This section provides detailed guidance on the procedures that the
    auditor should perform with respect to related parties, as described in
    FAM 280 and FAM 550. Additionally, in determining whether related party
    activities are properly accounted for and disclosed in the financial
    statements, the auditor should consult AU 334, which provides general
    guidance on related parties relationships and transactions. Further, 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 ^[223]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 at
    http://www.aicpa.org.

    .02 The U.S. government in its entirety is an economic entity and federal
    entities are components of the U.S. government. Therefore, transactions
    between federal entities are considered intragovernmental (Note: Federal
    Accounting Standards Board's (FASAB) Statements of Financial Accounting
    Standards (SFFAS) refers broadly to the cost of goods and services between
    federal entities as "inter-entity" costs). Within the U.S. 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 reimburses the
    providing entity in accordance with an agreed-upon price, which may or may
    not represent market value. However, frequently one entity provides goods
    or services to another entity free of charge (without reimbursement) and
    the cost of such activity is paid by appropriated funds of the providing
    entity. For example, the General Services Administration (GSA) routinely
    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 budget, policy and/or general
    management guidance to other federal entities. The Office of Personnel
    Management (OPM) helps federal civilian entities recruit nationwide; sets
    human resources management rules with the federal entities' involvement;
    administers systems for setting federal compensation and benefits; manages
    federal employee health and life insurance programs; and operates
    retirement programs for federal employees.

    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.

    .04 In the U.S. government, the most significant related parties are other
    governmental entities. Other possible related parties outside of the
    federal government include states, members of entity's management, and
    individuals and companies with which members of management may be related.

    .05 The auditor should make inquiries about the possible existence of
    related parties with material activity and balances that could affect the
    financial statements, including intragovernmental activity and balances.
    The auditor should also inquire about the possible existence of related
    parties involving members of management that usually are not material to
    the financial statements, but may be a sensitive conflict-of-interest
    issue involving potential misuse of government assets.

    The identification of related parties and activity and balances is
    important because (1) U.S. GAAP requires disclosure of material
    related-party transactions and certain control relationships, (2)
    fraudulent financial reporting and misappropriation of assets have been
    facilitated by the use of an undisclosed related party, and (3) distorted
    or misleading financial statements may result in the absence of adequate
    disclosure.

    .06 Financial statement users need related party information to make
    informed judgments. If parties are related, the transactions between them
    may not be based on an arm's-length 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, an entity may have 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. In these cases, users of financial
    statements should be aware of 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 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 may aggregate similar transactions by type. In cases of common
    control relationships, the nature of the control relationship is disclosed
    even if there are no transactions between the entities. Related party
    transactions between components of the audited entity that are eliminated
    in consolidation are disclosed. However, if separate statements of the
    components are issued, the disclosures are presented in the separate
    component statements.

    .08 The following sections discuss intragovernmental activity and
    balances, and 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.

    FASAB uses various terms to define intragovernmental activities. As
    discussed in FAM 902.02, SFFAS No. 4 refers to these activities broadly as
    inter-entity costs. SFFAS No. 30 refers to intra-departmental inter-entity
    costs to describe activities within the same department, while activities
    between two different departments are inter-departmental inter-entity
    costs. FASAB Interpretation No. 6 uses "department" to refer to any
    department, agency or other financial reporting entity that is not part of
    a larger reporting entity other than the government as a whole. The
    terminology used in FAM 902 is consistent with FASAB usage of the terms
    intra-departmental and inter-departmental activities.

    .10 Common examples of intragovernmental activities include:

    a.
               Goods and services provided from one federal entity to another
               (trade transactions), costs incurred, and reimbursable costs
               (including both interdepartmental and intradepartmental activity).

    b.
               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 revenue (including both
               interdepartmental and intradepartmental activity).

    c.
               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.

    d.
               Borrowings from the Treasury and the Federal Financing Bank,
               including interest accruals, interest income, and expenses.

    e.
               Costs of litigation paid by the Treasury Judgment Fund (including
               both interdepartmental and intradepartmental activity).

    f.
               Transactions with OPM relating to employee benefit programs such
               as Federal Employees' Retirement System, Civil Service Retirement
               System, and federal employees' life insurance and health benefits
               programs, that include routine payments, imputed financing, and
               accruals.

    g.
               Transactions with the Department of Labor (Labor) relating to the
               Federal Employee's Compensation Act (FECA) that include routine
               payments to Labor.

    .11 Intradepartmental activities and balances (within the same department)
    are eliminated at the department's consolidated financial statements
    level. Interdepartmental activities and balances (between federal
    entities) are eliminated at the U.S. government's consolidated financial
    statements level.

    Accounting and Reporting Guidance

    .12 In accounting for and reporting of related parties, including
    intragovernmental activity and balances, the auditor and the entity should
    refer to FASAB accounting standards, the Financial Standards Accounting
    Board (FASB) financial accounting standards (FAS), OMB guidance contained
    in OMB Circular No. A-136, and Treasury guidance contained in the Treasury
    Financial Manual (TFM). FAM 902.14-.20 illustrate these relevant documents
    in more detail.

    .13 SFFAS No. 4, Managerial Cost Accounting Concepts and Standards, and
    related interpretations, address the accounting standards for inter-entity
    cost activities. SFFAS No. 5, Accounting for Liabilities of the Federal
    Government, addresses inter-entity 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, as amended, addresses inter-entity 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.

    In accordance with SFFAS No. 4, as amended by SFFAS No. 30, effective for
    periods beginning after September 30, 2008, the costs of program outputs
    include the costs of services provided by other entities whether or not
    the providing entity is fully reimbursed. Additionally, each entity's full
    cost is to incorporate the full cost of goods and services that it
    receives from other entities. The entity providing the goods or services
    has the responsibility to provide the receiving entity with information on
    the full cost of services either through billing or other advice. The
    reporting entities also is to consult with the funding and administering
    agencies, such as OPM, for information needed to properly record
    inter-entity costs. SFFAS No. 4 directs OMB to designate the costs of
    goods and services received from other entities that are to be recognized
    and to issue guidance identifying these costs. ^[224]2

    2 In accordance with OMB Circular No. A-136, examples of unreimbursed
    costs that reporting entities are required to recognize include (but are
    not limited to): (1) employees' pension, post-retirement health and life
    insurance benefits, (2) other post-employment benefits for retired,
    terminated, and inactive employees, which includes unemployment and
    workers compensation under the Federal Employees' Compensation Act (Pub.
    L. No. 103-3), and (3) losses in litigation proceedings (see FASAB
    Interpretation No. 2, Accounting for Treasury Judgment Fund Transactions).
    In the case of employee benefits, the imputed amount is the difference
    between employer/employee contributions and the total cost of the benefit.

    .14 FASB FAS 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.

    .15 OMB Circular No. A-136, Financial Reporting Requirements, states that
    federal entities are to

         o report intragovernmental assets separately from transactions with
           non-Federal entities (entities outside the federal government) on the
           balance sheet,; disclose intragovernmental assets separately from
           other non-entity assets; identify intragovernmental liabilities
           covered by budgetary resources and those not covered by budgetary
           resources (such as accrued annual leave); and separately report
           intragovernmental liabilities,
         o disclose intragovernmental costs and revenue transactions separately
           from those made with the public and describe the criteria used for the
           cost/revenue classification. Disclosure is to include an explanation
           that makes it clear to the reader that the intragovernmental expenses
           relate to the source of goods and services purchased by the reporting
           entity and not to the classification of related revenue, and
         o reconcile intragovernmental balances and transactions at least
           quarterly and submit intragovernmental balance information as a note
           disclosure.

    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 entity management's responsibility for identifying
    intragovernmental transactions and balances and reconciling data with
    other entities, specific representations are included in the management
    representation letter for intragovernmental activity. These
    representations include intradepartmental eliminations, proper accounting
    and disclosure of transactions, and reconciliation (or inability to
    reconcile) with entities providing the goods or services (see FAM 1001).
    If such disclosure is included in the financial statements and the auditor
    believes that the disclosure is either not supported by management, or if
    management refuses to disclose related party transactions, the auditor
    generally should express a qualified or adverse opinion because of the
    inadequate disclosure, depending on materiality, and include the necessary
    disclosures in a separate paragraph of the audit report.

    .17 TFM section "Federal Intragovernmental Transactions Process" and
    Treasury's Federal Intragovernmental Transactions Accounting Policies
    Guide (Treasury Guide) provides governmentwide procedures for federal
    entities to account for and reconcile transactions occurring within and
    between each other. The procedures in this guidance does not apply to
    transactions between federal entities and nonfederal entities. Further
    information is available at the Treasury/Financial Management Service's
    (FMS) web site at [225]http://www.fms.treas.gov.

    .18 The TFM also includes procedures for CFO Act departments to reconcile
    and confirm intragovernmental activity and balances as of and for the
    fiscal year ended September 30. Each department's CFO is to provide the
    department's Inspector General (IG) with representations indicating
    whether the department completed the reconciliation. In addition, the
    department is to describe noncompliance with the reconciliation
    requirements. The auditor should include this representation in the
    management representation letter (see FAM 1001).

    .19 The Treasury Guide provides detailed information on accounting and
    reconciling intragovernmental balances. According to the guide, entities
    are to identify trading partners ^[226]3 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 The Treasury Guide also indicates that federal entities are to use the
    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 is to be
    designated for each transaction posted to the account.

    Continuing Issues from Prior Year Audits

    .21 Prior year audits of federal entity financial statements have
    identified numerous instances where entities did not identify, summarize,
    or reconcile intragovernmental activity and balances by trading partner.
    Controls over the intragovernmental transactions were not adequate. For

    Trading partners are federal agencies, bureaus, programs or other entities
    (within or between entities) participating in transactions with each
    other.

    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 is no assurance that the entity records contained
    balances that are fairly presented. This has been a material weakness at
    the

    U.S. government consolidated financial statement level in that entity
    intragovernmental accounts do not completely eliminate in consolidation.

    Intragovernmental Payment and Collection (IPAC) System

    .22 IPAC is the primary method used by most federal entities to
    electronically bill and/or pay for services and supplies within the U.S.
    government. IPAC is used to communicate to 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 amounts from Statement of Transactions
    (FMS 224) reported by the entity with the IPAC data. If there is a
    difference, a Statement of Differences (SOD) ^[227]4 , including a
    detailed list of all transactions charged or credited to a particular
    agency location code, is generated monthly. The SOD is an Internet
    application of the Government On-Line Accounting Link Information Access
    System II (GOALS II/IAS). Entities are to investigate the differences and
    make any necessary corrections on their next Statement of Transactions.

    .24 The auditor generally 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 these
    procedures with Fund Balance with Treasury (FBWT) audit procedures to
    assess the effectiveness of the entity's IPAC reconciliation (see FAM
    921).

    .25 The auditor generally should also design audit procedures to
    understand whether the entity uses other systems (EFT, check, standard
    forms used to transfer funds between appropriations, credit cards, etc) in
    addition to the IPAC system to process intragovernmental activity and
    balances. The auditor generally should determine whether these systems
    affect the

    The Government Wide Accounting (GWA) system is being implemented over the
    next several years and the SOD is scheduled to be eliminated (see FAM
    921.11-.12).

    fairness of intragovernmental activity and balances. (See audit procedures
    below and FAM 902 C.)

    Audit Procedures

    .26 The auditor should identify audit risk and materiality in determining
    the nature, extent, and timing of procedures for auditing
    intragovernmental activity and balances and in evaluating the results of
    these procedures. Throughout the audit, the auditor evaluates the possible
    existence of material intragovernmental activity and balances that could
    affect the financial statements. The auditor also evaluates information
    available concerning material intragovernmental activity and balances to
    determine the adequacy and appropriateness of financial statement
    disclosures.

    .27 During the planning phase, the auditor should assess inherent, fraud,
    and control risk. The auditor evaluates several conditions to assess
    inherent risk related to intragovernmental activity and balances. For
    example, inherent risk may exist because of the nature of the
    intragovernmental activity, such as a significant volume or dollar amount
    of transactions, number of trading partners, or complexity of
    transactions. The auditor should also assess the impact of inherent and
    control risk on control testing and substantive procedures. The auditor
    should determine whether similar conditions continue to exist and should
    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 also obtain an understanding of the
    entity's operations to identify, respond to, and resolve accounting and
    auditing problems early in the audit. This includes:

    a.
               knowledge of the entity's trading partners,

    b.
               the nature of intragovernmental transactions that occur,

    c.
               the volume and dollar amount of transactions, and

    d.
               management's attitude and awareness with respect to
               reconciliations of intragovernmental activity and balances.

    .29 The auditor should determine the effectiveness of the entity's
    internal control over intragovernmental activity and balances. This begins
    with the auditor identification of policies and procedures that pertain to
    the entity's ability to record, process, summarize, and report
    intragovernmental activity and balances by trading partner. The entity
    generally 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 entity's accounting system may not be able to adequately track
    intragovernmental activity and balances.

    .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, as annual or quarterly reconciliations
    may not be 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 those cases where the auditor finds significant deficiencies
    or material weaknesses in the intragovernmental reconciliation control and
    no other mitigating controls exist, the auditor must disclose this in the
    report or opinion on internal controls (FAM 580).

    .32 TFM contains agreed-upon procedures 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. These procedures should be performed regardless of
    the effect on the entity's consolidated financial statements or internal
    control report.

    .33 To avoid duplicate procedures, the auditor should consider the
    agreedupon 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 FAM 902 A,
    FAM 902 B, and FAM 902 C, respectively. The ARA, SCE(s), and audit
    procedures generally are customized by the auditor 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 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 generally should
    understand the entity's organization and its characteristics. The auditor
    generally should identify the possible existence of other related parties
    and other related party transactions throughout the audit to ensure that
    they are properly accounted for and disclosed (see FAM 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; ^[228]5 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.

    As indicated at FAM 902.04-.05, the auditor should also be alert to other
    related party transactions involving members of entity's management, and
    individuals and companies with which members of management may be related.
    While these transactions are usually not material to the entity's
    financial statements, there may be a sensitive conflict-of-interest issue
    involving the potential misuse of government assets.

    .35 The auditor should attempt to detect these other relationships by
    inquiring of management, reviewing major contracts/agreements, and reading
    financial disclosure statements. The auditor should document the names of
    related parties so audit staff are aware of them as they conduct the
    audit. Work done to test transactions with such parties may be coordinated
    with sensitive payments work, as discussed in FAM 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 entity 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). FAM 902 C provides examples of audit procedures for other related
    parties as well as for intragovernmental activity and balances. The
    auditor should customize the steps for the particular audited entity.

        Practice Aids

    .37 The following practice aids are presented as appendixes:

         o FAM 902 A - Example Account Risk Analysis (ARA),
         o FAM 902 B - Example Specific Control Evaluation (SCE), and
         o FAM 902 C - Example Audit Procedures

    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.

      DRAFT GAO/PCIE Financial Audit Manual Page 902 A-1 DRAFT GAO/PCIE Financial
      Audit Manual Page 902 A-2 DRAFT GAO/PCIE Financial Audit Manual Page 902 A-3
                   DRAFT GAO/PCIE Financial Audit Manual Page 902 A-4

    Substantive Testing 902 A - Example Account Risk Analysis for
    Intragovernmental Activity and Balances

                   DRAFT GAO/PCIE Financial Audit Manual Page 902 A-5
      DRAFT GAO/PCIE Financial Audit Manual Page 902 A-6 DRAFT GAO/PCIE Financial
      Audit Manual Page 902 A-7 DRAFT GAO/PCIE Financial Audit Manual Page 902 A-8

    Substantive Testing

        902 B - Example Specific Control Evaluation for Intragovernmental Accounts

    Accounting Relevant Potential misstatements in

                                   Control objectives

    Internal control activities IT Effective-W/P ref, application assertions
    in line accounting application

    (Y/N) ness of control assertions items assertions

    control testing activities step various various

    Existence or various various Substantiation occurrence 1. Recorded 1.
    Quarterly, intragovernmental N II.1.g-i

    1a. Recorded intragovernmental balances recorded in the entity's assets
    and liabilities do ^intragovernmental general ledgers are confirmed

                                 assets and liabilities

    not exist at a given date. [should exist at a given] and reconciled with
    trading [date.] partners.

        1. The entity and trading partners ^N II.1.g-i work together to exchange
           data/ correct errors promptly concerning the intragovernmental
           balances.
        2. Reconciliation adjustments and N supporting documents are ^III.A.1-7
           reviewed and approved by authorized personnel before being entered in
           the general ledgers.
        3. Reconciliation between Y [III.A.1-7] intragovernmental general ledger
           balances and subsidiary ledger balances are performed quarterly and
           reviewed by supervisory personnel.

         DRAFT GAO/PCIE Financial Audit Manual Page 902 B-1 Substantive Testing

    Accounting     Relevant     Potential          Control         Internal        IT   Effective- W/P ref,
                                misstatements    objectives        control
                                in                                 activities
    application assertions in   accounting                                        (Y/N)  ness of    control
                line            application
    assertions       items       assertions                                              control    testing
                                                                                        activities   step
                various various
                                                                   Same as 1a.
                                              1b. Recorded      1. above.                           Same as
                                              intragovernmental                                      above.
                                                     assets and
                                                 liabilities of
                                              the entity, at a  2. The entity       Y               II.1.l
                                              given date,          maintains the
                                              should be            transaction
                                              supported by         logs and
                                              appropriate          detailed
                                              detailed records     records of
                                              that are             transactions
                                              accurately           to facilitate
                                              summarized and       the
                                              reconciled to the    reconciliation
                                                                   process and to
                                                                   provide
                                                                   sufficient
                                                                   information
                                                                   for the
                                                                   location of
                                                                   the supporting
                                                                   documents.
                                              account balance.
                                                                   The entity's
                                                                   critical forms
                                              1c. Access to     1. and              Y               Example
                                              intragovernmental    records are                      control
                                                                   protected by
                                                                   safes
                                              assets, critical     and locks,                         tests
                                                   forms,          guards,                              are
                                                                   cameras, alarm
                                              records, and         systems, and                     omitted
                                                                   backup of
                                                                   electronic
                                               processing and      data.                           from the
                                                storage areas                                       example
                                                   should
                                              be permitted only 2. Changes made     Y               audit
                                                     in            to the trading
                                                accordance with    partner codes
                                                          laws,    file are                          pro
                                                                   restricted
                                              regulations, and     to authorized                   cedures.
                                                                   accounting
                                                   management's    personnel.
                                                        policy.

                   DRAFT GAO/PCIE Financial Audit Manual Page 902 B-2

    Substantive Testing

    Accounting Relevant Potential misstatements in

                                   Control objectives

    Internal control activities IT Effective-W/P ref, application assertions
    in line accounting application

    (Y/N) ness of control assertions items assertions

    control testing activities step various various

    Completevarious various Account Completeness ness

    2. Intragovernmental ^2. All intragovernmental 1. Same as existence above.
    Same as assets and liabilities of ^accounts that belong above. the entity
    exist but are ^in the financial state

    [omitted from the] ments should be so [financial statements.] included.
    There should 2. The entity reviews all transacY II.1.a-f be no undisclosed
    tions to identify and properly assets or liabilities. code
    intragovernmental transactions.

        1. The entity reconciles and Y II.2 & resolves IPAC differences (and
           III.B.1.c differences from other systems/ methods, if any, used to
           process intragovernmental transactions) promptly and records
           adjustments properly.
        2. Supervisory personnel review and Y II.1.m approve monthly account
           analyses of intragovernmental accounts and examine budget-to-actual
           and trend analyses.

                   DRAFT GAO/PCIE Financial Audit Manual Page 902 B-3

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Accounting application assertions

    Valuation or allocation

                           Relevant assertions in line items

    various various

    Valua-Valua-tion or tion or allocaalloca

    Potential misstatements in

    Control objectives

    Internal control activities accounting application assertions

        1. Elimination journal entries and supporting documentation are reviewed
           and approved by authorized personnel.
        2. Elimination entries are supported by schedules summarizing the SGL
           accounts that are combined to total the amounts eliminated.

          Valuation

    3. Intragovernmental ^3. Intragovernmental 1. Same as existence and

                   ^assets and liabilities completeness above. above.

                  assets and liabilities W/P ref, control testing step

                                                           IT          Effective-
                                                           (Y/N)          ness of
                                                                          control
                                                                       activities
                                                               N
                                                               Y

            II.1.k
                    & III.E

    II.1.k
               &

                                         III.E

                                        Same as

                                       tion tion

    included in the ^included in the

    financial statements ^2.

                     The entity periodically evaluates N I.4.a.ii &

                                  financial statements

                                    are valued on an

    [should be valued on] the condition and marketability

                [appropriate valuation] of intragovernmental assets, for

                                  inappropriate basis.

                            bases. example, receivables are

    evaluated for collectibility.
    3. The entity accounting records are compared with the      I.4.a.ii & iii
          assessed                                               N
          values such as independent
          appraisals or assets.

         DRAFT GAO/PCIE Financial Audit Manual Page 902 B-4 Substantive Testing

    Accounting     Relevant     Potential            Control             Internal    IT   Effective-     W/P
                                misstatements in     objectives          control                        ref,
                                                                        activities
    application assertions in      accounting                                       (Y/N)  ness of   control
                line               application
    assertions       items         assertions                                              control   testing
                                                                                          activities  step
                various various
                                Measurement 4.    4. Intragovernmental 1. Same as                    Same as
                                Intragovernmental    revenues and      existence                     above.
                                revenues and         expenses included and
                                expenses included    in the financial  completeness
                                in the financial     statements should above.
                                statements are       be properly
                                measured             measured.
                                improperly.
    Rights and  Rights  Rights  Ownership
    obligations and     and     5. Recorded       5. Recorded          1. Same as                    Same as
                                                                       existence
                                                                       and
                obliga  obliga  intragovernmental    intragovernmental completeness                   above.
                                                                       above.
                tions   tions   assets are owned     assets should be
                                       by
                                others because of    owned by the
                                            sale,    entity.
                                    or other
                                   contractual
                                  arrangements.
                                Rights
                                6. The entity     6. Intragovernmental 1. Same as                    Same as
                                does not                               existence
                                                                       and
                                  have certain       assets should be  completeness                   above.
                                    rights to        the               above.
                                recorded             entity's rights
                                                     at a
                                intragovernmental    given date.
                                assets because of
                                     certain
                                  restrictions.

                   DRAFT GAO/PCIE Financial Audit Manual Page 902 B-5

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Accounting Relevant Potential misstatements in

                                   Control objectives

    Internal control activities IT EffectiveW/P ref, application assertions in
    line accounting application

    (Y/N) ness of control assertions items assertions

    control testing activities step various various

          Obligations

    7. The entity does not 7. Intragovernmental 1. Same as existence and Same
    as have an obligation for liabilities should be completeness above. above.
    recorded the entity's obligations intragovernmental at a given date.
    liabilities at a given date.

         DRAFT GAO/PCIE Financial Audit Manual Page 902 B-6 Substantive Testing

    Accounting         Relevant        Potential            Control              Internal control   IT   Effective-     W/P
                                       misstatements in     objectives           activities                            ref,
    application  assertions in line       accounting                                               (Y/N)  ness of   control
                                          application
     assertions          items            assertions                                                      control   testing
                                                                                                         activities    step
                  various    various
                                       Account
    Presentation  Presen-    Presen-   classification
    and          tation and tation and 8.                8.                   1. The entity uses     Y               II.1
    disclosure   disclosure disclosure Intragovernmental    Intragovernmental    trading partner
                                       accounts are not     accounts should      codes to identify
                                       properly             be properly          and track trading
                                       classified and       classified and       partners when the
                                       described in the     described in the     intragovernmental
                                                                                 transactions
                                           financial        financial            are initiated and
                                          statements.       statements.          on all
                                                                                 documentation
                                                                                 thereafter.
                                                                                 The entity uses
                                                                              2. SGL account         Y               II.1
                                                                                 attributes to
                                                                                 identify the
                                                                                 nature
                                                                                 of account
                                                                                 balances and to
                                                                                 identify
                                                                                 intragovernmental
                                                                                 transactions by
                                                                                 trading partner.
                                                                                 The entity
                                                                                 classifies,
                                                                              3. summarizes,         Y               IV.1
                                                                                 and reports
                                                                                 intragovernmental
                                                                                 accounts by
                                                                                 trading partner
                                                                                 and
                                                                                 presents them in
                                                                                 the notes to the
                                                                                 special-purpose
                                                                                 financial
                                                                                 statements.

         DRAFT GAO/PCIE Financial Audit Manual Page 902 B-7 Substantive Testing

    Accounting     Relevant     Potential       Control       Internal control   IT   Effective-     W/P
                                misstatements  objectives     activities                            ref,
                                in
    application assertions in    accounting                                     (Y/N)  ness of   control
                line             application
    assertions       items       assertions                                            control   testing
                                                                                      activities  step
                various various
                                                              The CFO staff
                                                           4. checks that the     N               IV.1
                                                              intragovernmental
                                                              asset and
                                                              liability
                                                              categories
                                                              reported as
                                                              notes in the
                                                              special-purpose
                                                              financial
                                                              statements agree
                                                              with
                                                              the
                                                              intragovernmental
                                                              asset and
                                                              liability line
                                                              items reported on
                                                              the
                                                              balance sheet.
                                                              The entity
                                                              discloses
                                                           5. intragovern         Y               IV.1
                                                              mental gross cost
                                                              and earned
                                                              revenue by budget
                                                              functional
                                                              classification as
                                                              required by OMB
                                Consistency
                                9. The        9. The       1. Intragovernmental                  Same as
                                financial     financial       accounts are
                                statement
                                   components    statement    properly                            above.
                                    are based   components    classified and
                                                              described
                                on accounting  should be      in the financial
                                                based on      statements.
                                 principles    accounting
                                  different    principles
                                 from those     that are
                                   used in      applied
                                prior         consistently
                                periods.          from
                                               period to
                                                period.

                   DRAFT GAO/PCIE Financial Audit Manual Page 902 B-8

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

    Accounting     Relevant     Potential       Control      Internal control   IT   Effective-     W/P
                                misstatements objectives        activities                         ref,
                                in
    application assertions in    accounting                                    (Y/N)  ness of   control
                line             application
    assertions       items       assertions                                           control   testing
                                                                                     activities  step
                various various
                                Disclosure
                                10. Required  10. The     1. Intragovernmental                  Same as
                                information   financial      accounts are
                                   is not     statements     properly                            above.
                                disclosed in   or notes      classified and
                                     the                     described
                                    financial   should       in the financial
                                statements or contain all    statements.
                                in the notes  information
                                  thereto.       required
                                                 to be
                                              disclosed.

                   DRAFT GAO/PCIE Financial Audit Manual Page 902 B-9

    Substantive Testing 902 B - Example Specific Control Evaluation for
    Intragovernmental Accounts

                         [This page intentionally left blank.]

                  DRAFT GAO/PCIE Financial Audit Manual Page 902 B-10

    902 C - Example Audit  Procedures for Intragovernmental and Other  Related
    Parties' Activity and Balances

      921 A - Treasury Processes and Reports Related to FBWT Reconciliation

        A. Verification of Collections and EFT Disbursements

    These FBWT processes and reports are subject to change by the
    implementation of the GWA system discussed in FAM 921.11-.12.

    *CASHLINK is effective through September 30, 2007, when it is scheduled to
    become part of the Government Wide Accounting (GWA) system (see FAM
    921.11-.12). DRAFT GAO/PCIE Financial Audit Manual Page 921 A-1

        B. Verification of Disbursement Data

      DRAFT GAO/PCIE Financial Audit Manual Page 921 B-1 DRAFT GAO/PCIE Financial
      Audit Manual Page 921 B-2 DRAFT GAO/PCIE Financial Audit Manual Page 921 B-3
      DRAFT GAO/PCIE Financial Audit Manual Page 921 B-4 DRAFT GAO/PCIE Financial
      Audit Manual Page 921 B-5 DRAFT GAO/PCIE Financial Audit Manual Page 921 B-6

    Substantive Testing

      921 C - Example Specific Control Evaluation for Fund Balance with Treasury

    Relevant assertions in line

    Potential
    Accounting items

    misstatements in Control objectives Internal control activities IT
    Effectiveness W/P ref. & application

    accounting application (Y/N) of control control assertions FBWT Various

    assertions activities testing step

    Existence or Existence Existence

    Substantiation (See note 1.) Occurrence

    1. Recorded FBWT 1a. Recorded FBWT 1. Entity staff performs Y (insert)
    does not exist as of amounts should monthly reconciliation a given date.
    exist as of a between entity general

    given date. ledger (G/L) and Treasury records (appropriation and receipt
    account ledgers via GWA).

    2. Entity staff resolves receipt N (insert) and disbursement differences
    reported by Treasury statements of differences via GWA for collections and
    disbursements.

                   DRAFT GAO/PCIE Financial Audit Manual Page 921 C-1

    Substantive Testing 921 C - Example Specific Control Evaluation for Fund
    Balance with Treasury

                   DRAFT GAO/PCIE Financial Audit Manual Page 921 C-2

    Substantive Testing 921 C - Example Specific Control Evaluation for Fund
    Balance with Treasury

                   DRAFT GAO/PCIE Financial Audit Manual Page 921 C-3

    Substantive Testing 921 C - Example Specific Control Evaluation for Fund
    Balance with Treasury

                   DRAFT GAO/PCIE Financial Audit Manual Page 921 C-4

    Substantive Testing 921 C - Example Specific Control Evaluation for Fund
    Balance with Treasury

                   DRAFT GAO/PCIE Financial Audit Manual Page 921 C-5

    Substantive Testing 921 C - Example Specific Control Evaluation for Fund
    Balance with Treasury

                   DRAFT GAO/PCIE Financial Audit Manual Page 921 C-6

      941 - Auditing the Statement of Social Insurance

    .01 The Statement of Social Insurance (SOSI) has grown in prominence as it
    presents trillions of dollars of future federal expenditures over future
    federal revenues. Beginning with fiscal year 2006, the SOSI is required to
    be audited, along with certain social insurance disclosure information,
    while other social insurance information is to be presented as unaudited
    required supplemental information (RSI). Because most of the information
    is based on actuarial projections up to 75 years into the future, it
    presents a challenge to the federal entity responsible for its
    preparation, as well as to the auditor. FAM 941 provides auditors with
    some guidance in auditing the SOSI in accordance with U.S. GAGAS.

    .02 FASAB has established accounting requirements for the SOSI through
    various SFFAS. The financial statements affected are those of federal
    entities responsible for Social Security, Medicare, Railroad Retirement,
    and Black Lung programs, as well as the consolidated financial statements
    of the federal government. For periods beginning after September 30, 2005,
    the SOSI is to be presented as a basic financial statement with the
    underlying significant assumptions included in notes that are presented as
    an integral part of the financial statements.

    .03 FASAB standards for social insurance programs require entities and the
    consolidated federal financial statements to report:

            a.
                    The estimated present value of the income to be received from
                    or on behalf of the following groups during a projection
                    period sufficient to illustrate the long-term sustainability
                    of the social insurance programs for:

                       o current participants who have not yet attained
                         retirement age,
                       o current participants who have attained retirement age,
                         and
                       o individuals expected to become participants.

    b.
               The estimated present value of the benefit payments to be made
               during that same period to or on behalf of the groups listed in
               item (a) above.

    c.
               The estimated net present value of the cash flows during the
               projection period [the income described in item (a) above over the
               expenditures described in item (b) above, or the expenditures
               described in item (b) above over the income described in item (a)
               above].

                    d.
                            In notes to the SOSI:

                              1. The accumulated excess of all past cash
                                 receipts, including interest on investments,
                                 over all past cash disbursements within the
                                 social insurance program, represented by the
                                 fund balance at the valuation date.
                              2. An explanation of how the net present value
                                 referred to in item (c) above is calculated for
                                 the closed group. ^[229]1
                              3. Comparative financial information for items (a),
                                 (b), (c), and d (1) above for the current year
                                 and for each of the four preceding years.
                              4. The significant assumptions used in preparing
                                 the estimates.

        Accounting and Reporting Information

    .04 FASAB has issued standards for reporting on social insurance programs
    of federal entities as follows:

            * SFFAS No. 17 - Accounting for Social Insurance, effective for
              periods beginning after September 30, 1999, presents accounting
              standards for federal social insurance programs covering Social
              Security (Old-Age, Survivors, and Disability Insurance), Medicare
              (Hospital Insurance [Part A] and Supplementary Medical Insurance
              [Part B]), ^[230]2 Railroad Retirement, and Black Lung benefits,
              and Unemployment Insurance. Social insurance programs covered by
              SFFAS No. 17 have five common characteristics:

                1. financing from participants or their employers;
                2. eligibility from taxes or fees paid and time worked in covered
                   employment;
                3. benefits not directly related to taxes or fees paid;
                4. benefits prescribed in law; and
                5. programs intended for the general public.

         o SFFAS No. 25 - Reclassification of Stewardship Responsibilities and
           Eliminating the Current Services Assessment requires the Statement of
           Social Insurance to become a basic audited financial statement. It
           also provides that certain information about social insurance programs
           required by SFFAS No. 17 be reported in audited notes or as unaudited
           RSI, rather than as unaudited RSSI. In accordance with SFFAS No. 28,
           the effective period was deferred one year from fiscal year 2005 to
           fiscal year 2006.
         o SFFAS No. 26 - Presentation of Significant Assumptions for the
           Statement of Social Insurance: Amending SFFAS No. 25 requires that the
           underlying significant assumptions relating to the Statement of Social
           Insurance shall be included in audited notes with other information
           required by SFFAS No. 17 - including the sensitivity analysis - to be
           presented as RSI, except to the extent that the preparer elects to
           include some or all of that information in audited notes. In
           accordance with SFFAS No. 28, the effective period was deferred one
           year from fiscal year 2005 to fiscal year 2006.

    ^1 The closed group is defined as those persons who, as of a valuation
    date, are participants in a social insurance program as beneficiaries,
    covered workers, or payers of earmarked taxes or premiums.

    The Medicare Prescription Drug, Improvement, and Modernization Act of
    2003, Public Law 108-173, created a new prescription drug benefit under
    Medicare Part D, which is also covered by SFFAS No. 17.

    o SFFAS No. 28 - Deferral of the Effective Date of Reclassification of the
    Statement of Social Insurance: Amending SFFAS Nos. 25 and 26

    deferred the effective dates of SFFAS No. 25 and SFFAS No. 26 for one year
    to the fiscal year ended September 30, 2006.

    .05 Auditors generally should follow the FAM methodology contained in the
    planning, internal control, testing, and reporting phases in FAM 200-500
    and the audit guidance included in the AICPA's Statement of Position (SOP)
    04-1, Auditing the Statement of Social Insurance. SOP 04-1 provides
    guidance to auditors in auditing the Statement of Social Insurance.

    .06 As permitted by AU 543, a principal auditor may fulfill the
    requirements of SOP 04-1 by using work that other independent auditors
    have performed in conformity with the provisions of SOP 04-1. For example,
    for the OASDI program, the auditor of the consolidated financial
    statements of the U. S. government may use the work and report of the
    auditor of the Social Security Administration's Statement of Social
    Insurance.

    .07 In AU 342.10, the auditor should obtain an understanding of how
    management develops estimates. Based on that understanding, the auditor
    generally should evaluate the reasonableness of an estimate by:

         o reviewing and testing the process used by management to develop the
           estimate;
         o developing an independent expectation of the estimate to corroborate
           the reasonableness of management's estimate; and
         o reviewing subsequent events or transactions occurring prior to audit
           completion.

    .08 In auditing the Statement of Social Insurance, if the auditor has
    assessed management's controls over the estimation process to be
    effective, the auditor may determine that the most practicable and
    efficient approach is to test management's process. However, if the
    auditor finds that controls over the estimation process are ineffective,
    the auditor should consider whether it is practicable to:

    o develop an independent expectation of the estimate, or portions of the
    estimate, to corroborate management's estimate, or

    o obtain competent evidence from outside the audited entity's process that
    would be sufficient to support the assertions in the Statement of Social
    Insurance. If it is not practicable to mitigate the effects of the
    ineffective controls through substantive procedures such as these, the
    auditor's report on the Statement of Social Insurance should be modified
    (SOP 04-1, paragraph 9).

    .09 The auditor's objective when auditing the Statement of Social
    Insurance is to obtain sufficient, competent, evidential matter to provide
    reasonable assurance that:

         o the estimates presented in the Statement of Social Insurance are
           reasonable in the circumstances, and
         o the Statement of Social Insurance is presented fairly, in all material
           respects, in conformity with U.S. GAAP, including adequate disclosure.

    .10 If the auditor does not possess the level of competence in actuarial
    science to qualify as an actuary, the auditor generally should obtain the
    services of an independent actuary^3 to assist the auditor in planning and
    performing auditing procedures. Generally, the auditor will need the
    assistance of an independent actuary in performing various procedures
    during all phases of the audit and related to all elements of the
    estimates (SOP 04-1, paragraph 10).

        Key Implementation Issues

          Determining Materiality

    .11 In FAM 230, materiality is one of several tools the auditor uses to
    determine that the planned nature, extent, and timing of procedures are
    appropriate. Materiality represents the magnitude of an omission or
    misstatement of an item in a financial report that, in 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. Materiality has
    both quantitative and qualitative aspects. Even though quantitatively
    immaterial, certain types of misstatements could have a material impact on
    or warrant disclosure in the financial statements for qualitative reasons.

    .12 Auditors should use professional judgment in determining the
    appropriate element of the financial statements to use as a materiality
    base. Auditors generally consider materiality in the context of the
    financial statements taken as a whole, taking into account both
    quantitative as well as qualitative attributes of the financial
    statements. Auditors should exercise due professional care when setting
    the materiality base, carefully assessing the information gained during
    the planning phase of the audit and the needs of a reasonable person
    relying on the financial statements (SOP 04-1, paragraph 21).

    .13 For certain federal entities, amounts reported in the Statement of
    Social Insurance may vary significantly from the amounts reported in the
    other basic financial statements, or may differ significantly on a
    qualitative basis. In such cases, it may not be appropriate to establish a
    single materiality threshold for the entire set of financial statements.
    Instead, the auditor should use a separate materiality level(s) when
    planning and performing the audit of the Statement of Social Insurance and
    related disclosures (SOP 04-1, paragraph 22).

    The actuary can either be under  contract with the independent auditor  or
    employed by  the  independent  audit organization.  In  either  case,  the
    actuary performing  services  for  the  auditor would  need  to  meet  the
    independence standards  of  GAGAS,  which  are  applicable  to  audits  of
    Statements of Social Insurance.

    .14 The auditor generally should establish planning materiality in
    relation to the element of the financial statements that is most
    significant to the primary users of the statements (the materiality base -
    see FAM 230.08). The auditor uses professional judgment in determining the
    appropriate element of the financial statements to use as the materiality
    base. Also, since the materiality base may be based on unaudited
    preliminary information determined in the planning phase, the auditor may
    estimate the year-end balance(s) of the materiality base(s). To provide
    reasonable assurance that sufficient audit procedures are performed, any
    estimate of the materiality base(s) should use the low end of the range of
    estimated materiality so that sufficient testing is performed.

    .15 SFFAS No. 17 includes a discussion of SFFAC No. 1, Objectives of
    Federal Financial Reporting, which established four major reporting
    objectives in applying accounting standards:

        1. budgetary integrity,
        2. operating performance,
        3. stewardship, and
        4. systems and controls.

    SFFAC No. 1 provides useful information to assist the auditor in
    determining an appropriate materiality base. For example, while all four
    of the objectives are important, SFFAS No. 17 states that objectives No. 2
    and No. 3 directly impact the social insurance standards.

    .16 Objective No. 2 of SFFAC No. 1 states that federal financial reporting
    should assist report users to evaluate:

         o service efforts, costs, and accomplishments of the reporting entity,
         o the manner in which these efforts and accomplishments have been
           financed, and
         o the management of the entity's assets and liabilities.

    SFFAS No. 17 indicates that information about social insurance that is
    relevant to this objective includes the cost of the program as well as
    longrange estimates (and ranges of estimates) of future costs and other
    obligations. Estimates of future costs highlight the cost impact of
    changes in benefit levels as well as changes in economic and demographic
    conditions, such as the cost of health care and life expectancies.

    .17 Objective No. 3 of SFFAC No. 1 states that federal financial reporting
    should assist report users in assessing the impact on the country of the
    government's operations and investments for the period and how, as a
    result, the government's and the nation's financial condition has changed
    and may change in the future. Thus, federal financial reporting should
    provide information that helps the reader to determine whether:

         o the government's financial position has improved or deteriorated over
           the period,
         o future budgetary resources will likely to be sufficient to sustain
           public services and to meet obligations as they come due, and
         o government operations have contributed to the nation's current and
           future well being.

    .18 Fundamental questions about social insurance programs that can be
    addressed by accounting standards include whether:

         o programs are sustainable as currently constructed,
         o the government's financial condition has improved or deteriorated as a
           result of its efforts to provide for these and other programs, and
         o the likelihood that these programs will be able to provide benefits at
           current levels to those who are planning on receiving them.

    The information required by this standard, taken as a whole, will help
    users make this assessment while acknowledging the complexity of the
    programs and the uncertainty of long-term projections.

    .19 In determining the materiality base for planning and performing audits
    of an entity's Statement of Social Insurance, the auditor should evaluate
    the actuarial present value of the estimated future:

    a.
               [231]revenue (excluding interest^4) received from or on behalf of
               all current and future participants (estimated future revenue),

    b.
               expenditures for or on behalf of all current and future
               participants (estimated future expenditures), and

    c.
               balance of estimated future revenue (excluding interest)
               over/(under) estimated future expenditures (actuarial balance).

    .20 The auditor may determine that the actuarial balances are the most
    significant element of the Statement of Social Insurance to users of the
    financial statements. If so, the materiality base would be the actuarial
    balance. However, the auditor has the option of selecting a materiality
    base of either the estimated future revenues, or the estimated future
    expenditures. Regardless of which materiality base is selected, the
    auditor generally should select the materiality base that provides
    reasonable assurance that sufficient audit procedures are performed.

    The auditor's basis for the selection of the materiality base(s) generally
    should be documented, including consideration given to other possible
    measures or separate bases for estimated future revenue and estimated
    future expenditures. Auditors generally should follow the guidance in FAM
    230.11-.13 in determining materiality for planning and performing audits
    of entity Statements of Social Insurance.

    Income (excluding interest) consists of payroll taxes from employers,
    employees, and self-employed persons, revenue from federal income taxation
    of scheduled OASDI benefits, and miscellaneous reimbursements from the
    General Fund of the Treasury.

          Obtaining Management's Representations

    .21 Entity management is responsible for preparing the Statement of Social
    Insurance and underlying estimates in conformity with U.S. GAAP.
    Management is also responsible for the accuracy and completeness of the
    Statement of Social Insurance (SOP 04-1, paragraph 5). Therefore,
    management should determine its best estimate^5 of the economic and
    demographic conditions that will exist in the future. Because estimates in
    the Statement of Social Insurance are based on subjective as well as
    objective factors, management should use judgment to estimate amounts
    included in the Statement of Social Insurance. Management's judgment may
    be based on its knowledge and experience about past and current events and
    its assumptions about conditions it expects to exist.

    .22 Consistent with FAM 1001, the auditor should obtain specific
    representations relating to the Statement of Social Insurance. For an
    audit of an entity's Statement of Social Insurance, the representation
    letter should include, as applicable, representations included in FAM 1001
    A, example management representation letter.

    Planning Considerations for the Consolidated Government-wide Report

    .23 Pursuant to statutory requirements of the Government Management Reform
    Act (GMRA) of 1994, GAO serves as the principal auditor of the
    consolidated financial statements (CFS) of the U. S. government. GMRA also
    requires the Secretary of the Treasury to annually prepare and submit to
    the President and the Congress an audited financial statement, or
    Financial Report (FR) of the United States Government, for the preceding
    fiscal year. The Chief Financial Officer (CFO) of each of the verifying
    [232]agencies ^6 submits their financial data using the closing package^7
    process via the Governmentwide Financial Report System (GFRS) and the
    Federal Agencies' Centralized Trial-Balance System (FACTS I).

    All nonverifying agencies must submit FACTS I adjusted trial-balance (ATB)
    data and must complete GFRS Notes and Other FR Data. The Inspector General
    (IG) of each verifying agency, except those agencies with a fiscal
    year-end other than September 30, opines on the closing package data,
    (also referred to as the "special purpose financial statements, or
    "special purpose closing package") entered by the CFO into

    5

    Paragraph 25 of SFFAS No. 17, Accounting for Social Insurance, states, in
    part, "The projections and estimates used should be based on the entity's
    best estimates of demographic and economic assumptions, taking each factor
    individually and incorporating future changes mandated by current law."
    Certain entities prepare social insurance information using assumptions
    prepared by a board of trustees. Auditors should consider such assumptions
    to represent the entity's "best estimates" if the trustees have
    characterized them as such, and entity management has determined them to
    be reasonable. With respect to these assumptions, the auditor should
    perform audit procedures that are consistent with the guidance in
    paragraphs 9 through 36 of SOP 04-1.

    6

    The verifying agencies are the 24 CFO Act agencies and 11 other federal
    agencies.

    7

    The closing package process is a methodology designed to link agencies'
    comparative, audited consolidated, department-level financial statements
    to the FR. The closing package is the data submitted by each verifying
    agency for inclusion in the FR.

    GFRS, as to its consistency with the comparative, audited consolidated,
    department-level financial statements.

    .24 According to OMB audit guidance, the auditor should determine whether
    the special purpose financial statements and accompanying notes are fairly
    presented, in all material respects, in conformity with U.S. GAAP and the
    presentation requirements set forth in the Treasury Financial Manual
    (TFM), Part 2-Chapter 4700 (TFM 2-4700), Agency Reporting Requirements for
    the Financial Report of the United States Government. Beginning with
    fiscal year 2006, the Statement of Social Insurance is to be presented as
    a basic financial statement in accordance with SFFAS Nos. 25, 26, and 28.

    .25 TFM 2-4700 requires entities to provide the Statement of Social
    Insurance data and the underlying key assumptions in the FR Notes module
    in GFRS. All remaining social insurance information is to be submitted
    through the Other FR Data (Stewardship and Supplemental Information)
    module in GFRS^8 [233]. The auditor generally should

         o perform the procedures described in AU 558 for the Other FR Data
           information as required and defined in TFM 2-4700, And
         o assess whether the Other FR Data is materially consistent with the
           information in the special purpose financial statements.

    .26 Actuarial projections of the annual cash inflow from all sources
    exclude net interest on intragovernmental borrowing/lending for both the
    [234]component entity's Statement of Social Insurance ^9 and the U.S.
    government's consolidated Statement of Social Insurance.^10 In addition,
    because paragraph 32 (1)(a) of SFFAS No. 17 only permits cash inflow from
    the public to be included in the long-range actuarial projection of cash
    inflow presented in the U.S. government's consolidated Statements of
    Social Insurance, TFM 2-4700 requires the (1) General Fund transfers for
    the Federal Supplementary Medical Insurance (SMI - Medicare Part B)
    program, (2) General Fund transfers for the Federal Supplementary Medical
    Insurance (SMI - Medicare Part D) program, and (3) financial
    interchange^11 income for the Railroad Retirement benefits program to be
    excluded from the present value of the long-range actuarial projections.
    SFFAS No. 17 states that expense and liability recognition for the

    8

    Beginning in fiscal year 2006, TFM 2-4700 included these requirements. The
    process and modules used by FMS to prepare the consolidated Statements of
    Social Insurance and accompanying notes, and supplemental information
    included in the FR may change in future years, based on changes that may
    be made by FMS to TFM 2-4700.

    9

    SFFAS No. 17, paragraph 27 (a)(1).

    10

    SFFAS No. 17, paragraph 32 (a)(1).

    11

    Financial interchange (FI) income consists of transfers from the social
    security trust funds under a financial interchange between the railroad
    retirement and the social security systems. While the railroad retirement
    system has remained separate from the social security system, the two
    systems were closely coordinated with regard to earnings credits, benefit
    payments, and taxes. The purpose of this financial coordination is to
    place the Social Security Old-Age Survivors and Disability Insurance
    (OASDI) and Hospital Insurance (HI) trust funds in the same position they
    would have been in if railroad services were covered by the Social
    Security and Federal Insurance Contribution Acts.

    consolidated governmentwide entity are the same as for the component
    entities.^12

    Consequently, auditors responsible for these programs generally should
    determine the impact of the TFM requirement, which excludes the General
    Fund transfers and the financial interchange income from the present value
    of the long range actuarial projections on their auditing procedures.
    Auditors should plan and perform their department-level social insurance
    related audit procedures to obtain a reasonable basis for expressing an
    opinion on the Statement of Social Insurance.

    SFFAS No. 17, paragraph 30.

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                                      SECTION 1000

                                       Reporting

      1001 A - Example Management Representation Letter

    [Entity Letterhead]

    [Date of auditor's report and completion of the audit]

    The Honorable [name of Inspector General or Comptroller General]

    [Title as Inspector General or Comptroller General of the United States]

    [Name of IG entity or U.S. Government Accountability Office]

    [Also, include the independent external auditor as an addressee, if
    appropriate.]

    Address

    Dear [name(s)]:

    We are providing this letter in connection with your audit of the
    [entity's] balance sheet as of September 30, 20X6 and 20X5, [or dates of
    audited financial statements] and the related statements of net costs,
    changes in net position, budgetary resources, financing, social insurance
    [if applicable] and custodial activity [if applicable], for the years then
    ended (hereinafter referred to as the "financial statements").

    You conducted your audit to (1) express an opinion as to whether the
    financial statements are presented fairly, in all material respects, in
    conformity with U.S. generally accepted accounting principles, (2) report
    [or express an opinion] on the entity's internal control over financial
    reporting and compliance with laws and regulations as of September 30,
    20X6 [or date of latest audited financial statements], (3) (For CFO Act
    agencies) report whether the [entity's] financial management systems
    substantially comply with federal financial management systems
    requirements, applicable federal accounting standards (U.S. generally
    accepted accounting principles), and the U.S. Government Standard General
    Ledger at the transaction level as of September 30, 20X6, and (4) test for
    compliance with applicable laws and regulations. In addition, you have
    performed certain audit procedures with respect to the [entity's] 20X6
    Management's Discussion and Analysis (MD&A) and other supplementary
    information, which is included as part of the 20X6 financial statements of
    the [entity].

    (Recommended paragraph) Certain representations in this letter are
    described as being limited to matters that are material. For purposes of
    this letter, matters are considered material if they involve $XX or more.
    Items also are considered material, regardless of size, if they involve an
    omission or misstatement of accounting information that, in the light of
    surrounding circumstances, makes it probable that the judgment of a
    reasonable person relying on the information would be changed or
    influenced by the omission or misstatement. (OMB Bulletin 06-03 states
    that the management representation letter shall specify management's
    materiality threshold used for reporting items in the management
    representation letter.)

    We confirm, to the best of our knowledge and belief, the following
    representations made to you during the audits. These representations
    pertain to both years' financial statements, and update the
    representations we provided in the prior year:

        1. We are responsible for the fair presentation of the financial
           statements in conformity with U.S. generally accepted accounting
           principles. We are also responsible for the preparation of the MD&A,
           and (if any): required supplementary information (RSI), required
           supplementary stewardship information (RSSI), and other supplementary
           information.
        2. The financial statements are fairly presented in conformity with U.S.
           generally accepted accounting principles. The MD&A, and (if any) RSI,
           RSSI, and other supplementary information are fairly presented and are
           consistent with the financial statements

             1. We have made available to you all

                  1. financial records and related data;
                  2. where applicable, minutes of meetings of the Board of
                     Directors [or other similar bodies of those charged with
                     governance] or summaries of actions of recent meetings for
                     which minutes have not been prepared; and
                  3. any communications from the Office of Management and Budget
                     (OMB) concerning noncompliance with or deficiencies in
                     financial reporting practices.

        1. There are no material transactions that have not been properly
           recorded in the accounting records underlying the financial statements
           or disclosed in the notes to the financial statements.
        2. There are no uncorrected financial statement misstatements as we have
           adjusted the financial statements for all known and likely
           misstatements you have informed us of (or) We believe that the effects
           of uncorrected financial statement misstatements summarized in the
           attached summary are immaterial, both individually and in the
           aggregate, to the financial statements taken as a whole. (An example
           summary is provided in FAM 595 C.) [If management believes that
           certain of the identified items are not misstatements, management's
           belief may be acknowledged by adding to the representation, for
           example, "We believe that items XX and XX do not constitute
           misstatements because (description of reason)."]
        3. The [entity] has satisfactory title to all owned assets, including
           stewardship property, plant, and equipment. There are no liens or
           encumbrances on these assets and no assets have been pledged.
        4. We have no plans or intentions that may materially affect the carrying
           value or classification of assets and liabilities or that we are
           required to disclose in the financial statements.
        5. There are no guarantees under which the [entity] is contingently
           liable that require reporting or disclosure in the financial
           statements.
        6. Related party transactions including related accounts receivable or
           payable, revenues, expenditures, loans, transfers, leasing
           arrangements, assessments, and guarantees have been properly recorded
           and disclosed in the financial statements.
        7. No material events or transactions have occurred subsequent to
           September 30, 20X6 [or date of latest audited financial statements],
           that have not been properly recorded in the financial statements or
           disclosed in the notes.

    Intra-governmental Activities

    11. All inter-entity transactions and balances have been appropriately
    identified and eliminated for financial reporting purposes. All
    intra-governmental transactions and activities have been appropriately
    identified, recorded, and disclosed in the financial statements. We have
    reconciled [or have been unable to reconcile] intragovernmental
    transactions and balances with the federal entity providing the goods or
    services.

        Internal Control

        1. We are responsible for establishing and maintaining a system of
           internal control.

             1. Pursuant to 31 U.S.C. 3512(c), (d) (commonly known as the Federal
                Managers' Financial Integrity Act), we have assessed the
                effectiveness of the [entity's] internal control in achieving the
                following objectives:

                  1. reliability of financial reporting: Transactions are
                     properly recorded, processed, and summarized to permit the
                     preparation of the financial statements and supplementary
                     information in accordance with U.S. generally accepted
                     accounting principles, and assets are safeguarded against
                     loss from unauthorized acquisition, use, or disposition.
                  2. compliance with applicable laws and regulations:
                     Transactions are executed in accordance with laws governing
                     the use of budget authority; other laws and regulations that
                     could have a direct and material effect on the financial
                     statements, and any other laws, regulations, and
                     government-wide policies identified in OMB audit guidance.
                  3. reliability of performance reporting: Transactions and other
                     data that support reported performance measures in the MD&A
                     are properly recorded, processed, and summarized to permit
                     the preparation of performance information in accordance
                     with criteria stated by management.

    [This item is optional if the auditor is not opining on internal control.
    Also, if the agency bases its internal control assessment on suitable
    criteria other than 31 U.S.C. 3512(c), (d), cite the criteria used (for
    example, Internal Control--Integrated Framework issued by the Committee of
    Sponsoring Organizations (COSO) of the Treadway Commission).]

    14. Those controls in place on September 30, 20X6 [or date of latest
    audited financial statements], and during the years ended 20X6 and 20X5,
    provided reasonable assurance that the foregoing objectives are met.
    [Delete this item if the auditor is not opining on internal control.]

    [If there are material weaknesses:

    Those controls in place on September 30, 20X6, and during the years ended
    20X6 and 20X5, were not effective to provide reasonable assurance that the
    foregoing objectives were met because of the effects of the material
    weaknesses discussed below or in an attachment.]

        1. We have disclosed to you all significant deficiencies in the design or
           operation of internal control that could adversely affect the
           [entity's] ability to meet the internal control objectives and
           identified those we believe to be material weaknesses (or determined
           that none is a material weakness). [This item is optional if the
           auditor is not opining on internal control.]
        2. There have been no changes to internal control subsequent to September
           30, 20X6 [or date of latest audited financial statements], or other
           factors that might significantly affect the effectiveness of internal
           control. [If there were changes, describe them, including any
           corrective actions taken with regard to any significant deficiencies
           or material weaknesses.] [This item is not required if the auditor is
           not opining on internal control.]

        Fraud

        1. We acknowledge our responsibility for the design and implementation of
           programs and controls to prevent and detect fraud (intentional
           misstatements or omissions of amounts or disclosures in financial
           statements and misappropriation of assets that could have a material
           effect on the financial statements).

             1. We have no knowledge of any fraud or suspected fraud affecting
                the [entity] involving:

                  1. management,
                  2. employees who have significant roles in internal control, or
                  3. others where the fraud could have a material effect on the
                     financial statements.

    [If there is knowledge of any instances, describe them.]

    19. We have no knowledge of any allegations of fraud or suspected fraud
    affecting the [entity] received in communications from employees, former
    employees, or others. [If there is knowledge of any such allegations, they
    should be described.]

    Compliance of Systems with FFMIA

    [For CFO Act agencies subject to the Federal Financial Management
    Improvement Act of 1996 (FFMIA)]

        1. We are responsible for implementing and maintaining financial
           management systems that substantially comply with federal financial
           management systems requirements, federal accounting standards (U.S.
           generally accepted accounting principles), and the U.S. Government
           Standard General Ledger at the transaction level.
        2. We have assessed the financial management systems to determine whether
           they substantially comply with those federal financial management
           systems requirements. Our assessment was based on guidance issued by
           OMB.
        3. The financial management systems substantially complied with federal
           financial management systems requirements, federal accounting
           standards, and the U.S. Government Standard General Ledger at the
           transaction level as of [date of the latest financial statements].

    [If the financial management systems substantially comply with only one or
    two of the above elements, modify as follows:

    As of [date of financial statements], the [agency's] financial management
    systems substantially comply with [specify which of the three elements for
    which there is substantial compliance (e.g., federal accounting standards
    and the SGL at the transaction level)], but did not substantially comply
    with [specify which of the elements for which there was a lack of
    substantial compliance (e.g., federal financial management systems
    requirements)], as described below (or in an attachment).]

    [If the financial management systems do not substantially comply with any
    of these three elements, use the following paragraph:

    As of [date of financial statements], the [agency's] financial management

    systems do not substantially comply with the federal financial management

    systems requirements.]

    [If there is a lack of substantial compliance with one or more of the
    three requirements, identify all the facts pertaining to the
    noncompliance, including the nature and extent of the noncompliance and
    the primary reason or cause of the noncompliance.]

    Laws and Regulations

        1. We are responsible for the [entity's] compliance with applicable laws
           and regulations.
        2. We have identified and disclosed to you all laws and regulations that
           have a direct and material effect on the determination of financial
           statement amounts [may list laws and regulations].

             1. There are no

                  1. violations or possible violations of laws or regulations
                     whose effects we should evaluate for disclosure in the
                     financial statements or as a basis for recording a loss
                     contingency,
                  2. material liabilities or gain or loss contingencies that are
                     required to be accrued or disclosed that have not been
                     accrued or disclosed, or
                  3. unasserted claims or assessments that are probable of
                     assertion and must be disclosed that have not been
                     disclosed.

    [When there is no general counsel and management has not consulted legal
    counsel regarding contingencies, the auditor should obtain a written
    representation from management that legal counsel has not been consulted.
    Example wording 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." (See FAM 1002.24)

        1. We have complied with all aspects of contractual agreements that would
           have a material effect on the financial statements in the event of
           noncompliance.
        2. We are not aware of any violations of the Antideficiency Act that we
           must report to the Congress and the President for the year ended
           September 30, 20x6, (or, we have reported all known violations of the
           Antideficiency Act) and through the date of this letter.

        Statement of Social Insurance

    [For entities presenting a Statement of Social Insurance (SOSI) see AICPA
    publication SOP 04-1, Auditing the Statement of Social Insurance, (SOP
    04-1 S36) which suggests the following management representations.]

        1. Management is responsible for the assumptions and methods used in the
           preparation of the SOSI. Management agrees with the actuarial methods
           and assumptions used by the entity's actuary and have no knowledge or
           belief that would make such methods or assumptions inappropriate in
           the circumstances. Management did not give any instructions, nor cause
           any instructions to be given to the entity's actuary with respect to
           values or amounts derived, and is not aware of any matters that have
           affected the objectivity of the entity's actuary. Management believes
           that the actuarial assumptions and methods used to measure the amounts
           in the SOSI for financial accounting purposes are appropriate in the
           circumstances.
        2. Actuarial assumptions and methods used to measure the amounts in the
           SOSI for financial accounting and disclosure purposes represent
           management's best estimates regarding future events based on
           demographic and economic assumptions and future changes mandated by
           law.
        3. There were no material omissions from the data provided to the
           entity's actuary for the purpose of determining the actuarial present
           value of the estimated future income to be received and estimated
           future expenditures to be paid during the projection period sufficient
           to illustrate the long-term sustainability of (name of the social
           insurance program) as of (dates of SOSI presented).
        4. The SOSI covers a projection period sufficient to illustrate the
           long-term sustainability of the social insurance program.
        5. Management provided the auditor with all the reports developed by
           external review groups appointed by the entity or the program's
           trustees related to estimates in the SOSI.

             1. The following matters relating to the SOSI have been disclosed
                properly in the notes to the financial statements:

                  1. The accumulated excess of all past cash receipts, including
                     interest on investments, over all past cash disbursements
                     within the social insurance program represented by the fund
                     balance at the valuation date.
                  2. An explanation of how the net present value is calculated
                     for the closed group.
                  3. Comparative financial information for items in paragraphs
                     2a, 2b 2c and 2d (1) of SOP 04-1, for the current year and
                     for each of the preceding four years. (Note any preceding
                     years that are unaudited).
                  4. Significant assumptions used in preparing estimates

    34. There have been no changes in (or, changes in the following have been
    properly recorded or disclosed in) the actuarial methods or assumptions
    used to calculate amounts recorded or disclosed in the financial
    statements between

    a.
               the valuation dates (for example: of January 1, 20x6 and January
               1, 20x5) or changes in the method of collecting data, and

    b.
               the valuation date (for example: of January 1, 20x6), and the
               financial reporting date (of September 30, 20x6) or changes in the
               method of collecting data.

    35. There have been no changes in (or, changes in the following have been
    properly recorded or disclosed in) laws and regulations affecting social
    insurance program income and benefits between

    a.
               the valuation dates (for example: January 1, 20x6 and January 1,
               20x5)

    b.
               the valuation date (for example: January 1, 20x6) and the
               financial reporting date (of September 30, 20x6).

    36. Accounting estimates applicable to the financial information of the
    entity included in the SOSI are based on management's best estimate, after
    considering past and current events and assumptions about future events.

    Budgetary and Restricted Funds

    [OMB audit guidance includes a representation by management on the
    consistency of budgetary data in the following paragraph.]

        1. The information presented in the (entity's) Statement of Budgetary
           Resources (materially - defined in paragraph 2 on page 1001 A-1)
           agrees with information submitted in its year-end Reports on Budget
           Execution and Budgetary Resources (SF-133s). The information will be
           used as input for fiscal year 20x6 actual column of the Program and
           Financing Schedules reported in the fiscal year 20x8 Budget of the U.S
           Government. This information is supported by the related financial
           records and data.
        2. We have disclosed in the financial statements all earmarked funds as
           defined by FASAB SFFAS No. #27 and all restricted funds that are
           material.

    [Name of Head of Entity]

    [Title]

    [Name of Chief Financial Officer]

    [Title]

    Attachment

                         [This page intentionally left blank.]

      1002 - Inquiries of Legal Counsel

    .01 FAM 1002 provides guidance on procedures to obtain evidence that the
    financial accounting and reporting of contingencies ^[235]1 regarding
    litigation, claims, and assessments conform with U.S. generally accepted
    accounting principles (U.S. GAAP). FAM 1002 discusses the accounting and
    reporting guidance and audit procedures for inquiries of legal counsel
    concerning litigation, claims, and assessments, and includes an example
    audit program at FAM 1002 A; an example legal representation letter
    request at FAM 1002 B; and a legal representation letter response at FAM
    1002 C.

        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 U.S. 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,
    contains accounting and reporting standards for loss contingencies,
    including those arising from litigation, claims, and assessments. ^[236]2
    The Federal Accounting Standards Advisory Board (FASAB) Interpretation No.
    2, Accounting for Treasury Judgment Fund Transactions, provides additional
    guidance related to claims to be paid through the Treasury Judgment Fund.
    ^[237]3 Statement of Financial Accounting Standards (FAS) No. 5,
    Accounting for Contingencies, also provides guidance for financial
    accounting and reporting for loss and gain contingencies for government
    corporations and entities following U.S. GAAP for the private-sector
    promulgated by the Financial Accounting Standards Board (FASB). The
    definition of probable for legal contingencies is essentially the same in
    FAS No. 5 and SFFAS No. 5.

    .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
    remote to probable. SFFAS

    1

    Including environmental and disposal liabilities that are a type of
    contingency that is often a significant issue for the federal government.

    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.

    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 report the costs and liabilities arising
    from claims to be paid by the Judgment

    Fund and how the Judgment Fund accounts for the amounts that it is
    required to pay on behalf of federal

    entities.

    Nos. 5 and 12 use the terms remote, reasonably possible, and probable to
    identify three areas within the range of probability, as follows:

         o Remote--The chance of the future event or events occurring is slight.
         o Reasonably possible--The chance of the future event or events
           occurring is more than remote but less than probable.
         o 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.)

    .05 The entity should recognize a liability and a related charge to
    expense for an estimated loss from a loss contingency only when ^[238]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, the entity should determine whether to
    disclose the contingency. However, if no accrual is made for a loss
    contingency because one or more of the conditions in FAM 1002.05 are not
    met, the federal government and its entities should report contingent
    losses that involve situations where there is at least a reasonable
    possibility that a loss has been incurred.

    The entity should disclose 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. The reporting of
    contingent losses depends on the likelihood that a future event or events
    will confirm the loss or impairment of an asset or the incurrence of a
    liability. Terms used to assess the likelihood of loss are remote,
    reasonably possible, and probable as discussed in FAM 1002.04.

    Contingent losses that are assessed as probable and measurable are accrued
    in the financial statements. Losses that are assessed to be at least
    reasonable possible are disclosed in the notes. For an overview of the
    standards that provide criteria for how federal agencies are to account
    for contingent losses based on the likelihood of the loss and the
    measurability, see table 1 below:

    If the Judgment Fund will pay the claim, the entity still recognizes 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 reduces 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 establishes a payable to reimburse the
    Judgment Fund.

    Likelihood of
    future            Loss amount can be Loss range can be   Loss amount range
    outflow or other  reasonably         reasonably measured cannot be
                         measured                               reasonably
    sacrifice of                                             measured
    resources
                         Accrue the                             Disclose nature
    Probable: Future  liability          Accrue liability of of contingency
    confirming                           best estimate or    and include a
    event(s) are                         minimum amount in   statement that an
    likely to occur                      loss range if there estimate cannot
                                            is no best          be
                                            estimate, and       made
                                            disclose
                                            nature of
                                            contingency and
                                            range of estimated
                                            liability
    Reasonably                                               Disclose nature
    possible:         Disclose nature of Disclose nature of  of
    Possibility of    contingency and    contingency and     contingency and
    future                                                   include
    confirming        estimated amount.  estimated loss      a statement that
    event(s)                             range.              an
    occurring is more                                        estimate cannot
    than                                                     be
    remote and less                                          made
    than
    likely
    Remote:           No action is       No action is        No action is
    Possibility of    required           required            required
    future event(s)
    occurring is
    slight

    Management decides what to report. The auditor evaluates whether
    management's reporting is in accordance with U.S. GAAP.

    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
    entity 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. An Example Management Summary Schedule is provided
    at FAM 1002 D.

        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 to evidence that they are appropriately accounted for and
    disclosed. AU 9337 provides auditing interpretations of AU 337. OMB audit
    guidance also contains procedures for inquiries of legal counsel. (See FAM
    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 may discuss with management the events or conditions in
    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.

    .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
    auditor should ask management to have the legal letter request include
    either (1) a list of pending or threatened litigation, claims, and
    assessments, or (2) a request by management that legal counsel prepare the
    list. The auditor should also ask management to have the legal letter
    request include a list of unasserted claims and assessments the lawyer
    determined 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 any matters meeting the criteria). The auditor
    should obtain assurance from management, ordinarily in writing, that it
    has disclosed all unasserted claims when it is considered probable that a
    claim will be asserted and there is a reasonable possibility that the
    outcome will be unfavorable.

    Legal counsel then would supplement management's information about those
    unasserted claims and assessments, including an explanation of any matters
    where their 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 auditor should ask management to have the legal letter request include
    a request for legal counsel to make a statement that they will advise
    management about unasserted claims and assessments that management should
    evaluate for disclosure. See the example request at FAM 1002 B and example
    response at FAM 1002 C.

    .12 The auditor should also perform procedures to learn about legal claims
    against the government where no monetary damages are being sought,
    commonly referred to as non-monetary cases. In these cases, plaintiffs
    seek that the government either take or cease a particular action, which
    if successful, could cost the government significant amounts of money to
    comply. An example is a claim regarding the Department of Energy's
    classification of radioactive waste for disposal, which if successful
    could result in considerable environmental expense and liability. Auditors
    should make inquiries of management and legal counsel to determine if such
    nonmonetary cases exist. Management should determine the effect of losing
    the case, if any, on the entity's financial statements.

        Timing of Legal Letter Request and Responses

    .13 The auditor generally should perform procedures for inquiries of legal
    counsel concerning litigation, claims, and assessments 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 generally should coordinate the timing of
    legal letter requests, responses (including interim responses), and
    related management schedules. The auditor and the entity management should
    determine the due dates for obtaining responses from component units to
    provide legal letter responses for the entity's financial statements as
    well as for the U. S. Government's Consolidated Financial Statements. In
    setting the due dates, the auditor and entity management generally should
    allow for management to inquire of Department of Justice legal counsel on
    a case-specific basis.

    .14 In addition, when an entitywide audit team uses the work of entity
    component audit teams, the entitywide and component audit teams generally
    should coordinate the timing of legal letter requests, responses, and
    management schedules and determine 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
    from the component audit teams by the due dates.

    .15 The legal counsel's response should include matters that existed at
    the balance sheet date and through a date near the completion of the
    audit. If the effective date is substantially in advance of the completion
    of the audit (for example, earlier than 2 weeks before the completion of
    the audit), the auditor should contact the legal counsel for an updated
    response. To avoid this situation, the legal letter request may specify
    the period the legal counsel's response is to cover and the date the
    auditor expects to receive the response.

    .16 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 current date and through a point in time reasonably before the
    completion of the audit so that a preliminary evaluation of the
    significance of material legal matters can be made. This is particularly
    applicable to large federal agencies with numerous and complex cases.
    ^[239]5

    If an interim letter is used, the auditor should ask the entity to request
    that legal counsel submit a final or updated response covering matters
    from the interim date through the date of audit completion. The entity
    should request that the updated response contain only changes or a
    statement indicating there are no changes from the interim response and
    any new matters from the interim date through the completion of the audit.
    The auditor should ask the entity to request that legal counsel date and
    submit the final legal representation letter to coordinate with the
    management representation letter in FAM 1001.

    However, in some cases, the legal representation letters are ready first
    so entity management may rely upon them before signing the management
    representation letters. In theses cases, the auditor should make oral
    inquiries of legal counsel and document whether material changes had
    occurred from the date of the legal representation letter to the date of
    audit completion. The auditor should plan to receive letters to meet the
    reporting deadline in accordance with OMB Financial Reporting
    Requirements. See FAM 1002 B for an example legal letter request that
    includes requests for interim and updated responses from legal counsel.

        Determining a Materiality Level

    .17 The auditor and the entity may agree to limit the legal inquiry to
    matters that are considered individually or collectively material to the
    financial statements, provided that the entity and the auditor have agreed
    on the materiality level. The auditor should ask the entity to indicate
    the materiality level, if used, in the legal letter request and the entity
    should ask the lawyer to include the materiality in the response.

    .18 In determining a materiality level for the legal letter, the auditor
    and the entity 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),

    For example, for its fiscal year 2006 audit, the Department of Justice
    asked its components to submit interim representations by July 11, 2006,
    for contingencies that existed through June 30, 2006. This was to allow
    review of cases before external issuance.

    (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, the auditor of the U.S Government's
               Consolidated Financial Statements used 2.5 percent of design
               materiality for individual cases and 5 percent of design
               materiality for the aggregate of all cases.)

    .19 In aggregating cases, the auditor and the entity may use two levels of
    aggregation. First, similar cases are aggregated (such as employment
    discrimination cases, harbor maintenance fee cases, spent nuclear fuel
    cases, or military promotion board challenges), treated as a group and the
    auditor should compare the total with the individual materiality level.
    The aggregation generally includes a list of the individual cases and a
    discussion of the items of information included in the legal letter for
    the aggregated cases (see FAM 1002 B and FAM 1002 C).

    Second, cases not included in the legal letter individually or as part of
    a group of similar cases are aggregated. The auditor may use a higher
    materiality level for such an aggregation. However, the auditor may set
    this higher materiality 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 the other items listed in the
    previous paragraph.

    .20 Where the entity engages more than one legal counsel, the entity and
    the auditor should determine whether matters considered not material
    individually would exceed the materiality limit when aggregated. In
    addition, when separate legal representation letters are requested on
    individual components (such as bureaus or offices) of a consolidated
    entity because of individual component audits, the auditor may determine
    materiality levels for each component.

        Legal Counsels from Whom Information Should be Requested

    .21 Most federal entities 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).

    .22 In the federal government, the main legal counsel outside of the
    entity is the Department of Justice. ^[240]6 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.

    .23 The auditor should ask the entity to request that legal counsel 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, the evaluation and responses by general counsel ordinarily
    are adequate evidence. However, evidential matter obtained from general
    counsel is not a substitute for information that outside legal counsel
    refuses to furnish to the auditor.

    .24 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 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

    .25 Written responses from legal counsel will vary considerably in the
    scope of information provided and in the opinion expressed. In preparing
    the responses, legal counsel uses 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).

    .26 The auditor should ask the entity to request that legal counsel cover
    all entity components included in the financial statements being audited.
    Additionally, legal counsel generally should indicate the disposition of
    cases included in the prior year's letter that are no longer
    contingencies.

    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.

    .27 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 should evaluate any "unable to determine"
    and vague and unclear responses. The auditor also should evaluate 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

    .28 When legal counsel limits the response, the auditor should determine
    whether the limitation affects the auditor's report. Legal counsel may
    appropriately limit their response to certain matters. For example, to
    matters that (a) legal counsel has given substantive attention to in the
    form of legal consultation or representation, and (b) are determined to be
    individually or collectively material to the financial statements,
    provided the entity and the auditor have reached an understanding on
    materiality levels. These limitations are acceptable and are not
    limitations on the scope of the audit.

    .29 The following are examples of limitations on legal counsel's responses
    that the auditor should not accept 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 evaluate 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 has 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 evaluate this as 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

    .30 The following are examples of legal counsel responses that lack
    sufficient opinion on the resolution of a case:

    a.
               Uncertainties. 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
               generally should conclude that the financial statements are
               affected by an uncertainty concerning the outcome of a future
               event, which is not susceptible to reasonable estimation. See FAM
               580 for reporting on uncertainties.

                    b.
                            Unclear responses. Legal counsel 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 their 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:

                               o "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:

                               o "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.)
                               o "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.)

    .31 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 FAM 1002 C-4 to C-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, management should
    determine the disclosure. Management, with legal counsel's advice,
    determines whether cases are probable, reasonably possible, or remote, to
    decide whether to recognize them as liabilities and/or disclosed them in
    the notes to the financial statements.

    .32 If the auditor is not certain about legal counsel's evaluation, the
    auditor should discuss the matters with 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 unfavorable outcome,
    management should disclose the uncertainty and the auditor should evaluate
    the uncertainty's effect on the audit report.

        Example Legal Letter Request

    .33 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 ask that the reply be sent
    directly to the auditor with a copy to management by specified due dates.
    FAM 1002 B provides 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

    .34 The General Counsel's response on General Counsel letterhead is sent
    to the auditor with a copy to management by the agreed-upon due dates. The
    counsel may indicate that the response is provided for the auditor's use
    in connection with the audit.

    .35 FAM 1002 C shows an example of a legal counsel response, including the
    legal representation letter that should include Justice's legal
    contingency standard forms for each case or group of cases. Forms can be
    obtained on Justice's website at
    [241]http://www.usdoj.gov/civil/forms/forms.htm and auditors should check
    that current forms were used.

    .36 FAM 1002 D shows an example of management's schedule that documents
    how the information contained in the legal counsel's responses was used 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.

        Practice Aids

    .37 The following practice aids are provided at:

    FAM 1002 A - Example Audit Procedures for Inquiries of Legal Counsel;

    FAM 1002 B - Example Legal Letter Request;

    FAM 1002 C - Example Legal Representation Letter, and

    FAM 1002 D - Example Management Summary Schedule.

                         [This page intentionally left blank.]

      1002 C - Example Legal Representation Letter

    [General Counsel Letterhead]

    [Date]

    [Auditor]

    [Title]

    [Agency or Firm Name]

    [City]

    Subject: Legal Response in Connection with the 20X6 and 20X5 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 years ended September 30, 20X6 and 20X5 [see FAM 1002 B].
    [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
    the signer exercises general supervision, indicating exceptions to such
    supervision and situations where the auditor may primary rely 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 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 (1) loss contingencies [over the amount of (state
    materiality level agreed to with auditor and stated in request letter, for
    example $1 million)], or (2) loss contingencies that are less than or
    equal to [for example, $1 million] but in the aggregate exceed, [for
    example, $5 million] 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. General Counsel may use current Department of Justice forms to
    describe the cases (one for pending or threatened litigation, another for
    unasserted claims); see the DOJ website at
    [242]http://www.usdoj.gov/civil/forms/forms.htm. ] ^[243]1

    It is expected that cases or matters will be aggregated where appropriate.

    (Excluding unasserted claims and assessments, which are discussed below)

        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. Pending or
    threatened litigation that was reported in the prior year's legal
    representation letter, which is no longer pending or threatened is as
    follows

    [Identification of litigation with a short description of its
    disposition.] 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.

    There are no potential claims against the government where no monetary
    damages are being sought but plaintiffs are seeking that the government
    either take or cease a particular action, which if successful, could cost
    the government an amount management has determined will exceed $XX to
    comply. [or describe potential claims and amounts.]

                                       * * * * *

    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 receipt of a request to update
    the response, I will provide an updated response, which is due on
    [date],"] {If a final response: I disclaim any undertaking to advise you
    of changes that, after the date of this letter, 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 "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 the [entity]'s understanding that
    whenever, in the course of performing legal services for the [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 the [entity] and
    will consult with the [entity] concerning the question of such disclosure
    and the applicable requirements of Statement of Federal Financial
    Accounting Standards (SFFAS) No. 5, Accounting for Liabilities of the
    Federal Government, as amended by SFFAS No. 12, and Interpretation Number
    2 of SFFAS No. 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

    attachments (DOJ forms or other case information)

                         [This page intentionally left blank.]

    Reporting 1002 D - Example Management Summary Schedule

    The auditor should see that management prepare this schedule (or
    equivalent) summarizing the information contained in the legal letters. In
    particular, the auditor should determine that management has concluded 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 U.S. GAAP.
    Although most information comes directly from the legal letter, the
    auditor should determine that financial staff have accurately added 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

                                                   Amount or  Disposition in
                          Name of                  range of   financial
    Reference Amount   case/   Likelihood       potential  statements
    key       claimed  related of loss          loss
                          cases              (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 auditor
           should request that the CFO work with legal counsel to provide further
           disaggregation of dissimilar cases. There may also be other instances
           in which ahigher level of aggregation is desirable. The auditor should
           request that CFOs use professional judgment,

    considering the purpose of this schedule when determining the level of
    aggregation.

    DRAFT GAO/PCIE Financial Audit Manual Page 1002 D-1

    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."
             Disposition in financial statements - amount recorded: If
         6   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.)
    DRAFT            GAO/PCIE Financial Audit Manual             Page 1002 D-2

      1003 - Financial Statement Audit Completion Checklist

    Entity:

    Job Code:

    Principal Report:

    Other Reports (including management reports and testimonies):

        Instructions

    .01 This checklist is a tool to help auditors of financial statements
    determine whether they have complied with GAGAS, OMB audit guidance, and
    the FAM. The auditor-in-charge (AIC), audit senior, or audit manager
    should prepare this checklist before the audit completion date and sign in
    section VIII. The assistant director and first partner (audit director)
    should review this checklist before the audit completion date and also
    sign in section VIII. For GAO audits, the chief accountant or second
    partner should review the checklist and sign in section IX when engagement
    quality control review (previously called a second partner review) is
    completed before the audit completion date. If the audit is conducted at
    multiple sites, the site supervisor may complete parts of the checklist
    for each site (with the AIC, audit senior, or audit manager completing the
    overall checklist). While parts of the checklist are useful in audit
    planning, no signatures are required on the checklist in the planning
    phase.

    .02 The detailed questions in this checklist are to be answered "Yes",
    "No", or "N/A (not applicable)". For most questions, "No" answers indicate
    departures from professional standards or from auditor policies. The
    auditor should explain all "No" answers in section VII of this checklist
    and determine the effects and significance of "No" answers, including any
    effects on the auditor's report. Auditors should check "N/A" when the item
    does not exist or when the item exists but is judged to be not material.
    Because the checklist is designed for a wide range of financial statement
    audits, there may be many "N/A" answers. If the reason why a question is
    not applicable is not obvious, the auditor should document the reason on
    the checklist or in an attachment. It is not necessary to create
    additional documentation to support the "Yes" answers, but a column is
    provided to insert a reference to related audit documentation ("Ref.").
    The questions are summarized. For most questions, there is a reference to
    professional literature that provides more detail.

    .03 Section V has questions on GAO's report considerations and section VI
    has questions on GAO's quality control. GAO auditors should complete these
    sections. IG auditors and other auditors may use these sections or may
    substitute forms that conform to their reporting style and quality
    controls.

    .04 See FAM 650 related to reviewing this checklist (or equivalent) when
    using the work of others.

    .05 FAM Volume 3 has two checklists, Checklist for Federal Accounting (FAM
    2010), and Checklist for Federal Reporting and Disclosures, (FAM 2020),
    which superseded the July 2004 FAM 1050 checklist. The two checklists
    cover accounting, financial reporting, and disclosure requirements related
    to federal financial statements prepared using U.S. GAAP promulgated by
    FASAB and includes form and content presentation contained in OMB Circular
    No. A-136 (June 29, 2007). The AICPA publishes a disclosure checklist for
    financial statements prepared using U.S. GAAP promulgated by FASB.
    Preparers of entity financial statements may document their conformity
    with U.S. GAAP by either

         o completing the FAM 2010 and FAM 2020 checklists, or
         o completing the AICPA disclosure checklist, as applicable, and a
           supplemental checklist for FASAB requirements, or
         o completing an equivalent checklist that addresses applicable
           accounting, financial reporting, and disclosure requirements.

    Preparers should tailor checklists to the needs of their individual entity
    financial statements and auditors should review finished checklists for
    completeness and accuracy. If the preparer does not complete the
    checklists, the auditor should complete FAM 2010 and FAM 2020 or
    equivalent to document the conformity of the entity's financial statements
    with U. S. GAAP as discussed in FAM 560.

    .06 For GAO's financial audits, this checklist incorporates, by reference,
    additional job-related documentation requirements.

    .07 For GAO's financial audits, the chief accountant or second partner
    should perform an engagement quality control review. This review should be
    documented on FAM 1003-29. IG auditors and other auditors should determine
    the need for a similar review as part of their system of quality control
    under GAGAS.

    Reporting 1003 - Financial Statement Audit Completion Checklist

    CONTENTS Section Topic Page

    Planning and Concluding the
    Audit.............................................................................
    4
    Key Audit Areas
    ...........................................................................................................
    10
    Consultation
    .................................................................................................................
    17
    Report...........................................................................................................................
    18
    GAO's Report Considerations
    ....................................................................................
    23
    GAO's Quality
    Control.................................................................................................
    24
    Explanation of "No" Answers and Other
    Comments.............................................. 27
    Conclusions
    .................................................................................................................
    28
    Engagement Quality Control Review (Second Partner
    Review)........................... 29

    References:

    AICPA Professional Standards (vol. 1, Auditing)
    ............................................................. AU GAO/PCIE
    Financial Audit
    Manual..................................................................................FAM
    Government Auditing Standards (2007 edition)
    ........................................................GAGAS

    Reporting 1003 - Financial Statement Audit Completion Checklist Reporting
    1003 - Financial Statement Audit Completion Checklist Reporting 1003 -
    Financial Statement Audit Completion Checklist Reporting 1003 - Financial
    Statement Audit Completion Checklist Reporting 1003 - Financial Statement
    Audit Completion Checklist Reporting 1003 - Financial Statement Audit
    Completion Checklist Reporting 1003 - Financial Statement Audit Completion
    Checklist Reporting 1003 - Financial Statement Audit Completion Checklist
    Reporting 1003 - Financial Statement Audit Completion Checklist Reporting
    1003 - Financial Statement Audit Completion Checklist Reporting 1003 -
    Financial Statement Audit Completion Checklist Reporting 1003 - Financial
    Statement Audit Completion Checklist Reporting 1003 - Financial Statement
    Audit Completion Checklist Reporting 1003 - Financial Statement Audit
    Completion Checklist Reporting 1003 - Financial Statement Audit Completion
    Checklist Reporting 1003 - Financial Statement Audit Completion Checklist
    Reporting 1003 - Financial Statement Audit Completion Checklist Reporting
    1003 - Financial Statement Audit Completion Checklist Reporting 1003 -
    Financial Statement Audit Completion Checklist Reporting 1003 - Financial
    Statement Audit Completion Checklist Reporting 1003 - Financial Statement
    Audit Completion Checklist Reporting 1003 - Financial Statement Audit
    Completion Checklist Reporting 1003 - Financial Statement Audit Completion
    Checklist Reporting 1003 - Financial Statement Audit Completion Checklist
    Reporting 1003 - Financial Statement Audit Completion Checklist

    Section I: Planning and Concluding the Audit              N/A Yes No* Ref.
    1. Has the audit team documented that it has
    a. established an understanding with those contracting
    for the audit, officials of the entity, or others defined
    as the client and those charged with governance as to the
    objectives of the work; management's responsibilities;
    auditors' responsibilities; an overview of the nature,
    extent, and timing of planned audit procedures, the form,
    general content, and timing of communications; planned
    reporting on the financial statements, internal control,
    and compliance; the planned level of assurance; any
    limitations of the work and any potential restrictions on
    the auditor's reports; and
    b. issued an engagement letter, contract, or other
    written communication to describe the terms of
    the engagement?
    (FAM 215 and GAGAS, par. 4.06)
    2. Was an entrance conference held? (FAM 215 A)
    3. Does audit documentation contain an understanding of
    the entity, its operations, and its internal controls
    sufficient to assess risk and plan the audit? (FAM
    290.03-.04)
    4. Does the audit documentation contain an adequate
    audit strategy and audit plan? (FAM 290.05 and FAM
    290.09)

    Section I: Planning and Concluding the Audit              N/A Yes No* Ref.
    5. Did the audit team adequately perform and document
    planning steps (FAM 290.05) to include
              a. Perform preliminary analytical procedures? (FAM
    225)
    b. Determine planning and design materiality and
                   tolerable misstatement? (FAM 230)
    c. Identify and justify methodology used to assess
              computer-related controls if other than the
    FISCAM? (FAM 240)
    d. Identify significant laws and regulations? (FAM
    245)
    e. Identify relevant budget restrictions? (FAM 250)
           f. Design the audit to achieve an acceptable level of
               audit assurance that the financial statements are
                not materially misstated? (GAO uses 95 percent.)
    (FAM 260)
         g. Discuss the susceptibility of the entity's financial
                  statements to material misstatement? (FAM 260)
           h. Assess inherent risk and the overall effectiveness
             of the control environment, risk assessment,
               communication, and monitoring, including
                  whether weaknesses in the control environment,
                  risk assessment, communication, and monitoring
            preclude the effectiveness of specific control
    activities? (FAM 260)
    i. Assess fraud risks, including any related to
                 revenue and to management override of controls,
                 and exercise professional skepticism throughout
                  the audit? (FAM 260 and FAM 290.08)
    j. Brainstorm risk of material misstatement
                  including fraud risk and error risk? (FAM 260)
              k. Consider the effects of information technology,
                 including service centers? (FAM 270)
              l. Consider operations controls to be tested? (FAM
    275)
    m. Plan other procedures (representation letters,
    related party transactions, sensitive payments)? (FAM
    280)

    Section I: Planning and Concluding the Audit              N/A Yes No* Ref.
    5. (continued)
    n. Determine locations to be visited? (FAM 285)
    o. Determine staffing requirements? (FAM 290.05)
               p. Determine timing of procedures and milestones?
    (FAM 290.05)
    q. Determine extent of assistance from entity
    personnel? (FAM 290.05)
    6. Does the audit strategy consider findings and
    recommendations from previous audits that could
         affect the current audit objectives? (GAGAS, par. 4.09)
    7. Did the audit team identify budget controls for each
    relevant budget restriction and perform sufficient work
    to support the conclusions on internal control?
    (FAM 250, 310.06, 330.09)
    8. Did the audit team identify compliance controls and
           perform sufficient work to support the conclusions on
    internal control? (FAM 245, 310.05, 330.10)
    9. Did the audit team use the work of others (CPA firms,
    IGs, internal auditors, or specialists)? (FAM 650)
    10. Did the audit team perform overall analytical
    procedures, including documentation of
    a. expectations,
    b. data/sources,
    c. parameters,
    d. explanations/corroboration, and
    e. conclusions?
    (FAM 590.04)

    Section I: Planning and Concluding the Audit              N/A Yes No* Ref.
    11. Does the documentation indicate that the audit team
    properly performed procedures in the reporting phase of
    the audit (FAM 590) as follows:
    a. Evaluate misstatements, including considering whether
    any misstatements are indicative of fraud? (FAM 540)
    b. Bring all uncorrected known and likely misstatements
    to the attention of entity management and those charged
    with governance? (FAM 540.07)
    c Obtain attorneys' representations? (FAM 550.02 and FAM
    1002)
    d. Review subsequent events? (FAM 550.04 and FAM 1005)
    e. Obtain management representations? (FAM 550.07 and FAM
    1001)
    f. Identify and evaluate related party transactions? (FAM
    550.12 and FAM 1006)
    g. Communicate with those charged with governance? (FAM
    550.13)
    h. Review the consistency of other information in the
    Annual Financial Report? (FAM 580.77)

    Section I: Planning and Concluding the Audit              N/A Yes No* Ref.
    12. Does the audit summary memorandum or equivalent
    properly summarize or refer to documentation (FAM
    590.02-.03) addressing the following? a. Any changes from
    original assessments of the risk of material
    misstatement, materiality, or tolerable misstatement? b.
    Additional fraud risks or other conditions identified
    during the audit calling for an additional response and
    the related response? c. The basis for conclusions on
    significant auditing, accounting, and reporting issues?
    d. Conclusions on adequacy of procedures and sufficiency
    of evidence? e. The effects of uncorrected misstatements
    (known and likely) on the financial statements? f.
    Conclusions on financial statements? g. Conclusions on
    internal control? h. Conclusions on whether the entity's
    financial management systems meet the requirements of
    FFMIA? i. Conclusions on compliance with laws and
    regulations? j. Conclusions on the consistency of
    accompanying information with the financial statements?
    13. Has the audit director determined that communications
    have occurred among the audit team members
    regarding fraud risks and error risks? (FAM 540.19)

    Section I: Planning and Concluding the Audit              N/A Yes No* Ref.
    14. Is there documentation that
    a. The director approved deviations from the "should"
    procedures in the FAM and the basis for the deviations?
    (FAM 110.28)
    b. The auditor complied with "must" procedures of
    professional auditing standards as noted in the FAM? (FAM
    110.28 and Appendix B)

                      Section II: Key Audit Areas                N/A Yes No* Ref.
    Answer the questions below for each key audit area or
    cycle. The key audit areas and cycles to which these
    questions apply are
    ____________________________ 1. Did the audit team
    prepare the documentation
    summarizing considerations in planning and performing the
    work in the key audit areas and cycles
    for
    a. Cycle Matrix or an equivalent (or documentation in
    Account Risk Analysis or an equivalent)
                showing links between accounts, cycles,
               applications and line items? (FAM 290.06)
    b. Account Risk Analysis or an equivalent? (FAM 290.07)
    c. Cycle Memorandum and/or flowchart or equivalents? (FAM
    390.05)
    d. Specific Control Evaluation or an equivalent? (FAM
    390.07)
              e. Written audit plan and procedures? (FAM 390.01)
    2. If conditions changed during the course of the audit,
    were the audit strategy, audit plans, and procedures
    modified as appropriate in the circumstances, including
    evidence of first partner/director approval?
    (AU 311.05)

                      Section II: Key Audit Areas                N/A Yes No* Ref.
    3. When the audit team performed sampling, did it
    properly determine and document the
    a. method used in relation to test objectives,
    b. sample size and the method of determining the sample
    size,
    c. tests performed,
    d. results (misstatements and deviations found),
    e. evaluation (including projection to the population),
    and
    f. conclusions? (FAM 490.05)
    4. When the audit team performed substantive analytical
    procedures, did it properly document a. expectations and
    the method used to develop them, b. data
    sources/reliability, c. limit/criteria, d. client
    explanations and corroborating evidence, e. additional
    procedures, if any and f. conclusions? (FAM 490.07)
    5. When the audit team performed interim testing, did it
    a. test the rollforward period,
    b. properly document the
    i. basis for using interim testing and the line items/
    accounts and assertions tested,
                     ii. procedures performed, and
    iii. effects of any misstatements found? (FAM 495 C.06)
    6. Did the audit team evaluate the reasonableness of
    significant accounting estimates made by
    management? (AU 342)

                      Section II: Key Audit Areas                N/A Yes No* Ref.
    7. Were known and likely misstatements identified in the
    testing of the key area carried forward to the Schedule
    of Uncorrected Misstatements? (FAM 540.04 and FAM 595 C)
    8. Did an IT specialist review the specific control
    evaluation to evaluate the audit team's decision on which
    controls are computer-related (including controls
    relating to service-center-produced records)? (FAM
    350.10)

                      Section II: Key Audit Areas                N/A Yes No* Ref.
    Based on the risk of material misstatement, did the audit
    team perform adequate substantive audit procedures for
    line items/accounts on the following pages? (If not a key
    area, check the N/A box.)
    Fund Balance with Treasury (FBWT)
    Consider these issues:
    o Did the audit team test the entity's year-end
                reconciliation of Fund Balances with Treasury to
    Treasury accounts?
    o Did the audit team determine if the entity
                   a. researched and resolved differences before
                          making adjustments,
                    b. recorded any necessary adjustments in the
                        entity's FBWT accounts,
              c. reported the adjustments to Treasury, if
                            applicable, and
              d. disclosed in the notes to the financial
                    statements material unreconciled differences
                      and budget clearing account differences at
                  year-end, and material unreconciled
                    differences written off by the entity during
    the year?
             o Did the audit team assess (at absolute value) the
              materiality of unreconciled differences, including
                  those in budget clearing accounts?
    Receivables
    Consider these issues:
    o If substantive audit procedures were performed
              prior to year-end, was there an adequate review of
               transactions from the interim date to the balance
    sheet date? (AU 313.08-.09)
    o Were receivables confirmed and appropriate
                follow-up steps taken, including second requests
              and subsequent collections? (AU 330.30-.32)
          o Are receivables stated at net realizable value after
               allowance for uncollectible accounts? (AU 342.02)

                    Section II: Key Audit Areas              N/A  Yes  No*  Ref.
    Inventories
    Consider these issues:
    o Were physical inventories observed at locations
               where material amounts were located? (AU 331)
    o If perpetual inventory records are maintained,
            does the documentation indicate that differences
           disclosed by the physical inventory (or cycle
          counts) are properly reflected in the financial
    statements? (AU 331)
    o When the physical inventory is taken at a date
            other than the balance sheet date (or where
          rotating procedures are used), did the auditor
            consider inventory transactions between the
           inventory date(s) and the balance sheet date?
    (AU 313.08-.09)
    o Does the documentation contain evidence that
                counts were correctly made and recorded (was
            control over inventory tags or count sheets
            maintained) and test count quantities were
           reconciled with the counts reflected in the final
    inventory? (AU 331)
    o Were there adequate tests of
              a. clerical accuracy of the inventory,
              b. costing methods and substantiation of costs
              used in pricing all elements of the inventory,
    and
    c. cutoff?
    o Were analytical procedures used to test the
                 overall valuation of inventories?
    Investments
    Consider these issues:
             o Was a summary schedule prepared (or obtained)
         and details tested with respect to the description,
            purchase price and date, changes during the
          period, income, market value, etc. of investments?
    o Were securities either examined or confirmed?
    (AU 332)

                    Section II: Key Audit Areas              N/A  Yes  No*  Ref.
    Property, Plant, and Equipment
    Consider these issues:
             o Was a summary schedule prepared (or obtained)
              to show beginning balances, changes during the
                  period, and ending balances for
              a. property, plant, and equipment, and
                    b. accumulated depreciation
          and were significant activity and balances tested,
            particularly for existence and other significant
    assertions?
    o Were property items capitalized or expensed in
           accordance with consistent capitalization limits?
         o Did the audit team perform tests of completeness,
              such as testing from disbursements to property
    records?
    o Do the tests appear adequate and were proper
    conclusions drawn?
    Liabilities
    Consider these issues:
    o Did the audit team perform an adequate search
    for unrecorded liabilities?
    o Did the audit team consider expenses that might
           require accrual (e.g., pensions, compensated
            absences, other postretirement benefits, or
               postemployment benefits provided to former or
           inactive employees prior to retirement), and
             whether accrued expenses were reasonably
    stated?

                   Section II: Key Audit Areas              N/A   Yes  No*  Ref.
    Revenue and Expenses
    Consider these issues:
    o Did the audit team compare revenue and
         expenses for the period to expectations, based on
           the budget and the results of the preceding
    period? (AU 329)
    o For significant variances and fluctuations from
              expectations, were management's explanations
          corroborated with other audit evidence or if
            explanations could not be obtained, were other
             audit procedures performed to determine
          whether the variance is a misstatement? (AU 329)
    o Did the audit team consider
           a. the entity's revenue recognition policy,
                  b. unusual transactions, and
    c. fraud risks?
    o Do tests appear adequate, and were proper
    conclusions drawn?
    Statement of Budgetary Resources
    Consider these issues:
    o Were appropriate procedures applied, such as
             a. understanding and testing the budget
                       execution controls,
            b. tests of the process of preparing the
    statement,
               c. tests of undelivered orders, and
            d. review of reconciliation to the President's
    Budget?

                       Section III: Consultation                 N/A Yes No* Ref.
    1. Where warranted by the complexity or unusual nature
    of an issue (for example, issues where the FAM requires
    consultation, issues not discussed in the FAM
    or professional standards, going concern issues,
    economic dependency issues, issues arising after
    report issuance), was there appropriate consultation with
    specialists, including the
    o Reviewer,
    o Statistician,
    o Office of General Counsel, and
    o Technical Accounting and Auditing Expert?
    (FAM 100.26 and FAM Appendix A)
    2. Were significant consultations appropriately
    documented? (FAM 100.26)
    3. Were the persons consulted made aware of all relevant
    facts and circumstances?

                          Section IV: Report                    N/A  Yes No* Ref.
    1. Does the auditor's report or document containing the
            auditor's report (FAM 580.04, 580.77) include
    a. highlights page or executive summary (for GAO
    reports);
    b. transmittal letter (if appropriate);
    c. conclusions on:
    i. financial statements,
    ii. internal control,
                 iii. whether the entity's financial management
                        systems substantially complied with the
                requirements of the Federal Financial
                             Management Improvement Act of 1996
                    (FFMIA) for CFO act agencies,
                  iv. compliance with laws and regulations, and
               v. consistency of other information with
                        financial statements?
    d. objectives, scope, and methodology, including
                   description of instances where GAGAS and OMB
                audit guidance were not followed; and
              e. entity comments and auditor evaluation?
    2. Is the auditor's report (FAM 580) appropriate as to
    a. wording,
    b. scope of work,
    c. U.S. GAAP,
    d. explanatory paragraphs,
    e. opinion/disclaimer on financial statements,
    f. opinion/conclusions on internal control,
    g. conclusions on whether the entity's financial
                   management systems substantially comply with
                the requirements of FFMIA (for CFO Act
    agencies), and
    h. reporting on compliance with laws and
    regulations?

                          Section IV: Report                     N/A Yes No* Ref.
    3. Is background material (purpose, authority, and
    functions of programs/activities) limited to what is
    necessary?
    4. Is the auditor's report dated when all appropriate,
    sufficient audit evidence is obtained to support the
    opinion and all significant issues are resolved? (AU
    530, FAM 580)
    5. Does the auditor's report cover all periods for which
    financial statements are presented? (AU 508.65)
    6. If the financial statements of a prior period are
    presented and have been audited by a predecessor
    auditor whose report is not presented, does the auditor's
    report refer to the predecessor auditor's
    report? (AU 508.74)
    7. Does the auditor's report describe the responsibility
    the auditor is taking for supplementary information,
    including stewardship information? (AU 551; FAM
    580.78-.81)
    8. When illegal acts involve funds received from other
    governmental entities, did the audit team
    a. satisfy itself that the audited entity notified the
    proper officials of those entities within a reasonable
    time?
    b. If the entity did not, or was unable to do so because
    the top official was involved, did the audit team report
    these acts to the officials of those other governmental
    entities? (GAGAS, par. 5.15-.18)

                          Section IV: Report                     N/A Yes No* Ref.
    9. Does the auditor's report include
    a. identification of which matters are significant
    deficiencies and which are material weaknesses
    (GAGAS, par. 5.11), and b. presentation of all identified
           (1) instances of fraud and illegal acts that are more
                than inconsequential, (2) material violations of
            provisions of contracts or grant agreements, and (3)
                              material abuse? (GAGAS, par. 5.15)
    10. When appropriate, did the audit team report directly
    to outside parties on fraud, illegal acts, violations of
    provisions of contracts or grant agreements, or
    significant abuse? (GAGAS, par. 5.18)
    11. Did the auditor consider the status of all known
    significant findings and recommendations from prior
    audits that affect the current year report, including
    whether any failure to correct previously identified
    deficiencies in internal control is a significant
    deficiency or material weakness? (GAGAS pars. 5.11-.14.)
    12. Did the auditor document the basis to support
    (FAM 580.01) the
    a. opinion about whether the financial statements
                 and disclosures comply in all material respects
    with U.S. GAAP (FAM 560),
    b. opinion/conclusion on internal control,
    c. conclusion on whether the entity's financial
                    management systems substantially comply with
                the requirements of FFMIA, (for CFO act
    agencies), and
               d. conclusion on compliance with laws and
    regulations?

    Section IV: Report                                        N/A Yes No* Ref.
    13. Did the auditor document the basis for reported
    findings on
    a. internal control deficiencies, including
    classification of control deficiencies as material
    weaknesses, other significant deficiencies, or other
    control deficiencies (FAM 590.05),
    b. entity's financial management systems lack of
    substantial compliance with the requirements of FFMIA for
    CFO act agencies (FAM 590.06), and
    c. noncompliance with laws and regulations (FAM 590.07),
    if any?
    14. Did the auditor develop the elements of audit
    findings to include (where appropriate and known) the
    a. condition (describe the existing situation),
    b. criteria (state what we are comparing to),
    c. cause (reflect reason or reasons why the condition and
    criteria differ), and
    d. effect (describe the result of the difference between
    the condition and criteria)?
    (GAGAS paragraphs 4.14-.18)
    15. Are recommendations and suggestions reasonable,
    doable, and cost-effective?

                          Section IV: Report                     N/A Yes No* Ref.
    16. Does the report obtain the views of responsible
    officials in agency comments to include
    a. either oral or written comments,
    b. titles of senior official(s) involved,
    c. accurate characterization of general agreement or
    disagreement with the report,
    d. description of the substance of the comments, and
    e. auditor evaluation of the comments, particularly if
    they disagree, are inconsistent, or conflict with the
    report findings, conclusions, or recommendations.
    (GAGAS paragraphs 5.32-.37)
    17. Are there control deficiencies that do not meet the
         criteria for significant deficiencies and do not affect
                                                             the
    auditor's conclusions as to the effectiveness of internal
            controls which the auditor may communicate orally or
         in a separate management report? If so, did the auditor
    document any oral communications? (FAM 580.49,
    FAM 590.05, and GAGAS par. 5.14)

                   Section VI: GAO's Quality Control             N/A Yes No* Ref.
    1. Was the GAO report reviewed by the
    a. audit director (first partner),
    b. engagement quality control reviewer (second
    partner),
    c. Office of the General Counsel (form 124A),
    d. Applied Research & Methods (form 124C), and
    e. other stakeholders (form124C).
    2. Did the audit director (first partner) review the
    a. audit strategy (SAS 108.13-.14) or equivalent,
    including sampling approach (FAM 290.05),
    b. account risk analyses or equivalent for material areas
    with high or moderate risk of material misstatement (FAM
    290.07),
    c. audit summary memorandum (FAM 590.02-.03),
    d. management representation letter (FAM 1001),
    e. legal representation letter (FAM 1002),
    f. schedule of uncorrected misstatements (FAM 595 C),
    g. exit conference memorandum (FAM 590.10),
    h. GAO report with entity financial statements and
    related disclosures,
    i. referencing review sheet (GAO form 92),
    j. GAO abbreviated audit documentation set (GAO form
    419A), and
    k. this audit completion checklist (FAM 1003)?
    (FAM 1301.17)

                   Section VI: GAO's Quality Control             N/A Yes No* Ref.
    3. Did the assistant director review the
    a. entity profile or equivalent (FAM 290.04),
    b. audit strategy (SAS 108.13-.14) or equivalent,
    including sampling approach (FAM 290.05),
    c. account risk analyses or equivalent (FAM 290.07),
    d. initial audit plan with procedures (FAM 290.09),
    e. line item/account lead schedules,
    f. completed audit plan with procedures (FAM 290.09),
    g. specific control evaluations (FAM 330.07),
    h. audit summary memorandum (FAM 590.02-.03),
    i. Checklist for Federal Accounting (FAM 2010) and
    Checklist for Federal Reporting and Disclosures (FAM
    2020) for statements using U.S. GAAP promulgated by
    FASAB,
    j. financial reporting and disclosure checklist for
    statements using GAAP promulgated by FASB,
    k. management representation letter (FAM 1001),
    l. legal representation letter (FAM 1002),
    m. schedule of uncorrected misstatements (FAM 595 C),
    n. exit conference memorandum (FAM 590.10),
    o. GAO report with entity financial statements and
    related disclosures,
    p. referencing review sheet (GAO form 92),
    q. GAO abbreviated audit documentation set (GAO form
    419A), and
    r. this audit completion checklist (FAM 1003)?
    (FAM 1301.17)
    4. Did the assistant director determine that all
    significant
    review notes were resolved appropriately? (FAM
    1301.27-.28)

                   Section VI: GAO's Quality Control             N/A Yes No* Ref.
    5. Did the assistant director indicate that all
    documentation was sufficiently reviewed? (FAM 1301.05)
    6. Were review notes, superseded versions of
    documentation, and draft reports (except the referenced
    draft and the draft sent to the entity for comment),
    including review notes and superseded versions in
    electronic form, placed in a separate folder to be
    retained until the report is released, after which they
    may be destroyed or deleted electronically up to 60 days
    after the report release date? (FAM 1301.28)
    7. Were review responsibilities documented and
    communicated to all individuals on the assignment? (FAM
    1301.23)
    8. Was documentation prepared by an IT specialist
    reviewed by an IT manager or IT assistant director for
    technical content and by a member of the audit team to
    determine that related audit objectives were achieved?
    (FAM 1301.24)
    9. For areas that are both material and have high risk of
    material misstatement, did the audit director or
    assistant director perform secondary reviews of the
    documentation? (FAM 1301.12)
    10. Was all documentation prepared by the audit director
    or assistant directors read by the auditor-in-charge to
    determine its consistency with any related documentation?
    (FAM 1301.15)
    11. If the documentation indicated a difference of
    opinion between engagement personnel or between
    engagement personnel and a specialist or other person
    consulted, was the difference resolved appropriately and
    was the basis of the resolution documented? (FAM 1302)

    Section VII: Explanation of "No*" Answers and Other Comments
    The page below is provided for comments on all "No*" answers or to expand
    upon any of the "Yes" and "N/A" answers as needed, and may be modified as
    necessary. * For some questions, "No" answers may indicate departures from
    professional standards or from auditor policies. The auditor should
    explain all "No" answers below and determine the effects and significance
    of "No" answers, including any effect on the auditor's report.
    Page no.       Question no.        Explanatory comments      Conclusion

                           Section VIII: Conclusions                     Yes No**
    Based on your review and knowledge, do you believe
    1. The audit team performed the engagement, in all material
    respects,
    in accordance with GAGAS (which include U.S. GAAS) and
    applicable OMB guidance, or the auditor's report was
    appropriately modified?
    2. The financial statements conformed, in all material respects,
    with
    U.S. GAAP, or the auditor's report was appropriately modified?
    3. The auditor's report was appropriate in the circumstances?
    4. The documentation on this engagement supports the auditor's
    o opinion on the financial statements,
    o opinion/conclusions on internal control,
    o conclusions on whether the entity's financial management
    systems substantially comply with the requirements of FFMIA (for
    CFO act agencies), and
    o conclusions on compliance with laws and regulations.
    5. The audit team complied, in all material respects, with the
    audit
    organization's policies and procedures.

    ** If any of the above 5 statements have "No" responses, please describe
    the response in a memorandum to the reviewer. Date of audit completion
    ___________________________________
    Auditor-In-Charge_________________________________________ Date
    _______________ Audit Manager ___________________________________________
    Date _______________

    Assistant    Director    ________________________________________     Date
    _______________ Audit Director ___________________________________________
    Date _______________

    Reporting 1003 - Financial Statement Audit Completion Checklist

    For GAO financial audits this is the chief accountant or another  director
    who is a CPA and an experienced financial statement auditor.

    Reporting 1003 - Financial Statement Audit Completion Checklist

                         [This page intentionally left blank.]

    Reporting 1005 - Subsequent Events Review Entity
    ______________________________________________________________ Period of
    financial statements __________________________________________ Job code
    ____________________________________________________________

    References

    Visible links
     209. http://www.gao.gov/special.pubs/gaopcie/
     210. fmailto:FAM@gao.gov
     220. http://www.ignet.gov/pande/faec/fsan0906.xls
     222. http://www.opm.gov/asd/htm/bal06.htm
     225. http://www.fms.treas.gov/
     241. http://www.usdoj.gov/civil/forms/forms.htm
     242. http://www.usdoj.gov/civil/forms/forms.htm

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