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:

801: Reserved:

802: General Compliance Checklist:

803: Antideficiency Act:

804: Reserved:

805: Reserved:

806: Reserved:

807: Reserved:

808: Federal Credit Reform Act of 1990:

809: Provisions Governing Claims of the U.S. Government (31 
U.S.C. 3711-3720E) (Including the Debt Collection Improvement Act of 
1996) (DCIA):

810: Prompt Payment Act:

811: Reserved:

812: Pay and Allowance System for Civilian Employees, as 
Provided Primarily in Chapters 51-59 of Title 31, U.S. Code: 

813: Civil Service Retirement Act: 

814: Federal Employees Health Benefits Act: 

815: Reserved: 

816: Federal Employees' Compensation Act: 

817: Federal Employees' Retirement System Act of 1986: 

900: SUBSTANTIVE TESTING: 

901: Reserved: 

902: 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: 

921 D: Example Audit Procedures for Fund Balance with Treasury: 

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: 

1004: Checklist for Reports Prepared Under the CFO Act: 

1005: Subsequent Events Review: 

1006: Reserved:  (For Related Parties, see section 902): 

[End of section]

SECTION 600:

Planning and General:

601 - INTRODUCTION TO PART II-TOOLS: 

.01: 
Part II of the GAO/PCIE Financial Audit Manual (FAM) consists of tools 
to assist the auditor[Footnote 1] in performing a financial statement 
audit. These tools are generally organized according to the phases of 
the audit: tools in section 600 deal with the planning phase and 
general issues; section 700, the internal control phase; section 800, 
compliance; section 900, substantive testing; and section 1000, the 
reporting phase.

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

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

[End of section]

650-USING THE WORK OF OTHERS: 

.01: 
In many audits, the auditor uses the work and reports of other auditors 
and specialists. Other auditors include CPA firms, Inspectors General, 
state auditors, and internal auditors. Specialists include actuaries 
and information systems auditors. The audit organization may contract 
with a CPA firm to perform parts of or the entire audit. The audit 
organization should use FAM 650 to design and perform appropriate 
oversight and other procedures to use the work of other auditors and 
specialists. (The audit organization using the work of other auditors 
and specialists is referred to below as "the auditor.") This section 
provides guidance on using the work of other auditors and specialists 
and the nature and extent of procedures the auditor should perform.

.02: 
Various professional standards provide guidance in this area. These 
standards include AU 543, "Part of Audit Performed by Other Independent 
Auditors"; AU 322, "The Auditor's Consideration of the Internal Audit 
Function in an Audit of Financial Statements"; AU 336, "Using the Work 
of a Specialist";[Footnote 2] and AU 315 (SAS No. 84), "Communication 
Between Predecessor and Successor Auditors." These standards have 
different requirements depending on whether the other organization is 
an independent auditor, an internal auditor, or a specialist.

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

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

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

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

* work performed by internal auditors; and:

* internal audit staff who provide direct assistance to the auditor.

.04:
AU 543.13 states: "In some circumstances the principal auditor may 
consider it appropriate to participate in discussions regarding the 
accounts with management personnel of the component whose financial 
statements are being audited by other auditors and/or to make 
supplemental tests of such accounts. The determination of the extent of 
additional procedures, if any, to be applied rests with the principal 
auditor alone in the exercise of his professional judgment and in no 
way constitutes a reflection on the adequacy of the other auditor's 
work. Because the principal auditor in this case assumes responsibility 
for his opinion on the financial statements on which he is reporting 
without making reference to the audit performed by the other auditor, 
his judgment must govern as to the extent of procedures to be 
undertaken.":

.05: 
The above paragraph makes clear that the principal auditor exercises 
considerable judgment in deciding what procedures are necessary to use 
the work of the other auditor. FAM 650 provides guidance in making the 
judgments necessary to use the work of others. These judgments include:

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

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

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

* the auditor's determination of the level of review (see paragraphs 
650.36-.41).

.06: 
The auditor should coordinate with other auditors whose work he or she 
wishes to use. In turn, the other auditor should consider the needs of 
auditors who plan to use the work being performed so that the judgments 
exercised by both auditors could satisfy the needs of both. This is 
best done before major work is started. For example, auditors of a 
consolidated entity (such as the U.S. government or an entire 
department or agency) are likely to plan to use the work of auditors of 
subsidiary entities (such as individual departments and agencies or 
bureaus and components of a department). This coordination can result 
in more economy, efficiency, and effectiveness of government audits in 
general and avoid duplication of effort. In addition, the coordination 
needs to be ongoing throughout the audit so that the timing needs of 
both the auditor and the other auditors are met. The other auditors 
should make their audit documentation available for review by the 
auditor on an ongoing basis during the audit.

.07: 
In this coordination, the auditor should inform the other auditor how 
his or her work and report will be used. AU 543.07 indicates that if 
the auditor's report will name the other auditor, the auditor should 
obtain permission to do so and should present the other auditor's 
report together with the principal auditor's report. For CPA firms, 
this permission may be obtained through the contracting process. The 
auditor also should provide the other auditors a draft of the report as 
a courtesy.

.08: 
When there is a difference of opinion between the two auditors, the 
principal auditor generally should confer with the other auditor to 
reach agreement with him or her as to the procedures necessary to 
satisfy both auditors' professional judgments. If both auditors are 
unable to reach agreement, see paragraphs 650.54 to .56. Section 650 B 
contains example audit procedures for using the work of others, which 
depend on the judgments made.

TYPES OF REPORTING:

.09: 
There are various types of reporting when using the work of other 
auditors and specialists. The type of reporting depends on the degree 
of responsibility the auditor accepts and the work performed by the 
auditor. Factors for the auditor to consider in deciding which type of 
reporting to use include the amount of assurance the auditor wishes to 
provide, legal requirements, and cost-benefit considerations. The 
degree of resources required varies by type of report and generally 
increases in the order presented below. The type of reporting should be 
decided in planning the job and generally should be discussed with the 
other auditors or specialists. In deciding the type of reporting, the 
auditor should consider AU 504.03, which states that an auditor is 
"associated with financial statements when he has consented to the use 
of his name in a report, document, or written communication containing 
the statements." (Section 650 C contains examples of wording for two 
types of reporting.) The types of reporting are as follows.

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

b. 
Auditor transmittal letter--There are two types of transmittal letters, 
one expressing no assurance and one expressing negative assurance on 
the other auditors' work. For either type, the auditor is associated 
with the financial statements as described in AU 504. The fourth 
standard of reporting states, (in the last sentence) "where an 
auditor's name is associated with financial statements, the report 
should contain a clear-cut indication of the character of the auditor's 
work, if any, and the degree of responsibility the auditor is taking." 
Because the auditor did not perform an audit, the auditor should 
disclaim an opinion and should not express concurrence with the other 
auditors' opinion. The auditor may use this approach when there is no 
legal requirement for the auditor to express an opinion or concurrence 
but the auditor is required to or wants to issue a report or letter. 
The auditor may expand the letter to highlight certain findings or 
information or to indicate that certain procedures were performed. See 
example 1 of section 650 C for wording for both types of transmittal 
letters.

* Auditor transmittal letter expressing no assurance--For this letter, 
the auditor issues a transmittal letter without reviewing the other 
auditors' documentation. In these situations, the transmittal should be 
clear as to the limitations of the auditor's work. The auditor still 
has the responsibility to monitor any contract and meet the 
requirements of the IG Act, as amended, CFO Act, and Accountability of 
Tax Dollars Act of 2002, if applicable.

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

c.
The auditor issues a report that refers to other auditors' reports and 
indicates a division of responsibilities--To use this approach, the 
auditor has two decisions to make: (1) whether the auditor may serve as 
the principal auditor (AU 543.01-.03) and (2) whether the auditor 
should refer to the work of the other auditors (AU 543.01-.10). The 
auditor should exercise considerable judgment in making these decisions 
and should document the basis for the decisions. One consideration the 
auditor may use in deciding whether the auditor is the principal 
auditor is whether the auditor has sufficient knowledge of the entire 
entity, including portions audited by other auditors. Another 
consideration is the materiality and importance of the consolidated 
assets, liabilities, expenses, revenues, or net position he or she has 
not audited. The auditor may issue a report that refers to other 
auditors when (1) the other auditors have reported on financial 
statements for a component entity that is part of the entity whose 
financial statements the auditor is reporting on and (2) the auditor 
does not wish to take responsibility for the other auditors' work. (See 
AU 543.09 for example wording. This approach may be used only for CPA 
firms or for other auditors who are organizationally independent [see 
paragraph 650.14]; it may not be used for internal auditors or 
specialists.) However, if the reader of the report could question the 
basis for the principal auditor issuing the opinion because of the 
significant materiality and importance of the portion of the financial 
statements audited by the other auditors, the auditor should consider 
whether there is a need to issue a report that does not mention the 
other auditors' work, which may require additional work (see 650.09 e 
below).

d. 
The auditor issues a report that expresses concurrence with the other 
auditors' report and conclusions--The auditor may use this approach 
when other auditors have reported on financial statements and the 
auditor needs or wants to provide more assurance than what is provided 
by the transmittal letter.[Footnote 3] Expressing concurrence means 
that the auditor would have reached the same opinion or conclusion had 
he or she done the audit. Therefore, the auditor needs to do the same 
level of work as he or she would have done to take responsibility for 
the other auditor's work.[Footnote 4] The auditor usually accomplishes 
this by (1) reviewing the audit documentation and (2) having 
discussions with entity management and/or performing supplemental 
tests. See example 2 in section 650 C for report wording. This approach 
may be used only for CPA firms or for other auditors who are 
organizationally independent (see paragraph 650.14). This report should 
not be used for specialists, since AU 336.15 prohibits reference to a 
specialist's report unless the auditor issues a qualified or adverse 
opinion or a disclaimer of opinion based on the specialist's work. This 
approach also should not be used for internal auditors. AU 322.19 notes 
that the responsibility to report on the financial statements rests 
with the auditor and cannot be shared with internal auditors.[Footnote 
5]

e. 
The auditor issues a report that does not mention the other auditors' 
or specialists' work--In this situation, the auditor issues the report 
in section 595 A and/or B (as if no other auditors or specialists were 
involved). This means the auditor takes responsibility for the other 
auditors' or specialists' work. (See 650.09 c above for a discussion of 
principal auditor issues.) The auditor may use this approach when the 
other auditors have done part of the audit; the approach also may be 
used when the other auditors have done substantially the entire 
audit.[Footnote 6] The auditor usually accomplishes this by (1) 
reviewing the audit documentation and (2) having discussions with 
entity management and/or performing supplemental tests. The auditor 
also should use this approach when using the work of specialists and 
internal auditors, because professional standards do not permit 
referring to specialists' or internal auditors' work (unless, for 
specialists, the auditor issues a qualified or adverse opinion or a 
disclaimer of opinion based on the specialist's work). GAO uses this 
approach in the audit of the consolidated financial statements of the 
United States Government.

.10: The following chart presents an overview of the work the auditor 
generally should perform for each type of report or letter. "Yes" means 
some of that category of work generally should be performed. "No" means 
that the category is generally not required for the report or letter. 
The extent of work in each category depends on the auditor's judgment. 
See paragraph 650.36 for discussion on level of review.

Type of reporting: No association with report (paragraph 650.09 a): 
Auditor transmittal letter expressing no assurance (paragraph 650.09 
b, first bullet): Evaluate the other auditors' independence and 
objectivity (paragraphs 650.11-.24): No[A]; Evaluate the other 
auditors' qualifications (paragraphs 650.25-.35): No; Level of Review 
(paragraphs 650.36-.42): None; Hold discussions and/or perform 
supplemental tests (paragraphs 650.43-.47): No.

Type of reporting: Auditor transmittal letter expressing no assurance 
(paragraph 650.09 b, first bullet): Evaluate the other auditors' 
independence and objectivity (paragraphs 650.11-.24): Yes; Evaluate 
the other auditors' qualifications (paragraphs 650.25-.35): Yes; Level 
of Review (paragraphs 650.36-.42): Low or none; Hold discussions and/
or perform supplemental tests (paragraphs 650.43-.47): No.

Type of reporting: Auditor transmittal letter expressing negative 
assurance (paragraph 650.09 b, second bullet): Evaluate the other 
auditors' independence and objectivity (paragraphs 650.11-.24): Yes; 
Evaluate the other auditors' qualifications (paragraphs 650.25-.35): 
Yes; Level of Review (paragraphs 650.36-.42): Moderate or low; Hold 
discussions and/or perform supplemental tests (paragraphs 650.43-.47): 
No.


Type of reporting: Report refers to the other auditors' report and 
indicates a division of responsibilities (paragraph 650.09 c): 
Evaluate the other auditors' independence and objectivity (paragraphs 
650.11-.24): Yes; Evaluate the other auditors' qualifications 
(paragraphs 650.25-.35): Yes; Level of Review (paragraphs 650.36-.42): 
Low or None; Hold discussions and/or perform supplemental tests 
(paragraphs 650.43-.47): No.

Type of reporting: Report concurs with the other auditors' report or 
does not mention the other auditors' work (paragraph 650.09 d and e): 
Evaluate the other auditors' independence and objectivity (paragraphs 
650.11-.24): Yes;  Evaluate the other auditors' qualifications 
(paragraphs 650.25-.35): Yes; Level of Review (paragraphs 650.36-.42): 
High, moderate or low; Hold discussions and/or perform supplemental 
tests (paragraphs 650.43-.47): Yes for internal auditors' work 
(should include supplemental tests); Yes for auditors' work for high 
level of review; No for auditor's work for moderate or low level of 
review.

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

[End of table]

EVALUATING THE OTHER AUDITORS' OR SPECIALISTS' INDEPENDENCE AND 
OBJECTIVITY:

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

.12: 
For CPA firms and specialists, the contracting process is designed to 
select a firm that is independent and objective. The statement of work 
or request for proposal should ask the firms to represent that they are 
independent and objective with respect to the auditee and should 
request the firms to describe in their proposals all work, including 
nonaudit services, they have done for the auditee in the last several 
years (see GAGAS Amendment No. 3, Independence, and Answers to 
Independence Questions). The technical evaluation panel should evaluate 
whether the nature and extent of this work or other factors cause an 
independence or objectivity issue. In this evaluation, the panel may 
consider, for example, whether (1) the other auditors will need to 
audit their own work or (2) whether the other auditors made management 
decisions or performed management functions.

.13: 
If possible,[Footnote 7] the auditor should have a role in contracting 
for the CPA firm or specialist. When the auditor does not participate 
in contracting for the CPA firm or specialist, the auditor generally 
should obtain an overview of the contracting process; this generally 
should include reading the statement of work or request for proposal 
and the proposal of the firm selected, and understanding the 
evaluations of the panel selecting the firm. The auditor should 
determine whether the firm provided a representation as to independence 
and objectivity (usually in its proposal). If the firm has not provided 
a representation as to independence and objectivity, the auditor should 
obtain a representation from the firm. If the auditor is not familiar 
with the firm, the auditor should inquire of professional organizations 
(such as the American Institute of Certified Public Accountants or the 
Public Company Accounting Oversight Board established by the Sarbanes-
Oxley Act of 2002) as to the firm's professional reputation and 
standing.

.14: 
For government auditors, the auditor should decide whether the other 
audit organization is organizationally independent to report externally 
or whether it should be considered an internal audit organization. The 
auditor may refer to the work of organizationally independent 
government auditors but should not refer to the work of internal audit 
organizations in the audit report; generally more extensive review and 
supervision are necessary when dealing with internal auditors. The 
auditor should obtain written representations from the head of the 
government audit organization that to the best of his or her knowledge, 
the organization and the individual auditors doing the work are 
independent of the entity being audited. This means that the individual 
auditors are free of personal impairments to independence and maintain 
an independent attitude and appearance; it also means that the 
organization is free from external impairments and is organizationally 
independent (see GAGAS 3.11). The representation letter may indicate 
the general criteria for determining independence, such as "under the 
criteria in GAGAS." The representations should be for the period of the 
financial statements to the date of the other auditors' report. Since 
the decision on the independence and objectivity of the other auditors 
is needed to plan the auditor's work, the auditor generally should 
obtain oral representations early in the audit, with written 
representations at the end of the audit.[Footnote 8]

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

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

b. "assigned to a different branch of government within the same level 
of government as the audited entity, for example, a legislative auditor 
auditing an executive branch program.":

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

a. "is directly elected by voters of the jurisdiction being audited,

b. "is elected or appointed by a legislative body, subject to removal 
by a legislative body, and reports the results of audits to and is 
accountable to a legislative body,

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

d. "is appointed by, accountable to, reports to, and can only be 
removed by a statutorily created governing body, the majority of whose 
members are independently elected or appointed and come from outside 
the organization being audited.":

.17: 
If the other audit organization or its head meets one of the above 
criteria, the auditor need not perform any procedures concerning 
organizational independence other than to obtain a representation 
letter from the head of the audit organization as noted in paragraph 
650.14 (see paragraph 650.23 for tests of personal independence). 
However, if the auditor encounters evidence that the audit organization 
might not be organizationally independent, the auditor should consider 
the need for inquiries and other procedures; the auditor should then 
evaluate the results of these procedures.

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

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

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

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

d. "statutory protections that prevent the audited entity from 
interfering with the reporting on any audit, including the findings, 
conclusions, and recommendations, or the manner, means, or timing of 
the audit organization's reports,

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

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

g. "statutory access to records and documents that relate to the 
agency, program, or function being audited.":

.19: 
If the head of the audit organization concludes that the organization 
has all the safeguards listed above, the audit organization may be 
considered free from organizational impairments to independence when 
reporting externally. The audit organization should document the 
statutory provisions in place that provide these safeguards. The 
external quality assurance reviewer will review these provisions to 
determine whether the necessary safeguards are present.

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

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

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

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

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

.22: 
If the auditor concludes that the internal auditors are not independent 
under GAGAS and IIA standards, the auditor should treat the work as if 
the auditee prepared it. If the auditor concludes that the internal 
auditors are independent under GAGAS and IIA standards, the auditor may 
use their work to the extent permitted by AU 322. In either case, the 
auditor may not issue a report referring to or concurring with the work 
of internal auditors.

.23: 
In addition to evaluating the other auditors' organizational 
independence, the auditor should evaluate whether the audit team has 
any personal impairments. For both internal auditors and 
organizationally independent government audit organizations, the 
auditor generally should ask how the other auditors monitor the 
personal independence of individual staff members, especially those 
doing the work the auditor would like to use.

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

EVALUATING THE OTHER AUDITORS' OR SPECIALISTS' QUALIFICATIONS:

.25: 
After evaluating the other auditors' or specialists' independence and 
objectivity, the auditor should evaluate the other auditors' or 
specialists' qualifications to perform the specific tasks required. 
This involves evaluating the qualifications of the firm or audit 
organization and evaluating the qualifications of the specific audit 
team. Where the auditor has previously used the work of the same other 
auditors, the auditor generally should update the previous evaluation.

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

.27: 
Where the auditor did not participate in the contracting process, the 
auditor should consider how the qualifications of the firm were 
evaluated. For example, did the evaluation panel review resumes of the 
team; review the audit approach; and read the peer review report, the 
related letter of comments, and the firm's response to the peer review 
report? The auditor should read these documents and reach a conclusion 
as to qualifications.

.28: 
For auditors other than CPA firms, the auditor should ask whether the 
audit organization had a peer review and the date of that review. IGs 
have peer reviews performed every 3 years by other IGs. Most state 
auditors also have peer reviews every 3 years. To comply with GAGAS, 
the audit organization should have a peer review every 3 years. The IIA 
standards indicate that, "[e]xternal assessments, such as quality 
assurance reviews, should be conducted at least once every five years 
by a qualified, independent reviewer or review team from outside the 
organization.". While reviews under the IIA standard are not designed 
to report whether the audit organization's quality control adheres to 
GAGAS, they do provide evidence about whether the work adheres to a 
recognized set of professional standards. The auditor should read the 
peer review report, the letter of comments, and the audit 
organization's response. Where the audit organization has received an 
unqualified peer review report recently (usually less than 1 year ago), 
further review of the audit organization's qualifications is generally 
not required.

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

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

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

* independence, integrity, and objectivity (see above);

* personnel management (includes recruiting and hiring, advancement, 
professional development and training, and assigning personnel to 
assignments);

* audit performance (includes supervision and consultation);

* acceptance and continuance of assignments; and:

* monitoring programs.

.32: 
This information usually is obtained through interviews of the audit 
organization's management and staff and through reading the audit 
organization's quality control summary document, if one has been 
written. The auditor also may read the organization's manuals and other 
guidance for conducting audits.

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

.34: 
Where the auditor is not fully satisfied as to the other auditors' 
qualifications, the auditor generally should perform a more detailed 
review of the documentation and/or perform supplemental tests of key 
line items (see paragraph 650.36). The auditor also may help the other 
auditors improve future audits.

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

* contract with another firm,

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

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

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

* issue a disclaimer of opinion.

PLANNING THE REVIEW AND TESTING OF THE OTHER AUDITORS' OR SPECIALISTS' 
WORK:

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

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

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

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

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

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

f. The auditors' prior experience with the other auditors (both for the 
audit team and for the other audit organization) (the level of review 
decreases as the auditor has favorable experience in working with the 
other auditors).

g. The materiality of the line item in relation to the financial 
statements the auditor is reporting on, taken as a whole (the level of 
review increases as the line item becomes more material).

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

.37: 
If the other auditors' work had a scope limitation, this generally 
affects the level of review (except for transmittal letters with no 
assurance). If the other auditors disclaim an opinion on the financial 
statements because of a scope limitation, the auditor should issue a 
disclaimer of opinion (unless the financial statements the other 
auditors audited are not material to the financial statements the 
auditor is auditing). It will not take much review to be satisfied that 
the disclaimer is appropriate. Discussions with entity management and/
or supplemental tests are not required in this situation, and the 
review of documentation may be limited to summary documentation. Thus, 
the level of review is usually low or no review (see footnote 6). 
However, the auditor may decide to do additional work to learn about 
the entity, to help the other auditor plan future audits, or to help 
management correct the causes of the scope limitation.

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

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

.40: 
A scope limitation on the auditor's work that results in a qualified 
opinion needs a similar amount of work as an unqualified opinion.

.41: 
Section 650 A illustrates the work that generally should be performed 
for each level of review for each significant line item as well as what 
to retain in the documentation.

REVIEW OF DOCUMENTATION:

.42: The extent of the auditor's review of the other auditors' or 
specialists' documentation depends on the level of review and is a 
judgment based on the factors in paragraph 650.36. For the low level of 
review, the review of documentation may be limited to key summary 
planning and completion documentation. For the moderate level, the 
auditor generally should review more of the other auditors' or 
specialists' documentation, especially those evidencing important 
decisions. For financial statement audits, these include the General 
Risk Analysis (GRA) or audit plan or equivalent documents; the Account 
Risk Analysis (ARA) (or equivalent documentation) for significant 
accounts; the Specific Control Evaluations (SCE) (or equivalent 
documentation) for significant applications; the documentation for 
high-risk accounts, estimates, and judgments; the analytical 
procedures; the audit completion checklist (or equivalent 
documentation); the audit summary memorandum; and the summary of 
possible adjustments. For the high level of review, the auditor 
generally should review all of the items for the moderate level of 
review plus the important detailed documentation.

DISCUSSIONS AND/OR SUPPLEMENTAL TESTS WHERE LEVEL OF REVIEW IS HIGH:

.43: 
AU 543.13 states: "In some circumstances the principal auditor may 
consider it appropriate to participate in discussions regarding the 
accounts with management personnel of the component whose financial 
statements are being audited by other auditors and/or to make 
supplemental tests of such accounts." "In some circumstances" is 
interpreted to mean when the level of review is high. Thus, where the 
level of review is high, the auditor should (1) review audit 
documentation and (2)hold discussions with auditee management and/or 
perform tests of original documents. The objective of these additional 
procedures is for the auditor to obtain additional evidence about 
whether key items are properly handled and well supported. For example, 
the auditor generally should discuss key items with auditee management, 
especially estimates and judgments; this discussion generally should be 
with the other auditors present. The auditor generally should attend 
the entrance and exit conferences and other key meetings held by other 
auditors or specialists. The auditor should consider that for key items 
that are high risk, discussions with management may not provide 
sufficient evidence and supplemental tests may need to be performed.

.44: 
Supplemental tests may be a selection of the other auditors' work, 
additional tests of the accounting records, or both. To perform 
supplemental tests, the auditor should have access to the entity's 
personnel and their books and records. The auditor may coordinate 
access to the entity's personnel and records through the other auditor. 
The auditor and the other auditor also may jointly perform parts of a 
test, where the sample is planned jointly and the results are evaluated 
jointly. Although supplemental tests are usually performed only when 
the level of review is high, the auditor may decide to perform 
supplemental tests in other situations to learn about the entity, to 
help the other auditor plan future audits, or to help management 
correct problems.

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

.46: 
The auditor generally should limit discussions with entity management 
and/or supplemental tests to line items that are both high combined 
risk and material to the financial statements the auditor is reporting 
on, especially in areas involving estimates and judgments or in areas 
on which users place extensive reliance. The auditor's supplemental 
tests generally should include some items that the other auditor tested 
that appear to be exceptions to determine whether they were 
appropriately considered in formulating an opinion. The auditor should 
consider performing supplemental tests while the other auditors are at 
the auditee location and have access to records; this can minimize the 
inconvenience to the auditee.

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

SUBSEQUENT EVENTS REVIEW AND DATING OF THE AUDITOR'S REPORT:

.48: The auditor's report should be dated when the auditor completes 
fieldwork. If the other auditors' or specialists' report is dated 
earlier and the auditor's report does not mention the other auditors' 
report or concurs with the other auditors' report (example 2 of section 
650 C), the subsequent events review should be updated to the date of 
the auditor's report. The auditor may ask the other auditors to update 
the subsequent events work to the required date, or the auditor may 
update the subsequent events review. Since this requires additional 
work, the auditor should attempt to complete fieldwork when the other 
auditors complete fieldwork. This issue should be considered in 
planning. It is not necessary to update the subsequent events review 
when the auditor issues a transmittal letter (example 1 of section 650 
C).

STAFFING THE REVIEW OF THE OTHER AUDITORS' OR SPECIALISTS' WORK:

.49: 
When staffing the review, the auditor should consider that the other 
auditors or specialists may already have reviewed the work at several 
levels. The auditor's staff reviewing the work generally should have 
enough experience in financial statement auditing to understand the 
judgments that need to be made and to interact with the higher levels 
of the other audit organization. Most of the review generally should be 
done by or under the direction of an assistant director or a manager 
who has significant experience in performing and reviewing financial 
statement audit work. Supplemental tests may be done by less 
experienced staff members and supervised by an assistant director or an 
experienced audit manager. Primary review of the experienced audit 
manager's or assistant director's documentation should be performed by 
the audit director or an assistant director designated by the audit 
director. However, the assistant director or audit manager should 
review the documentation of supplemental tests performed by the less 
experienced staff members. Because of the high level of financial 
statement auditing experience of staff members doing and reviewing this 
work, secondary review should be performed only in very high-risk 
situations.

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

EVALUATING THE WORK:

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

.52: 
Sometimes, the other auditors use methodologies or audit approaches 
that are different from those the auditor would have used. The auditor 
should recognize that auditing requires a great deal of professional 
judgment and that there often are alternative ways to achieve audit 
objectives. Thus, the auditor should first understand the basis for the 
nature, timing, and extent of the other auditors' procedures. The 
auditor should evaluate whether sufficient evidence has been obtained 
to meet the auditor's objectives; usually the auditor should consider 
materiality and combined risk for the particular line item in this 
evaluation. If the auditor has concerns about whether the other 
auditors' work provides sufficient evidence, the auditor should discuss 
the matter with the audit director and the Reviewer before formally 
discussing the issue with the other auditors.

.53: 
The auditor should consider the significance of the test results to the 
audit of the financial statements the auditor is reporting on. As an 
example, the other auditors might have selected a nonstatistical sample 
and/or the sample size might be smaller than the sample size the 
auditor would have selected. The auditor might decide that this 
provides sufficient evidence in an area that is less material or is not 
risky. However, if the area is material or risk is high, the auditor 
might conclude that sufficient evidence has not been obtained and that 
additional work is needed. In this case, after consulting with the 
audit director and the Reviewer, the auditor generally should either 
ask the other auditors to perform additional tests or perform the 
additional tests; if the additional testing is not done, the auditor 
should consider the effect of this scope limitation on the auditor's 
report. Since reaching this conclusion after the work is performed is 
inefficient, when the level of review is high, the auditor generally 
should coordinate or concur with major planning decisions before audit 
work is started.

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

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

.56: 
If the auditor does not reach agreement with the other auditors, the 
auditor should consider how to report. For very material disagreements, 
the auditor may decide not to transmit the other auditors' report, 
instead issuing a disclaimer of opinion due to a scope limitation or 
doing additional work, if necessary, to issue an appropriate opinion. 
In less material disagreements, the auditor may transmit the other 
auditors' report, issue the transmittal letter or report, and describe 
the disagreement and the basis for the auditor's conclusions.

DOCUMENTING THE REVIEW OF OTHER AUDITORS' OR SPECIALISTS' WORK:

.57: 
Regardless of the type of reporting or the level of review, the 
auditor's documentation should contain the items listed in section 650 
A under "documentation.":

.58: 
In addition, where the auditor performs supplemental tests of the 
accounting records, the auditor's documentation should contain a 
description of the work (this may be a list of the documents the 
auditor examined or tick marks on a copy of the other auditors' 
documentation if that is the basis for the selection) and the auditor's 
conclusion. It is not necessary to retain copies of the documents 
examined.

.59: 
It is important to distinguish between the auditor's responsibilities 
to review the documentation of other auditors versus what the auditor 
might copy and retain from that documentation. The auditor should use 
judgment in deciding which of the other auditors' or specialists' 
documents to copy and retain. Copies of documents readily available 
from the other auditors or the auditee (such as invoices and contracts) 
need not be retained. Section 650 A indicates what documentation the 
auditor generally should retain.

.60: 
The auditor may decide to retain other documentation if it might be 
useful in understanding the entity, training staff members, planning 
future audits, reviewing the documentation, or writing the report. 
Documentation in this category includes the entity profile (or 
equivalent), the general risk analysis or audit plan, the audit 
programs, the ARA and SCE forms (or equivalent), the trial balance or 
lead schedules, the management representation letter, and the attorney 
representation letter. Auditors often find it helpful to keep copies of 
documents in case questions are raised in review but not to include 
those copies in the documentation unless they are needed to document 
the work performed. Documents should not be retained if they are no 
longer needed. The audit plan or audit program may indicate which 
documents to retain.

USING INTERNAL AUDIT STAFF TO PROVIDE DIRECT ASSISTANCE TO THE AUDITOR:

.61: 
Sometimes the auditor or the auditee requests that internal auditors 
provide direct assistance to the auditor. Before this is done, the 
auditor should be satisfied with the independence, objectivity, and 
qualifications of the staff assigned to do the work requested. AU 
322.27 indicates that in these situations "the auditor should inform 
the internal auditors of their responsibilities, the objectives of the 
procedures they are to perform, and matters that may affect the nature, 
timing, and extent of procedures.. The auditor should also inform the 
internal auditors that all significant accounting and auditing issues 
identified during the audit should be brought to the auditor's 
attention." The auditor should direct, review, test, and evaluate the 
work done by internal auditors to the extent appropriate based on the 
auditor's evaluation of risk, materiality, objectivity, and 
qualifications.

USING AGENCY SPECIALISTS:

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

MULTIPLE LEVELS OF OTHER AUDITORS:

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

.64: 
In these situations, each audit organization should follow the guidance 
in section 650. The IG should evaluate the independence (see paragraphs 
650.11-. 24) and qualifications of the other auditors (see paragraphs 
650.25-. 35), should review the audit documentation (see paragraph 
650.42), and may need to have discussions with entity management and/or 
perform supplemental tests of key accounts (see paragraphs 650.43-. 47) 
(depending on the level of review deemed appropriate). GAO should 
evaluate the qualifications of the IG organization (by reading the peer 
review report, the letter of comments, and the audit organization's 
response as described in paragraph 650.25) and the team doing the 
monitoring, should review the IG's documentation, and may perform 
supplemental tests. When GAO finds that the IG has done and documented 
adequate work including discussions with management and/or supplemental 
tests, GAO's discussions and/or supplemental tests would be quite 
limited--perhaps a walk-through of work done in high-risk and material 
areas. Often, GAO may attend fewer meetings than the IG staff attends 
and would concentrate the review on the IG's documentation. GAO may 
then issue a report on the financial statements.

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

[See PDF for image]

[End of table]

REPORTS ON OTHER AUDITORS' WORK:

.66: 
The auditor may be asked to issue a report evaluating work done by 
other auditors in a situation where the auditor is not using the work 
of the other auditors. For example, the auditor might be asked to 
evaluate an audit done by a CPA firm. While AU 543, 322, and 336 are 
not directed towards these situations, the guidance in FAM 650 is 
helpful in planning and reporting on these assignments.

[End of section]

650 A-SUMMARY OF AUDIT PROCEDURES AND DOCUMENTATION FOR REVIEW OF
OTHER AUDITORS' WORK: 

.01: 
The table in this section indicates the work that generally should be 
performed for each level of review, as well as what generally should be 
retained in the documentation. The table does not include work on other 
auditor's independence, objectivity, and qualifications. (See 
paragraphs 650.11-.35 for a discussion of that work.) Where the other 
auditor uses equivalent documents, review those documents.

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

AUDIT PROCEDURES.

At entity level:

* Communicate with the other auditors: 

- as to the objectives of the work; 

- discuss their procedures and results; 

* Attend key entrance and exit meetings; 

* COORDINATE OR CONCUR IN SIGNIFICANT PLANNING DECISIONS BEFORE MAJOR 
WORK IS STARTED; 

* Review: 

- general risk analysis; 
- audit plan; 
- scope of work; 
- audit summary memorandum; 
- summary of unadjusted misstatements; 
- analytical procedures; 
- completion checklist; 
- determination of planning and design materiality; 
- information systems background; 
- general and application controls documentation (done by information 
systems auditor); 
- representation letters; 
- key documentation; 

* Read: 
- other auditor's report; 
- financial statements and notes; 
- stewardship report and required supplementary information; 
- other accompanying information; 
- management's response; 

For significant line items, accounts, or applications: 

* Review: 
- audit program; 
- conclusions about significant issues and their resolution (often in 
audit summary) 
- conclusions about line items; 
- account risk analysis (ARA); 
- specific control evaluations (SCE); 
- cycle memo; 
- flowcharts; 
- determination of test materiality; sampling plan; 
- other auditors' key documentation; 
- documentation for high-risk accounts, estimates, and judgments; 
analytical procedures; evaluation of sample results; 
- summary of possible adjustments; 

* PARTICIPATE IN DISCUSSIONS WITH MANAGEMENT PERSONNEL AND/OR PERFORM 
SUPPLEMENTAL TESTS OF the line items (especially key items, estimates 
and judgments); COMPARE CONCLUSIONS.

[End of table]

DOCUMENTATION.

Retain:

* Auditor prepared:
- audit plan; 
- audit program; 
- memo documenting entrance and exit conference; 
- MEMOS DOCUMENTING KEY MEETINGS ATTENDED and discussions with auditee 
management; 
- results of review of documentation; 
- SUPPLEMENTAL TEST DOCUMENTATION; 
summary memo; 

* Other auditor prepared: 

* At entity level: 

- other auditor's report; 
- final financial statements and notes; 
- stewardship report; 
- management letter; 
- other auditor's unadjusted misstatements, estimate of the 
imprecision of audit procedures, and comparison with materiality; 
- audit completion checklist; 
- other auditor's audit summary memo; 

* At line item level: 
- documentation that supports exceptions; 
- other auditor's documentation evidencing significant judgments and 
conclusions; 

Optional: 

- entity profile; 
- general risk analysis; 
- other auditor's audit plan; 
- other auditor's audit program; 
- account risk analyses; 
- specific control evaluations; 
- sampling plan; 
- trial balance; 
- lead schedules; 
- evaluation of sample results; 
- management representation letter; 
- legal representation letter.

[End of table]

[End of section]

650 B - EXAMPLE AUDIT PROCEDURES FOR USING THE WORK OF OTHERS: 

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

[See PDF for image]

[End of table]

Step: 

EVALUATING INDEPENDENCE, OBJECTIVITY, AND QUALIFICATIONS FOR 
GOVERNMENT AUDITORS; Independence and objectivity: 1. For all 
government audit organizations, obtain written representation from the 
head of the audit organization that the audit organization and the 
individual auditors are independent of the entity being audited; 

2. Determine whether the audit organization meets ONE of the criteria 
in paragraph 650.15, or the head meets ONE of the criteria in paragraph 
650.16; If the organization (or its head) meets one of these 
criteria, no further work is needed unless the auditor finds contrary 
evidence as to independence and objectivity in other parts of the 
audit. Indicate which criterion is met; document the evaluation of any 
other evidence obtained. (Go to step 6.)

3. If the audit organization (or its head) does not meet any of the 
criteria in step 2, determine whether it meets ALL of the criteria in 
paragraph 650.18;

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

5. If the audit organization does not meet the criteria for 
organizational independence to report externally, determine whether the 
organization is an independent internal audit organization under GAGAS 
and IIA standards. Determine whether the internal auditors are 
objective for the activities they audit. Consider the organizational 
status of the head of the audit organization, including whether the 
head; is accountable to the head or deputy head of the government 
entity,; is required to report the results of the audit organization's 
work to the head or deputy head of the government entity, and; is 
located organizationally outside the staff or line management function 
of the unit under audit;

6. For all government audit organizations, obtain an understanding of 
organization's policies to enhance the objectivity of individual 
auditors, including; policies to prohibit auditors from auditing areas 
where relatives are employed,; policies to prohibit auditors from 
auditing areas where they were recently assigned or are scheduled to be 
assigned after they complete their tour of duty in auditing, and; 
policies to require representations as to objectivity and lack of 
conflicts of interest from each auditor;

7. Prepare memorandum documenting work performed and conclusions as to 
independence and objectivity;

Qualifications: 

8. Read the latest peer review report, letter of 
comments, and the audit organization's response. Note date of report 
and whether it is unqualified. If report is recent (usually within the 
past year) and unqualified, go to step 12;

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

10. If the organization has not had a recent peer review or 
inspection, obtain an overview of the important policies and procedures 
in the functional areas (through interviews of management and staff and 
through reading the summary quality control document, if any). Consult 
with Reviewer before performing this step;

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

12. Inquire how the audit organization determined the staffing for the 
audit. Evaluate the overall qualifications of the team performing the 
work. Review resumes and consider for key team members: educational 
level, professional certifications, and professional experience; 
continuing professional education, especially whether key team members 
have received training and have current knowledge in the type of work 
done; supervision and review of work; whether the audit team has 
adequate sources for consultation and use of specialists, especially 
for audit sampling, audit methodology, and review of computer controls; 
and; quality of documentation, reports, and recommendations; 

13. If the auditor has significant concerns about the audit 
organization's or team's objectivity or qualifications, the auditor, in 
developing the audit plan, may either; ask the audit organization to 
substitute more objective or highly qualified staff members; do the 
work, treating any work done by the other auditors as prepared by the 
auditee; divide the work so that the other auditors test the areas 
where they are qualified and the auditor does the rest of the audit; 
or; issue a disclaimer of opinion;

[End of table]

Step:

MONITORING THE WORK (FOR ALL TYPES OF OTHER AUDITORS AND FOR 
SPECIALISTS): 

1. Develop a plan for reviewing the other auditors' or 
specialists' work and, if necessary, performing supplemental tests of 
the accounting records. Determine the level of review for each line 
item;

2. Monitor the planning of the audit (FOR MODERATE AND HIGH LEVEL OF 
REVIEW); Attend entrance meeting and key planning meetings; Review 
the entity profile; Review the General Risk Analysis or equivalent 
document (and audit plan if prepared as a separate document) (FOR ALL 
LEVELS OF REVIEW); Review the determination of planning materiality 
and design materiality; Have an information systems auditor review the 
information resource management background information and the 
documentation for review of general and application controls; Document 
line items and applications to be reviewed; For each such line item, 
review the Account Risk Analyses, the Specific Control Analyses, the 
cycle flowcharts, the cycle memoranda, the determination of test 
materiality, and the audit program or equivalent documents; 


3. Monitor the execution of the audit (for reports following example 2 
of section 650 C or section 595 A and/or B WHERE LEVEL OF REVIEW IS 
HIGH); Attend key meetings, especially those discussing high-risk 
areas, significant estimates and judgments, and the other auditors' 
conclusions; Discuss key items with auditee management, especially 
significant estimates and judgments; Perform supplemental tests of the 
accounting records; ** Generally do for high risk and material line 
items, especially in areas involving estimates and judgments or ones 
that users rely on extensively; ** Generally do while the other 
auditors are at the auditee location and have access to the records; 
** Examine some of the same documents the other auditors examined or 
make own selection or both; ** Compare results of other auditors' work 
to results of supplemental tests; ** Document scope of supplemental 
testing and conclusions reached;

4. Monitor the completion of the audit (items with * are usually not 
necessary for LOW level of review); Review the overall analytical 
procedures; *Review the key documentation for the line item and for 
completing the audit; consider evaluations of sample results. (For 
example, were projections appropriate? Was appropriate action taken 
based on sample results?); *Determine whether the subsequent events 
review was updated to the date of the auditor's report; Review the 
audit summary memorandum, conclusions about line items, and summary of 
possible adjustments; Review the audit completion checklist (or 
equivalent document); Review the management representation letter and 
the legal representation letter; *Attend key exit conference(s); Read 
the other auditors' report, the financial statements, the notes, the 
other accompanying information, and management's response; 

5. Prepare summary memorandum;

6. Write the auditor's report or transmittal letter; 

[End of table]

[End of section]

650 C - EXAMPLE REPORTS WHEN USING THE WORK OF OTHERS: 

EXAMPLE 1 - TRANSMITTAL LETTER:

We contracted with the independent certified public accounting firm of 
[name of firm] to audit the financial statements of [name of entity] as 
of [date] and for the year then ended. The contract required that the 
audit be done in accordance with U.S. generally accepted government 
auditing standards; OMB's bulletin, Audit Requirements for Federal 
Financial Statements; and the GAO/PCIE Financial Audit Manual.

In its audit of [name of entity], [name of CPA firm] found:

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

* [entity] had effective[Footnote 11] internal control over financial 
reporting (including safeguarding assets) and compliance with laws and 
regulations,

* [entity's] financial management systems substantially 
complied[Footnote 12] with the requirements of the Federal Financial 
Management Improvement Act of 1996 (FFMIA), and:

* no reportable noncompliance with laws and regulations it tested.

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

[Discuss significant matters].

[For transmittal letters expressing no assurance, use the following 
paragraph:]

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

[For transmittal letters expressing negative assurance, use the 
following paragraph:]

In connection with the contract, we reviewed [name of CPA firm]'s 
report and related documentation and inquired of its representatives. 
Our review, as differentiated from an audit in accordance with U.S. 
generally accepted government auditing standards, was not intended to 
enable us to express, and we do not express, opinions on [name of 
entity]'s financial statements or internal control[Footnote 13] or on 
whether [entity]'s financial management systems substantially complied 
with FFMIA;[Footnote 14] or conclusions on compliance with laws and 
regulations. [Name of CPA firm] is responsible for the attached 
auditor's report dated [date] and the conclusions expressed in the 
report. However, our review disclosed no instances where [name of CPA 
firm] did not comply, in all material respects, with U.S. generally 
accepted government auditing standards.[Footnote 15]

EXAMPLE 2 - REPORT CONCURRING WITH OTHER AUDITORS' OPINION (PRESENTING 
REPORT OF OTHER AUDITORS AFTER THE AUDITOR'S REPORT)[Footnote 16]

Under [citation of statute], we are responsible for auditing [name of 
entity]. To help fulfill these responsibilities, we contracted with 
[name of firm], an independent certified public accounting firm. [Name 
of firm]'s report dated [date] is attached.

We concur[Footnote 17] with [name of firm]'s report that indicated:

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

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

* [entity's] financial management systems substantially complied with 
the requirements of the Federal Financial Management Improvement Act of 
1996 (FFMIA), and:

* no reportable noncompliance with laws and regulations it tested.

Details of their conclusions are in their report.

OBJECTIVES, SCOPE, AND METHODOLOGY:

Management is responsible for (1) preparing the financial statements in 
conformity with U.S. generally accepted accounting principles, (2) 
establishing, maintaining, and assessing internal control to provide 
reasonable assurance that the broad control objectives of 31 U.S.C. 
3512 (c), (d) (Federal Managers' Financial Integrity Act) are met, (3) 
ensuring that [entity]'s financial management systems substantially 
comply with FFMIA requirements, and (4) complying with applicable laws 
and regulations.

We are responsible for obtaining reasonable assurance about whether (1) 
the financial statements are presented fairly, in all material 
respects, in conformity with U.S. generally accepted accounting 
principles, and (2) management maintained effective internal control, 
the objectives of which are the following:

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

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

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

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

[End of section]

660 - AGREED-UPON PROCEDURES: 

.01: 
In an engagement to apply agreed-upon procedures, a client engages an 
auditor to perform specific procedures on subject matter and report on 
the results to assist users in evaluating subject matter or an 
assertion. Agreed-upon procedures should be performed in accordance 
with the Statements on Standards for Attestation Engagements (SSAE). 
The auditor should read appropriate sections (e.g., AT 101, Attest 
Engagements, and AT 201, Agreed-Upon Procedures Engagements) and 
thoroughly understand them before performing agreed-upon procedures.

.02: 
An agreed-upon procedures engagement may be applied to a variety of 
subject matter. The engagement will vary depending on the needs of the 
user. The engagement may assist entity management by providing 
information for making decisions and give report users information on 
important areas. Examples of agreed-upon procedures are:

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

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

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

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

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

.03: 
In agreed-upon procedures engagements, all parties involved, which 
include the report users, the entity responsible for the subject matter 
(which may or may not be the same as the user), and the auditor, should 
clearly understand the procedures to be applied. Since users may have 
different needs, the nature, timing, and extent of the agreed-upon 
procedures also may differ. Therefore, the users, and not the auditor, 
assume the responsibility for the sufficiency of the design and extent 
of the procedures since they best understand their own needs, although 
the auditor may assist the user in designing the procedures.

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

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

.06: 
The auditor need not perform additional procedures beyond the agreed-
upon procedures. If matters come to the auditor's attention by other 
means that significantly contradict the subject matter (or assertion), 
the auditor should include these matters in the report. For example, if 
during the course of applying agreed-upon procedures regarding an 
entity's operation, the auditor becomes aware of a material weakness 
related to the assertion by means other than the agreed-upon 
procedures, the auditor should include this matter in the report. This 
may be done by mentioning the material weakness with a footnote 
reference to another report where it is described in detail.

.07: 
Where circumstances impose restrictions on the performance of the 
agreed-upon procedures, the auditor should attempt to obtain agreement 
from the users of the report to modify the agreed-upon procedures. When 
agreement cannot be obtained (for example, when the agreed-upon 
procedures are published by a regulatory agency that will not modify 
the procedures), the auditor should describe restrictions in the report 
or withdraw from the engagement.

WRITTEN REPRESENTATIONS:

.08: 
The auditor should determine if a representation letter is necessary. 
The auditor may determine that a representation letter is necessary, 
for example, if (1) the responsible entity is so large there is a risk 
as to whether one person knows whether pertinent information has been 
made available to the auditor, (2) the subject matter depends on 
estimates, judgments, or future events (i.e., whether the subject 
matter is less objective and fact-based and more subjective), or 
(3) the user of the report believes written representations should be 
obtained. Although generally not required (unless specifically required 
by another attestation standard, such as in a compliance engagement) a 
representation letter may nonetheless be a useful means of documenting 
the responsible entity's representations. (See FAM section 660 B for an 
example representation letter for an agreed-upon procedures 
engagement.):

.09: 
The responsible entity's refusal to furnish written representations 
determined by the auditor to be necessary constitutes a scope 
limitation. In such circumstances, the auditor should do one of the 
following:

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

* withdraw from the engagement, or:

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

DOCUMENTATION:

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

.11: 
Although the quantity, type, and content of documentation varies with 
the circumstances, ordinarily it should be sufficient to demonstrate 
that the work was adequately planned and supervised and sufficient 
evidential matter was obtained to provide a reasonable basis for the 
report.

.12: 
The auditor generally should prepare a summary memorandum that recaps 
the work performed and refers to the detailed documentation. This 
memorandum generally should include the auditor's conclusion on whether 
the work was performed in accordance with GAGAS, including the 
attestation standards, and the GAO/PCIE FAM and whether the report is 
appropriate. (See FAM section 660 C for an agreed-upon procedures 
completion checklist.):

REPORTING:

.13: 
An auditor should report on the agreed-upon procedures in the form of 
results. The auditor should not provide any opinion or negative 
assurance about whether the subject matter or the assertion is fairly 
stated based on the criteria. The report should include information 
such as the identification of the entities that agreed to the 
procedures and took responsibility for the sufficiency of the design 
and extent of the procedures for their purposes, as shown in the 
example report in FAM section 660 D.

.14: 
The auditor should report all results arising from application of the 
agreed-upon procedures. The concept of materiality does not apply to 
results to be reported in an agreed-upon procedures engagement unless 
the users of the report agree to the definition of materiality. This 
could be included in the engagement letter. Any agreed-upon materiality 
limits should be described in the report.

.15: 
The auditor should include a statement indicating that the report is 
intended for the specified users who have agreed upon the procedures 
performed and taken responsibility for the sufficiency of the design 
and extent of the procedures for their needs. However, since 
governmental reports are generally a matter of public record, the 
distribution of the report is not limited.

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

.17: 
The auditor also may include explanatory language about such matters as 
the following:

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

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

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

* explanation of sampling risk.

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

Examples of appropriate/inappropriate description of findings:

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

Procedures agreed-upon: Select a random sample of 45 Treasury SF-224 
reconciliations; determine if XYZ reported revenue receipts were 
properly classified and reconciled to Treasury FMS records; 
Description of findings: Appropriate: Revenue receipts selected 
randomly from the monthly Treasury SF-224 reconciliation process 
were properly classified and agreed with Treasury FMS records; 
Description of findings: Inappropriate: The revenue receipts 
approximated the amount shown in the Treasury FMS records.

Procedures agreed-upon: Examine personnel files of 40 individuals 
randomly selected from the timekeeping records for the year; determine 
if all the selected files contain a current and approved Notification 
of Personnel Action; Description of findings: Appropriate: Thirty 
of the selected files contained a current and approved Notification of 
Personnel Action. Ten files did not contain a current and approved 
Notification of Personnel Action (list and identify exceptions); 
Description of findings: Inappropriate: Some of the personnel files 
did not contain a current and approved Notification of Personnel Action.

[End of table]

Other Report Issues:

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

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

[End of section]

660 A - EXAMPLE AGREED-UPON PROCEDURES ENGAGEMENT LETTER: 

[Date]

Management of ABC Agency:

Subject: Fiscal Year 20X1 Agreed-Upon Procedures for the Tax Trust 
Fund:

Dear Management Official:

Based on our discussions, we agree to perform agreed-upon procedures to 
assist ABC Agency in determining the completeness and accuracy of 
receipts transferred to the tax trust fund. XYZ Agency is responsible 
for the information to which these procedures will be applied.

This letter documents our agreement to perform these agreed-upon 
procedures related to fiscal year 20X1. We will perform these 
procedures in accordance with U.S. generally accepted government 
auditing standards, which incorporate the financial audit and 
attestation standards established by the American Institute of 
Certified Public Accountants (AICPA). The procedures are included in 
the enclosure to this letter. We will meet with you as needed to 
discuss the agreed-upon procedures, results, and other issues that may 
arise.

We are not engaged to perform, and will not perform, an examination, 
the objective of which would be to express an opinion on the amount of 
receipts transferred to the tax trust fund. Accordingly, we will not 
express such an opinion. Were we to perform additional procedures, 
other matters might come to our attention that we would report to you.

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

Unless we hear from you, we will assume your concurrence with these 
procedures and their sufficiency for your purposes.[Footnote 18] Please 
contact me at [telephone number] if you or your staff have any 
questions.

Sincerely yours,

[Name of Director]

Director:

Enclosure:

cc: XYZ Agency:

Agreed-Upon Procedures for Tax Receipts and Refunds:

General:

* Compare fiscal year 20X1 tax collections for the ABC tax trust fund 
per XYZ's Statement of Custodial Activity with:

**the trust fund's accounting records and:

**ABC's consolidated financial statements.

* Obtain explanations and examine supporting documentation for 
differences.

Sampling:

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

For the sample items selected:

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

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

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

For the sample items selected:

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

[End of section]

660 B - EXAMPLE REPRESENTATION LETTER FROM RESPONSIBLE ENTITY ON 
AGREED-UPON PROCEDURES ENGAGEMENT: 

[XYZ Agency letterhead]

[Date]

Dear Auditor:

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

* We acknowledge responsibility for XYZ's budget execution process.

* We acknowledge responsibility for selecting the criteria [state 
criteria] and for determining the appropriateness of the criteria for 
our purposes.

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

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

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

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

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

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

* The agency's accounting system provides timely disclosure of total 
valid obligations incurred to date and total budgetary resources 
available for obligations within each apportionment.

* The system also provides timely disclosure of the authorization or 
creation of commitments, obligations, or expenditures that exceed 
apportionments and allotments.

* We are not aware of instances of noncompliance with the above-stated 
procedures.

* There has been no fraud involving management, employees, or 
contractor staff who have significant roles in the operation of our 
budget execution process.

* We have no plans or intentions that would materially affect our 
budgetary process or operations.

Sincerely yours,

Management, XYZ Agency:

[End of section]

660 C - AGREED-UPON PROCEDURES COMPLETION CHECKLIST: 

Entity:

Job code:

Principal report:

.01: 
This checklist is a tool to help auditors comply with the requirements 
for agreed-upon procedures engagements. No specific signatures are 
required on the checklist in the planning phase.

.02: 
Several of the last questions include steps in GAO's quality control 
process, including the GAO workpaper set, second partner review, and 
review by the Technical Accounting and Auditing Expert (Chief 
Accountant at GAO) when that person is not the second partner. GAO 
auditors should complete these questions and forms. IG auditors and 
other auditors may use these questions and forms or may substitute 
questions and forms that consider their reporting style and quality 
control.

Step: 

1. Has the audit team documented an understanding with the users? 

2. Does the documentation cover the following? The nature of the 
engagement; Identification of the subject matter, the responsible 
entity, and the criteria; Identification of the users of the report; 
Auditor's responsibilities; Reference to GAGAS and the attestation 
standards; Agreement on procedures; Disclaimers expected; Any 
involvement of a specialist; Materiality limits; 

3. Was an entrance conference held with the responsible entity? 

4. Has the auditor determined whether a letter of representation from 
the responsible entity is necessary? (Note: This is not a requirement.); 

5. Were applicable laws and regulations documented if part of the 
procedures?

6. Were review responsibilities communicated to individuals on the 
assignment?

7. Does the documentation contain the following? The scope and 
methodology, including any sampling criteria used; Documentation of 
the work performed to support reported results; Descriptions of 
transactions and records examined; Evidence of supervisory review; 

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

9. Does the documentation record a reasonable basis for the results of 
the agreed-upon procedures?

10. Does the summary memorandum summarize the results of the 
procedures and refer to the documentation?

11. Were any deviations from the standard reporting elements 
documented and the basis approved by the assistant director with 
copies of the documentation sent to the audit director and Reviewer 
(AT 201.31)? 

12. Was the report referenced?

13. Did the assistant director review the following? Understanding with 
the client; Memorandum of entrance conference with the responsible 
entity; Completed work programs; Memorandums on key engagement 
issues; Summary of the results of the procedures; Memorandum of exit 
conference with the responsible entity; Deviations from standard 
reporting language; Financial schedules/statements; Agreed-upon 
procedures report; GAO workpaper set (or equivalent); 

14. Did the audit director review the following? Understanding with the 
client; Summary of results of the procedures; Memorandum of exit 
conference with responsible entity; Deviations from standard reporting 
language; Agreed-upon procedures report; GAO workpaper set (or 
equivalent);

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

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

17. Is the report appropriate as to the following? Wording; Scope of 
work; GAGAS; Explanatory paragraphs; 

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

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

[End of table]

Second Partner's (OR EQUIVALENT) Concurrence on Agreed-Upon Procedures 
work: 

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

Procedures: Before the report was issued, I performed the 
following procedures: 

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

* read documentation of key decisions and consultations; 

* read the agreed-upon procedures report; 

* and; confirmed with the audit director that there are no unresolved 
issues; 

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

Title 
Signature 
Date.

TECHNICAL ACCOUNTING AND AUDITING EXPERT'S Concurrence on Agreed-Upon 
Procedures work.

Objective of review: When the Technical Accounting and Auditing 
Expert is not the second partner (or equivalent), the Technical 
Accounting and Auditing Expert should read the report. The Technical 
Accounting and Auditing Expert should then sign the conclusions below; 

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

[End of section]

660 D - EXAMPLE AGREED-UPON PROCEDURES REPORT: 

[Date]

Management of ABC Agency:

Subject: Applying Agreed-Upon Procedures: Count of Cash and Related 
Items:

Dear Management Official:

We have performed the procedures contained in the enclosure to this 
letter, which we agreed to perform and with which you concurred, solely 
to meet your needs for an independent count of cash and cash-related 
items as of September 30, 20X1.

We conducted our work in accordance with U.S generally accepted 
government auditing standards, which incorporate financial audit and 
attestation standards established by the American Institute of 
Certified Public Accountants. These standards also provide guidance 
when performing and reporting the results of agreed-upon procedures.

You are responsible for the adequacy of the procedures to meet your 
objectives and we make no representation in that respect. The 
procedures we agreed to perform consist of counting amounts for cash 
and related receipts and comparing combined totals to the authorized 
amounts. The enclosure contains the agreed-upon procedures and our 
results.

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

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

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

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

Sincerely yours,

[Name of Director]

Director:

Enclosure:

Results OF CASH COUNTS:

Procedures:

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

Results:

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

FOOTNOTES

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

[2] The AICPA also issued Practice Alert 2002-02, Use of Specialists.

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



[4] 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.

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



"To help fulfill these responsibilities, we contracted with the 
independent certified public accounting firm of [insert firm name] to 
perform a financial statement audit in accordance with U.S. generally 
accepted government auditing standards, OMB's bulletin, Audit 
Requirements for Federal Financial Statements, and the GAO/PCIE 
Financial Audit Manual. The report of [name of CPA firm] dated [date] 
is attached. We evaluated the nature, timing, and extent of the work, 
monitored progress throughout the audit, reviewed the documentation of 
[name of CPA firm], met with partners and staff members of [name of 
firm], evaluated the key judgments, met with officials of [entity being 
audited], performed independent tests of the accounting records [if 
applicable], and performed other procedures we deemed appropriate in 
the circumstances. Our opinions expressed above are consistent with the 
opinions of [name of CPA firm]. Thus, in this audit, we:" (continue 
with numbered items).



[6] For example, a number of other auditors may have audited individual 
components of an entity and the auditor may audit the consolidation 
process. The auditor may choose to use this approach if the auditor has 
sufficient knowledge of the entire entity and does additional work (see 
paragraph 650.10).

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

[8] Obtaining a representation from the head of the audit organization 
is similar to the procedure for CPA firms under AU 543.10b.

[9] Some situations may require significantly more work than the work 
shown for the high level. In those situations, the auditor generally 
should perform significant supplemental tests; in some cases, the audit 
may be a joint audit.



[10] In some situations, the auditor may decide less review or no 
review is necessary. These situations typically involve entities or 
line items that are very small in relation to the financial statements 
taken as a whole. In these situations the auditor may decide to read 
the other auditors' report and the financial statements and ask 
questions if anything seems unusual.

[11] If the other auditors did not provide an opinion on internal 
control, change this to "there were no material weaknesses in internal 
control" (and include a definition of material weakness in a footnote).



[12] If the other auditors did not provide an opinion (i.e., did not 
give positive assurance) on whether the entity's systems complied with 
FFMIA, change this to "no instances in which entity's financial 
management systems did not substantially comply" (i.e., negative 
assurance).

[13] If the other auditors did not provide an opinion on internal 
control, change this to read "conclusions about the effectiveness of 
internal control."



[14] If the other auditors did not provide an opinion on FFMIA, change 
"opinion" to "conclusions."



[15] If the auditor found that the other auditors did not comply with 
GAGAS, or if the auditor disagrees with the other auditors' 
conclusions, see paragraphs 650.54-.56.

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



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

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

[End of section]

SECTION 700:

Internal Control:

701 - ASSESSING COMPLIANCE OF AGENCY SYSTEMS WITH THE FEDERAL FINANCIAL
SYSTEMS WITH THE FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT (FFMIA): 

.01: 
FFMIA emphasizes the need for agencies to have systems that can 
generate timely, reliable, and useful information with which to make 
informed decisions and to ensure ongoing accountability. FFMIA requires 
the 24 CFO Act departments and agencies[Footnote 1] to implement and 
maintain financial management systems that comply substantially with 
(1) federal financial management systems requirements, (2) applicable 
federal accounting standards, and (3) the U.S. Government Standard 
General Ledger (SGL) at the transaction level. The law also requires 
auditors to report whether agency financial management systems comply 
with the FFMIA requirements. OMB has provided FFMIA implementation 
guidance to help agencies and their auditors determine compliance. This 
section also provides guidance for assessing agency systems' compliance 
with FFMIA. It explains FFMIA's requirements and discusses audit issues 
related to testing for compliance with the act. An example audit 
program is included as section 701 A.

FFMIA REQUIREMENTS:

.02: 
OMB Circular A-127, Federal Financial Systems,[Footnote 2] also 
addresses the three FFMIA requirements. OMB Circular A-127 prescribes 
policies and standards for executive branch departments and agencies to 
follow in developing, operating, evaluating, and reporting on financial 
management systems (see www.whitehouse.gov/omb/financial). In its 
FFMIA implementation guidance, OMB identifies the applicable 
requirements from Circular A-127 that should be assessed when making an 
FFMIA compliance determination.[Footnote 3] OMB, in Circular A-127, 
refers to the federal financial management systems requirements, a 
series of publications issued by the Joint Financial Management 
Improvement Program (JFMIP), as the source of governmentwide 
requirements for financial management systems software functionality. 
JFMIP has developed a framework to describe the basic elements of an 
integrated financial management system, including the core financial 
system. Agency financial management systems fall into four categories: 
core financial systems, other financial and mixed systems[Footnote 4] 
(such as procurement, property, budget, payroll, and travel systems), 
shared systems,[Footnote 5] and departmental executive information 
systems (systems to provide information to all levels of management.):

.03: 
JFMIP has developed publications of systems requirements for the core 
financial system and for some of the mixed or feeder systems (see 
www.jfmip.gov). The systems requirements in the publications are stated 
as either mandatory (required) or value-added (optional). Agencies 
should use the mandatory functional and technical requirements in 
planning system improvement projects, whereas value-added requirements 
should be used as needed. The core financial management system affects 
all financial event transaction processing because it maintains 
reference tables used for editing and classifying data, controls 
transactions, and maintains security. The core financial management 
system consists of six functional areas: general ledger management, 
funds management, payment management, receivable management, cost 
management, and reporting. OMB Circular A-127 requires agencies to use 
for agency core financial management systems commercial-off-the-shelf 
(COTS) software that has been tested and certified through the JFMIP 
software certification process. According to JFMIP, core financial 
management system certification does not mean that agencies that 
install qualified software packages will have financial systems that 
are in compliance with FFMIA. Many other factors can affect the 
capability of the systems to comply with FFMIA, including modifications 
made to the JFMIP-certified core financial management system software, 
and the validity and completeness of data from feeder systems. JFMIP's 
certification process does not eliminate or significantly reduce the 
need for agencies to develop and conduct a comprehensive testing effort 
to ensure that the software product meets their requirements:

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

.05: 
Implementing the SGL at the transaction level is also a requirement of 
FFMIA. The SGL provides a uniform chart of accounts and guidance for 
use in standardizing federal agency accounting and supports the 
preparation of standard external reports required by OMB and Treasury 
(see www.fms.treas.gov/ussgl). The SGL is defined in the latest 
supplement, which is released annually, to the Department of the 
Treasury's Treasury Financial Manual (TFM). The supplement is composed 
of five major sections (1) chart of accounts, (2) account descriptions, 
(3) accounting transactions, (4) SGL attributes, and (5) report 
crosswalks. Each agency should implement a chart of accounts that is 
consistent with the SGL and meets the agency's information needs. OMB 
Circular A-127 states that application of the SGL at the transaction 
level means that financial management systems will process transactions 
following the definitions and defined uses of the general ledger 
accounts as described in the SGL. Transaction detail supporting SGL 
accounts are required to be available in the financial management 
systems and directly traceable to specific SGL account codes. In 
addition, the criteria for recording financial events in all financial 
management systems should be consistent with accounting transaction 
definitions and processing rules defined in the SGL.

.06: 
OMB's FFMIA implementation guidance requires the CFO act agency 
auditors to perform tests of the compliance of the entity's systems 
with FFMIA. Auditors who are reporting that agency financial management 
systems do not substantially comply with FFMIA requirements are to 
include in their reports (1) the entity or organization responsible for 
the financial management systems that have been found not to be 
substantially compliant and all pertinent facts relating to the 
noncompliance, (2) the nature and extent of the noncompliance including 
areas in which there is substantial but not full compliance, (3) the 
primary reason or cause of the noncompliance, (4) the entity or 
organization responsible for the noncompliance, (5) any relevant 
comments from any responsible officer or employee, and (6) a statement 
with respect to the recommended remedial actions for each instance of 
noncompliance and the time frames for implementing these actions. FFMIA 
as well as OMB's FFMIA implementation guidance require agencies to 
report whether the agencies' financial management systems comply with 
FFMIA's requirements and prepare remediation plans that include 
resources, remedies, and intermediate target dates necessary to bring 
the agency's financial management systems into substantial compliance.

.07: 
According to OMB's FFMIA implementation guidance, auditors are to plan 
and perform their audit work in sufficient detail to enable them to 
determine the degree of compliance and report on instances of 
noncompliance for all of the applicable FFMIA requirements. The 
guidance describes specific minimum requirements from Circular A-127 
that agency systems should meet to achieve compliance and provides 
indicators of compliance. The indicators included in OMB's 
implementation guidance are characterized as examples and are not all-
inclusive. The four primary factors OMB identifies as critical to 
assessing compliance with FFMIA are determining whether agencies 
can:[Footnote 6]

* Prepare financial statements and other required financial and budget 
reports using information generated by the financial management 
system(s);

* Provide reliable and timely financial information for managing current 
operations;

* Account for their assets reliably, so that they can be properly 
protected from loss, misappropriation, or destruction; and,

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

AUDIT ISSUES:

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

.09: 
As a result of the overlapping scope and nature of FFMIA assessments 
and financial statements audits, the auditor should use, where 
appropriate, the audit work performed as part of the financial 
statement audit. In the example audit program (FAM 701 A) for testing 
compliance with FFMIA, several procedures indicate that the auditor may 
have performed the procedure as part of the financial statement audit; 
whereas, other procedures needed to assess FFMIA compliance require 
additional work not normally contemplated by financial statement 
auditors. The determination of FFMIA compliance need not be performed 
simultaneously with the financial statement audit. The determination of 
FFMIA compliance may be performed by different staff or staggered 
throughout the assessment time frame. While the example audit program 
provides steps the auditor should perform, the auditor may tailor the 
steps to satisfy the objectives or intent of the step if the step 
cannot be completed as described. Because of the broad scope of federal 
operations and the many variations that can and do flow from such a 
broad scope, the degree of specificity in the example audit program 
varies. For example, each agency will likely need and use a variety of 
internal reports for managing current operations. These reports may be 
on line or in hard copy. Auditors will need to use their skills and 
professional judgment to assess the adequacy of these reports that are 
essential to having FFMIA compliance. Auditors may also rely on other 
work products that address the objectives of the example audit 
procedures.

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

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

[End of section]

701 A - EXAMPLE AUDIT PROCEDURES FOR TESTING COMPLIANCE WITH FFMIA: 


Entity:

Date of review:

Job code:

Objective: FFMIA requires the 24 major departments and agencies covered 
by the CFO Act to implement and maintain financial management systems 
that comply substantially with (1) federal financial management systems 
requirements, (2) applicable federal accounting standards, and (3) the 
U.S. Government Standard General Ledger (SGL) at the transaction level. 
OMB also requires certain designated entities to determine FFMIA 
compliance. The objective of this audit program is to assess whether 
agencies' systems' comply with FFMIA.

FFMIA example audit procedures: Description of Procedure:

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

A. To understand the FFMIA requirements, read: 
Federal Financial Management Improvement Act, P.L. 104-208; Audit 
Requirements for Federal Financial Statements (OMB Bulletin); OMB 
Memorandum, January 4, 2001, Revised Implementation Guidance for the 
Federal Financial Management Improvement Act; JFMIP Publications of 
Federal Financial Management System Requirements including the 
Framework and Core Financial System Requirements; Form and Content of 
Agency Financial Statements (OMB Bulletin); FASAB Standards; Treasury 
Financial Manual (TFM) sections related to the SGL (see transmittal 
letter S2-01-02 and TFM Part 2, Chapter 4000); OMB Circular No. A-123, 
Management Accountability and Control; OMB Circular No. A-127, 
Financial Management Systems; OMB Circular No. A-130, Management of 
Federal Information Resources; Government Information Security Reform 
(GISR) legislation, Floyd D. Spence National Defense Authorization Act 
for Fiscal Year 2001, Pub. L. 106-398.

B. Read the prior year's workpapers and audit report to identify (1) 
the auditors' FFMIA determinations, (2) reported instances of 
noncompliance with FFMIA, and (3) material weaknesses and reportable 
conditions related to the agency's financial management systems; 
Prepare a schedule of the previously identified problems to follow up 
on the status of these specific problems. See section 701 B for an 
example of the schedule.

C. Read the most recent FMFIA report, IG reports, GAO reports, internal 
control workpapers from the financial statement audit or other reports 
related to financial systems and consider the impact of any reported 
weaknesses on the FFMIA assessment; Obtain an update on the status 
of the issues and document problems identified in the schedule in 
section 701 B.

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

E. From the work performed in part I (planning), decide whether it is 
necessary to perform the remaining test steps. If the information 
gathered indicates "longstanding, well-documented financial management 
systems weaknesses" that preclude compliance with FFMIA requirements, 
then: Document recognition of longstanding, well-documented 
financial management systems weaknesses and identify the source for 
this conclusion; Obtain and document an understanding of management's 
process for determining whether its systems comply with FFMIA 
requirements. Report any deficiencies identified in management's 
process; Complete step V (summary), except for completion of the 
schedule in FAM section 701 B.

II. Testing for Compliance with Federal Financial Management Systems 
Requirements; 

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

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

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

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

b. If the feeder systems interface with the core 
systems, determine whether reconciliations are performed between the 
systems. If reconciliations are performed, determine how often and by 
whom; assess the adequacy of the reconciliation, including follow-up 
activities and supervisory review; 

c. Through interviews with agency 
management and reading of systems documentation, determine if the 
agency's systems have detective controls (i.e., batch control or hash 
totals or supervisory reviews) and preventive controls (i.e. segregated 
duties, appropriate authorizations, or access controls) to process 
transactions properly and timely. (May be performed as part of the 
internal control phase).

2. Using the documentation prepared in step II.B.1 above, identify 
those JFMIP financial management systems requirements that are 
applicable to the agency's operations. For example, for those agencies 
that do not have grant or loan programs, the auditor would not need to 
assess whether JFMIP requirements related to grants or loans are 
applicable. Document the results.

C. Determine whether the agency's core financial management system and 
the financial portions of its applicable feeder systems, as identified 
in step II.B.2 above, conform to JFMIP's federal financial management 
systems requirements; Ask whether the agency's core financial 
management system is a JFMIP-certified COTS system. If so, ask which 
version of the software is being used and obtain the agency's JFMIP 
certification for that software version. [Agencies replacing software 
to meet core financial system requirements must use JFMIP-certified 
core financial management systems as required by OMB Circular A-127, 
but it is not a noncompliance issue for FFMIA purposes.].

1. Ask whether there have been significant changes in the agency's 
automated business processes since compliance testing with JFMIP 
requirements was last performed. If so, ask whether the agency has 
performed an assessment of any new functionality using the JFMIP system 
requirements documents, GAO checklists, or similar tools. Document the 
results.

2. For those agencies with a core financial management system that is 
not a JFMIP-certified COTS and for any feeder systems, obtain any 
analyses performed by agency management to support its FFMIA and FMFIA 
assessments that document how the agency's systems conform to the 
applicable JFMIP systems requirements. If management has not performed 
an analysis of systems functionality, go to step C.5.

3. Select several important functions that management has reported as 
complying with the systems requirements and determine if management's 
assessment can be relied upon.

4. If management's results cannot be relied upon for each system, 
perform an assessment of the functionality of the applicable systems 
using JFMIP system requirement documents, GAO checklists or other 
similar tools.

5. Document in section 701 B, the instances and related impact in which 
the agency's systems did not comply with JFMIP requirements.

D. Ask if management receives appropriate reports that are significant 
to performing day-to-day management operations; 

1. Determine the adequacy of reports used to manage day-to-day 
operations; 

a. For reports that are 
produced by the agency's financial management systems, ask 
knowledgeable users, read the agency's financial management systems 
documentation, and from other audit work, use professional judgment to 
determine if the reports produced by the systems are timely, useful, 
reliable, complete, and appropriately summarized for the management 
level receiving the report. Use professional judgment, agency policy, 
and/or criteria evident from each report to determine its timeliness 
and accuracy; i.e., if a report is due by the 10th of each month, 
verify it was provided by the 10th OF EACH MONTH. IF ONLY ON-LINE ACCESS 
IS PROVIDED FOR IMPORTANT internal reports, through observation, 
documentation, and inquiry--such as obtaining systems logs and asking 
key managers about their work habits--assess whether the reports were 
available and accessed. Through inquiry and observation, assess if 
management uses the reports to manage operations. Ask management what 
improvements are needed in the current reporting methods. Document the 
results; 

b. If the reports were not produced by the agency's financial 
management systems, ask how the reports were prepared and perform a 
similar assessment as described in step D.1.a.

2. Determine whether appropriate levels of management are receiving 
adequate and timely management information. See FAM paragraph 903.12 
for questions related to determining FFMIA compliance with SFFAS No. 
4; 

a. Using professional judgment and industry best practices, identify 
internal management performance-related information that should be 
available for managing day-to-day operations; 

b. Determine whether 
appropriate levels of management are receiving the information 
identified in step D.2.a; 

c. If full costing is not used in these 
management reports, assess whether the lack of full cost information 
affects the usefulness of the information. Review management's 
justification that full costing would not be beneficial for the 
internal reports. This may need to be assessed on a case-by-case 
basis.

3. Include any deficiencies identified and related impact in the 
schedule shown in section 701 B.

E. Identify the agency's external reports that are related to financial 
management such as those used for budget formulation and execution, 
fiscal management of agency programs, funds management, payments and 
receipts management, and to support the legal, regulatory, and other 
special requirements of the agency; 

1. Through interviews with 
knowledgeable users and reading of the agency's financial management 
system documentation, determine if the reports are produced by the 
systems; 

a. For external reports that are tested as part of the financial 
statement audit, include any deficiencies identified and the related 
impact in section 701 B; 

b. For external reports that are not tested as 
part of the financial statement audit, using professional judgment 
select several reports and assess whether the reports are reliable, 
timely, and complete. Include any deficiencies identified and the 
related impact in section 701 B.

2. As an indicator of systems deficiencies, determine the magnitude and 
type of adjustments made by both management and the auditors to derive 
financial statements after the end of the accounting period.

F. Determine if the agency's financial management systems track 
financial events and summarize information to facilitate the 
preparation of auditable financial statements. This determination can 
result from work performed as part of the financial statement audit. 
Document the deficiencies and the related impact in the schedule shown 
in section 701 B.

G. Determine if the financial management systems enable the agency to 
prepare, execute, and report on the agency's budget in accordance with 
the requirements of OMB Circular No. A-11. This determination can 
result from work performed as part of the financial statement audit. 
Document the deficiencies and the related impact in the schedule shown 
in section 701 B.

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

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

2. Ask agency management whether an assessment was performed of the 
validity of the financial data used to derive the performance measures. 
If so, obtain and review the assessment and any supporting 
documentation.

3. If agency management has not assessed the validity of the financial 
data used to derive the agency's performance measures, include this 
deficiency in section 701 B.

4. Determine if recent GAO or IG reports have addressed the validity of 
financial data used to derive performance measures.

5. If any deficiencies were identified, include them along with the 
related impact in the schedule shown in FAM section 701 B.

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

1. Have the IS auditors review the annual management evaluation and the 
annual independent evaluation conducted in accordance with the 
Government Information Security Reform (GISR) legislation.

2. Document the deficiencies and related impact identified by the IS 
auditors in the schedule shown in section 701 B.

J. Determine if the financial management systems include internal 
control to safeguard resources against waste, loss, and misuse, and 
whether reliable data are obtained, maintained, and disclosed in system 
generated reports. Some of the information needed to make this 
determination may be obtained from the work performed in the internal 
control phase of the financial statement audit, and other systems 
internal control weaknesses may be identified from other audit reports 
reviewed and steps performed in this program. Document the results in 
section 701 B.

III. Testing for Compliance with the Federal Accounting Standards; 


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

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

2. Determine if any issues reported as part of the financial statement 
audit were related to the lack of the agency's implementation of the 
accounting standards in their systems or the standards were not 
properly applied because of inadequate or improperly implemented manual 
procedures. Document the results in the schedule shown in section 701 
B.

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

* use the agency's accounting classification elements to identify and 
establish unique cost objects to capture, accumulate, and report costs 
and revenues;

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

* transfer cost 
data directly to and from other cost systems/applications that produce 
or allocate cost information; 

Also, see step II.D.2 of this audit program.

C. From the deficiencies identified in performing steps in part II 
(testing for compliance with federal financial management systems 
requirements) and from tests conducted as part of the financial 
statement audit, determine if the financial systems record and 
summarize transactions in accordance with applicable accounting 
standards. Note that the systems functionality assessments performed in 
step II. B. should have determined any compliance issues related to 
accounting standards since the accounting standards are used as a 
source for systems functionality requirements. Document the results and 
the related impact in the schedule shown in section 701 B.

IV: Testing for Compliance with the SGL: 

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

1. Ask agency 
management and from the documentation prepared in step II.B.1 above, 
determine how financial transaction data are summarized from the 
financial systems to the core financial system.

2. Compare the agency's chart of accounts to the SGL accounts and 
identify any deviations.

3. Review all of the standard entries allowed by the core financial 
system to determine if these entries conform to the SGL posting rules.

4. Document any deficiencies and the related impact in the schedule 
shown in section 701 B.

B. Ask whether the agency uses a crosswalk from its chart of accounts 
for its core financial management system to the SGL. If so, perform 
tests to determine the accuracy of the crosswalk; 

1. Trace all SGL accounts to the crosswalk.

2. Identify any SGL accounts that are not included in the crosswalk. 
Identify any agency accounts not associated with an SGL account in the 
crosswalk.

3. Compare the posting rules used by the system to those included in 
the SGL to determine whether the posting rules used by the system 
conform to the SGL.

4. Document deficiencies and the related impact in the schedule shown 
in section 701 B.

V. Summary; 

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

1. Finalize the schedule of the FFMIA 
noncompliances identified in the schedule prepared in FAM section 701 
B.

2. Read the agency's management representation letter covering the 
fiscal year under audit to obtain the agency management's FFMIA 
determination; 

a. Document the entity or organization responsible for the 
financial management systems that have been found not to comply; 


b. Document all facts pertaining to the: 

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

ii. primary reason or cause of the noncompliance;

iii. impact of 
the noncompliance;

iv. entity or organization responsible for the 
noncompliance; and; 

v. relevant comments from any responsible officer or 
employee; 

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

3. After reviewing the nature and extent of deficiencies identified, 
conclude whether the systems deficiencies identified constitute lack of 
substantial compliance with FFMIA. Consider the four factors in 
paragraph 701.07 from OMB's FFMIA implementation guidance when drawing 
this conclusion.

4. Prepare the FFMIA section of the report. See FAM paragraphs 580.62 
through .66 and sections 595 A, 595 B, and 1603, as appropriate.

[End of section]

701 B - SUMMARY SCHEDULE OF INSTANCES OF NONCOMPLIANCE WITH FFMIA: 

[See PDF for image]

[End of table]

FOOTNOTES

[1] OMB also requires certain designated entities to determine FFMIA 
compliance.



[2] OMB is considering revising this guidance.



[3] OMB did not include certain elements of Circular A-127, section 7, 
in its FFMIA implementation guidance because some of the elements are 
not essential to satisfying the requirements of FFMIA and to the 
ability of an agency's systems to provide reliable, timely, and useful 
information necessary for federal managers' responsibilities. 
Accordingly, those elements are not included in this section.

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



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

[6] OMB is considering revising this guidance.

[End of section]

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

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

.03: 
To understand and evaluate compliance controls, the auditor also should 
follow the guidance in FAM 260 on identifying risk factors and in FAM 
320 on understanding information systems. The FAM also provides 
additional guidance on compliance considerations for all audit phases.

INSTRUCTIONS FOR GENERAL COMPLIANCE CHECKLIST:

.04: 
The checklist contains a summary of each law. The auditor generally 
should use this checklist or equivalent to determine which of these 
laws are considered to be significant for purposes of testing 
compliance, as discussed in FAM 245. The auditor should indicate 
whether each law meets the criteria for significance by placing a check 
mark in the appropriate column (yes or no). OMB audit guidance requires 
auditors of CFO Act agencies to test for five of the laws, as noted in 
section 295 H. Auditors also may test for the other four laws if they 
have determined they are material to the financial statements being 
audited.

.05: 
The auditor may need to use estimates or interim information in the 
preliminary column. The final amounts (based on the audited amounts or 
the final amounts of available budget authority) are used to determine 
whether all laws that would be significant in quantitative terms have 
been identified for control and compliance testing. The sources of all 
amounts included in this checklist should be documented. If the law is 
considered to be significant from a qualitative standpoint, the reasons 
for this conclusion should be documented.

.06: 
Supplements to the General Compliance Checklist (Form 802):

Supplement number: 

Law: Antideficiency Act (required for CFO Act agencies); Supplement 
number: 803.

Law: Federal Credit Reform Act of 1990 (required for CFO Act 
agencies); Supplement number: 808.

Law: Provisions Governing Claims of the U.S. Government as provided 
primarily in 31 U.S.C. 3711-3720E (Including the Debt Collection 
Improvement Act of 1996 (DCIA)) (required for CFO Act agencies); 
Supplement number: 809.

Law: Prompt Payment Act (required for CFO Act agencies); Supplement 
number: 810.

Law: Pay and Allowance System for Civilian Employees as Provided 
Primarily in Chapters 51-59 of Title 5, U.S. Code (required for CFO 
Act agencies); Supplement number: 812.

Law: Civil Service Retirement Act; Supplement number: 813.

Law: Federal Employees Health Benefits Act; Supplement number: 814.

Law: Federal Employees' Compensation Act; Supplement number: 816.

Law: Federal Employees' Retirement System Act of 1986; Supplement 
number: 817.

[End of table]

Entity:

Period of financial statements:

Job code:


Description of Law:

Antideficiency Act - 31 U.S.C. 1341, 1342, 1514, 1517: 

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

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


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

Individual appropriations: (Preliminary; Final):
budget authority: (Preliminary; Final):
Planning materiality: (Preliminary; Final): 
If yes, complete compliance supplement 803; 

Federal Credit Reform Act of 1990 (FCRA), 2 U.S.C. 661-661f; 

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

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

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

Total appropriations or other budget authority available during the 
fiscal year for costs of FCRA activities (direct loans, loan 
guarantees, and related modifications): (Preliminary; Final)

Planning materiality: (Preliminary; Final) 

If yes, complete compliance supplement 808.

Provisions Governing Claims of the U.S. Government, Including the Debt 
Collection Improvement Act of 1996 (DCIA): 

These provisions address 
the collection of amounts owed to the federal government. Interest 
generally accrues from the date that a notice stating the amount due 
and the interest policies is first mailed to the debtor. Interest 
generally accrues at a rate established by the Secretary of the 
Treasury. Administrative costs and penalties shall also be charged; 

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

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

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

Provisions Governing Claims of the U.S. Government, Including the Debt 
Collection Improvement Act of 1996 (DCIA):  


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

Amount of receivables at the end of the audit period that are subject 
to provisions governing claims of the U.S. government, including DCIA:
(Preliminary; Final).  

Planning materiality: (Preliminary; Final)

If yes, complete compliance supplement 809; 

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

Prompt Payment Act, 31 U.S.C. 3901 et seq: 

The Prompt Payment Act requires federal entities to make payments for 
property or services by 
the due date specified in the related contract or, if a payment date is 
not specified in the contract, generally 30 days after the invoice for 
the amount due is received. If payments are not made within the 
appropriate period, the entity shall pay an interest penalty. Also, 
discounts offered by vendors may be taken only during the specified 
period. If they are taken after the time period has expired, an 
interest penalty shall be paid; 

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

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

Amount of payments made for property and services subject to the 
Prompt Payment Act: (Preliminary; Final)

Planning materiality: (Preliminary; Final)

If yes, complete compliance supplement 810; 

Pay and Allowance System for Civilian Employees as Provided Primarily 
in Chapters 51-59 of Title 5, U.S. Code; 

These laws require that 
employees be paid at the appropriate rates established by law, 
including general pay increases, and that employees be paid at least 
minimum wage; 

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

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

Payroll expense: (Preliminary; Final)
Planning materiality: (Preliminary; Final)

If yes, complete compliance supplement 812; 

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

Civil Service Retirement Act, 5 U.S.C. 8331 et seq: 

This law 
provides retirement benefits to employees who were hired prior to 
January 1, 1984. For each employee, the entity withholds a percentage 
of basic pay from the employee's compensation and contributes an equal 
amount for retirement. The employee and entity amounts are remitted to 
Treasury; 

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

Expense for retirement contributions: (Preliminary; Final)
Planning materiality: (Preliminary; Final)

If yes, complete compliance supplement 813.

Federal Employees Health Benefits Act, 5 U.S.C. 8901 et seq: 

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

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

Expense for health insurance: (Preliminary; Final);
Planning materiality:  (Preliminary; Final); 

If yes, complete compliance supplement 814; 

Federal Employees' Compensation Act, 5 U.S.C. 8101 et seq: 

This law 
provides for the compensation of employees injured or disabled while 
performing their duties. Claims are paid out of the Federal Employees' 
Compensation Fund. Federal entities are billed annually by the fund for 
claims paid on their behalf; 

Does the entity's expense for the audit 
period for benefits paid by the Federal Employees' Compensation Fund on 
the entity's behalf exceed planning materiality or are provisions of 
the Federal Employees' Compensation Act otherwise considered to be 
significant?

Expense for Compensation Fund claims: (Preliminary; Final);
Planning materiality: (Preliminary; Final); 

If yes, complete compliance supplement 816; 

Federal Employees' Retirement System Act of 1986, 5 U.S.C. 8401 et 
seq:

This law provides retirement benefits for employees who were 
hired after December 31, 1983. For each employee, the entity withholds 
a percentage of basic pay from the employee's compensation and 
contributes an amount equal to the employing agency's applicable normal 
cost percentage less the employee deduction rate for retirement. The 
employee and entity amounts are remitted to Treasury; 

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

Expense for retirement contributions: (Preliminary; Final);
Planning materiality: (Preliminary; Final); 

If yes, complete compliance supplement 817.

Other laws; Perform the following procedures and include references 
to supporting documentation: 

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

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

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

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

Are any other laws or regulations identified for compliance testing? 

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

[End of table]

INSTRUCTIONS FOR COMPLIANCE SUPPLEMENTS:

.07: 
Each compliance supplement consists of (1) a compliance summary, (2) a 
compliance audit program, and (3) notes.

Compliance Summary:

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

.09: 
The first column contains a description of the specific provisions of 
the law that have been identified for compliance testing, the type of 
provision, and the reference to the law.

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

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

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

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

.14: 
Compliance tests should be performed using the related Compliance Audit 
Program as described below. The results of the compliance tests should 
be indicated in the last column of the Compliance Summary along with a 
reference to the supporting documentation.

Compliance Audit Program:

.15: 
A compliance audit program has been developed for the provisions 
identified on the related compliance summary for each law. For each law 
identified for compliance testing on the General Compliance Checklist, 
the auditor generally should perform each step of the related 
compliance audit program. Because the subject matter of some laws is 
closely related to matters the auditor will be planning to test for 
other parts of the audit, the auditor should consider coordinating with 
that other testing and designing multipurpose tests. For example, 
payroll compliance testing could be performed using multipurpose tests 
of payroll controls and/or substantive payroll testing. The auditor 
generally should initial in the "performed by" column of the compliance 
audit program when he or she performs the procedure. A reference to the 
documentation recording the work performed for each step generally 
should be included in the last column of the compliance audit program.

803 - ANTIDEFICIENCY ACT: 

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

OMB guidance on budget execution, including the Antideficiency Act, is 
included in OMB Circular A-11, Part 4.

[See PDF for image]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Antideficiency Act are considered to be significant 
as indicated on Form 802 - General Compliance Checklist. The procedures 
in this program are designed to test compliance with the provisions 
listed on the Compliance Summary for this law.

Audit Procedures:

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

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

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

For the accounts listed in step 1, document if this assurance is 
provided through effective controls (as indicated on Form 803 - 
Compliance Summary) or if substantive tests of the budget information 
are necessary; 

If the controls are not considered to be effective in 
meeting some or all of the budget control objectives listed in FAM 395 
F, perform substantive tests of the budget amounts (obligations and 
expenditures) as discussed in FAM 495 B. These substantive tests should 
be performed only for those potential misstatements for which the 
entity does not have effective budget controls; 

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

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

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

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

5. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 

For any noncompliance noted, the auditor should 

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

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

* consider the 
implications of any instances of noncompliance on the financial 
statements, and 

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

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

[End of table]

Note 1: Entities are required to establish regulations that provide for 
a system of administrative controls over their execution of budget 
authority (31 U.S.C. 1514(a)). As discussed in FAM 250.03, the entity 
may elect to lower the level at which budget limitations are legally 
binding in these regulations. For example, the entity may elect to 
reduce the legally binding limit on the obligation and expenditure of 
budget funds from the apportionment to the allotment level. The auditor 
should determine the level at which the entity's legally binding limit 
has been established.

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

[End of section]

808 - FEDERAL CREDIT REFORM ACT OF 1990: 

Note: Complete this compliance summary or prepare equivalent 
documentation only if provisions of the Federal Credit Reform Act of 
1990 (FCRA) are considered to be significant as indicated on Form 802 - 
General Compliance Checklist.

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

[See PDF for image]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Federal Credit Reform Act (FCRA) are considered to be 
significant as indicated on Form 802 - General Compliance Checklist. 
The procedures in this program are designed to test compliance with the 
provisions listed on the Compliance Summary.

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

Audit Procedures: 

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.

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

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

If the controls are not considered to be 
effective in meeting some or all of the budget control objectives 
listed in FAM 395 F, plus the supplemental objectives for FCRA listed 
in FAM 395 F Sup, perform substantive tests of the budget amounts 
(obligations and expenditures) as discussed in FAM 495 B. These 
substantive tests should be performed only for those potential 
misstatements for which the entity does not have effective budget 
controls.

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

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

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

3. (b) Compare the amount of obligations for modifications of direct 
loan obligations or outstanding direct loans to the amount of available 
budget authority. (Note: The sale of a direct loan is considered a 
modification. Discuss applicability of this budget restriction to 
direct loans and direct loan obligations that were outstanding prior to 
October 1, 1991, with OGC prior to performing compliance test.).

3. (c) Compare the amount of obligations for loan guarantee commitments 
to the amount of the available appropriation or other budget authority. 
(Note: This budget restriction is only applicable to obligations for 
loan guarantee commitments made on or after October 1, 1991.).

3. (d) Compare the amount of obligations for modifications of loan 
guarantee commitments or outstanding loan guarantees to the amount of 
available budget authority. (Note: Discuss applicability of this budget 
restriction to loan guarantees and loan guarantee commitments that were 
outstanding prior to October 1, 1991, with OGC prior to performing 
compliance test.) (2 U.S.C. 661c(b) and (e)).

If the amounts of 
obligations in any of these comparisons exceed the available budget 
authority, the entity may not be in compliance. Perform step 5;

4. Direct and guaranteed loan programs that have a negative subsidy 
(cash inflows exceed cash outflows) do not receive an appropriation. 
However, such programs have a loan limit that cannot be exceeded, i.e., 
a maximum number of loans that can be made or guaranteed. For these 
programs, compare the total number and dollar volume of loans made to 
the loan limit in the applicable Presidents' Budget. Perform step 5.

5. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance.

For any noncompliance noted, the auditor should: 

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

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

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

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

6. Document conclusions on compliance with each provision on Form 808 
- Compliance Summary.

[End of table]

Note 1: A direct loan is a disbursement of funds by the government to a 
non-federal borrower under a contract that requires the repayment of 
such funds with or without interest. The term also includes the 
purchase of, or participation in, a loan made by another lender. The 
term does not include the acquisition of a federally guaranteed loan in 
satisfaction of default claims or the price support loans of the 
Commodity Credit Corporation. (2 U.S.C. 661a(1)):

Note 2: A direct loan obligation is a binding agreement by a federal 
agency to make a direct loan when specified conditions are fulfilled by 
the borrower. (2 U.S.C. 661a(2)):

Note 3: A loan guarantee is any guarantee, insurance, or other pledge 
with respect to the payment of all or a part of the principal or 
interest on any debt obligation of a nonfederal borrower to a 
nonfederal lender, but does not include the insurance of deposits, 
shares, or other withdrawable accounts in financial institutions. (2 
U.S.C. 661a(3)):

Note 4: A loan guarantee commitment is a binding agreement by a federal 
agency to make a loan guarantee when specified conditions are fulfilled 
by the borrower, the lender, or any other party to the guarantee 
agreement. (2 U.S.C. 661a(4)):

Note 5: Appropriations or other budget authority to cover the cost of 
budget obligations for direct loan obligations and loan guarantee 
commitments must be made in advance by Congress. For revolving or other 
funds that otherwise would be available for these budget obligations, 
Congress must enact a limit on the use of such funds for these purposes 
to make them available for use. (2 U.S.C. 661c(b)):

Note 6: Costs are defined as the estimated long-term cost to the 
government of a direct loan or loan guarantee, calculated on a net 
present value basis, excluding administrative costs and any incidental 
effects on governmental receipts or outlays. These calculations are 
described in further detail under the valuation control objective for 
obligations in FAM 395 F. (2 U.S.C. 661a(5)):

Note 7: There is an exemption from this requirement for entitlements 
(mandatory programs such as the guaranteed student loan program and the 
VA home loan guaranty program) and credit programs of the Commodity 
Credit Corporation existing on the date of enactment of the act 
(November 5, 1990). (2 U.S.C. 661c(c)):

Note 8: Modifications are government actions that alter the estimated 
net present value of a direct loan or loan guarantee for which an 
obligation has been recorded, for example, the sale of a direct loan, 
per SFFAS No. 2, paragraph 53, or a policy change affecting the 
repayment period or interest rate for a group of existing loans. 
(Changes within the terms of existing contracts or through other 
existing authorities are not considered to be modifications. Also, 
"work outs" of individual loans, such as a change in the amount or 
timing of payments to be made, are not considered modifications.) The 
effects of these changes should be included in the annual reestimates 
of the estimated net present value of the obligations. Permanent 
indefinite authority is provided by FCRA for these reestimates.

Note 9: Discuss applicability of this budget restriction to direct 
loans, direct loan obligations, loan guarantees, or loan guarantee 
commitments that were outstanding prior to October 1, 1991, with OGC 
prior to performing control or compliance tests.

Note 10: The auditor should consider the results of the evaluation and 
testing of budget controls and testing of the Statement of Budgetary 
Resources. These controls relate to the execution of budget authority 
and usually are the same controls that are used to comply with the 
Antideficiency Act and the Federal Credit Reform Act. Accordingly, 
additional consideration of controls that achieve the compliance 
objective generally is not necessary if the auditor has assessed 
whether the entity achieves all of the budget control objectives listed 
in FAM 395 F, including the supplemental control objectives for the 
Federal Credit Reform Act. The auditor should reference to the budget 
control evaluation and testing and perform any additional procedures 
considered necessary to conclude if compliance controls are effective.

[End of section]

809 - PROVISIONS GOVERNING CLAIMS OF THE U.S. GOVERNMENT (31 U.S.C.
3711-3720) (INCLUDING THE DEBT COLLECTION IMPROVMENT ACT OF 1996 
(DCIA)): 

Note: Complete this compliance summary or prepare equivalent 
documentation only if provisions governing claims of the U.S. 
government, as provided primarily in sections 3711-3720E of Title 31, 
U.S. Code (including provisions of the Debt Collection Improvement Act 
of 1996), are considered significant, as indicated on Form 802 - 
General Compliance Checklist.

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

[See PDF for image]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions governing claims of the United States government as provided 
primarily in sections 3711-3720E of Title 31, U.S. Code (including 
provisions of the Debt Collection Act of 1996) are considered 
significant, as indicated on Form 802 - General Compliance Checklist. 
The procedures in this program are designed to test compliance with the 
provisions listed on the Compliance Summary.

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

Audit Procedures: 

1. Based on the preliminary assessment of compliance control 
effectiveness (as documented on Form 809 - Compliance Summary), select 
a sample of amounts owed to the entity during or at the end of the 
audit period. (The sample size will vary based on the expected 
effectiveness of compliance controls, as discussed in FAM 460.02). 
Document the sampling approach using the documentation in FAM section 
495 E. See note 8 regarding sampling efficiencies and completeness of 
the sample population.

2. For each item selected in step 1 obtain the loan file or other 
supporting documentation and note the following information as of the 
date selected for testing:

* due date of debt;

* amount owed;

* date the notice of the amount due and the interest policies is first 
mailed to the debtor;

* amount of interest accrued and other administrative 
charges and penalties charged, if any; and

* number of days the debt is 
past due, if any; 

Perform step 3 if the debt is past due; 
Perform step 4 if the debt is not past due.

3. If the amount selected is past due:

(a) Calculate the number of 
days that interest should be accrued on the debt as of the date 
selected for testing. Interest generally accrues from the date that the 
notice of the amount due is first mailed to the debtor. (See note 1.) 
Compare the auditor's calculation with the calculation performed by the 
entity and obtain explanation and examine support for any differences. 
(31 U.S.C. 3717(b)).

3. (b) Determine the interest rate that should be used to accrue 
interest on the debt. The rate is published in the Federal Register and 
should be the rate that was in effect on the date that the notice of 
the amount due is first mailed to the debtor. (The web site for the 
Federal Register is: http://www.access.gpo.gov/su_docs/aces/
aces140.html.) Compare the auditor's determination of the rate to the 
rate used by the entity and obtain explanation and examine support for 
any differences. (31 U.S.C. 3717(a) and (c)).

3. (c) Calculate the amount of interest that should be owed as of the 
date selected for testing using the number of days tested in (a) and 
the interest rate tested in (b). Compare the auditor's calculation to 
the amount calculated by the entity and obtain explanation and examine 
support for any differences. See notes 2 and 3 regarding the waiver of 
interest.

3. (d) Obtain the entity's schedule of administrative charges and late 
payment penalties and determine if the appropriate amounts were charged 
to the debtor. See note 3 regarding the waiver of these charges. (31 
U.S.C. 3717(e) and (f)).

4. If the debt is not past due, determine through examination of the 
entity's records whether 

(a) interest, administrative charges, or penalties are not being 
charged; and

(b) the debtor had no 
outstanding nontax delinquent federal debt at the time the loan was 
obtained. (31 U.S.C. 3720 B).

5. The objectives listed below relate to procedural-based provisions. As 
discussed in FAM 460.06, sufficient procedures usually are performed in 
conjunction with tests of compliance controls for these procedural-
based provisions to conclude on the entity's compliance without 
performing additional procedures. Additional procedures should not be 
performed to obtain evidence regarding compliance with the provisions 
related to the following objectives unless sufficient evidence 
regarding compliance was not obtained during compliance control tests 
documented on Form 809 - Compliance Summary; 

(a) Claims of more than 
$100,000 (excluding interest, penalties, and administrative costs) are 
referred to the Justice Department for compromise, termination, or 
suspension. See note 4. (31 U.S.C. 3711 ); 

(b) Claims delinquent for a 
period of 180 days have been referred to Treasury for collection. See 
notes 5, 6, and 7. (31 U.S.C. 3711 (g)).

6. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 

For any noncompliance noted, the auditor should 

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

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

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

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

7. Document conclusions on compliance with each provision on Form 809 
- Compliance Summary.

[End of table]

Note 1: Claims are amounts owed to the government, including amounts 
owed for loans insured or guaranteed by the government. The term 
"claim" is used interchangeably with the term "debt" in this law. (31 
U.S.C. 3701(b))

Interest normally accrues from the date that notice of the debt and the 
agency's interest policies is first mailed to the debtor. If the agency 
sends a bill to the debtor in advance of the due date and that bill 
states the interest policies, interest would accrue from the due date 
specified in the bill.

The provisions regarding accrual of interest and other charges do not 
apply to the extent that a statute, related regulation, loan agreement, 
or contract provides otherwise, or if a claim is under a contract 
executed before October 25, 1982, that is in effect on October 25, 
1982. (31 U.S.C. 3717(g)) Accrual of interest and penalties under this 
law does not apply to amounts owed by other agencies of the federal 
government, a state government or a unit of general local government or 
to amounts payable to the entity under the Internal Revenue Code, the 
Social Security Act, or tariff laws. (31 U.S.C. 3701 (c) and (d)) This 
law, however, does not preclude the charging of interest to state and 
local governments under authority provided under other laws.

Note 2:
The entity shall waive the collection of interest on a claim (or 
any portion of the claim) that is paid within 30 days after the date on 
which interest began to accrue. The agency may extend this 30-day 
period. (31 U.S.C. 3717(d)) Interest that is either accrued or 
collected on claims that are paid within the 30-day period would 
usually not be material or otherwise significant for purposes of 
compliance testing. If the auditor considers this provision to be 
significant for compliance testing, this form should be tailored to 
include the appropriate testing procedures.

Note 3:
The entity has the authority to waive the collection of 
interest, penalties, and administrative charges. The entity should 
follow its own regulations when determining whether a waiver is 
appropriate. Such regulations should be in conformity with the 
standards set jointly by the Comptroller General, the Attorney General, 
and the Secretary of the Treasury described in 31 CFR 901.9. (31 U.S.C. 
3717(h)):

The entity may increase an administrative claim (debt not based on an 
extension of government credit through direct loans, guarantees, or 
insurance, including fines, penalties, and overpayments) annually by 
the cost of living adjustment in lieu of charging interest and 
penalties. (31 U.S.C. 3717(i)):

Note 4:
Compromise is the term used when an amount less than the total 
amount of the claim is accepted by the entity as payment in full. 
Suspension refers to the temporary deferral of collection activities 
until collection activity is expected to be more successful. 
Termination refers to stopping of collection activities.

Only the Justice Department has the authority to compromise, terminate, 
or suspend collection on claims that are greater than $100,000 
(excluding interest, penalties, and administrative charges). Pursuant 
to 31 CFR Parts 902.1 and 903.1, entities generally should use a Claims 
Collection Litigation Report (CCLR) to refer such matters to the 
Justice Department.

Note 5:
Exceptions to the requirement to transfer nontax debt delinquent 
for a period of 180 days to Treasury for collection are:

(a)a debt or claim that:

(1)is in litigation or foreclosure;

(2)will be disposed of under an asset sales program within 1 year after 
becoming eligible for sale, or later than 1 year if consistent with an 
asset sales program and a schedule established by the entity and 
approved by OMB;

(3)has been referred to a private collection contractor for collection 
for a period determined by Treasury;

(4)has been referred by, or with the consent of, Treasury to a debt 
collection center for a period determined by Treasury; or:

(5)will be collected under internal offset, if such offset is 
sufficient to collect the claim within 3 years after the date the debt 
or claim is first delinquent; and:

(b) 
to any other specific class of debt or claim, as determined by Treasury 
at the request of an entity. (31 U.S.C. 3711(g)(2)) Examples include:

(1) 
debts in bankruptcy meeting the criteria for an automatic stay (11 
U.S.C. 362),

(2) foreign debt considered uncollectable by Treasury due to foreign 
diplomacy considerations and affairs of state,

(3) debts in forbearance or appeals.

Note 6: Exceptions to the requirement to notify Treasury of nontax debt 
delinquent over 180 days for administrative offset are a claim that has 
been outstanding for more than 10 years or when a statute explicitly 
prohibits using administrative offset or setoff to collect the type of 
claim involved. (31 U.S.C. 3716(e)) Also, this section does not 
prohibit the use of any other administrative offset authority existing. 
(31 U.S.C. 3716 (d)):

Prior to referring debts to Treasury, an agency shall inform the debtor 
of the amount and nature of the debt (such as overpayment, etc.), and 
actions which may be taken to enforce recovery of a delinquent debt. 
These include:

(a) offset of any payments which the debtor is due, including tax 
refunds, and salary;

(b) referral of the debt to a private collection agency;

(c) referral of the debt to the Department of Justice or agency 
counsel for litigation;

(d) reporting of the debt to a credit bureau;

(e) 
reporting of the debt, if discharged, to IRS as a potential taxable 
income.

In the future, the agency also will need to inform the debtor that the 
debt may be subject to administrative wage garnishment, his/her 
identity may be published or publicly disseminated, and/or the debt may 
be sold.

The notice must tell the debtor that he/she has the opportunity:

(a) to inspect and copy records relating to the debt,

(b) for a review by the agency; and:

(c) to enter into a written repayment agreement.

Note 7: Before an entity refers past-due debt to Treasury for reduction 
of tax refund, it must:

(a) notify the person incurring such debt that the entity proposes to 
refer to Treasury for tax refund offset,

(b) give such person at least 60 days to present evidence that all or 
part of the debt is not past due or not legally enforceable,

(c) 
consider any evidence presented by such person and determine that an 
amount of such debt is past due and legally enforceable,

(d) 
satisfy such other conditions Treasury may prescribe to ensure the 
above determination is valid and that the entity has made reasonable 
efforts to obtain payment, and:

(e) 
certify that reasonable efforts have been made by the entity to obtain 
payment. (31 U.S.C. 3720A (b)):

Treasury issues regulations prescribing the times at which entities 
shall submit notices of past-due legally enforceable debts, the manner 
of submitting them, and the information to be contained in them. The 
regulations also specify the minimum amount of debt that may be 
referred for tax refund offset and the fee the entity shall pay to 
reimburse Treasury for its costs.

Note 8: If multipurpose testing is used for the compliance test and/or 
compliance control test and/or a substantive test of accounts or loans 
receivable details, the sample items for the compliance test and/or 
compliance control test should be selected using the sampling method 
used for the substantive test as described in FAM 430. Otherwise, the 
items should be selected using attribute sampling as discussed in FAM 
460.02.

As with all sampling applications, the auditor should consider the 
completeness of the test population. For efficiency, the auditor should 
consider using records that were tested for validity, accuracy, and 
completeness (as well as the other financial statement assertions) in 
conjunction with substantive tests of the population.

[End of section]

810 - PROMPT PAYMENT ACT: 

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

OMB guidance on the Prompt Payment Act is included in 5 CFR Part 1315.

[See PDF for image]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Prompt Payment Act are considered to be significant 
as indicated on Form 802 - General Compliance Checklist. The procedures 
in this program are designed to test compliance with the provisions 
listed on the Compliance Summary.

OMB Guidance on the Prompt Payment Act is included in 5 CFR Part 1315.

Audit Procedures: 

1. Based on the preliminary assessment of compliance control 
effectiveness (as documented on Form 810 - Compliance Summary), select 
a sample of payments from throughout the audit period. (The sample size 
will vary based on the expected effectiveness of compliance controls as 
discussed in FAM 460.02.) Document the sampling approach using the 
documentation in FAM section 495 E. See note 6 regarding sampling 
efficiencies and completeness of the population; 

2. For each item selected in step 1, obtain the supporting 
documentation for the payment such as the invoice voucher package; 

(a) Document the following items in the documentation: 

* invoice number; 

* payee; 

* invoice amount; 

* invoice date; 

* invoice receipt date 
(or other date used for determining compliance with this law - see step 
2 (b)); 

* payment date; 

* amount of interest penalty paid, if any; 

* amount of discount taken, if any; and appropriation account(s) 
charged for the expenditure and interest penalty, if any.

2. (b) For each item selected, note whether the payment was made by the 
required due date. The required due date may be the date specified in 
the contract or, if a date is not specified, 30 days after receipt of 
the invoice (31 U.S.C. 3903(a)(1)(A) and (B)). If payment is for meat 
or meat food products, perishable agricultural products, dairy products 
or construction contracts, consult with OGC to determine payment due 
date. Specific payment due dates to avoid interest penalties are 
established by law for these items. (31 U.S.C. 3903(a)(2), (3), (4), 
and (6)); 

The invoice receipt date is the later of (1) the date the 
entity's designated representative or office actually receives a proper 
invoice or (2) the 7th day after the date on which, in accordance with 
the terms and conditions of the contract, the property is actually 
delivered or performance of the services is actually completed (unless 
the entity accepted the property or services before the 7th day or a 
longer acceptance period is specified in the contract). If the date of 
actual invoice receipt is not indicated, the entity must use the 
invoice date. (31 U.S.C. 3901(a)(4)(A) and (B)); 

If the payment was made prior to the payment due date, perform step 3; 

If the payment was made after the payment due date, perform step 4; 

If a discount was taken, perform step 5.

3. If the payment was made prior to the payment due date, and no 
discount was taken, determine that no interest penalty was paid; 

(Note: If the entity did not take advantage of a discount for which it 
was eligible or if an interest penalty was paid when it was not owed, 
the auditor generally should determine the cause of these items for 
purposes of reporting findings.).

4. If the payment was made after the payment due date, determine 
whether; 

(a) an interest penalty was paid;  

(b) the amount of the interest penalty was properly calculated; and 

(c) the interest penalty was paid out of the appropriation used to pay 
the related expenditures; 

Review the accounting codes indicated on the expense 
voucher. Determine whether the accounting codes used to record the 
interest penalty are the same as those used for the related expenditure 
and whether the codes and amounts agree with those recorded in the 
budgetary accounting records. (See step 6 regarding proper 
summarization of amounts.) (31 U.S.C. 3902 (a), (b), and (f)); 

Investigate any differences between the amount of interest penalty 
calculated by the auditor and the amount paid by the entity, including 
any instances when an interest penalty was owed but not paid. See note 
5. Investigate any instances when the proper appropriation account was 
not charged; 

See note 2 regarding the interest rate to be used. See 
notes 3 and 4 regarding the period the penalty should cover.

5. If a discount was taken, determine whether it was taken during the 
specified period the discount was available. If the discount was taken 
during the specified period, further consideration is not necessary; 

If any discounts are taken after the appropriate time period, determine 
whether; 

(a) an interest penalty was paid,; 
(b) the amount of the 
interest penalty was properly calculated, and 
(c) the interest 
penalty was charged against the appropriation used for the related 
expenditures; 

Review the budget accounting codes indicated on the 
expense voucher. Determine whether the budget accounting codes 
indicated on the voucher for the interest penalty are the same as those 
used for the related expenditure. Determine whether the codes and 
amounts on the voucher agree with those recorded in the budgetary 
accounting records. (See step 6 regarding proper summarization of the 
budgetary amounts.) (31 U.S.C. 3902 (a), (b), and (f), and 31 U.S.C. 
3904); 

Interest penalties should be calculated on the amount of the 
discount. The penalty accrues on the amount of the discount from the 
last date specified that the discounted amount may be paid (31 U.S.C. 
3904). See note 2 regarding the interest rate to be used to calculate 
the interest penalty;  

Investigate any differences between the amount of 
interest penalty calculated by the auditor and the amount paid by the 
entity, including any instances when an interest penalty was owed but 
not paid. Investigate any instances when the proper appropriation 
account was not charged.

6. Consider the procedures performed on the entity's budget controls 
over summarization of expenditure balances as discussed in FAM 395 F; 

If the auditor has assessed the entity's controls as effective in 
achieving the control objective of summarization of expenditure 
balances, further procedures are not necessary to obtain assurance as 
to whether interest penalties are paid out of the proper appropriation 
account; 

If the auditor has assessed the controls as ineffective, 
the auditor should perform procedures to determine if the entity has 
properly summarized the expenditure balances as described in FAM 495 
B.

7. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 

For any noncompliance noted, the auditor should: 

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

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

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

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

8. Document conclusions on compliance with each provision on Form 810 
- Compliance Summary.

[End of table]

Note 1: The required due date is generally the date specified in the 
contract or, if a date is not specified, 30 days after receipt of the 
invoice (31 U.S.C. 3903(a)(1)(A) and (B)) If payment is for meat or 
meat food products, perishable agricultural products, dairy products or 
construction contracts, consult with OGC to determine payment due date. 
Specific payment due dates to avoid interest penalties are established 
by law for these items. (31 U.S.C. 3903(a)(2), (3), (4), and (6)):

The invoice receipt date is established as the later of (1) the date 
the entity's designated representative or office actually receives a 
proper invoice or (2) the 7th day after the date on which, in 
accordance with the terms and conditions of the contract, the property 
is actually delivered or performance of the services is actually 
completed, unless the entity accepted the property or services before 
the 7th day or a longer acceptance date is specified in the contract. 
If the date of actual invoice receipt is not indicated, the entity must 
use the invoice date. (31 U.S.C. 3901(a)(4)(A) and (B)):

Note 2: Interest shall be calculated at the rate set by the Secretary of 
the Treasury under section 12 of the Contract Disputes Act of 1978 (41 
U.S.C. 611) that is in effect at the time the entity accrues the 
obligation to pay a late payment interest penalty. The rates are 
published in the Federal Register. (31 U.S.C. 3902(a)):

Note 3: The interest penalty shall be paid for the period beginning on 
the day after the required payment date and ending on the date on which 
payment is made. (31 U.S.C. 3902(b)):

An interest penalty not paid after any 30-day period shall be added to 
the principal amount of the debt, and a penalty accrues thereafter on 
the combined amount of principal and interest. (31 U.S.C. 3902(e)):

Note 4: A payment is deemed to be made on the date a check for payment 
is dated or an electronic transfer is made. (31 U.S.C. 3901 (a)(5)):

Note 5: The temporary unavailability of funds to make a timely payment 
due for property or services does not relieve the entity head of the 
obligation to pay interest penalties under this law. (31 U.S.C. 3902 
(d)):

Note 6: If multipurpose testing is used for the compliance test and/or 
compliance control test and/or a substantive test of payments details, 
the sample items for the compliance test and/or compliance control test 
should be selected using the sampling method used for the substantive 
test as described in FAM 430. Otherwise, the items should be selected 
using attribute sampling as discussed in FAM 460.02.

As with all sampling applications, the auditor should consider the 
completeness of the test population. For efficiency, the auditor should 
consider using records that were tested for validity, accuracy, and 
completeness (as well as the other financial statement assertions) in 
conjunction with substantive tests of the population.

[End of section]

812 - PAY AND ALLOWANCE SYSTEM FOR CIVILIAN EMPLOYEES, AS PROVIDED 
PRIMARILY IN CHAPTERS 51-59 OF TITLE 5, U.S. CODE: 


Note: Complete this compliance summary or prepare equivalent 
documentation only if provisions of the Pay and Allowance System for 
Civilian Employees, as provided primarily in Chapters 51-59 of Title 5, 
U.S. Code, are considered to be significant as indicated on Form 802 - 
General Compliance Checklist.

[See PDF for image]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Pay and Allowance System for Civilian Employees, as 
provided primarily in Chapters 51-59 of Title 5, U.S. Code, are 
considered to be significant as indicated on Form 802 - General 
Compliance Checklist. The procedures in this program are designed to 
test compliance with the provisions listed on the Compliance Summary.

Audit Procedures: 

Note: These tests are closely related to procedures performed for 
substantive tests of payroll expense details. Use of multipurpose 
testing in this situation is strongly encouraged.

1. Based on the preliminary assessment of compliance control 
effectiveness (as documented on Form 812 - Compliance Summary), select 
an appropriate sample of disbursements from the payroll records 
throughout the audit period. (The sample size will vary based on the 
expected effectiveness of compliance controls as discussed in FAM 
460.02). Document the sampling approach using the documentation in FAM 
section 495 E. See note 2 regarding sampling efficiencies and 
completeness of the population. 

2. For each item selected in 1, note the following information: 

* employee name; 

* pay period (number and dates); 

* amount of gross pay for the period; 

* pay rate; 

* total hours worked; and number of hours worked 
at regular pay and other pay (i.e., overtime, premium pay, etc.). 

3. For each item selected in 1, obtain the employee's personnel file 
and note the following in effect for the pay period selected: the 
employee's grade and step and the employee's pay rate.

4. For each item selected in 1,

(a) Calculate the amount of gross 
pay using the hours worked and the employee's pay rate indicated on the 
payroll records. Compare the amount of gross pay calculated by the 
auditor to the amount shown on the payroll records for the selected pay 
period and obtain explanation and examine support for any differences.

Note:  To convert basic annual amount to a daily, weekly or biweekly 
amount, divide the annual rate by 2,087 for an hourly rate. Multiply 
the hourly rate by number of either daily hours, 40 for weekly, or 80 
for biweekly amounts. (5 U.S.C. 5504)  

4. (b) Compare the employee's pay rate in the payroll records to the 
appropriate pay rate for the employee's approved grade and step on the 
pay schedules established by executive order. (Use the approved grade 
and step indicated in the employee's personnel records for this test.) 
Obtain explanation and examine support for any differences between the 
actual pay rate for the period selected and the authorized amounts. (5 
U.S.C. 5332, 5343, and 5383); 

If the employee's pay is not set by 
these pay schedules, determine whether the amount paid is properly 
authorized and whether the pay rate is at least minimum wage. (29 
U.S.C. 206)  

5. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance.; 

For any noncompliance noted, the auditor should; identify the 
weakness in compliance controls that allowed the noncompliance to 
occur, if not previously identified during compliance control testing; 

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

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

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

6. Document conclusions on compliance with each provision on Form 812 
- Compliance Summary.  

[End of table]

Note 1: To convert basic annual amount to a daily, weekly, or biweekly 
amount, divide the annual rate by 2,087 for an hourly rate. Multiply 
the hourly rate by number of either daily hours, 40 for weekly, or 80 
for biweekly amounts. (5 U.S.C. 5504):

Note 2: If multipurpose testing is used for the compliance test and/or 
compliance control test and a substantive test of payroll expense 
details, the sample items for the compliance test and/or compliance 
control test should be selected using the sampling method used for the 
substantive test. Otherwise, the items should be selected using 
attribute sampling, as discussed in FAM 460.02.

As with all sampling applications, the auditor should consider the 
completeness of the population. For efficiency, the auditor should 
consider using records that were tested for validity and completeness 
(as well as the other financial statement assertions) in conjunction 
with substantive tests of payroll or other payroll related compliance 
tests.

Note 3: If the entity outsources payroll processing, the entity remains 
responsible for compliance. Dividing responsibility for payroll 
processing activities between the entity and the service organization 
could make payroll testing more complicated, although the same testing 
should be performed. The auditor may accomplish that testing with the 
assistance of the service organization's auditor, who may issue an 
internal control report on the service organization under AU 324 
(SAS 70). Or the service organization's auditor may assist the entity 
auditor by performing agreed-upon procedures at the service 
organization (e.g., substantive testing) under AT 201 (see FAM 660).

[End of section]


813 - CIVIL SERVICE RETIREMENT ACT: 

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

[See PDF for table]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Civil Service Retirement Act are considered to be 
significant as indicated on Form 802 - General Compliance Checklist. 
The procedures in this program are designed to test compliance with the 
provisions listed on the Compliance Summary.

Audit Procedures: 

1. Based on the preliminary assessment of compliance control 
effectiveness (as documented on Form 813 - Compliance Summary), select 
a sample of expense amounts for individuals' gross pay from the payroll 
disbursement records for the audit period for employees covered by the 
Civil Service Retirement Act system (CSRS). (See note 1.); 

(The 
sample size will vary based on the expected effectiveness of compliance 
controls, as discussed in FAM 460.02). Document the sampling approach 
using the documentation in FAM section 495 E. See note 3 regarding 
sampling efficiencies and completeness of the population; 

These tests should be coordinated with other tests of payroll-related 
expenses and with the agreed-upon procedures agency auditors perform 
for the Office of Personnel Management (OPM), per OMB audit guidance, 
if performed; 

2. For each selection made in 1, document the following for the pay 
period selected: 

* the amount withheld for the cost of retirement benefits; 

* the amount of basic pay; and 

* if indicated in the 
payroll disbursement records, document the retirement plan under which 
the withholdings were made (CSRS or FERS). (Only employees covered by 
CSRS should be included in this compliance test. See FAM 817 for the 
FERS compliance test.).

3. For each item selected in 1, obtain the employee's personnel file 
and note the following: 

* employee hire date,

* amount of basic pay, and 

*the retirement plan under which the employee is covered.

4. For each selection made in 1, 

(a) Compare the amount of basic pay 
indicated in the employee's personnel file with the amount indicated in 
the payroll records and obtain an explanation and examine support for 
any differences. (This procedure would be performed only if not already 
performed as part of other testing.).

(b) Calculate the amount of the withholdings for retirement costs 
based on 7 percent of basic pay for executive branch employees (see 
note 2 for percentages for other employees) for the selected pay period 
and document the amount in the documentation. Compare to the actual 
amount withheld for the selected pay period and obtain an explanation 
and examine support for any differences. (5 U.S.C. 8334(a)(1)).

(c) Determine whether the entity contributed an equal amount for the 
employee's retirement for the selected pay period. Obtain explanation 
and examine support for any differences between the employee and entity 
contributions. (5 U.S.C. 8334(a)(1)).

5. Determine whether amounts contributed by the entity are charged to 
the appropriation or fund used to pay the employee for the selected pay 
period by performing the following procedures: 

(a) Review the accounting codes indicated on the supporting 
documentation; 

(b) Determine whether the accounting codes used to record the entity 
contribution are the same as those used for the related payroll 
expenditure and whether the codes and amounts agree with those recorded 
in the budgetary accounting records. (This step assumes other payroll 
testing would have included checking that the codes represent the 
proper appropriation.).

(c) Consider the procedures performed on the entity's budget 
controls over summarization of expenditure balances as discussed in FAM 
395 F; If the auditor has assessed the entity's controls as 
effective in achieving the control objective of summarization of 
expenditure balances, further procedures are not necessary to obtain 
assurance as to whether the entity's contributions are paid out of the 
proper appropriation account; If the auditor has assessed the 
controls as ineffective, the auditor should perform procedures to 
determine whether the entity has properly summarized the expenditure 
balances as described in FAM 495 B. (5 U.S.C. 8334 (a)(1)).

6. Determine whether the entity has effective controls over the proper 
summarization of (a) the amounts withheld from employees for retirement 
costs under this law and (b) the entity contributions for remittance to 
Treasury. If the entity does not have effective controls for 
summarization, test the summarization of the totals that include the 
items selected for testing in step 1.

7. Compare the combined totals of employee withholdings and entity 
contributions that include each selection made in step 1 to the deposit 
made to Treasury and the remittance sent to OPM and obtain an 
explanation and examine support for any differences. The funds should 
be deposited in the Treasury to the credit of the Civil Service 
Retirement and Disability Fund. (5 U.S.C. 8334(a)(2)).[Empty].
[Empty].

8. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 

For any noncompliance noted, the auditor should; 

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

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

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

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

9. Document conclusions on compliance with each provision on Form 813 
- Compliance Summary.

[End of table]

Note 1: Employees may be covered by the Civil Service Retirement Act 
(CSRS) or the Federal Employees' Retirement System Act (FERS), 
generally depending on their employment date.

Note 2: The percentage to be withheld for the service period after 
December 31, 2000, for (1) executive branch employees is 7 percent and 
(2) Congressional employees is 7.5 percent. The percentage to be 
withheld for the service period between January 1, 2001 and 
December 31, 2002, for Members of Congress is 8.5 percent. The 
percentage withheld for service after December 31, 2002, for Members of 
Congress is 8 percent. (5 U.S.C. 8334(a)(1)):

Note 3: If multipurpose testing is used for the compliance test and/or 
compliance control test and a substantive test of payroll expense 
details, the sample items for the compliance test and/or compliance 
control test should be selected using the sampling method used for the 
substantive test. Otherwise, the items should be selected using 
attribute sampling, as discussed in FAM 460.02.

As with all sampling applications, the auditor should consider the 
completeness of the population. For efficiency, the auditor should 
consider using records that were tested for validity and completeness 
(as well as the other financial statement assertions) in conjunction 
with substantive tests of payroll or other payroll related compliance 
tests.

Note 4: If the entity outsources payroll processing, the entity remains 
responsible for compliance. Dividing responsibility for payroll 
processing activities between the entity and the service organization 
could make payroll testing more complicated, although the same testing 
should be performed. The auditor may accomplish that testing with the 
assistance of the service organization's auditor, who may issue an 
internal control report on the service organization under AU 324 
(SAS 70). Or the service organization's auditor may assist the entity 
auditor by performing agreed-upon procedures at the service 
organization (e.g., substantive testing) under AT 201 (see FAM 660).

[End of section]

814 - FEDERAL EMPLOYEES HEALTH BENEFITS ACT: 


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

[See PDF for image]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Federal Employees Health Benefits Act are considered 
to be significant as indicated on Form 802 - General Compliance 
Checklist. The procedures in this program are designed to test 
compliance with the provisions listed on the Compliance Summary.

Audit Procedures: 

1. Based on the preliminary assessment of compliance control 
effectiveness (as documented on Form 814 - Compliance Summary), select 
a sample of expense amounts for individuals' gross pay from the payroll 
disbursement records for the audit period; 

(The sample size will 
vary based on the expected effectiveness of compliance controls, as 
discussed in FAM 460.02). Document the sampling approach using the 
documentation in FAM section 495 E. See note 2 regarding sampling 
efficiencies and completeness of the population. 

These tests should 
be coordinated with other tests of payroll-related expenses and with 
the agreed-upon procedures agency auditors perform for OPM, per OMB 
audit guidance, if performed. 

2. For each selection made in step 1, document the employee, the pay 
period selected, and the amount withheld for the pay period selected, 
if any, for the cost of health insurance. If available, document the 
health plan enrollment code. 

3. For each selection made in step 1, obtain the employee's personnel 
file and note whether the employee elected health insurance coverage 
for the period to which payroll disbursement relates. Such coverage 
should be indicated on OPM form SF 2809; 

If the employee did not 
elect health insurance coverage, ask why amounts are being withheld for 
the cost of insurance and determine whether any entity contributions 
are being made inappropriately as well. 

4. If the employee identified in step 3 elected coverage, perform the 
following steps:

(a) Obtain the schedule of health insurance costs 
for all plans published by OPM. Using the enrollment code for the plan 
selected by the employee on OPM form SF 2809, calculate the employee's 
portion of the health insurance cost and record it in the 
documentation. Compare it to the amount actually withheld for the 
selected pay period and obtain an explanation and examine support for 
any differences. (5 U.S.C. 8906(d)); 

(b) For each employee in (a), determine the appropriate amount of 
the entity's contribution for its share of health insurance costs by 
using the OPM schedule of costs. Compare it to the amount actually 
contributed by the entity for the employee's health insurance for the 
selected pay period and obtain an explanation and examine support for 
any differences. (See note 1 for part-time career employees.) (5 U.S.C. 
8906(b)(1)); 

(c) For each employee in (b), determine if amounts contributed by 
the entity are charged to the appropriation or fund that is used to pay 
the employee for the selected pay period by performing the following 
procedures:

(1) Review the accounting codes indicated on the 
supporting documentation; 

(2) Determine whether the accounting codes 
used to record the entity contribution are the same as those used for 
the related payroll expenditure and whether the codes and amounts agree 
with those recorded in the budgetary accounting records. (This step 
assumes other payroll testing would have included checking that the 
codes represent the proper appropriation.); 

(c) (3) Consider the procedures performed on the entity's budget 
controls over summarization of expenditure balances as discussed in FAM 
395 F; 

If the auditor has assessed the entity's controls as 
effective in achieving the control objective of summarization of 
expenditure balances, further procedures are not necessary to obtain 
assurance as to whether the entity's contributions are paid out of the 
proper appropriation account; 

If the auditor has assessed the 
controls as ineffective, the auditor should perform procedures to 
determine whether the entity has properly summarized the expenditure 
balances as described in FAM 495 B. (5 U.S.C. 8906(f)).

5. Determine whether the entity has effective controls over the proper 
summarization of the amounts withheld from employees for health 
insurance costs under this law and the entity contributions for 
remittance to Treasury. If the entity does not have effective controls 
for summarization, test the summarization of the totals that include 
the items selected for testing in step 1.; 

6. Compare the total cost of health insurance on the entity's records 
(employee and employer portions) for the selected pay period to the 
deposit made to Treasury and the documentation sent to OPM and obtain 
an explanation and examine support for any differences. The funds 
should be deposited in the Treasury to the credit of the Employees 
Health Benefits Fund. (5 U.S.C. 8909); 

7. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 
For any noncompliance noted, the auditor should

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

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

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

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

8. Document conclusions on compliance with each provision on Form 814 
- Compliance Summary.; 

[End of table]

Note 1: 
For part-time career employees, the biweekly entity contribution 
shall be calculated on a prorata basis based on the ratio of number of 
scheduled part-time hours to the number of scheduled regular hours for 
an employee serving in a comparable position on a full-time basis. (5 
U.S.C. 8906(b)(3)):

Note 2: If multipurpose testing is used for the compliance test and/or 
compliance control test and a substantive test of payroll expense 
details, the sample items for the compliance test and/or compliance 
control test should be selected using the sampling method used for the 
substantive test. Otherwise, the items should be selected using 
attribute sampling, as discussed in FAM 460.02.

As with all sampling applications, the auditor should consider the 
completeness of the test population. For efficiency, the auditor should 
consider using records that were tested for validity and completeness 
(as well as the other financial statement assertions) in conjunction 
with substantive tests of payroll or other payroll related compliance 
tests.

Note 3: If the entity outsources payroll processing, the entity remains 
responsible for compliance. Dividing responsibility for payroll 
processing activities between the entity and the service organization 
could make payroll testing more complicated, although the same testing 
should be performed. The auditor may accomplish that testing with the 
assistance of the service organization's auditor, who may issue an 
internal control report on the service organization under AU 324 
(SAS 70). Or the service organization's auditor may assist the entity 
auditor by performing agreed-upon procedures at the service 
organization (e.g., substantive testing) under AT 201 (see FAM 660).

[End of section]

816 - FEDERAL EMPLOYEES COMPENSATION ACT: 

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

[See PDF for figure]

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Federal Employees' Compensation Act are considered to 
be significant as indicated on Form 802 - General Compliance Checklist. 
The procedures in this program are designed to test compliance with the 
provisions listed on the Compliance Summary for this law.

Audit Procedures:

Note: The provisions identified for testing are procedural-based 
provisions. As discussed in FAM 460.06, sufficient procedures usually 
are performed in conjunction with tests of compliance controls for 
these procedural-based provisions to conclude on the entity's 
compliance without performing additional procedures. Additional 
procedures should not be performed to obtain evidence regarding 
compliance with the provisions related to the following objectives 
unless sufficient evidence regarding compliance was not obtained during 
compliance control tests documented on Form 816 - Compliance Summary.

1. Reference to conclusions on compliance controls on Form 816 - 
Compliance Summary and indicate whether any additional procedures are 
necessary.

2. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 

For any noncompliance noted, the auditor should; 

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

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

* consider the implications of any instances of 
noncompliance on the financial statements; and report instances of 
noncompliance, as appropriate (see FAM 580.67-.75).

3. Document conclusions on compliance with each provision on Form 816 
- Compliance Summary.

[End of table]

Note 1: A statement showing the total cost of benefits and other 
payments made from the Employees' Compensation Fund during the 
preceding July 1 through June 30 expense period on account of the 
injury or death of employees or individuals under the jurisdiction of 
the entity is required to be provided by the Secretary of Labor to the 
entity by August 15 of each year. (5 U.S.C. 8147):

Note 2: Entities not dependent on an annual appropriation shall make the 
required deposit to Treasury from funds under its control during the 
first 15 days of October after receipt of the statement showing the 
costs paid on the entity's behalf. (5 U.S.C. 8147):

[End of section]

817 - FEDERAL EMPLOYEES' RETIREMENT SYSTEM ACT OF 1986: 

Note: Complete this compliance summary or prepare equivalent 
documentation only if provisions of the Federal Employees' Retirement 
System Act of 1986 are considered significant as indicated on Form 802 
- General Compliance Checklist.

[See PDF for image] 

[End of table]

Note: Complete this program or prepare equivalent documentation only if 
provisions of the Federal Employees' Retirement System Act of 1986 are 
considered significant as indicated on Form 802 - General Compliance 
Checklist. The procedures in this program are designed to test 
compliance with the provisions listed on the Compliance Summary.

Audit Procedures: 

1. Based on the preliminary assessment of compliance control 
effectiveness (as documented on form 817 - Compliance Summary), select 
a sample of expense amounts for individuals' gross pay from the payroll 
disbursement records for the audit period for employees covered by the 
Federal Employees' Retirement System (FERS). (See note 1.); 

(The 
sample size will vary based on the expected effectiveness of compliance 
controls as discussed in FAM 460.02). Document the sampling approach 
using the documentation in FAM section 495 E. See note 4 regarding 
sampling efficiencies and completeness of the sample population; 


These tests should be coordinated with other tests of payroll-related 
expenses and with the agreed-upon procedures agency auditors perform 
for OPM, per OMB audit guidance, if performed.

2. For each selection made in 1, document the following for the pay 
period selected: 

* the amount withheld for the cost of retirement 
benefits,

* the amount of basic pay, and 

* if indicated in the 
payroll disbursement records, document the retirement plan under which 
the withholdings were made (CSRS or FERS). (Only employees covered by 
FERS should be included in this compliance test. See FAM 813 for the 
CSRS compliance test.).

3. For each item selected in 1, obtain the employee's personnel file 
and note the following: 

* employee hire date, 
* amount of basic pay, and 
* the retirement plan under which the employee is covered.

4. For each selection made in 1, 

(a) Compare the amount of basic pay 
indicated in the employee's personnel file with the amount indicated in 
the payroll records and obtain an explanation and examine support for 
any differences. (This procedure would be performed only if not already 
performed as part of other testing.).

(b) Calculate the amount of the withholdings for retirement costs 
based on 0.8% of basic pay for most employees (see note 2 for 
percentages for certain employees) for the selected pay period and 
record the amount in the documentation. Compare to the actual amount 
withheld for the selected pay period and obtain an explanation and 
examine support for any differences. (5 U.S.C. 8422(a)(1)).

(c) Determine whether the entity contributed the correct amount for 
the employee's retirement for the selected pay period. Obtain an 
explanation and examine support for any differences between the entity 
contributions and the amount calculated using OPM's normal cost 
percentage. (5 U.S.C. 8423(a)(1) and 5 U.S.C. 8401(23)).

5. Determine if amounts contributed by the entity are charged to the 
appropriation or fund used to pay the employee for the selected pay 
period by performing the following procedures: 

(a) Review the accounting 
codes indicated on the supporting documentation; 

(b) Determine whether 
the accounting codes used to record the entity contribution are the 
same as those used for the related payroll expenditure and whether the 
codes and amounts agree to those recorded in the budgetary accounting 
records. (This step assumes other payroll testing would have included 
checking that the codes represent the proper appropriation.); 


(c) Consider the procedures performed on the entity's budget controls 
over summarization of expenditure balances as discussed in FAM 395 F; 

If the auditor has assessed the entity's controls as effective in 
achieving the control objective of summarization of expenditure 
balances, further procedures are not necessary to obtain assurance as 
to whether the entity's contributions are paid out of the proper 
appropriation account; 

If the auditor has assessed the controls as 
ineffective, the auditor should perform procedures to determine whether 
the entity has properly summarized the expenditure balances as 
described in FAM 495 B. (5 U.S.C. 8423(a)(1)).

6. Determine whether the entity has effective controls over the proper 
summarization of the amounts withheld from employees for retirement 
costs under this law and the entity contributions for remittance to 
Treasury. If the entity does not have effective controls for 
summarization, test the summarization of the totals that include the 
items selected for testing in step 1.

7. Compare the combined totals of employee withholdings and entity 
contributions that include each selection made in step 1 to the deposit 
made to Treasury and the remittance sent to OPM and obtain explanation 
and examine support for any differences. The funds should be deposited 
in the Treasury to the credit of the Civil Service Retirement and 
Disability Fund. (5 U.S.C. 8422(c) and 5 U.S.C. 8401(6)).


8. If the entity does not appear to be in compliance based on the 
results of tests performed, discuss these matters with OGC and, when 
appropriate, the Special Investigator Unit to conclude if noncompliance 
actually has occurred and the implications of such noncompliance; 

For any noncompliance noted, the auditor should; 

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

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

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

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

9. Document conclusions on compliance with each provision on Form 813 - 
Compliance Summary.

[End of table]

Note 1: Employees may be covered by the Civil Service Retirement Act 
(CSRS) or the Federal Employees' Retirement System Act (FERS), 
generally depending on their employment dates.

Note 2: For most employees, the percentage to be withheld is 0.8 percent 
(7 percent less the Social Security tax rate). For congressional 
employees, Members of Congress, and law enforcement officers, 
firefighters, air traffic controllers, and nuclear materials couriers, 
the withholding rates are higher. (See 5 U.S.C. 8422(a)(1).).

Note 3: The Office of Personnel Management (OPM) computes the normal 
cost percentage. For FY 2002, it is 11.5 percent for regular employees. 
For congressional employees, Members of Congress, and law enforcement 
officers, firefighters, air traffic controllers, and nuclear materials 
couriers, the normal cost percentages are higher. OPM lists the 
percentages in its Benefits Administration Letters, accessible on its 
Internet site, http://www.opm.gov/asd/htm/bal01.htm (where the 2 
digits after "bal" represent the calendar year of the letters). (5 
U.S.C. 8401(23)):

Note 4: If multipurpose testing is used for the compliance test and/or 
compliance control test and a substantive test of payroll expense 
details, the sample items for the compliance test and/or compliance 
control test should be selected using the sampling method used for the 
substantive test. Otherwise, the items should be selected using 
attribute sampling, as discussed in FAM 460.02.

As with all sampling applications, the auditor should consider the 
completeness of the test population. For efficiency, the auditor should 
consider using records that were tested for validity and completeness 
(as well as the other financial statement assertions) in conjunction 
with substantive tests of payroll or other payroll related compliance 
tests.

Note 5: If the entity outsources payroll processing, the entity remains 
responsible for compliance. Dividing responsibility for payroll 
processing activities between the entity and the service organization 
could make payroll testing more complicated, although the same testing 
should be performed. The auditor may accomplish that testing with the 
assistance of the service organization's auditor, who may issue an 
internal control report on the service organization under AU 324 (SAS 
70). Or the service organization's auditor may assist the entity 
auditor by performing agreed-upon procedures at the service 
organization (e.g., substantive testing) under AT 201 (see FAM 660).

[End of section]

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 sections 280 and 550. AU 334 (SAS No. 45) provides general guidance 
on the procedures that should be performed to identify related party 
relationships and transactions so that the auditor may satisfy him or 
herself that they are appropriately accounted for and disclosed. In 
addition, the American Institute of Certified Public Accountants 
(AICPA) has issued a toolkit for accountants and auditors titled, 
Accounting and Auditing for Related Parties and Related Party 
Transactions[Footnote 1]. This toolkit includes selected authoritative 
accounting and auditing literature, an illustrative audit program, 
disclosure checklist, confirmation letter, and letter to other auditors 
and is available at the AICPA's website: http://www.aicpa.org/news/
relpty1.htm.

.02: 
The federal government in its entirety is an economic entity. Federal 
entities are components of the U.S. government; therefore, transactions 
between federal entities are considered intragovernmental. Within the 
federal government, many reporting entities rely on other federal 
entities to help them achieve their missions and fulfill their 
operating objectives. These arrangements may be voluntary, stipulated 
by law, or established by mutual agreement of the entities involved and 
may not be carried out on an arm's-length basis. In many cases, the 
entity receiving goods or services will reimburse the providing entity 
in accordance with some agreed-upon price, which may or may not 
represent market value. Often, however, one entity provides goods or 
services to another entity free of charge (without reimbursement). For 
example, the General Services Administration, in some cases, provides 
property management services and contract award and administration to 
other entities without charge.

.03: 
In addition, certain federal entities can significantly influence the 
operating policies of the transacting entities. For example, the Office 
of Management and Budget (OMB) provides policy and/or general 
management guidance to other federal entities, and the Office of 
Personnel Management (OPM) helps federal entities recruit nationwide 
and sets human resources management rules with the federal entities' 
involvement; administers the systems for setting federal compensation 
and benefits; manages federal employee health and life insurance 
programs; and operates the retirement program for federal employees.

.04: 
Thus, in the federal government, the most significant related parties 
are other federal government entities. Other possible related parties 
outside of the federal government include states, members of the 
entity's management, and individuals and firms with which members of 
management may be related.

.05: 
The auditor should consider the possible existence of related parties 
with material activity and balances that could affect the financial 
statements, including intragovernmental activity and balances. The 
identification of related parties and activity and balances is 
important because of (1) the requirement under U.S. generally accepted 
accounting principles to disclose material related-party transactions 
and certain control relationships, (2) the instances of fraudulent 
financial reporting and misappropriation of assets that have been 
facilitated by the use of an undisclosed related party, and (3) the 
potential for distorted or misleading financial statements in the 
absence of adequate disclosure.

.06: 
The reason for disclosing related party information is that financial 
statement users may need that information to make informed judgments. 
As stated above, if parties are related, the transactions between them 
may not be based on an arm'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, if the entity has transactions with 
another entity based on a common control situation, such as when the 
entity controls or can significantly influence the management or 
operating policies of the transacting entity, the users of financial 
statements should know the nature of the relationship since this 
control relationship could result in operating results or financial 
positions significantly different from those that would have been 
achieved in the absence of such relationship.

.07: 
Disclosures generally should include the nature of the relationship 
between the entity and its related parties, a description of the 
transactions, including donations, dollar amounts of transactions that 
occurred during the period, and amounts due to or from related parties 
as of the end of the period. Disclosures could include aggregation of 
similar transactions by type. In cases of common control relationships, 
the nature of the control relationship generally should be disclosed 
even if there are no transactions between the entities. Disclosure of 
related party transactions is not required for transactions between 
components of the audited entity that are eliminated in consolidation. 
However, if separate statements of the components are issued, the 
disclosures should be presented in the separate component statements.

.08: 
The following paragraphs discuss intragovernmental activity and 
balances, then other related parties.

INTRAGOVERNMENTAL ACTIVITY AND BALANCES:

.09: 
Intragovernmental amounts represent activity and balances within or 
between federal entities. Intradepartmental amounts are activity and 
balances within the same department (a department here means any 
department, agency, administration or other entity designated by OMB as 
a financial reporting entity that is not part of a larger financial 
reporting entity other than the government as a whole). 
Interdepartmental amounts are activity and balances between two 
different departments. The intradepartmental and interdepartmental 
amounts are subsets of intragovernmental activity and balances.

Intragovernmental activity includes:

* Intragovernmental fiduciary transactions such as:

** Transactions with the Department of Labor (Labor) relating to the 
Federal Employee's Compensation Act, including routine payments to 
Labor;

** Transactions with the OPM relating to employee benefit programs (the 
Federal Employees' Retirement System, the Civil Service Retirement 
System, and federal employees' life insurance and health benefits 
programs) including routine payments, imputed financing, and accruals;

** Investments in federal securities issued by Treasury's Bureau of the 
Public Debt, including interest accruals, interest income and expense, 
and amortization of premiums and discounts; and:

** Borrowings from the Treasury and the Federal Financing Bank, 
including interest accruals, interest income, and expenses;

* Goods and services provided from one federal entity to another (trade 
transactions) including any related revenues earned, costs incurred, 
and reimbursable costs (including both interdepartmental and 
intradepartmental activity);

* Transfers between entities based on agreements or legislative 
authority, expended appropriations, taxes and fees collected, 
collections for others, accounts receivable from appropriations, 
transfers payable, and custodial revenue (including both 
interdepartmental and intradepartmental activity); and:

* Imputed costs such as fiduciary transactions with OPM and Labor 
mentioned above and costs of litigation paid by the judgment fund 
(including both interdepartmental and intradepartmental activity).

.11: 
Activity and balances between federal entities (interdepartmental 
transactions) should be eliminated at the U.S. Government's 
Consolidated Financial Statements level, while the activity and 
balances within the same department (intradepartmental) should be 
eliminated at the department's consolidated financial statements level.

Accounting and Reporting Guidance:

.12: 
In accounting for and reporting of related parties, including 
intragovernmental activity and balances, the entity should refer to 
Statements of Federal Financial Accounting Standards (SFFAS), 
Statements of Financial Accounting Standards, OMB guidance, and 
Treasury guidance. The following paragraphs illustrate these relevant 
documents.

.13: 
SFFAS No. 4, Managerial Cost Accounting Concepts and Standards, and 
related interpretations address the accounting standards for 
interentity cost activities. SFFAS No. 5, Accounting for Liabilities of 
the Federal Government, addresses interentity liabilities, including 
federal debt, pensions and retirement benefits. Also, SFFAS No. 7, 
Accounting for Revenue and Other Financing Sources and Concepts for 
Reconciling Budgetary and Financial Accounting, addresses interentity 
revenue and requires disclosure of the nature of intragovernmental 
exchange transactions in which an entity provides goods or services at 
a price less than full cost or does not charge a price at all. The 
reporting entities should also consult with the funding and 
administering agencies, such as OPM, for information needed to properly 
record interentity costs. Note that SFFAS No. 4 directs OMB to 
designate the costs of goods and services received from other 
departments that should be recognized, which it has done in the 
guidance mentioned below.

.14: 
Statement of Financial Accounting Standards No. 57, Related Party 
Disclosures, defines related parties and provides examples of related 
party transactions and general guidance on disclosures of transactions 
between related parties. Footnote disclosures generally should include 
disclosure of the nature of the relationship between the entity and its 
related parties, a description of the transactions, including 
donations, dollar amounts of transactions that occurred during the 
period, and amounts due to or from related parties as of the end of the 
period.

.15: 
The OMB bulletin titled Form and Content of Agency Financial Statements 
indicates that federal entities should:

* Present intragovernmental amounts by trading partner (reciprocal 
federal entity) as required supplementary information (RSI). 
Intragovernmental asset and liability categories reported as RSI should 
agree with the intragovernmental asset and liability line items 
reported on the balance sheet. The intragovernmental RSI may be limited 
to the consolidated departmentwide financial statements of the Chief 
Financial Officers (CFO) Act departments and agencies covered by the 
form and content bulletin. The intragovernmental RSI reporting 
requirement does not extend to federal components that are required to 
prepare financial statements. All amounts should be net of intraentity 
transactions.

* Reconcile intragovernmental asset, liability, and revenue amounts 
reported as RSI with their trading partners; and:

* Report intragovernmental gross cost to generate earned revenue from 
trade transactions, as well as total entity gross cost and earned 
revenue, by budget functional classification.

OMB also has issued a memorandum titled Business Rules for 
Intragovernmental Transactions that requires agencies to use the same 
methodology in accounting for certain intragovernmental transactions, 
which should help in reconciliation.

.16: 
To emphasize the agency management's responsibility for identifying 
intragovernmental activity and balances and reconciling data with 
relevant trading partners, the entity should include specific 
representations in the management representation letter that 
intragovernmental, including intradepartmental, transactions have been 
properly accounted for, reconciled with trading partners, and disclosed 
(see FAM section 1001). If such disclosure is included in the financial 
statements and the auditor believes that the disclosure is not 
supported by management, or if management refuses to disclose related 
party transactions, the auditor generally should give a qualified or 
adverse opinion because of the inadequate disclosure, depending on 
materiality, and include the necessary disclosures in a separate 
paragraph in the audit report.

.17: 
Treasury Financial Manual (TFM) section "Federal Intragovernmental 
Transactions Process" and the Federal Intragovernmental Transactions 
Accounting Policies Guide (Guide) provide governmentwide procedures for 
federal entities to account for and reconcile transactions occurring 
within and between each other. The procedures in these guides do not 
apply to transactions between federal entities and nonfederal entities. 
The TFM and the Guide are available at the Treasury/Financial 
Management Service's (FMS) websites (http://fms.treas.gov/tfm/vol1/
v1p2c400.html and http://www.fms.treas.gov/cfs/dev/index.html).

.18: 
The TFM includes procedures for CFO Act departments to reconcile and 
confirm with their trading partners intragovernmental activity and 
balances as of and for the fiscal year ended September 30. Each 
department's CFO is to provide the department Inspector General (IG) 
with representations indicating whether the department completed the 
reconciliation. In addition, the department is to describe 
noncompliance with the reconciliation requirements. (See TFM.) These 
CFO representations should be included in the management representation 
letter (see above).

.19: 
The Guide provides detailed guidance on accounting and reconciling 
intragovernmental balances. According to the Guide, federal entities 
should identify trading partners[Footnote 2] for all intragovernmental 
transactions and accumulate detail and summary information for each 
activity by trading partner from their accounting records. The trading 
partner code may be incorporated (1) as part of account coding 
classification or (2) in the customer/vendor identification code in 
accounts receivable and payable systems. These codes are the same as 
the Treasury index agency code used by the Treasury to prepare the 
governmentwide consolidated financial statements. If the two-digit 
Treasury index agency code is not adequate to identify the trading 
partner, entities may expand the partner code to components below the 
department level and communicate these codes to their trading partners.

.20: 
Federal entities also should use Standard General Ledger (SGL) account 
attributes to indicate the nature of account balances and to identify 
intragovernmental transactions. For example, the federal "F" and 
nonfederal "N" attributes used in conjunction with an SGL account in 
the Federal Agencies' Centralized Trial Balance System (FACTS) I 
submissions enable Treasury/FMS to prepare elimination entries for the 
governmentwide financial statements. When the federal attribute "F" is 
used with an SGL account, a trading partner should be designated for 
each transaction posted to the account.

Audit History:

.21: 
Prior years' audits of several federal entities' financial statements 
have identified instances where entities did not identify, summarize, 
or reconcile intragovernmental activity and balances by trading 
partner. Controls over the intragovernmental transactions were not 
adequate. For example, one department instructed its components to make 
buyer's intragovernmental transaction amounts agree with seller's 
information without requiring an adequate reconciliation or 
verification if goods or services were provided. Similar issues were 
also identified concerning activity and balances within the same entity 
(intradepartmental). Accordingly, there was no assurance that the 
entity records contained fairly stated balances.

Intragovernmental Payment and Collection (IPAC) System[Footnote 3]

.22: 
IPAC is the primary method used by most federal entities to 
electronically bill and/or pay for services and supplies within the 
government, and to communicate to the Treasury and the trading partner 
agency that the online billing and/or payment for services and supplies 
has occurred. IPAC, however, is not intended to be a control over the 
intragovernmental transactions (reciprocal accounts). The auditor 
should understand that IPAC was not designed as an accounting system 
and does not require trading partners to record transactions at the 
same time or in the same amounts. In addition, unreconciled IPAC 
differences could affect the existence and completeness of 
intragovernmental activity and balances.

.23: 
The IPAC billing entity initiates an IPAC transaction either as a 
collection or a payment. The IPAC customer entity receives an IPAC 
transaction either as a payment or a collection. Monthly, the Treasury 
compares the customer and billing entities' Statement of Transactions 
with the IPAC data. If there is a difference, a Statement of 
Differences, including a detailed list of all transactions charged or 
credited to a particular agency location code, is generated monthly. 
Entities should investigate the differences and make any necessary 
corrections on their next Statement of Transactions.

.24: 
The auditor should examine the entity's IPAC reconciliation procedures 
to determine if the entity performs the reconciliation and researches 
and resolves differences reflected on the statement of differences 
properly and timely. The auditor may coordinate with the Fund Balance 
with Treasury (FBWT) procedures to assess the effectiveness of the 
entity's IPAC reconciliation.

.25: 
The auditor should also design procedures to understand whether the 
entity uses other systems (standard forms used to transfer funds 
between appropriations, credit cards, and others) in addition to the 
IPAC system to process intragovernmental activity and balances. The 
auditor should determine whether these systems affect the fairness of 
intragovernmental activity and balances. (See audit procedures below 
and FAM section 902 C.):

Audit Procedures:

.26: 
The auditor should consider audit risk and materiality in determining 
the nature, timing, and extent of procedures for auditing 
intragovernmental activity and balances and in evaluating the results 
of these procedures. Throughout the audit, the auditor should consider 
the possible existence of material intragovernmental activity and 
balances that could affect the financial statements. The auditor should 
evaluate all the information available concerning material 
intragovernmental activity and balances and determine that the 
financial statement disclosures are adequate and appropriate.

.27: 
During the planning phase, the auditor should assess inherent, fraud, 
and control risk. In assessing the inherent risk related to 
intragovernmental activity and balances, there are several conditions 
that the auditor should consider. For example, inherent risk may exist 
because of the nature of the intragovernmental activity, such as a 
significant volume of transactions and number of trading partners or 
complex transactions. The auditor should assess the impact of inherent 
and control risk on control testing and substantive testing. The 
auditor should determine whether similar conditions continue to exist 
and understand management's response to such conditions.

.28: 
In assessing inherent and control risk, the auditor should obtain an 
understanding of management responsibilities and the relationship of 
each component to the total department and of each department to other 
departments. The auditor should obtain an understanding of the entity's 
operations to identify, respond to, and resolve accounting and auditing 
problems early in the audit. For example, the auditor should know what 
trading partners the entity has, the nature of intragovernmental 
transactions that occur, the volume and dollar amount of transactions, 
and management's attitude and awareness with respect to reconciliations 
of intragovernmental activity and balances.

.29: 
The auditor should assess the effectiveness of the entity's internal 
control over intragovernmental activity and balances. The auditor 
should identify the policies and procedures that pertain to the 
entity's ability to record, process, summarize, and report 
intragovernmental activity and balances by trading partner. The agency 
should emphasize the importance of identifying and classifying 
intragovernmental transactions by trading partner when they are 
initiated and on all documentation thereafter; without this initial 
identification, the system will not be able to keep track of them.

.30: 
Without proper and timely reconciliation of intragovernmental activity 
and balances, misstatements in these account balances at the component 
and/or department level could materially affect the balances at the 
governmentwide level (as well as at the department or component level). 
In addition, when preparing consolidated financial statements, the 
preparer must eliminate intragovernmental activity and balances within 
and between departments or components. Because the amounts reported for 
entity trading partners for certain intragovernmental accounts could be 
significantly out of balance, the preparer would not be able to 
eliminate these accounts in the consolidated financial statements. The 
auditor may advise the entity about the need for monthly confirmation 
and reconciliation of these transactions with trading partners. Annual 
or quarterly reconciliations are generally not sufficient to detect and 
resolve misstatements promptly.

.31: 
If the auditor determines that the entity's reconciliation control for 
intragovernmental transactions is not effectively designed and placed 
in operation, the auditor should consider the effect on the financial 
statements. Where intragovernmental transactions are or could be 
material, significant additional work is usually necessary to express 
an unqualified opinion. In some cases where the auditor finds material 
weaknesses in the intragovernmental reconciliation control and no other 
mitigating controls exist, the auditor may decide to modify the audit 
opinion (see FAM section 580).

.32: 
The TFM contains agreed-upon procedures for the department inspectors 
general to perform for federal intragovernmental activity and balances. 
These procedures are intended to assist with accounting for and 
eliminating intragovernmental activity and balances in the preparation 
of department and governmentwide financial statements and reports. The 
IG should perform these procedures regardless of the opinion on the 
department consolidated financial statements.

.33: 
To avoid duplicate procedures, the auditor should consider the agreed-
upon procedures contained in the TFM when designing the tests for 
intragovernmental activity and balances. Examples of the account risk 
analysis (ARA), specific control evaluation (SCE), and audit procedures 
for the audit of intragovernmental activity and balances are in 
sections 902 A, 902 B, and 902 C. The ARA, SCE(s), and audit procedures 
generally should be customized for the particular entity. For example, 
if the auditor determines that the intragovernmental accounts 
receivable line item is significant, the auditor generally should 
prepare a separate ARA, SCE(s), and audit procedures for the 
intragovernmental accounts receivable account and its related 
accounting applications. (Note that a single SCE for a line-item/
account-related accounting application is presented. There are likely 
transaction-related accounting applications listed on the ARA that also 
would have SCEs.) In addition, to improve efficiency, the auditor may 
coordinate tests of intragovernmental activity and balances with tests 
of nonfederal activity and balances.

OTHER RELATED PARTIES:

.34: 
To effectively plan and perform an audit, the auditor should understand 
the entity's organization and its characteristics. The auditor should 
consider the possible existence of other related parties and other 
related party transactions throughout the audit to satisfy him or 
herself that they are properly accounted for and disclosed (see 
paragraph 902.07). Other related parties may include states that 
federal entities made payments to in carrying out or executing their 
federal programs. Examples of these programs are Department of Health 
and Human Services grants to states for Medicaid,[Footnote 4] 
Department of Transportation Federal Highway Administration programs 
such as federal aid for highways and highway safety construction 
programs, and Department of Labor State Unemployment Insurance and 
Employment Service Operations.

.35: 
The auditor may attempt to detect these relationships by inquiry of 
management, reviewing major contracts/agreements, and reading 
financial disclosure statements. The documentation generally should 
include the names of related parties so all audit staff may become 
aware of transactions with them. Work done to test transactions with 
such parties may be coordinated with sensitive payments work, as 
discussed in paragraph 280.05.

.36: 
In addition to the procedures on related parties, the auditor also 
generally should inquire about other parties that may not be related 
parties, but that the agency may wish to disclose because of a public 
perception that they might be related, although professional standards 
do not require disclosure if the parties are not related (as defined in 
AU 334). Section 902 C shows examples of audit procedures for other 
related parties as well as for intragovernmental activity and balances. 
The steps should be customized for the particular audited entity.

PRACTICE AIDS:

.37: 
The following practice aids are appended:

Section 902 A - Example Account Risk Analysis (ARA),

Section 902 B - Example Specific Control Evaluation (SCE), and:

Section 902 C - Example Audit Procedures:

[End of section]

902 A - EXAMPLE ACCOUNT RISK ANALYSIS FOR INTRAGOVERNMENTAL ACTIVITY 
AND BALANCES: 

[See PDF for image]

[End of figure]

[End of section]

902 B - EXAMPLE SPECIFIC CONTROL EVALUATION FOR INTRAGOVERNMENTAL
ACCOUNTS: 

[See PDF for image]

[End of figure]

[End of section]

902 C - EXAMPLE AUDIT PROCEDURES FOR INTRAGOVERNMENTAL AND OTHER 
RELATED PARTIES' ACTIVITY AND BALANCES: 

Entity:

Period of financial statements:

Job code:

Audit Procedures[1]: 

Planning Phase: 

Obtain an understanding of the entity's operations 
that are significant to the audit of intragovernmental and other 
related party activity and balances (see FAM section 220). 

1. To obtain an understanding of significant accounting and auditing 
issues, read the entity's prior year's accountability and auditors' 
reports. 

2. To identify the entity's accounting and reporting requirements and 
applicable auditing standards for intragovernmental and other related 
party activity and balances, read the following: 

a. SFFAS No. 4, 
Managerial Cost Accounting Concepts and Standards; SFFAS No. 5, 
Accounting for Liabilities of the Federal Government; SFFAS No. 7, 
Accounting for Revenue and Other Financing Sources and Concepts for 
Reconciling Budgetary and Financial Accounting; Statement of Financial 
Accounting Standards No. 57, Related Party Disclosures; AU Section 334, 
Related Parties; AU Section 558, Required Supplementary Information; 
OMB bulletin on Form and Content of Agency Financial Statements; 
Treasury/Financial Management Service's (FMS) Federal 
Intragovernmental Transactions Accounting Policies Guide; and Treasury 
Financial Manual section "Federal Intragovernmental Transactions 
Process."; 

b. The entity's internal procedures for identifying, accounting, 
reconciling and reporting intragovernmental and other related party 
activity and balances. 

c. The entity's process for identifying, classifying, and reporting 
intragovernmental activity and balances requiring elimination at the 
consolidated departmentwide or governmentwide level. 

3. To identify the impact of systems/methods for processing, accounting 
and financial reporting of intragovernmental and other related party 
activity and balances,

a. Interview the entity's key management about, 
for example, the systems/methods that are used to process 
intragovernmental and other related party activity and balances (e.g., 
IPAC, credit cards, standard forms used to transfer funds between 
appropriations, and others). 

b. Obtain estimates of the approximate number and dollar amount of 
intragovernmental and other related party activity and balances (this 
could be based on the prior year) that are processed by each 
significant system/method (see FAM section 270). 

c. Consider coordinating this work with the audit of like nonfederal 
activity and balances (i.e., similar transactions by the entity with 
parties other than other federal entities). 

4. To identify the intragovernmental and other related party activity 
and balances; 

a. Ask the entity management: 

i. Names of all related parties 
(intragovernmental and others) and whether there were transactions with 
them during the period. Other possible related parties outside of 
government might be states, management, and individuals and firms with 
which members of management may be related or otherwise be able to 
significantly influence the management or operating policies. 

ii. The nature and terms of all significant activities and balances. 
For example,

* for a seller entity,

** Obtain information on the types of significant revenues, any markup 
percentage(s) over full cost, and the settlement/payment due date. 

** Inquire as to how the full cost of products and services sold is 
determined. 

* for a buyer entity, 

** Inquire about the minimum requirements (business 
rules) that must be met before an intragovernmental trading partner may 
provide goods or services. 

* Inquire as to amounts, if any, that are in dispute at year-end. 

iii. 
Whether the audited entity receives services without reimbursement or 
for less than full reimbursement, for example, donated services, such 
as space or detailed employees. If so, ask if the entity is complying 
with GAAP and/or OMB requirements with respect to accounting and 
reporting treatment of these transactions. Also, if applicable, ask 
about the approximate fair value and/or financial statement disclosure 
for such goods and/or services. 

iv. Whether the entity centrally maintains contracts, agreements, and 
support for the terms of all significant transactions with related 
parties. 

b. Review, if any: 

i. The entity policy for advance approval of related party 
transactions by senior management. 

ii.  
The entity policy for requiring disclosure by employees to appropriate 
officials of potential conflicts of interest, such as related party 
transactions by employees of the entity. Also determine if summaries of 
such transactions are communicated to financial management for its 
consideration. 

iii. Vendor and customer master file listings, major contracts, and 
IPAC activity for intragovernmental or other related parties. 

c. Ask Treasury/FMS regarding entities historically reporting 
intragovernmental transactions with the audited entity. 

5. 
Provide audit staff with the names of known intragovernmental and other 
related party trading partners, a description of the nature of 
significant transactions with each, and such other information as 
considered necessary to assist them in planning and performing other 
sections of the audit. 

6. Summarize the results. 

7. 
Document the auditor's preliminary assessment of risks related to the 
intragovernmental and other related party activity and balances in the 
ARA form or equivalent. 

II. Internal Control Phase: 

Understand the internal control the entity 
has in place for identifying, accounting for, eliminating, and 
reporting intragovernmental and other related party activity and 
balances (existence, completeness, valuation, rights and obligations, 
presentation and disclosure) (see FAM section 320). 

1. Determine through 
inquiry of management, walkthroughs, review of prior years' 
documentation and other means, how and when the entity identifies 
intragovernmental and other related party transactions. 

a. Whether the 
entity identifies the transactions by trading partner when they are 
initiated and on all documentation thereafter. 

b. If the entity uses trading partner codes, the relationship of such 
codes to other document identifiers such as vendor codes. For example, 
trading partner codes may be integral to each vendor code, or it may be 
necessary to crosswalk vendor codes to a file of trading partner 
codes. 

c. If the entity does not use trading partner codes, determine how the 
entity identifies, analyzes, and accumulates intragovernmental 
activity and balances. For example, the entity may derive such amounts 
through off-line manual processes after the fact. 

d. When the entity recognizes each significant category of 
intragovernmental and other related party transactions. For example, 
when an invoice is received, when processed through IPAC, when goods or 
services are received, when notified by the seller that an agreed-upon 
stage of completion has been achieved. Consider whether the entity's 
policy in recording intragovernmental and other related party 
transactions is appropriate. 

e. 
Whether the entity and its trading partners use consistent reciprocal 
ledger accounts and categories of activity and balances for recording 
and reconciling such amounts. If so, ask what processes are in place to 
provide management with reasonable assurance that trading partners are 
recognizing reciprocal transactions in the same period, for the same 
amount, and by consistent or compatible accounting methods. 

f. If the entity complies substantially with the SGL at the transaction 
level as it applies to intragovernmental activity and balances. (Note: 
The SGL accounts used should include attributes for intragovernmental 
activity and balances that identify (a) that these accounts contain 
intragovernmental transactions (e.g., attribute "F") and (b) the 
trading partner (e.g., Treasury trading partner code "20").); 

g. Policies and procedures for confirming intragovernmental and other 
related party activity and balances with trading partners. 

h. 
How often the entity reconciles its related party activity and balances 
with its trading partners. Also inquire as to whether adjustments 
identified as necessary through the reconciliation process have been 
properly recognized in the financial records. If not, ask why. If the 
entity did not perform reconciliations, ask why not. 

i. 
Whether the selling and buying entities have established processes to 
facilitate the timely reconciliation of activity and balances. (Note: 
The selling entity is typically responsible for furnishing detailed 
transaction information to facilitate reconciliation.); 

j. What the entity's year-end cut-off procedures related to the 
intragovernmental and other related party activity are. Determine if 
procedures provide assurance that intragovernmental activities 
occurring in the current period are recorded in the current period. 
(Since the reconciliation process should detect cutoff errors, see 
above for reconciliation procedures with trading partners.); 

k. What the entity's policies and procedures are for intraentity 
elimination. 

l. 
Whether the entity maintains transaction logs or detailed records of 
transactions to identify the postings to SGL accounts and to facilitate 
the reconciliation process. The logs should include sufficient 
information to enable identification and location of the supporting 
documents. 

m. 
Whether the entity reviews and approves monthly account analyses of 
intragovernmental accounts and examines budget-to-actual and trend 
analyses. 

2. Coordinate with the results of audit procedures for other cycles to 
determine if the entity has internal control issues related to 
intragovernmental and other related party activity and balances. For 
example, to determine if the entity has control issues related to 
intragovernmental activity and balances, coordinate with the results of 
FBWT audit procedures to determine if the entity has issues on its 
FBWT/IPAC reconciliation such as material unreconciled amounts and aged 
unreconciled IPAC differences. 

3. Perform walk-throughs of processes for identifying, accounting, 
reconciling, confirming, eliminating, and reporting intragovernmental 
and other related party activity and balances to obtain or update the 
auditor's understanding of these procedures and preliminarily assess 
the effectiveness of these controls. 

a. Walkthrough the process from 
initiation to recording in the general ledger and inclusion in the 
financial statements or elimination for each significant type of 
intragovernmental and other related party activity and balances. 

b. Walk through the management/entity approval process of payments to 
trading partners. (Note: Prior audits have identified instances where 
payment controls for intragovernmental transactions were not 
sufficient, for example, the seller entity made payments to trading 
partners without verifying whether goods or services were provided.); 

c. Identify and document differences in process for nonfederal and 
intragovernmental and other related party activities and balances. 

d. If the entity performs reconciliations of intragovernmental activity 
and balances with trading partners during the year, the auditor should 
walk through both interim and year-end reconciliation processes. 

4. Prepare or update the cycle memorandum, flowchart, and ARA and SCE 
forms (See FAM sections 390, 395 H and I, and 902 A and B) or 
equivalents. 

III. Testing Phase: 

A. For intragovernmental accounts, if the auditor 
preliminarily determines that the entity's reconciliation and 
confirmation controls with trading partners are effectively designed 
and placed in operation, test the entity's policies and procedures to 
determine if the reconciliation and confirmation controls are effective 
and if intragovernmental balances appear reasonable. 

1. Obtain final 
yearend reconciliations/confirmations of intragovernmental activity 
and balances for each trading partner and supporting documentation; or 
obtain the entity CFO responses for intragovernmental activity and 
balances and the supporting documentation for the final reconciliation/
confirmations. (See the Treasury Financial Manual (TFM) sections on CFO 
procedures/representations and on IG Agreed-Upon Procedures for Federal 
Intragovernmental Activity and Balances); 

2. Compare the amounts in the reconciliations to supporting 
documentation. 

3. 
Trace the adjustments, if any, identified in the reconciliation process 
to the entity's financial records. 

4. Compare the amounts, excluding intra-departmental activity and 
balances, in the audited department consolidated financial statements 
to such amounts in the department's final FACTS I or FACTS Notes 
reports to FMS. 

5. Prepare an agreed-upon procedures report. (Note: The procedures in 
steps 1 to 4 above are agreed-upon procedures for intragovernmental 
activity and balances. See the TFM, volume 1, section on IG Agreed-Upon 
Procedures for Federal Intragovernmental Activity and Balances. Also 
see FAM section 660.); 

6. 
Consider whether these agreed-upon procedures are sufficient to achieve 
financial statement audit objectives. For example, whether the agreed 
upon procedures are applied to all significant assertions for all 
significant intragovernmental activity and balances. Typically these 
procedures alone will not be sufficient for financial statement audit 
purposes. 

7. If the agreed-upon procedures are not sufficient, then design 
additional procedures that in combination with the agreed-upon 
procedures will be sufficient. For example: 

Reconciliation/confirmation (existence, completeness, valuations, 
rights and obligations, and classification): 

* OMB's bulletin on Form and Content of 
Agency Financial Statements requires an entity to reconcile and confirm 
intragovernmental activity and balances with trading partners 
semiannually, beginning with the six-month period ending March 31, 2002 
and quarterly, beginning with the three-month period ending December 
31, 2002. If the entity performed monthly, quarterly, or semiannual 
reconciliations, test reconciliations to determine if the entity's 
reconciliation control is effective throughout the year. 

* There should 
be a separate reconciliation/confirmation for each trading partner. 


* This reconciliation/confirmation also may be used for within entity 
reconciliation/confirmation (intraentity). 

a. Determine the completeness 
of population: Determine if the entity performed reconciliations and 
confirmations for all trading partners by comparing the trading 
partners on the reconciliations and confirmation forms to subsidiary 
records or the entity's trading partner list obtained during the 
planning phase. 

b. For each reconciliation/confirmation: 

i. Determine if the 
reconciliation/confirmation was reviewed and approved by the 
appropriate personnel. 

ii. 
Compare the total amounts and SGL accounts of the activity and balances 
reported on the reconciliation/confirmation form with the general and 
subsidiary ledger accounts, and the total amounts to audited financial 
statements and footnote disclosures. If differences are found, document 
each such difference. Consider potential impact on financial statements 
and post the differences identified to summary of unadjusted 
misstatements. 

iii. 
Test whether the entity used appropriate SGL accounts and whether these 
SGL accounts include the proper attribute(s) to indicate that they 
result from intragovernmental transactions. (Note: For example, when 
the federal attribute "F" is used with an SGL account, a trading 
partner should be designated for each transaction posted to the 
account.) Entities can modify SGL accounts listed on the form to be 
more specific. 

iv. 
Consider whether the entity is using the reciprocal accounts delineated 
in the FMS Guide. Entities should use these accounts to account for 
intragovernmental activity and balances in the specified categories. 
Use of these reciprocal accounts will facilitate the reconciliation and 
confirmation process. 

v. For fiduciary activity and balances, compare amounts on the 
reconciliation forms to amounts on the Intragovernmental Fiduciary 
Confirmation System. (Note: Fiduciary activity and balances include 
loans from the Federal Financing Bank and Bureau of Public Debt, 
investments with Bureau of Public Debt, Federal Employees Compensation 
Act transactions with Labor, and employee benefit transactions with 
OPM. The seller entity--Bureau of Public Debt, Treasury, Federal 
Financing Bank, Labor, and OPM--will make balances information and 
other details available through the Intragovernmental Fiduciary 
Confirmation System for the buyer entities' use in reconciling amounts 
to their records. The Intragovernmental Fiduciary Confirmation System 
is the official confirmation system for federal entities that engage in 
fiduciary intragovernmental transactions with Bureau of Public Debt, 
Federal Financing Bank, OPM, and Labor.); 

vi. For transfers, test whether; 

* the classification of transfers as expenditure or nonexpenditure is 
proper, and 

* the accounting and reporting are appropriate. 

vii. 
For trust fund transfers such as highway and airport trust funds, also 
test whether the trust fund amounts are properly accounted for and 
maintained in accordance with laws that established these funds. (Note: 
Test either by the trust fund auditor or as agreed-upon procedures by 
the auditor who audits the entity that collects the revenue for it.); 


Reconciliation adjustments and differences (all intragovernmental 
categories); (Note: Exhibit I to FAM 902 C provides an illustration of 
a reconciliation tool that may be used to summarize reconciling items 
and prove amounts between a buyer and a seller entity.); 

c. Determine whether adjustments, if any, are supported and timely: 

i. Trace the 
adjustments and reconciling items identified in the reconciliation 
process to the entity general and subsidiary ledgers. 

ii. Examine the adjustments and supporting documents to determine if 

* The 
entity timely and properly performed the research and identified causes 
for differences. 

* The adjustments are agreed upon by both entities and 
made to proper SGL accounts. (Note: Examples of adjustments and 
reconciling items are: 

** Adjustments in estimated accruals: For 
example, the seller entity has recorded unbilled revenue and the buyer 
entity was not timely advised of the estimated accrual. 

** Adjustments 
due to timing differences: For example, timing differences caused by a 
buyer entity's delay in recording IPAC transactions into proper SGL 
accounts. 

** Reconciling item for capitalization of assets: For 
example, the buyer entity purchased property and equipment or inventory 
and recorded them as assets.); 

iii. 
Obtain or prepare aging of outstanding unadjusted reconciling amounts 
for all significant intragovernmental balance sheet accounts. Identify 
old and/or unusual reconciling items and obtain explanations from the 
entity. 

iv. Review final yearend reconciliation for any accounting policy 
differences and determine if the entity explains the causes of these 
differences on the final reconciliation. The causes of these 
differences might be differences in accounting standard requirements, 
for example, amortization methods for discounts and premiums. For 
example, one trading partner uses the interest method and the other 
trading partner uses the straight-line method to amortize discounts/
premiums. (Note: There should be no material unresolved differences on 
the final year-end reconciliation forms. The entity should resolve all 
differences with trading partners.); 

v. Determine the extent of unadjusted differences at year-end. Assess 
their materiality on the financial statement line item and the overall 
financial statements. 

vi. If adjustments are made subsequent to the completion of the 
confirmations (during the audit period), determine if the entity 
revised the reconciliation and confirmation and submitted the updated 
data to FMS. 

8. 
Summarize the results of testing: (1) conclude on the effectiveness of 
the entity's reconciliation and confirmation controls and (2) propose 
adjustments, if necessary. 

9. Determine whether the results of testing and the nature of 
misstatements indicate that combined risk should be assessed 
differently and whether the audit procedures should be revised. 

B. For intragovernmental activity and balances, if the auditor 
preliminarily determines that the entity's reconciliation/
confirmation control with trading partners is not effective, or if the 
reconciliations and/or confirmations are not performed by the entity, 
the auditor should consider the effect on substantive tests and on the 
audit report. In some cases, the auditor may decide to modify the audit 
opinion when no reconciliation and other mitigating controls existed. 
However, when intragovernmental activity and balances are material, 
significant additional work may be necessary to express an unqualified 
opinion such as: 

1. Coordinate work with other related line items to test 
existence, completeness, valuation, rights and obligations, and 
classification of intragovernmental activity and balances. For 
example, 

a. In conjunction with cash receipts, revenues, and accounts 
receivable testing, determine if intragovernmental accounts receivable 
were collected subsequent to test date. Examine supporting 
documentation for the posting of collections to the cash records; 
determine if intragovernmental revenues and receivables are included in 
nonfederal balances. 

b. Test completeness of intragovernmental activity and balances by 
reviewing vendor and customer master files to determine if 
intragovernmental vendors and customers are properly included in 
intragovernmental accounts. 

c. Consider sending confirmation requests to trading partners for both 
balance sheet and net cost activity and balances. Especially if 
combined risk is assessed as high, consider applying similar 
confirmation procedures as to the nonfederal accounts. 

Cut off test (existence and completeness); 

d. Determine if there are 
unrecorded transactions and if the transactions are recorded in the 
correct period. 

i. Coordinate with the FBWT audit team to review results 
of the FBWT reconciliation tests. For example, review IPAC transactions 
reconciliations and the recording of IPAC transactions in accounting 
systems; consider how timely and whether appropriate; review IPAC 
transactions after 9/30-subsequent billing and collecting 
transactions-to determine unrecorded transactions as of 9/30. 

ii. Search for unrecorded sales revenue, accounts receivable, purchases, 
and accounts payable (completeness). For example, 

* To search for 
unrecorded sales revenue and accounts receivable, select sales invoices 
for trading partners recorded in the xx-day period subsequent to year-
end. Trace the selected invoices to shipping records or evidence of 
service performance. Determine whether the sales revenue and accounts 
receivable were recorded in the correct period. Alternatively, select 
from shipping records to trading partners prior to year-end and trace 
to sales invoices. 

* To test the completeness of amounts recorded as accounts payable at the 
balance-sheet date, select disbursements after the end of the audit 
period and test if the amounts were recorded in accounts payable. 

2. Review the test results of other related line items to determine if 
there are issues related to existence, completeness, valuation, rights 
and obligations, and classification in the tested accounts and 
transactions and the impact on the intragovernmental activity and 
balances. In testing these other accounts, consider whether items 
tested were from trading partners. 

3. Summarize the results and propose adjustments, if necessary. 

4. Determine if the results of testing and the nature of misstatements 
indicate that combined risk should be assessed differently and whether 
the audit procedures should be revised. 

Control and substantive tests of details--other related parties: 

C. 
Attain satisfaction about the purpose, nature, and extent of material 
other related party transactions and their effect on the financial 
statements. Coordinate with sensitive payments work, including the 
review of executive compensation, travel, official entertainment funds, 
unvouchered expenses, and consulting services (see FAM section 
280.05). 

1. Based on the work performed during the planning and internal 
control phases, determine and document the methodology used to select 
the transactions for testing. 

* Examine all transactions, 
* Dollar unit sampling (DUS), 
* Classical variables estimation sampling, or
* Other (describe). 

2. For the selected transactions, 

a. examine documentation such as invoices, contracts, agreements, and 
receiving and shipping reports; 

b. determine whether the transactions have been properly approved; 

c. confirm transaction terms and amounts with the other party to the 
transaction; and; 

d. 
test the compilation of amounts that may be disclosed in the financial 
statements for reasonableness. 

3. Summarize the results. 

4. Determine if the results of testing and the nature of misstatements 
indicate that combined risk should be assessed differently and if the 
audit procedures should be revised. 

Substantive analytical procedures (FAM 475):

D. Substantive 
analytical procedures: Perform analytical procedures to assess whether 
balances are reasonable and reflect appropriate activities (existence 
and completeness). If the entity performs reconciliation and 
confirmation of intragovernmental activity and balances and the auditor 
places reliance on those tests of details, less rigorous, supplemental 
analytical procedures may be used to increase the auditor's 
understanding of intragovernmental activity and balances after 
performing tests of details in Testing, step III.A, above. However, in 
the absence of adequate reconciliation and confirmation controls, some 
or all of these procedures may be necessary to obtain sufficient 
evidence, if possible. For example, 

1. Develop expectations of the 
accounts payable and receivable balances overall or for all significant 
trading partners in light of the payment cycle during the year. Then, 
compare the recorded balance overall or by trading partner to the 
expected amount and investigate differences in the recorded balance if 
differences exceed (insert an amount such that the total 
uninvestigated difference for all trading partners, including those not 
selected, does not exceed the limit). 

2. 
Develop expectations of recorded intragovernmental sales overall or for 
all significant trading partners based on independent data; for 
example, consider using trading partners' orders. Then compare the 
expectations to the recorded sales amounts and investigate differences 
in the recorded balance if differences exceed  (insert an amount 
such that the total uninvestigated difference for all trading partners, 
including those not selected, does not exceed the limit). 

3. Examine accounting records, for example, accounts receivable and 
payable, for large, unusual, or nonrecurring activity or balances. For 
example, consider expectations as to the types of intragovernmental 
activity and balances and trading partners based on the planning work. 
Then, examine significant unexpected/unusual intragovernmental 
activity and balances and intragovernmental activity or balances with 
unexpected trading partners. Document the definition of significant. 

4. Summarize the results of testing and determine if adjustments are 
necessary. 

Elimination (existence, completeness, and valuation): 

E. Test 
consolidation/elimination for transactions occurring within the entity 
(intraentity) to determine whether the elimination is appropriate and 
supportable. 

1. Obtain a list of each component entity's intraentity 
transactions identified for elimination and each component entity's 
reconciliation of its intraentity activity and balances with its 
respective trading partners. This step may be done in conjunction with 
the test of reconciliation (see step III.A above). 

2. Review the entity's eliminating journal entries and supporting 
documentation for elimination entries of the entitywide consolidated 
financial statements. Determine whether elimination journal entries 
are 

a. approved by management and; 

b. supported by schedules summarizing the SGL accounts that are 
combined to total the amounts eliminated. 

3. Summarize the results. 

4. Determine if the results of testing and the nature of misstatements 
indicate that combined risk should be assessed differently and if the 
audit procedures should be revised. 

IV. Reporting Phase: 

To determine if the presentation and disclosures 
of intragovernmental and other related party balances comply with GAAP 
and OMB requirements: 

1. Determine whether financial reports are prepared 
in accordance with the OMB bulletin on Form and Content of Agency 
Financial Statements. For example, 

a. Review the balance sheet and 
determine whether it is properly classified and line items are 
correctly reported as intragovernmental or nonfederal. 

b. Read the required supplementary information (RSI) to determine if 
intragovernmental amounts and the related federal trading partners for 
assets, liabilities, earned revenue from trade (buy/sell) transactions 
and nonexchange revenue are presented as RSI. The gross cost to 
generate earned revenue from trade transactions should be presented by 
budget functional classification in the notes to the financial 
statements. 

c. Read disclosures for the Statement of Net Cost in the notes to the 
departmentwide financial statements and determine if the department 
includes a separate disclosure of intragovernmental gross cost and 
earned revenue by budget functional classification as required by OMB's 
form and content bulletin. Gross cost and earned revenue should be net 
of intradepartment transactions (consolidated). 

2. 
Read the entitywide financial statements, notes, and RSI; compare the 
reported intragovernmental and other related party (if any) activity 
and balances with the test results. 

3. Request that the entity's management include, in the representation 
letter, representations related to intragovernmental and other related 
party activity and balances. (See FAM section 1001 for guidance.); 

4. Communicate with trading partner entities' auditors (with auditee's 
permission) to consider whether issues identified by the other auditors 
affect the auditor' s conclusions on intragovernmental transactions. 

5. 
Read the various current period Agreed-Upon Procedures (AUP) reports to 
consider whether the findings will affect the auditor's conclusion and/
or if additional procedures need to be performed. For example, 

a. The AUP 
report on employee withholdings and employer contributions that are 
reported on the Report of Withholdings and Contributions for Heath 
Benefits, Life Insurance and Retirements. This AUP report is to assist 
OPM in assessing the reasonableness of the Retirement, Health Benefits, 
and Life Insurance Withholdings/Contributions and Supplemental 
Semiannual Headcount report submitted to OPM (see OMB audit guidance). 

b. 
The AUP report on FACTS I verification. This AUP report is to evaluate 
the department's management assertion that it compared the department's 
summarized FACTS I data to its consolidated financial statements and to 
determine whether such data is in agreement. 

6. Summarize the results and determine if adjustments are necessary. 

7. Conclude whether intragovernmental and other related party activity and 
balances have been adequately accounted for and properly disclosed in 
the financial statements. 

[End of table]

Exhibit I: Reconciliation of Seller Entity Intragovernmental Earned 
Revenue with Buyer Entity Cost: 

[See PDF for image]

[End of section]

903 - AUDITING COST INFORMATION: 

.01: 
This section provides general guidance for considering cost information 
and planning audit procedures. The auditor should coordinate these 
procedures with procedures on auditing various line items and accounts. 
The auditor is concerned about cost information for a number of 
reasons. First, the auditor should obtain sufficient evidence to 
determine whether the costs are fairly stated in the financial 
statements and appropriately classified. Proper classification at the 
agency level also contributes to proper classification of costs in the 
consolidated financial statements of the U.S. government. Second, for 
CFO Act agencies and components designated by OMB, the auditor is 
concerned about the entity's financial management systems' substantial 
compliance with the three requirements of FFMIA. Third, cost 
information is important to the MD&A, although the auditor does not 
opine on the MD&A. The most relevant accounting standard for cost 
information is Statement of Federal Financial Accounting Standards 
(SFFAS) No. 4, Managerial Cost Accounting. This standard has relevance 
both to external financial reporting and to cost information for 
internal management reporting.

STATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS NO. 4, MANAGERIAL 
COST ACCOUNTING:

.02: 
SFFAS No. 4 establishes the concepts and standards for providing 
reliable and timely information on the full cost of federal programs, 
their activities, and outputs. The objectives of managerial cost 
information specified in SFFAS No. 4 are:

* To provide program managers with relevant and reliable information 
relating costs to outputs and activities. With this information, 
program managers should understand the costs of the activities they 
manage. The cost information should assist them in improving 
operational efficiency.

* To provide relevant and reliable cost information to assist Congress 
and executives in making decisions about allocating federal resources, 
authorizing and modifying programs, and evaluating program performance.

* To provide consistency between costs reported in general purpose 
financial reports and costs reported to program managers. This includes 
standardizing terminology to improve communication among federal 
organizations and users of cost information.

.03: 
The first two objectives primarily address the managerial use of cost 
information in improving operating efficiency and cost effectiveness, 
making planning and budgeting decisions, and measuring performance. The 
third objective primarily addresses external financial reporting. That 
objective can be achieved by reporting cost information in financial 
statements that is consistent with costs generated by the cost 
accounting process. Because of the differences in the three objectives, 
some requirements in SFFAS No. 4 are relevant to managerial decision 
making and operations improvement, while some requirements are relevant 
to external financial reporting.

.04: 
The cost accounting concepts section of SFFAS No. 4 (paragraphs 41-66) 
establishes the overall goals of cost accounting for federal agencies. 
Managerial cost accounting should be a fundamental part of the 
financial management system and, to the extent practicable, be 
integrated with the other parts of the system. Managerial costing 
should use a basis of accounting, recognition, and measurement that is 
appropriate for the intended purpose. Cost information developed for 
various purposes should be drawn from a common data source, and output 
reports should be reconcilable to each other.

.05: 
The five fundamental standards for managerial cost accounting set forth 
in SFFAS No. 4 (paragraphs 67-162) are important for the auditor. These 
standards will lead to the development of accurate and consistent cost 
information for internal and external reporting by federal agencies. 
The five standards are:

* Requirement for cost accounting: Each reporting entity should 
accumulate and regularly report the cost of its activities for 
management information.

* Responsibility segments: Management of each reporting entity should 
define and establish responsibility segments and report the costs of 
each segment's outputs.

* Full costs: Reporting entities should report the full costs of 
outputs, which is the total amount of resources used to produce the 
output, including direct and indirect costs.

* Interentity costs: Each entity's costs should incorporate the full 
cost of goods and services received from other entities. As directed by 
SFFAS No. 4, paragraph 110, OMB has designated, in its bulletin, Form 
and Content of Agency Financial Statements, the costs of goods and 
services received from other entities that should be recognized.

* Costing methodology: The costs of resources that directly or 
indirectly contribute to the production of outputs should be 
accumulated and assigned to outputs using appropriate methodologies. 
(See paragraph 903.07.):

AUDIT PROCEDURES FOR FINANCIAL STATEMENT OPINION:

.06: 
As part of understanding the entity's operations, the auditor should 
obtain an overview of how the entity meets these standards. This may be 
done by inquiry, observation, and walkthrough procedures. Substantive 
tests of the cost accounting system are usually necessary. The auditor 
should consider coordinating tests with other control and substantive 
tests. Based on the auditor's understanding of the agency's operations, 
the auditor should determine whether the statement of net costs is 
designed to include all the costs of the agency's programs. Also, in 
testing the statement of net costs, the auditor should test the 
financial statement assertions related to costs including whether 
expenses are properly classified in the statement of net costs, and in 
the notes by budget functional classification, as required by OMB's 
form and content guidance. The following (see FAM section 395 B) are 
examples of subassertions related to costs:

Existence or occurrence:

* Validity: (1) Recorded costs, underlying goods and services used, and 
related processing procedures are authorized by federal laws, 
regulations, and management policy. (2) Recorded costs are approved by 
appropriate individuals in accordance with management's general or 
specific criteria. (3) Recorded costs represent goods and services that 
were actually used and are properly classified.

* Cutoff: Costs recorded in the current period represent goods and 
services used during the current period.

* Summarization: (1) The summarization of recorded costs is not 
overstated. (2) Costs are assigned to appropriate classifications in 
the financial statements.

Completeness:

* Transaction completeness: All valid costs are recorded and properly 
classified.

* Cutoff: All goods and services used in the current period should be 
recorded in the current period.

* Summarization: The summarization of recorded costs is not 
understated.

Valuation or allocation:

* Accuracy: (1) Costs are recorded at correct amounts. (2) Costs are 
recorded using appropriate assignment methodologies.

* Measurement: Costs included in the financial statements are properly 
measured.

Presentation and disclosure:

* Account classification: Cost accounts are properly classified and 
described in the financial statements.

* Consistency: The financial statement costs are based on accounting 
principles that are applied consistently from period to period.

* Disclosure: The financial statements and footnotes contain all 
information required to be disclosed.

.07: 
SFFAS No. 4 discusses three methods of assigning costs: directly 
tracing costs, assigning costs on a cause-and-effect basis, and 
allocating costs on a reasonable and consistent basis. Although the 
standard discusses these three methods in relation to assigning costs 
to responsibility segments and outputs, the methods are also applicable 
to assigning costs to financial statement line items in the statement 
of net costs, generally by program, and in the notes by budget 
functional classification. The different methods of assigning costs may 
require different auditing procedures for determining whether costs are 
properly classified in the statement of net costs by program and in the 
notes by budget functional classification.

.08: 
For example, for directly traced costs (such as materials used in 
production or employees who worked on an output), the auditor generally 
should test whether costs were assigned to the appropriate program and/
or budget functional classification.

.09: 
Costs may be assigned on a cause-and-effect basis, by grouping costs 
into cost pools where an intermediate activity may be a link between 
the cause and the effect. For example, an information technology 
department may provide support to other departments. The information 
technology department may assign costs to other departments on a cause-
and-effect basis by first assigning costs to an intermediate activity, 
such as hardware installation or software design. Then the costs in 
these pools may be further assigned to other departments based on their 
use of these technical services. In auditing these types of costs, the 
auditor should test whether costs are assigned to the appropriate cost 
pool (hardware installation, software design), but also whether the 
costs are appropriately summarized in the pool. Then, when costs are 
assigned to other departments, the auditor should test whether costs 
assigned are based on appropriate usage information, whether the cost 
assignments are reasonable and consistent, and whether they are 
mathematically accurate.

.10: 
Costs may be allocated if it is not economically feasible to directly 
trace or assign costs on a cause-and-effect basis. This is commonly 
done with costs such as general management, depreciation, rent, 
maintenance, security, and utilities used in common by various 
segments. These costs are generally accumulated in cost pools and 
allocated to segments or outputs (or programs or budget functional 
classifications) based on a relevant common denominator such as number 
of employees, square footage of office space, or amount of direct costs 
incurred in segments. In auditing these allocated costs, the auditor 
should test whether the costs are assigned to the appropriate cost pool 
and summarized appropriately. The auditor also should determine whether 
the allocation basis is reasonable and consistent and test the 
mathematical allocation. In addition, the auditor should determine 
whether an allocation rather that directly tracing costs or assigning 
them on a cause-and-effect basis is appropriate in the circumstances.

.11: 
The entity exercises judgment in determining the line item/programs 
included in its statement of net costs. The auditor should consider 
whether classifications are reasonable in the circumstances.

Federal Financial Management Improvement Act of 1996 (FFMIA):

.12: 
For audits of the CFO Act agencies and components identified by OMB 
audit guidance, the auditor should determine whether the agency's 
financial management systems comply substantially with the three 
requirements of FFMIA (see paragraph 100.02 and FAM section 701). To 
determine compliance with SFFAS No. 4 for the purposes of FFMIA, the 
auditor should ask these questions, which relate to the standards 
discussed in paragraph 903.05:

* Does the agency regularly accumulate and report the costs of its 
activities to management?

* Has the agency defined its major programs and responsibility segments 
for the purpose of delineating costs?

* Does the agency properly accumulate costs by those programs and 
segments?

* Has the agency accounted for the full costs (including interentity 
costs) of products, services, or outputs to be externally reported at 
the entitywide level?

* Has the agency accounted for the costs of resources that contribute 
to the production of outputs by individual responsibility segment using 
appropriate costing methodologies?

* Has the agency reported those costs in the year-end financial 
statements on the accrual basis of accounting?

* Are the costs reported for external financial reporting and those 
reported for internal management reporting consistent and reconcilable?

* Is the reported management cost information consistent, timely, and 
comprehensive?

* Is the cost information reported in such a manner that management can 
determine answers to appropriate questions about costs of outputs?

* How does management determine whether costs are appropriate?

* How does management determine the entity's compliance with FFMIA?

This inquiry is frequently combined with the procedures in paragraph 
903.06, the outcome of which should be considered in concluding about 
the entity's compliance with the cost accounting requirements under 
FFMIA. Also, the auditor should review evidence supporting management's 
assertions in response to these questions, as further discussed in 
section 701, Assessing Compliance of Agency Systems with the Federal 
Financial Management Improvement Act (FFMIA).

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A):

.13: 
The auditor does not provide an opinion on the MD&A. Thus, the main 
concern is consistency of information, rather than testing the 
reliability of the cost data in the MD&A. The auditor should read the 
MD&A for consistency with the financial statements and with the 
auditor's knowledge of the entity. Testing generally should be limited 
to data in the financial statements, as discussed in paragraph 903.06, 
not the MD&A. Analytical procedures may be used to consider the 
reasonableness of cost data in the MD&A. Based on this comparison, the 
auditor should consider whether additional testing is needed.

.14: 
Although costs reported in internal and external reports should be 
consistent, they may differ in the degree of detail and reporting 
frequency. Cost information for management may require more frequent 
and timely reporting. It also may require more specific and detailed 
information regarding the costs of specific activities or outputs. By 
comparison, external reports could be less frequent, and the cost 
information more aggregated, such as on a suborganization or program 
basis.

[End of section]

921 - AUDITING FUND BALANCE WITH TREASURY (FBWT): 

.01: 
This section provides guidance in auditing the Fund Balance with 
Treasury (FBWT) account. It explains key agency and Treasury processes 
and procedures related to FBWT accounts and discusses audit issues. 
Practice aids, including example Account Risk Analysis (ARA) and 
Specific Control Evaluation (SCE) forms and suggested audit procedures 
for the FBWT line item, are included in appendices.

.02:  
The FBWT account (SGL account 1010) is an asset account representing 
the unexpended spending authority in agencies' appropriations. Federal 
agencies record their budget spending authority in FBWT accounts and 
increase or decrease these accounts as they collect or disburse funds. 
Most agencies maintain several fund balance accounts funded by 
different types of appropriations, such as annual 1-year appropriations 
and/or multiyear appropriations that are included in the financial 
statement FBWT line item. The FBWT account also serves as one of 
several mechanisms to prevent agencies' disbursements from exceeding 
appropriated amounts.

.03: 
In the federal government, Treasury serves as the central banker. Most 
agencies use the banking services provided by Treasury's Financial 
Management Service (FMS) and do not keep cash in separate bank 
accounts. Some agencies have authority to disburse funds on their own 
behalf. These agencies still maintain FBWT accounts and follow 
Treasury's reporting and reconciliation requirements.

.04: 
Unlike commercial banking institutions, Treasury does not keep 
independent accounting records of each agency's FBWT accounts. Instead, 
Treasury uses monthly data reported by the agencies to calculate 
agencies' FBWT balances and requires agencies to perform detailed 
reconciliations of FBWT accounts to maintain the accuracy and 
reliability of agencies' fund balance records. Effective 
reconciliations also serve as a detection control for identifying 
unauthorized and unrecorded transactions at the agencies and Treasury.

.05: 
Treasury requires agencies to maintain FBWT accounts and to perform a 
two-part reconciliation process each month.

* First, agencies should reconcile differences identified by Treasury 
between cash receipts and disbursements transactions reported by 
agencies to those reported by other sources of financial data, such as 
the Federal Reserve, commercial banks, other federal agencies, and the 
FMS regional financial centers. Treasury reports differences identified 
to agencies each month on "Statements of Differences."[Footnote 5]

* Second, agencies should reconcile differences between their records 
and Treasury records of the monthly activity recorded in the FBWT 
accounts. Each month Treasury provides appropriation, fund, and 
receipt account ledgers, which include a rollforward of the previous 
month's balance, the current month's cash activity reported by the 
agency and other account activity (supplemental appropriations, 
rescissions, nonexpenditure transfers, entries reported by other 
agencies) to compare to their records.

Differences remain until reconciled by the agencies and represent 
potential misstatements in agencies' financial statements and budget 
execution reports.

Audit Issues:

.06: 
Many agencies have problems in reconciling the transaction activity in 
their FBWT accounts. Ineffective FBWT reconciliations contribute to 
agencies' inability to prepare auditable financial statements. Without 
effective agency reconciliations of receipt and disbursement activity, 
the agency FBWT balance -the amount of funds available to it for 
expenditure in each appropriation - may contain material misstatements, 
and auditors generally would be unable to determine whether FBWT is 
fairly stated.

.07: 
Prior audits of agencies' financial statements identified instances in 
which agencies were not timely reconciling their FBWT accounts. 
Instead, some agencies adjusted their accounts to show the amounts 
reported by Treasury and/or recorded differences in suspense accounts 
without adequately researching the causes of the differences. 
Unreconciled differences recorded in suspense accounts could represent 
transactions that have not been recorded by the agency to the 
appropriate accounts. Only after researching its accounting records and 
reports can an agency determine the cause of the problem and make the 
proper adjustments to its FBWT accounts (and related asset, liability, 
expense, or revenue accounts) or advise Treasury to correct its 
records.

.08: 
There were instances in which agencies did not receive Statements of 
Differences from Treasury, even though unreconciled differences 
existed. Some agencies did not use their accounting records to prepare 
monthly reports to Treasury. Instead, they reported the same amounts 
recorded in OPAC and CASHLINK to avoid Statements of Differences; 
generally these agencies tracked differences in suspense accounts. 
Because Treasury uses these sources to compare with the amounts 
reported by the agency, Treasury did not identify differences; thus, no 
Statements of Differences were issued. Also, some agencies cleared 
Statements of Differences by reporting adjustments to Treasury before 
researching and resolving differences. Therefore, amounts reported on 
Statements of Differences might not always be an adequate indicator of 
reconciliation problems or an adequate measure of the extent of 
outstanding unreconciled differences. Auditors should design tests to 
obtain an understanding of the agency's reconciliation procedures in 
order to assess the effect of its reconciliation process on the 
financial statements and to determine the level of audit procedures 
required after considering the materiality of unreconciled differences.

.09: 
Because Treasury's record of an agency's FBWT is the result of the 
activity reported to Treasury by the agency itself, and is not obtained 
from another source, the reconciliation process is a key control over 
FBWT accounts.

.10: 
One year's successful audit of the reconciliation of FBWT activity will 
generally not result in an auditable balance because the auditor faces 
the issue of auditing the beginning balance. Except for the first year 
of an appropriation, the balances in most FBWT accounts are included in 
the FBWT line item rollforward from year to year until the account is 
closed, which can be 5 years or more, depending on the type of 
appropriation.

.11: 
In an initial audit, the auditor should design tests to obtain 
assurance on the FBWT beginning balance. This may require testing of 
FBWT reconciliations performed in prior years or other audit procedures 
that provide assurance on the FBWT line item. For example, in some 
instances detailed audit procedures over beginning balances related to 
other financial statement accounts that affect FBWT could provide 
assurance. In tests of other account balances, the auditor may be able 
to determine that old errors were written off or other appropriate 
adjustments were made to FBWT and that the fund balances from prior 
years and remaining unadjusted reconciling differences are immaterial.

Audit Approach:

.12: 
Because Treasury relies on the monthly data reported by the agencies to 
calculate agencies' FBWT balances, confirmation of FBWT account 
balances with Treasury does not provide competent evidence. Therefore, 
the auditor needs to obtain competent evidence through tests of the 
agency's FBWT reconciliation process.

.13: 
Since most assets, liabilities, revenues, and expenses stem from or 
result in cash transactions, misstatements in the receipt or 
disbursement activity recorded in the FBWT accounts affect the balances 
of various financial statement accounts. Even though net FBWT account 
balances may be immaterial as of the date of the financial statements, 
the gross receipt and disbursement transactions flowing through the 
FBWT account during the fiscal year are usually material. Therefore, 
the auditor should test the reconciliation of the transaction activity 
flowing through the account. In addition, the auditor should assess the 
impact of gross unreconciled differences on the FBWT and other 
financial statement line items.

.14: 
The auditor should design an audit program that includes steps to 
determine whether the agency:

* prepares monthly reports to Treasury using the same detailed 
accounting records of collection and disbursement transactions that 
are used to prepare the agency's financial statements;

* researches and resolves the underlying causes of differences between 
amounts reported by Treasury and agency records each month and makes 
the proper adjustments; and:

* monitors suspense account activity - including maintaining detailed 
records of unreconciled differences charged to the account and 
maintaining records that age the differences - and performs procedures 
to timely and properly clear the account.

.15: 
The auditor also should design procedures to determine the magnitude of 
the agency's gross unreconciled differences at year-end by analyzing 
the Treasury Statements of Differences reports and agency suspense 
account items in terms of their aggregate absolute values and resulting 
impact on the financial statements. (Since each difference represents a 
potential misstatement, the roll-up and netting of charges and credits 
can significantly understate the total outstanding differences.):

Practice Aids:

.16: The following practice aids are appended to this section:

* Section 921 A - Treasury Processes and Reports Related to FBWT 
Reconciliation.

* Section 921 B - Example Account Risk Analysis (ARA).

* Section 921 C - Example Specific Control Evaluation (SCE). (Note that a 
single SCE of the line item/account-related accounting application for 
FBWT is presented. There are transaction-related accounting 
applications listed on the ARA that affect FBWT, such as cash receipts 
and cash disbursements, that would require transaction related SCEs.):

* Section 921 D - Example Audit Procedures.

.17: 
These aids are not all inclusive. They do not include tests of other 
accounts, such as Other Cash on Deposit bank accounts and Imprest 
Funds. Also, for agencies that write their own checks, the aids do not 
discuss or include tests of controls over check stock. If material, the 
auditor should apply appropriate additional tests. The aids provide the 
auditor with a framework for designing tests of FBWT accounts. Auditors 
should use professional judgment in designing audit programs for their 
particular agency after considering materiality, audit risks, and 
internal control.

.18: 
The auditor should use judgment in determining the most effective and 
efficient method to achieve the audit objectives. When possible, the 
FBWT audit procedures should be coordinated with other tests. For 
example, many procedures may be performed in conjunction with tests of 
agency cash receipts and cash disbursements. Others may be included as 
part of compliance testing.

[End of section]

921 A - TREASURY PROCESSES AND REPORTS RELATED TO FBWT RECONCILIATION: 

[See PDF for image]

[End of table]

[End of section]

921 B - EXAMPLE ACCOUNT RISK ANALYSIS FOR FUND BALANCE WITH TREASURY: 

[See PDF for image]

[End of figure]

[End of section]

921 C - EXAMPLE SPECIFIC CONTROL EVALUATION FOR FUND BALANCE WITH 
TREASURY: 

[See PDF for image]

[End of figure]

[End of section]

921 D - EXAMPLE AUDIT PROCEDURES FOR FUND BALANCE WITH TREASURY: 

FBWT Example Audit Procedures: 

Planning Phase; FB-1:

A. To obtain an understanding of the agency's 
accounting and reporting requirements for Fund Balance with Treasury 
(FBWT) accounts, read the following documents: 

* Treasury Financial 
Manual, Volume I, part 2, chapter 5100 - Reconciling Fund Balance with 
Treasury accounts, http://fms.treas.gov/fundbalance. 

* Current OMB bulletin, Form and Content of Agency Financial 
Statements. 

* Statements of Federal Financial Accounting Standards (SFFAS No. 1). 

* Agency 
accounting policies and procedures for the Fund Balance with Treasury 
Accounts. 

B. Read prior year documentation, financial statements, and related 
auditor's reports to determine if there were any audit issues/
reportable conditions related to FBWT. 

Internal Control Phase; FB-2: 

A. To obtain an understanding of the 
agency's internal controls over FBWT accounts, perform the following: 

1. Interview key agency staff about the FBWT procedures and controls in 
place at the agency. 

a. Determine what method the agency uses to disburse 
funds (FMS regional finance centers, on its own behalf, and/or both 
methods). 

b. Obtain an understanding of the significant accounting 
systems and controls used in reporting and accounting for FBWT 
transactions. 

c. Identify FBWT line item general ledger accounts. 

d. Obtain 
an understanding of the agency's FBWT reconciliation procedures. Ask 

* if and how the agency tracks differences between the agency's and 
Treasury FBWT records; 

* what suspense accounts, if any, are used by the 
agency to track unreconciled differences; 

* if the agency has a process/system for aging unreconciled 
differences; and; 

* how the agency reports and handles differences. 

B. Walk through the FBWT reconciliation process and determine whether 
reconciliation controls have been placed in operation. 

Testing Phase; FB-3:

A. To determine whether the agency's reconciliation 
of the monthly SF 224, 1219/1220 or 1218/1221 Statement of 
Transactions/Accountability report submitted to Treasury, to the 
applicable general ledger (G/L) accounts is effective (existence): 

1. Obtain a list of the agency's Agency Location Codes (ALCs). Agency 
ALCs can be obtained through the GOALS. ALCs indicate the agency's 
method of disbursement. Four digit ALCs indicate a non-Treasury 
disbursing agency. Eight digit ALCs indicate a Treasury disbursing 
agency. 

2. Obtain the monthly Statements of Transactions (SF 224) or 
Statements of Accountability/Transactions (SF 1219/1220 or 1218/1221) 
for each ALC for the fiscal year, or for the period being audited if 
testing at an interim date. 

3. Select the individual Statements of Transactions (SF 
224) or Statements of Accountability/Transactions (SF 1219/1220 or 
1218/1221) to be tested (use separate forms to document the sampling 
plan). Indicate selection method. 

* Dollar unit sampling (DUS), 
* Classical Variables Estimation Sampling, or  
* Other (describe) 

For each statement selected: 

a. Compare the ALC on the SF 224 or SF 1219/1220 or 1218/1221 to the 
agency's list of ALCs. 

b. Trace monthly collection and disbursement amounts reported on 
the SF 224, SF 1219/1220 or SF 1218/1221 to amounts recorded in the 
agency's official accounting records (G/L). 

c. Trace any prior period 
adjustment amounts reported on the SF 224, SF 1219/1220 or SF 1218/1221 
to supporting documentation and the agency's G/L. 

d. Examine supporting documentation for any differences. 

B. Summarize the results of testing. 

C. Determine whether the results of testing indicate that combined risk 
should be assessed differently and whether the audit procedures should 
be revised. 

FB-4: 

A. To determine whether the agency is properly reconciling 
collection and disbursement differences identified by Treasury 
(existence and completeness): 

1. Obtain the following Treasury reports 
for each ALC for each month of the fiscal year, or for the period being 
audited if testing at an interim date. 

* Final month-end Statements of 
Differences (FMS 6652). Note: To obtain the population of Statements of 
Differences, obtain the initial month-end Statements of Differences 
issued by Treasury. Treasury issues month-end Statements of Differences 
for each accounting month (when differences are identified) and 
continues to send statements for that month until the difference is 
cleared. To obtain the initial differences reports for the period being 
audited, obtain the reports that show the same accounting date and 
audit date on the statement, indicating that this is the initial 
statement of differences issued for that month. 

* Advice of Check Issued 
Discrepancy reports (FMS 5206). (Note: This step applies only for 
agencies that disburse their own funds - Non-Treasury Disbursing 
Offices (NTDO) agencies.); 

* Treasury letters notifying the agency of 
outstanding differences between amounts reported on the SF 1219/1220 or 
SF 1218/1221 and its check issued summary reports. (Note: This step 
applies only for NTDO agencies.); 

Select the individual statements/letters to be tested (use separate 
forms to document the sampling plan). Indicate selection method: 

* Dollar unit sampling (DUS), 
* Classical variables estimation sampling, or 
* Other (describe).  

For each statement/letter selected: 

a. Compare the ALC number on the statement/report to the agency's list 
of ALCs. 

b. 
Examine the agency's reconciliation files/documentation supporting the 
reconciliation of the difference, and determine if differences were 
adequately researched and resolved. 

c. Trace resulting adjustments, if any, to subsequent month Treasury 
reporting (SF 224, 1219/1220, or 1218/1221) and/or the agency general 
ledger accounts to determine if adjustments were properly recorded. 
(Note: reconciling items do not always result in adjustments to the G/
L and/or Treasury records. The resulting adjustment, if any, depends on 
the cause of the difference. For example, an adjustment to the agency's 
G/L is not necessary when a bank error caused the difference. The bank 
is responsible for reporting the adjustment to Treasury.); 

B. 
Summarize the results of testing and conclude on the effectiveness of 
the agency's reconciliation controls. 

C. 
Determine if the results of testing indicate that combined risk should 
be assessed differently and if the audit procedures should be revised. 

FB-5: 

A. To determine if the agency's monthly reconciliation of its G/L to 
Treasury records is effective (existence and completeness): 

1. For the months that correspond to the Statements of Differences 
selected above, obtain the Undisbursed Appropriation Account ledgers 
(FMS 6653) and Receipt Account ledgers (FMS 6655) sent by Treasury and 
the agency's reconciliation. 

* Trace the FMS 6653/6655 balance per the 
agency reconciliation to the FMS 6653/6655 reports sent by Treasury. 

* Trace 
the G/L account balances per the reconciliation to the appropriate G/L 
accounts. 

* Trace account activity per the FMS 6653/6655 to the agency 
G/L. (Note: Typical activity, other than agency disbursements and 
receipts, may include supplemental appropriations, non-expenditure 
transfers, and entries reported by other agencies.); 

* Examine supporting documentation for reconciling items. 

* Determine if the appropriate 
adjustments were made to the general ledger or that Treasury had been 
notified of needed corrections. 

B. 
Summarize the results of testing and conclude on the effectiveness of 
the agency's reconciliation controls. 

C. 
Determine if the results of testing indicate that combined risk should 
be assessed differently and if the audit procedures should be revised. 

FB-6: 

A. To determine whether the agency's year-end (September) 
reconciliation of FBWT accounts is effective (existence and 
completeness): 

1. Obtain the Agency's year-end (September) FBWT 
reconciliation and Treasury's September Undistributed Appropriation 
Account Ledger (FMS 6653) and Receipt Account Ledger (FMS 6655). 

* Trace 
appropriation, fund, and receipt account balances reported on the 
Treasury account ledgers to the agency's reconciliation. 

* Trace the 
appropriation, fund, and receipt account balances reported on the 
Treasury account ledgers to the agency general ledger. 

* Examine supporting documentation for reconciling items. 

* Determine if appropriate adjustments were made to the G/L and/or 
reported to Treasury. 

2. Obtain the year-end (September) Statements of Differences reports 
issued by Treasury (FMS 6652, and/or FMS 5206 and Treasury notification 
letters). 

* Trace reported differences to the agency's reconciliation to 
determine if all differences were included in the FBWT reconciliation. 

* Examine supporting documentation and determine if differences were 
adequately resolved. 

* Trace resulting adjustments to supplemental 
Statements of Transactions/Accountability or subsequent month Treasury 
reporting (SF 224, 1219/1220, or 1218/1221) and/or the agency general 
ledger. 

3. Summarize the results of testing. 

FB-7: 

A. To determine the extent of unreconciled differences at year-end 
and the potential impact on the agency FBWT account balance: 

1. Determine 
if unresolved differences reported by Treasury on Statements of 
Differences as of September 30 for the fiscal year being audited were 
subsequently resolved and properly accounted for. 

* Obtain the 
Statements of Differences for the months subsequent to year-end 
(October through end of fieldwork). 

* Identify unreconciled differences 
outstanding at 9/30 that were subsequently resolved. 

* Determine if the 
differences were adequately researched and resolved. 

* Determine if the 
appropriate adjustments were made to the agency FBWT accounts or that 
Treasury had been notified of needed corrections. 

2. Determine the extent of unreconciled differences included in 
suspense accounts that are not included on Statements of Differences. 


* Obtain suspense account transaction detail report as of 9/30 for the 
year being audited. 

* Obtain suspense account transaction detail report 
for months subsequent to year-end (October through end of fieldwork). 
* Identify unreconciled differences outstanding at 9/30 that were 
subsequently resolved. 

* Determine if the differences were adequately researched and resolved. 

* Determine if the appropriate adjustments were 
made to the agency FBWT accounts or that Treasury had been notified of 
needed corrections. 

3. Assess the materiality of all unreconciled differences outstanding 
(at absolute value). 

4. Summarize test results. 

5. 
Document the potential effect of material unreconciled differences on 
the FBWT line item and other financial statement accounts. 

FB-8; 
A. To determine if the agency recorded warrants, appropriation 
transfers, and rescissions properly, perform the following (rights and 
obligations): 

1. For first year appropriations, obtain copies of the 
appropriation legislation and U.S. Treasury Appropriation Warrants (FMS 
6200) for the fiscal year. 

* Compare the warrants to the appropriation 
legislation. 

* Trace amounts reported on the appropriation warrants to 
beginning appropriation balances recorded in the general ledger FBWT 
accounts. 

* Examine supporting documentation for any differences/reconciling 
items. 

2. 
For other than first year appropriations, trace the beginning balances 
recorded in the general ledger to audited ending balances of the prior 
fiscal year financial statements. (Note: If this is a first year audit, 
additional work may be necessary to substantiate the beginning FBWT 
account balance. For example, the auditor may need to consider if the 
reconciliation process has been effective over the life of the 
appropriations. This may require review of prior year 
reconciliations.); 

3. For appropriation activity occurring during the fiscal year being 
audited (supplemental appropriations, rescissions, and nonexpenditure 
transfers), obtain copies of related legislation for supplemental 
appropriation and rescission warrants and U.S. Treasury Non-Expenditure 
Transfer Authorizations form (FMS 1151) for the fiscal year. 

* Compare 
supplemental appropriations and rescissions recorded in the agencies' 
FBWT account to appropriation legislation and to U.S. Treasury 
warrants. 

* Compare non-expenditure transfer amounts recorded in the 
agencies' FBWT account to approved Non-Expenditure Transfer 
Authorizations form (FMS 1151). 

4. Examine supporting documentation for any differences/reconciling 
items. 

FB-9: 

A. To determine the existence and completeness of the appropriation, 
fund, and receipt accounts included in the FBWT financial statement 
balance (existence, completeness, presentation and disclosure): 

1. Obtain the agency "crosswalk" of G/L accounts included in the FBWT 
line item and the September Treasury Undisbursed Appropriation Account 
Trial Balance and Receipt Account Trial Balance. 

* Trace account balances 
listed on the Treasury trial balances to the agency crosswalk of G/L 
accounts included in the FBWT line item. 

* Determine the status of 
accounts (i.e., open, expired, canceled) and assess whether the account 
is appropriately included in the FBWT line item. 
* Obtain an explanation 
and determine the appropriateness of accounts omitted from or included 
in the crosswalk that were not included in the Treasury trial balance. 

IV. Reporting Phase; FB-10; To determine if the FBWT balance appears 
reasonable (analytical procedure): 

1. Compare the G/L accounts that 
constitute the FBWT with expectations and obtain explanation for any 
unexpected changes (e.g., credit balances, new accounts, closed 
accounts) or the absence of expected changes. 

2. Determine if additional testing is necessary. 

B. To assess whether the presentation of the financial statements and 
footnote disclosures for the FBWT line item are in accordance with U.S. 
generally accepted accounting principles (SFFAS No. 1) (presentation 
and disclosure) (see GAO/PCIE FAM, Part II, section 1004-Financial 
Reporting: Checklist for Reports Prepared under the CFO Act): 

1. 
Determine if the agency has presented and disclosed FBWT in the notes 
to the financial statements in accordance with U.S. generally accepted 
accounting principles. 

2. Determine if material unreconciled differences are disclosed and 
explained in the notes to the financial statements. 

3. 
Determine if material unreconciled differences that were written off by 
the agency during the fiscal year being audited are disclosed in the 
notes to the financial statements. 

4. Determine if material restrictions, if any, have been properly 
disclosed. 

FB-11: 

A. Prepare proposed audit adjustments, if any. 

B. Conclude if the FBWT line item is fairly stated and if the controls 
over FBWT are effective. 

FOOTNOTES

[1] These tools are based on the best practices guidance received from 
the participating accounting and auditing firms and the AICPA 
publication, Practice Alert No. 95-3, Auditing Related Parties and 
Related Party Transactions, which is available at http://www.aicpa.org/
members/div/secps/lit/practice/953.htm.

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

[3] The Intragovernmental Payment and Collection (IPAC) system replaced 
the Online Payment and Collection (OPAC) system in December 2001.

[4] Medicaid assists states in providing medical care to their low-
income populations by granting federal matching payments under the 
Social Security Act to states with approved plans.

[5] The banking system data is reported via CASHLINK, other federal 
agencies via IPAC (which replaced OPAC in December 2001), and FMS 
regional financial centers via GOALS. See FAM section 921 A for more 
detail on the Treasury processes and reports related to FBWT 
reconciliation.

[End of section]

SECTION 1000:

Reporting:

1001 - MANAGEMENT REPRESENTATIONS: 

.01: 
This section deals with the management representations that the auditor 
is required to obtain from current management as part of the audit, as 
described in sections 280 and 550. It covers the four general areas of 
representations: representations about the financial statements, 
internal control, financial management systems' substantial compliance 
with the requirements of the Federal Financial Management Improvement 
Act of 1996 (FFMIA), and compliance with laws and regulations. In the 
AICPA standards, these representations are discussed in sections AU 333 
(SAS 85), AT 501.44 (from Statement on Standards for Attestation 
Engagements (SSAE) Number 10, paragraph 5.44), and AU 801. OMB audit 
guidance also contains guidance on management representations letters. 

.02: 
Written representations from management ordinarily confirm oral 
representations given to the auditor, indicate and document the 
continuing appropriateness of those representations, and reduce the 
possibility of misunderstanding. Management representations are not a 
substitute for audit procedures. If a representation is contradicted by 
other audit evidence, the auditor should investigate the circumstances 
and consider the reliability of the representation. Also, the auditor 
should then consider whether it is appropriate to rely on other 
management representations. Management's refusal to furnish written 
representations is a scope limitation sufficient to preclude an 
unqualified opinion. 

.03: 
The specific representations obtained will depend on the circumstances 
of the engagement and the nature and basis of presentation of the 
financial statements. These representations apply to all the financial 
statements and all periods covered by the audit report. In addition to 
the representations given in the AICPA standards, the auditor generally 
should consider the need to obtain representations on other matters 
based on the circumstances of the audited entity. Also, the 
representations given in the example representation letter in section 
1001 A should be deleted if inapplicable or customized to the situation 
of the entity being audited. 

.04: 
The management representation letter should be obtained from the 
highest level of the audited entity. The officials who sign the 
management representation letter should be those who, in the auditor's 
view, are responsible for and knowledgeable, directly or through 
others, about the matters in the representation letter. These officials 
should generally be the head of the entity and the CFO, or equivalent. 
Additional management representation letters should be obtained from 
any component units for which separate reports are to be issued. 

.05: 
The management representation letter should be on the audited entity's 
letterhead. The representations should be as of a date no earlier than 
the date of the auditor's report--the end of fieldwork. To ensure the 
letter is ready in time, a draft letter generally should be provided to 
and discussed with management early in the audit and updated for 
circumstances found throughout the audit. Where management signs the 
letter after the end of fieldwork, the letter should state that the 
representations are as of the date of the audit report. If management 
signs the letter before the end of fieldwork, the auditor generally 
should obtain a separate letter to update the representations to the 
end of fieldwork. However, where the time difference is short, the 
auditor may update the representations orally and document the update 
in the workpapers. 

.06: 
Although the management representation letter generally should be 
addressed to the Comptroller General (at GAO) or the agency IG, the 
audit team should consider having the entity deliver it directly to a 
member of the team to avoid any delays in receiving the letter. 

.07: 
Especially for large audited entities, management may need to specify a 
materiality threshold in the management representation letter, below 
which items would not be considered exceptions. The auditor should be 
satisfied that such a materiality threshold is so far below design 
materiality that even many items below this level would not, in the 
aggregate, approach design materiality. For example, a threshold that 
is 5 percent (or less) of design materiality may be sufficiently low. 
The materiality level may be different for different representations 
and would not apply to those representations not directly related to 
amounts in the financial statements (such as responsibility for the 
statements). 

REPRESENTATIONS RELATING TO THE FINANCIAL STATEMENTS:

.08:
Paragraph AU 333.06 lists 17 management representations that are 
ordinarily included in a GAAS audit if applicable. These generally 
relate to management acknowledging its responsibility for the financial 
statements and its belief that the financial statements are fairly 
presented in conformity with generally accepted accounting principles; 
completeness of financial information; recognition, measurement, and 
disclosure; and subsequent events. Examples of additional 
representations that may be appropriate depending on an entity's 
business or industry are given in appendix B to AU 333. The auditor may 
review section AU 333 for items that could be added to the 
representations, many of which would have to be modified in the federal 
government environment. (OMB has added a representation dealing with 
intragovernmental transactions and their reconciliations for CFO Act 
agencies and components.):

.09:
Appendix B of AU 333 gives example language for the following 
situations:

General:

* Unaudited interim information accompanies the financial statements. 

* The impact of a new accounting principle is not known. 

* There is justification for a change in accounting principles. 

* Financial circumstances are strained, with disclosure of management's 
intentions and the entity's ability to continue as a going concern. 

* The possibility exists that the value of specific significant long-
lived assets or certain identifiable intangibles may be impaired. 

* The work of a specialist has been used by the entity. 

Cash:

* Disclosure is required of compensating balances or other arrangements 
involving restrictions on cash balances, line of credit, or similar 
arrangements. 

Financial instruments:

* Management intends to and has the ability to hold to maturity debt 
securities classified as held to maturity. 

* Management considers the decline in value of debt or equity securities 
to be temporary. 

* Management has determined the fair value of significant financial 
instruments that do not have readily determinable market values. 

* There are financial instruments with off-balance-sheet risk and 
financial instruments with concentrations of credit risk. 

Receivables:

* Receivables have been recorded in the financial statements. 

Inventories:

* Excess or obsolete inventories exist. 

Deferred charges:

* Material expenditures have been deferred. 

Debt:

* Short-term debt could be refinanced on a long-term basis, and 
management intends to do so. 

Contingencies:

* Estimates and disclosures have been made of environmental remediation 
liabilities and related loss contingencies. 

* Agreements may exist to repurchase assets previously sold. 

Pension and postretirement benefits:

* An actuary measured pension liabilities and costs. 

* There is involvement with a multiemployer plan. 

* Postretirement benefits have been eliminated. 

* Employee layoffs that would otherwise lead to a curtailment of a 
benefit plan are intended to be temporary. 

* Management intends to either continue to make or not make frequent 
amendments to its pension or other postretirement benefit plans, which 
may affect the amortization period of prior service cost, or management 
has expressed a substantive commitment to increase benefit obligations. 

Sales:

* There may be losses from sales commitments. 

* There may be losses from purchase commitments. 

* Nature of the product or industry indicates the possibility of 
undisclosed sales terms. 

.10: 
The auditor generally should consider the need for additional 
customizing of the example representation letter given in section 1001 
A and for the additional representations in paragraph 1001.09. Many of 
the representations may have to be qualified, especially in an initial 
audit or in later audits where significant problems remain. For 
instance, where the example representation letter states that there are 
no violations of laws or regulations, the entity may need to add at the 
end of the statement, "except as follows:" and describe the violations. 

.11: 
In addition, the auditor generally should consider whether 
circumstances may require that additional descriptive items be included 
in the representation letter, especially as support for conclusions the 
auditor makes in the audit. This is important where the corroborating 
information that can be obtained by procedures other than inquiry is 
limited. For example, the letter should include descriptions of (1) the 
reasons for audited-entity-imposed scope limitations, such as lack of 
availability of certain records, (2) the basis for material liability 
estimates, key asset valuations, or the probability of contingencies, 
and (3) significant plans or intentions for the entity. For example, if 
the entity has a pension plan outside of the Civil Service Retirement 
System or the Federal Employees' Retirement System, an item should 
state that the entity does not plan to terminate the plan and that 
management believes the actuarial assumptions and methods used to 
measure pension liabilities and costs for financial reporting purposes 
are appropriate in the circumstances. 

REPRESENTATIONS RELATING TO INTERNAL CONTROL:

.12: 
Internal control representations when the auditor opines on internal 
control are found in AT 501.44 (SSAE 10, paragraph 5.44). These 
representations relate to management's (1) acknowledging its 
responsibility for internal control, (2) stating that management has 
assessed the effectiveness of its internal control and specifying the 
control criteria used, (3) stating management's assertion about the 
effectiveness of its internal control based on the control criteria, 
(4) stating that management has disclosed to the auditor 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 pointing out those that are material weaknesses 
(using the definition in the representation letter, which is the 
definition in AU 325), (5) describing any fraud, and (6) stating 
whether there were any changes to internal control subsequent to the 
end of the reporting period. Where the auditor is not opining on 
internal control, he or she should delete representations 2 and 3 
above. Depending on circumstances, the auditor should consider 
modifying representation 4 above to remove the phrase "pointing out 
those that are material weaknesses. " The auditor also should modify the 
introductory paragraph to the representation letter. 

.13: 
For items 2 and 3, the auditor expects entities to use criteria 
established under FMFIA and OMB Circular A-123 in their FMFIA internal 
control assessment. Standards in GAO's green pamphlet Standards for 
Internal Control in the Federal Government were established as 
standards for federal entities to follow, and they were incorporated by 
OMB into Circular A-123. The November 1999 update to these standards 
(GAO/AIMD-00-21.3.1) is effective for fiscal year 2000 FMFIA reports 
and incorporates concepts from the private sector guidance Internal 
Control--Integrated Framework by the Committee of Sponsoring 
Organizations (COSO) of the Treadway Commission. Entities should 
summarize in the representation letter any material weaknesses relating 
to financial reporting (including safeguarding), compliance (including 
budget), and performance measures controls. Example wording for the 
representations is given in section 1001 A for the case where 
management asserts that its internal control as of the date of the 
financial statements provided reasonable assurance that misstatements, 
losses, or noncompliance material in relation to the financial 
statements or required supplementary stewardship information would be 
prevented or detected on a timely basis. If there are material 
weaknesses, management should include a brief description of them in 
its representation letter and modify its assertion accordingly. 

.14:
For entities that have not formally assessed the effectiveness of their 
internal control, AT 501 (SSAE 10, chapter 5) provides that the auditor 
may assist management in its assessment by gathering or preparing 
information that management can use in evaluating the effectiveness of 
its internal control. The auditor may also use the information in 
forming an opinion on internal control. Thus, the example 
representations are appropriate for inclusion in the management 
representation letter if management and the auditor agree on the 
conclusions regarding the effectiveness of internal control. 

REPRESENTATIONS RELATING TO FINANCIAL MANAGEMENT SYSTEMS' SUBSTANTIAL 
COMPLIANCE WITH FFMIA REQUIREMENTS:

15: 
FFMIA requires the auditor who performs a CFO Act audit to report 
whether the entity's financial management systems comply substantially 
with (1) federal financial management systems requirements, (2) 
applicable federal accounting standards (now recognized as generally 
accepted accounting principles), and (3) the SGL at the transaction 
level. In order to report in accordance with FFMIA, the auditor should 
obtain representations from management as to the entity's systems' 
compliance with these requirements. 

.16: 
The auditor should obtain representations that management takes 
responsibility for complying substantially with the FFMIA requirements, 
stating that it has assessed the systems' compliance, stating the 
criteria used, and asserting the systems' substantial compliance (or 
lack thereof). The criteria should be the requirements in OMB Circular 
A-127, Financial Management Systems (which incorporates the SGL, the 
JFMIP Federal Financial Management Systems Requirements documents, and 
other OMB circulars). These requirements are further described, 
including indicators of substantial compliance, in OMB's FFMIA 
implementation guidance for CFOs and IGs, referenced in OMB's audit 
guidance. 

REPRESENTATIONS RELATING TO COMPLIANCE WITH LAWS AND REGULATIONS:

.17: 
AU 801.07 suggests that a representation relating to compliance with 
laws and regulations state that management has identified and disclosed 
to the auditor all laws and regulations that have a direct and material 
effect on the financial statements. 

.18: 
In addition, AT 601 (SSAE 10, chapter 6) deals with compliance 
attestation. The auditor is not required to follow this standard 
because it does not apply to audits reporting on compliance as part of 
an audit of financial statements or on audits reporting in accordance 
with Government Auditing Standards. However, in situations in which the 
auditor believes additional representations regarding compliance may be 
needed, examples are given in AT 601. 68 (SSAE 10, paragraph 6. 68). 

EFFECT OF CHANGE IN MANAGEMENT ON REPRESENTATION LETTER:

.19: 
Sometimes management is reluctant to sign representations for periods 
when it did not manage the entity. The auditor should explain to 
management that by issuing the financial statements, it is making the 
assertions implicit in the financial statements. Management may wish to 
understand the transactions and controls supporting the financial 
statements, and the auditor should help it do so. Where a change in 
management is expected, the auditor may advise the new management to 
obtain representations from the old management about the period prior 
to the change. 

[End of section]

1001 A - EXAMPLE MANAGEMENT REPRESENTATION LETTER: 

[Entity Letterhead]

[Date of auditor's report and completion of fieldwork]

The Honorable [name of Inspector General or Comptroller General]

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

[Name of agency] [or U.S. General Accounting Office]

Washington, D. C. 

Dear [name]:

This letter is in connection with your audits of the [entity's] balance 
sheet as of September 30, 20X1 and 20X2, [or dates of audited financial 
statements] and the related statements of net costs, changes in net 
position, budgetary resources, financing, and custodial activity [if 
applicable], for the years then ended for the purposes of (1) 
expressing an opinion as to whether the financial statements are 
presented fairly, in all material respects, in conformity with 
generally accepted accounting principles, (2) expressing an opinion [or 
reporting] on [entity's] internal control as of September 30, 20X2 [or 
date of latest audited financial statements], (3) reporting whether the 
[entity's] financial management systems substantially comply with 
federal financial management systems requirements, applicable federal 
accounting standards (generally accepted accounting principles), and 
the U.S. Government Standard General Ledger at the transaction level as 
of September 30, 20X2, and (4) testing for compliance with applicable 
laws and regulations. 

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 $X 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. 

We confirm, to the best of our knowledge and belief, the following 
representations made to you during the audits (these representations 
are as of [date of completion of fieldwork], 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 and stewardship information in conformity with generally 
accepted accounting principles. 

2. The financial statements are fairly presented in conformity with 
generally accepted accounting principles. 

3. We have made available to you all:

a. financial records and related data,

b. where applicable, minutes of meetings of the Board of Directors [or 
other similar bodies, such as congressional oversight committees] or 
summaries of actions of recent meetings for which minutes have not been 
prepared, and:

c. communications from the Office of Management and Budget (OMB) 
concerning noncompliance with or deficiencies in financial reporting 
practices. 

4. 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. 

5. We believe that the effects of the uncorrected financial statement 
misstatements summarized in the accompanying schedule are immaterial, 
both individually and in the aggregate, to the financial statements 
taken as a whole. [An example accompanying schedule is included in 
section 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]. "] [This representation is required for audits of financial 
statements for periods beginning on or after December 15, 1999. ]

6. The [entity] has satisfactory title to all owned assets, including 
stewardship property, plant, and equipment; such assets have no liens 
or encumbrances; and no assets have been pledged. 

7. We have no plans or intentions that may materially affect the 
carrying value or classification of assets and liabilities. 

8. Guarantees under which the [entity] is contingently liable have been 
properly reported or disclosed. 

9. Related party transactions and related accounts receivable or 
payable, including assessments, loans, and guarantees, have been 
properly recorded and disclosed. 

10. All intraentity transactions and balances have been appropriately 
identified and eliminated for financial reporting purposes, unless 
otherwise noted. All intragovernmental transactions and balances have 
been appropriately recorded, reported, and disclosed. We have 
reconciled intragovernmental transactions and balances with the 
appropriate trading partners for the four fiduciary transactions 
identified in Treasury's Intra-governmental Fiduciary Transactions 
Accounting Guide, and other intragovernmental asset, liability, and 
revenue amounts as required by OMB Bulletin 97-01, as amended. 

11. There are no:

a. possible violations of laws or regulations whose effects should be 
considered for disclosure in the financial statements or as a basis for 
recording a loss contingency,

b. material liabilities or gain or loss contingencies that are required 
to be accrued or disclosed that have not been accrued or disclosed, or:

c. unasserted claims or assessments that are probable of assertion and 
must be disclosed that have not been disclosed. 

12. We have complied with all aspects of contractual agreements that 
would have a material effect on the financial statements in the event 
of noncompliance. 

13. No material events or transactions have occurred subsequent to 
September 30, 20X2 [or date of latest audited financial statements], 
that have not been properly recorded in the financial statements and 
stewardship information or disclosed in the notes. 

14. There has been no material 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 or stewardship information) or any fraud involving 
management or employees who have significant roles in internal control. 
[If there were any incidents of fraud meeting the foregoing criteria, 
they should be described. ]

15. We are responsible for establishing and maintaining internal 
control. 

16. Pursuant to the Federal Managers Financial Integrity Act, we have 
assessed the effectiveness of [entity's] internal control in achieving 
the following objectives:

a. reliability of financial reporting--transactions are properly 
recorded, processed, and summarized to permit the preparation of 
financial statements and stewardship information in accordance with 
generally accepted accounting principles, and assets are safeguarded 
against loss from unauthorized acquisition, use or disposition;

b. compliance with applicable laws and regulations--transactions are 
executed in accordance with (i) laws governing the use of budget 
authority and with other laws and regulations that could have a direct 
and material effect on the financial statements and (ii) any other 
laws, regulations, and governmentwide policies identified by OMB in its 
audit guidance; and:

c. reliability of performance reporting--transactions and other data 
that support reported performance measures are properly recorded, 
processed, and summarized to permit the preparation of performance 
information in accordance with criteria stated by management. 

17. Those controls in place on September 30, 20X2 [or date of latest 
audited financial statements], provided reasonable assurance that the 
foregoing objectives are met. 

[If there are material weaknesses, the foregoing representation should 
be modified to read:

Those controls in place on September 30, 20X2, provided reasonable 
assurance that the foregoing objectives are met except for the effects 
of the material weaknesses discussed below or in the attachment. 

or: Internal controls are not effective. 

or: Internal controls do not meet the foregoing objectives. ]

18. 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. [This item is 
not required if the auditor is not opining on internal control. ]

19, There have been no changes to internal control subsequent to 
September 30, 20X2 [or date of latest audited financial statements], or 
other factors that might significantly affect it. [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. ]

20. We are responsible for implementing and maintaining financial 
management systems that comply substantially with federal financial 
management systems requirements, federal accounting standards 
(generally accepted accounting principles), and the U.S. Government 
Standard General Ledger at the transaction level. 

21. We have assessed the financial management systems to determine whether 
they comply substantially with these federal financial management 
systems requirements. Our assessment was based on guidance issued by 
OMB. 

22. 
The financial management systems complied substantially 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, this representation should be modified as 
follows:

As of [date of financial statements], the [entity's] financial 
management systems comply substantially 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 comply substantially 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 comply substantially with 
any of thee three elements, the following paragraph should be used 
instead:

As of [date of financial statements], the [entity's] financial 
management systems do not comply substantially with the federal 
financial management systems requirements. ]

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

23. 
We are responsible for [entity's] compliance with applicable laws and 
regulations. 

24. 
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. 

25. 
We have disclosed to you all known instances of noncompliance with laws 
and regulations. 

__:

[Name of Head of Entity]

[Title]

__:

[Name of Chief Financial Officer]

[Title]

[End of section]

1002 - INQUIRIES OF LEGAL COUNSEL

.01: 
This section provides guidance on procedures for the auditor to perform 
to obtain evidence that the financial accounting and reporting of 
contingencies[Footnote 1] regarding litigation, claims, and 
assessments conform with U.S. generally accepted accounting principles 
(GAAP), as described in FAM sections 280 and 550. This section 
discusses the accounting and reporting guidance and audit procedures 
for inquiries of legal counsel concerning litigation, claims, and 
assessments, and includes examples of a legal representation letter 
request, a legal representation letter response, including the 
Department of Justice's standard forms for legal contingencies, and 
management's schedule for summarizing the information contained in the 
legal response. 

ACCOUNTING AND REPORTING GUIDANCE:

.02: 
Entity management is responsible for implementing policies and 
procedures to identify, evaluate, account for, and disclose litigation, 
claims, and assessments as a basis for the preparation of financial 
statements in conformity with GAAP. 

.03: 
Statement of Federal Financial Accounting Standards (SFFAS) No. 5, 
Accounting for Liabilities of the Federal Government, as amended by 
SFFAS No.12, Recognition of Contingent Liabilities Arising from 
Litigation: An Amendment of SFFAS No. 5, Accounting for Liabilities of 
the Federal Government, contains accounting and reporting standards for 
loss contingencies, including those arising from litigation, claims, 
and assessments. [Footnote 2] The Federal Accounting Standards Advisory 
Board (FASAB) Interpretation No. 2, Accounting for Treasury Judgment 
Fund Transactions, clarifies GAAP related to claims to be paid through 
the Treasury Judgment Fund. [Footnote 3] Statement of Financial 
Accounting Standards No. 5, Accounting for Contingencies, also provides 
guidance for financial accounting and reporting for loss and gain 
contingencies for those entities following GAAP for nongovernmental 
entities. The definition of probable for legal contingencies is now 
essentially the same in Statement of Financial Accounting Standard No. 
5 and SFFAS No. 5, since SFFAS No.12 has amended the latter. 

.04: 
A contingency is an existing condition, situation, or set of 
circumstances involving uncertainty as to possible gain or loss to an 
entity. The uncertainty will ultimately be resolved when one or more 
future events occur or fail to occur. When a loss contingency exists, 
the likelihood that the future event or events will confirm the loss or 
impairment of an asset or the incurrence of a liability can range from 
probable to remote. SFFAS Nos. 5 and 12 use the terms probable, 
reasonably possible, and remote to identify three areas within the 
range of potential loss, as follows:

* Probable--For pending or threatened litigation and unasserted claims, 
the future confirming event or events are likely to occur. (For other 
contingencies, the future event or events are more likely than not to 
occur.):

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

* Remote--The chance of the future event or events occurring is slight. 

.05: 
A liability and the related cost for an estimated loss from a loss 
contingency should be recognized (accrued by a charge to income) 
when[Footnote 4]

a. a past event or exchange transaction has occurred,

b. a future outflow or other sacrifice of resources is probable, and:

c. the future outflow or sacrifice of resources is measurable. 

.06: 
Disclosure of the nature of an accrued liability for loss 
contingencies, including the amount accrued, may be necessary for the 
financial statements not to be misleading. For example, if the amount 
recognized is large or unusual, disclosure should be considered. 
However, if no accrual is made for a loss contingency because one or 
more of the conditions in paragraph 1002.05 are not met, disclosure of 
the contingency should be made when there is at least a reasonable 
possibility that a loss has been incurred. The disclosure should 
include the nature of the contingency, and an estimate of the possible 
liability or range of possible liability, if estimable, or a statement 
that such an estimate cannot be made. In addition, if the Judgment Fund 
might be involved in the payment of the possible loss, the federal 
entity involved in the litigation should discuss the Judgment Fund's 
role in a note to the financial statements. 

.07: 
Although management often relies on advice of legal counsel about the 
(a) likelihood of an unfavorable outcome and (b) estimates of the 
amount or range of potential loss for litigation, claims, and 
assessments, management is ultimately responsible for determining 
whether these contingencies are probable, reasonably possible, or 
remote. Management does this to decide whether they should be 
recognized as liabilities and/or disclosed in the notes to the 
financial statements. Thus, the Office of Management and Budget's (OMB) 
audit guidance requires CFO Act agency management to prepare a schedule 
summarizing legal contingencies including whether they are probable, 
reasonably possible, or remote, and whether (and in what amounts) they 
have been accrued or disclosed in the financial statements (see example 
summary schedule in FAM section 1002 D). 

AUDIT PROCEDURES:

.08: 
The auditor should design procedures to test the entity's accounting 
for and disclosure of litigation, claims, and assessments. AU 337 (SAS 
12) provides guidance on the procedures to identify litigation, claims, 
and assessments so that the auditor may obtain evidence that they are 
appropriately accounted for and disclosed. AU 9337 provides auditing 
interpretations of AU 337. OMB guidance for audits of federal financial 
statements also contains procedures for inquiries of legal counsel. 
(See FAM section 1002 A for example audit procedures.):

.09: The auditor should obtain evidence relevant to the following factors 
with respect to litigation, claims, and assessments:

a. The existence of a condition, situation, or set of circumstances 
indicating uncertainty as to the possible loss to an entity arising 
from litigation, claims, and assessments. 

b. The period in which the underlying causes for legal action occurred. 

c. The likelihood of an unfavorable outcome (probable, reasonably 
possible, or remote). 

c. The amount or range of potential loss, if estimable. 

.10: 
The auditor should discuss with management the events or conditions 
that should be considered in the accounting for and reporting of 
litigation, claims, and assessments. The auditor should perform audit 
procedures to corroborate the information provided by management, 
including requesting that management send a legal letter request to the 
entity's legal counsel. An example audit program is in FAM section 1002 
A. The audit procedures should be modified, as appropriate, for the 
particular entity. 

.11:
A letter from legal counsel to the auditor, in response to a legal 
letter request from management to legal counsel, is the auditor's 
primary means of corroborating the information furnished by management 
concerning the accuracy and completeness of litigation, claims, and 
assessments. The legal letter request may include a list of pending or 
threatened litigation, claims, and assessments or a request by 
management that legal counsel prepare the list. The legal letter 
request also may include a list of unasserted claims and assessments 
considered probable of assertion, and that, if asserted, would have at 
least a reasonable possibility of an unfavorable outcome, to which 
legal counsel has devoted substantive attention on the entity's behalf 
in the form of legal consultation or representation (or a statement 
that management is not aware of any matters meeting the criteria). 
Legal counsel then would supplement management's information about 
those unasserted claims and assessments, including an explanation of 
matters where his or her views differ from those expressed by 
management in the legal letter request. In the federal government, 
where the general counsel may be part of management, the general 
counsel may instead provide the list of unasserted claims or 
assessments meeting the above criteria. The legal letter request should 
also include a request for legal counsel to make a statement that he or 
she will advise management about unasserted claims and assessments that 
should be considered for disclosure. (See the example request and 
response in FAM sections 1002 B and 1002 C.):

Timing of Legal Letter Request and Responses:

.12: 
The audit procedures for inquiries of legal counsel concerning 
litigation, claims, and assessments should be performed on a timely 
basis to give priority to the resolution of potential problem areas and 
to complete other procedures. To meet deadlines, the auditor, entity 
management, and legal counsel should coordinate the timing of legal 
letter requests, responses (including interim responses), and related 
management schedules. The auditor and the entity management should 
consider the due dates for providing legal letter responses for the 
entity financial statements as well as for the U.S. Government's 
Consolidated Financial Statements. (OMB sometimes provides these dates 
for the governmentwide audit.) The due dates should enable the auditors 
to timely complete their work, including the potential need for 
management to inquire of Department of Justice legal counsels on a 
case-specific basis. 

.13: 
In addition, when an entitywide audit team uses the work of entity 
component audit teams, the entitywide and component audit teams should 
coordinate the timing of legal letter requests, responses, and 
management schedules and consider the due dates for the component 
financial statements as well as the entitywide financial statements. 
The entitywide team generally should receive copies of the component 
letters. 

.14: 
The legal counsel's response should include matters that existed at the 
balance sheet date and through the end of fieldwork. The effective date 
(the latest date covered by the legal counsel's review) should be as 
close as feasible to the completion of fieldwork. If the effective date 
is substantially in advance of the end of fieldwork (for example, 
earlier than 2 weeks before end of fieldwork), the auditor should 
contact the legal counsel for an updated response. To avoid this 
situation, the legal letter request should clearly specify the period 
the legal counsel's response should cover and the date the auditor 
should receive the response. 

.15: 
To assist the auditor in completing the review of legal matters in a 
timely manner (and to assist management in preparing the financial 
statements), the auditor may ask management to request legal counsel to 
submit a preliminary or interim response covering matters that existed 
at the balance sheet date and through a point in time reasonably before 
the end of fieldwork so that a preliminary evaluation of the 
significance of material legal matters can be made. Then, the legal 
counsel should submit a final or updated response covering matters 
through the end of fieldwork. The updated response generally should 
contain only changes or a statement indicating there are no changes 
from the interim response. (See FAM section 1002 B for an example legal 
letter request that includes requests for interim and updated responses 
from legal counsel.):

Determining a Materiality Level:

.16: 
The auditor may limit the inquiry to matters that are considered 
individually or collectively material to the financial statements, 
provided the entity and the auditor have reached an understanding and 
agreement on the materiality level. The materiality level, if used, 
should be documented in the legal letter request and in the response. 

.17: 
In determining a materiality level for the legal letter, the auditor 
should set the level sufficiently low that the cases not included in 
the legal letter would not be material to the financial statements 
taken as a whole when aggregated with (1) other cases not included in 
the letter, (2) all other types of contingencies, (3) all other items 
that would not be adjusted because they are judged immaterial 
(unadjusted misstatements), (4) all other amounts in the financial 
statements that would not be tested directly because they were judged 
to be immaterial, and (5) all other items resolved on the basis of 
materiality considerations. For example, 2. 5 percent of design 
materiality is used for individual cases in the U. S Government's 
Consolidated Financial Statements and 5 percent of design materiality 
is used for the aggregate of all cases. 

.18: 
In aggregating cases, the auditor and the entity may use two levels of 
aggregation. First, similar cases (such as employment discrimination 
cases, harbor maintenance fee cases, spent nuclear fuel cases, or 
military promotion board challenges) should be aggregated and treated 
as a group and compared with the individual materiality level. The 
aggregation generally should include a list of the individual cases 
that are aggregated and a discussion of the items of information 
requested to be included in the legal letter for the aggregated cases 
(see FAM sections 1002 B and 1002 C). Second, all cases not included in 
the legal letter individually or as part of a group of similar cases 
should be aggregated. A higher materiality level may be used for such 
an aggregation; however, this higher materiality level should be set 
sufficiently low that the cases not included in the legal letter would 
not be material to the financial statements taken as a whole when 
aggregated with the other items listed in the previous paragraph. 

.19: 
Where the entity engages more than one legal counsel, the auditor 
should exercise caution so that matters considered not material 
individually would not, when aggregated, exceed the materiality limit. 
In addition, when separate legal representation letters are issued on 
individual components/bureaus of a consolidated entity because of 
individual component audits, the auditor may determine materiality 
levels for each component/bureau. 

Legal Counsels from Whom Information Should Be Requested:

.20: 
Most federal agencies have a general counsel who has primary 
responsibility for and knowledge about the entity's litigation, claims, 
and assessments. The auditor should request entity management to send a 
legal letter request to the general counsel. In addition, the auditor 
should ask the management and/or general counsel whether the entity 
used outside legal counsel whose engagement may be limited to 
particular matters (e.g., specific litigation). 

.21: 
In the federal government, the main legal counsel outside of the entity 
is the Department of Justice. [Footnote 5] The entity's management, its 
legal counsel, or the auditor may consult with Justice as well as other 
outside legal counsel to assure completeness and accuracy of the 
presentation of matters related to litigation, claims, and assessments. 
Such consultation may include requesting a list of pending litigation, 
claims, and assessments from Justice or other outside legal counsel, or 
discussion of specific cases. 

.22: 
The legal response should cover all litigation, claims, and assessments 
pertaining to the federal reporting entity, including matters handled 
by Justice and other outside legal counsel on behalf of the entity. If 
the general counsel has overall responsibility for handling and 
evaluating litigation, claims, and assessments, his or her evaluation 
and responses ordinarily would be considered adequate. However, 
evidential matter obtained from inside legal counsel is not a 
substitute for information that outside legal counsel refuses to 
furnish to the auditor. 

.23: 
Where there is no general counsel and management has not consulted 
legal counsel, the auditor should obtain a written representation from 
management that legal counsel has not been consulted. Such 
representation may be incorporated as an item in the management 
representation letter. (See FAM sections 550 and 1001.) (An example 
item is: "We are not aware of any pending or threatened litigation, 
claims, or assessments or unasserted claims or assessments that are 
required to be accrued or disclosed in the financial statements in 
accordance with SFFAS No. 5. We have not consulted legal counsel 
concerning litigation, claims, or assessments. "):

Evaluation of Responses:

.24: 
Written responses from legal counsel will vary considerably in the 
scope of information provided and in the opinion expressed. In 
preparing the responses, legal counsels should consider the guidance 
contained in the American Bar Association's Statement of Policy 
Regarding Lawyers' Responses to Auditors' Requests for Information (ABA 
Policy Statement) (included in its entirety in AU 337 C). If legal 
counsel does not follow the ABA Policy Statement in responding to the 
auditor, the legal counsel's response nevertheless should meet the 
requirements of AU 337. 

.25: 
The response should cover all components included in the financial 
statements being audited. Legal counsel generally should indicate the 
disposition of cases included in the prior year's letter that are no 
longer contingencies. 

.26: 
The auditor should evaluate each response in terms of sufficiency as 
evidence and consider (a) the possible limitations on the scope of 
legal counsel's responses and (b) the lack of sufficient opinion on the 
resolution of a case. AU 9337 provides guidance in evaluating legal 
counsel's responses. The auditor also should consider the legal 
counsel's response in light of any other information that comes to the 
auditor's attention. 

Possible Limitations on the Scope of Legal Counsel's Responses:

.27: 
When legal counsel limits his/her responses, the auditor should 
determine whether the limitation affects the auditor's report. A legal 
counsel may appropriately limit responses to certain matters; for 
example, to matters that (a) the legal counsel has given substantive 
attention to in the form of legal consultation or representation and 
(b) are considered individually or collectively material to the 
financial statements, provided the entity and the auditor have reached 
an understanding on materiality levels. These limitations are 
acceptable and not limitations on the scope of the audit. 

.28: 
The following are examples of limitations on legal counsel's responses 
that are not acceptable to the auditor and that would ordinarily result 
in a scope limitation:

a. Legal counsel refuses to furnish the requested information. When 
legal counsel refuses to furnish the information requested in the legal 
letter request, the auditor should consider this matter as a scope 
limitation sufficient to preclude an unqualified opinion. 

b. 
Legal counsel excludes matters requested. The legal counsel's responses 
may not address all information requested. The auditor should compare 
legal counsel's response with the legal letter request and determine 
whether legal counsel has addressed all the information requested. If 
legal counsel excluded any of the requested matters, the auditor should 
obtain responses for those matters from legal counsel. If the auditor 
is unable to obtain all the information needed, the auditor should 
consider this a scope limitation that could be sufficient to preclude 
an unqualified opinion. 

c. 
Legal counsel indicates that certain information is being withheld due 
to attorney-client privilege. Under the American Bar Association (ABA) 
Code of Professional Responsibility, legal counsel is required to 
preserve the confidences and secrets of the client. Legal counsel may 
disclose confidences to the auditor only with the consent of the 
client. If the legal letter request is prepared in accordance with AU 
337, the auditor should expect that legal counsel would be responsive; 
otherwise the scope of the audit would be restricted. (On the other 
hand, explanatory language in the legal letter request or in legal 
counsel's response emphasizing that management or legal counsel does 
not intend to waive attorney-client privilege or attorney work-product 
privilege does not result in a scope limitation.):

Lack of Sufficient Opinion on the Resolution of a Case:

.29: 
The following are examples of the legal counsel's responses that lack 
sufficient opinion on the resolution of a case. 

a. 
Uncertainties. A legal counsel may be unable to respond concerning the 
likelihood of an unfavorable outcome of litigation, claims, and 
assessments or the amount or range of potential loss, because of 
inherent uncertainties. In these circumstances, the auditor ordinarily 
will conclude that the financial statements are affected by an 
uncertainty concerning the outcome of a future event, which is not 
susceptible to reasonable estimation. The auditor should follow the 
guidance in FAM section 580 for reporting on uncertainties. 

b. Unclear responses. Legal counsels sometimes use general terms to 
indicate their evaluation of the outcome of a case. The ABA Policy 
Statement states that legal counsel may, in the appropriate 
circumstances, communicate to the auditor his/her view that an 
unfavorable outcome is "probable" or "remote. " The legal letter 
responses may include phrases that mean remote or probable. The phrases 
below are examples of opinions that provide sufficient clarity that the 
likelihood of an unfavorable outcome is remote:

* "We are of the opinion that this action will not result in any 
liability to the entity. ":

* "We believe that the plaintiff's case against the entity is without 
merit. ":

The following are examples of opinions that indicate significant 
uncertainty as to whether the entity will prevail:

* "In our opinion, the entity has a substantial chance of prevailing in 
this action. " (A "substantial chance," a "reasonable opportunity," and 
similar terms indicate more uncertainty than an opinion that the entity 
will prevail.):

* "It is our opinion that the entity will be able to assert meritorious 
defenses to this action. " (The term "meritorious defenses" indicates 
that the court will not summarily dismiss the entity's defenses; it 
does not indicate legal counsel's opinion that the entity will 
prevail.):

.30: 
To avoid unclear and incomplete responses, the auditor generally should 
ask management to request legal counsel to use Justice's standard forms 
to describe legal contingencies (see pages 1002 C-4 to 6 for examples 
of these forms). When legal counsel does not indicate whether the 
unfavorable outcome is probable or remote, management and the auditor 
should conclude that the outcome is reasonably possible and the case 
should be considered for disclosure. (Management, with legal counsel's 
advice, determines whether cases are probable, reasonably possible, or 
remote, to decide whether they should be recognized as liabilities and/
or disclosed in the notes to the financial statements.):

.31: 
If the auditor is not certain about the legal counsel's evaluation, the 
auditor should discuss the matters with the legal counsel and entity 
management (and document the oral discussion) and/or obtain written 
clarification in a follow-up letter. Sometimes legal counsel may give a 
clearer indication of likelihood orally. If legal counsel is unable to 
give a clear evaluation of the likelihood of an unfavorable outcome, 
management should disclose the uncertainty and the auditor should 
consider the uncertainty's effect on the audit report. 

Example Legal Letter Request:

.32: 
The legal letter request, which the auditor may assist management to 
draft, should be on the audited entity's letterhead, signed by the 
Chief Financial Officer (CFO), or equivalent, and request a reply 
directly to the auditor and a copy to management by specified due 
dates. FAM section 1002 B shows an example legal letter request that 
includes requests for interim and updated responses from legal counsel 
and matters that should be covered in the letter. 

Example Legal Counsel's Responses and Management's Schedule:

.33: 
The General Counsel should respond on General Counsel letterhead to the 
auditor with a copy to management by the agreed-upon due dates. The 
response should indicate that it is provided for the auditor's use in 
connection with the audit. 

.34: 
FAM section 1002 C shows an example of a legal counsel response, 
including the legal representation letter and Justice's legal 
contingency standard forms for each case or group of cases, 
respectively. Justice's forms (pages 1002 C-4 to 6) are on Justice's 
website: http://www. usdoj. gov/civil/forms/forms. htm. 

.35: 
FAM section 1002 D shows an example of management's schedule that 
documents how the information contained in the legal counsel's 
responses was considered in preparing the financial statements. 
Management should include each case discussed in the legal letter and 
indicate (1) the amount accrued for probable cases and (2) note 
disclosure for reasonably possible cases, probable cases where the 
amount cannot be estimated, and probable cases where a range of amounts 
above the accrued amount is estimated. The electronic templates for FAM 
sections 1002 C (pages 1002 C-1 to 3) and 1002 D are on OMB's website: 
http://www. whitehouse. gov/omb/bulletins/index. html. 

PRACTICE AIDS:

.36: The following practice aids are appended:

Section 1002 A - Example Audit Procedures;

Section 1002 B - Example Legal Letter Request;

Section 1002 C - Example Legal Representation Letter, including 
Justice's Example Legal Contingencies Forms; and:

Section 1002 D - Example Management Summary Schedule. 

[End of section]

1002 A - EXAMPLE AUDIT PROCEDURES FOR INQUIRIES OF LEGAL COUNSEL: 

Entity:

Period of financial statements:

Job code:

Example Audit Procedures:

I. Testing Procedures: 

1.  Ask management about the entity's policies and 
procedures for identifying, evaluating, and accounting for litigation, 
claims, and assessment. 

2. Obtain from management a description and evaluation of litigation, 
claims, and assessments existing as of the balance sheet date and 
through the date of management's response (which should be near the end 
of fieldwork). (This may instead be obtained from the entity's legal 
counsel.). 

3. 
To determine whether an outside legal counsel is performing services 
for the entity, inquire of management whether outside legal counsel has 
been used by the entity and matters handled. Ask management for a list 
of pending litigation, claims, and assessments from the Department of 
Justice and/or examine correspondence and invoices from other outside 
legal counsel (e.g., for legal fees), if any. 

4. 
Ask whether the entity has changed its general counsel or outside legal 
counsel or the general counsel or outside legal counsel has resigned or 
has indicated an intention to resign. If so, determine if there are 
matters that may affect the financial statements. For example, in 
appropriate circumstances, a legal counsel may be required by the ABA 
Code of Professional Responsibility to resign the engagement if the 
legal counsel's advice concerning disclosures is disregarded by the 
entity. 

5. To identify litigation, claims, and assessments read minutes of 
management meetings, contracts, loan agreements, leases, and 
correspondence from other government entities and discuss pertinent 
items with management. 

6. If information comes to the auditor's attention that may indicate a 
potential contingency with respect to litigation, claims, or 
assessments that may require adjustment to or disclosure in the 
financial statements, discuss with the entity its possible need to 
consult legal counsel. Depending on the severity of the matter, refusal 
by the entity to consult legal counsel in those circumstances may 
result in a scope limitation. Consider the effect of such a limitation 
on the auditor's report. 

7. 
Request entity management to send a legal letter request to the general 
counsel asking counsel to respond directly to the auditor. (Obtain a 
copy of the legal letter request.) Consider whether to also request 
legal letters from any outside legal counsel. The legal letter should 
cover litigation, claims, and assessments pertaining to the reporting 
entity, including matters handled by the Department of Justice or other 
outside legal counsel. (See Sections 1002 B for an example legal letter 
request.) Coordinate with management and legal counsel to; 

* determine 
the timing of legal letter requests and responses and related 
management's summary/schedules of information contained in legal 
responses and; 

* determine a materiality level to be included in the 
legal representation letter. 

8. 
Read the legal letter responses and management's schedules to identify 
litigation, claims, and assessments. 

9. 
Compare the description and evaluation of the current year's legal 
letter responses to the prior year's audit documentation. If this 
comparison indicates that certain legal matters in the prior year are 
no longer included, discuss these matters with management or legal 
counsel to obtain an understanding of the reasons for the changes. 


10. 
Determine whether the information in the legal representation letter is 
consistent with management's schedule summarizing the information in 
the letter and related supporting documentation. 

11. 
Discuss with legal counsel if the information obtained is not complete, 
clear, or consistent. 

12. 
Evaluate legal counsel's responses and determine the effects of the 
responses on liabilities and related note disclosures in the financial 
statements and on the auditor's report. 

13. 
If a response date is substantially in advance of the audit report 
date, for example, earlier than 2 weeks prior to date of auditors' 
report, obtain a written or oral update response. (The longer the 
period between the legal letter and the audit report date, the more 
important a written update becomes.). 

II. Reporting Procedures: 

Obtain a representation from management in 
the management representation letter (see FAM sections 550 and 1001) 
that the entity has disclosed all unasserted claims that legal counsel 
has advised are probable of assertion that, if asserted, would have at 
least a reasonable possibility of an unfavorable outcome and must be 
disclosed. 

1. Discuss the description and evaluation of litigation, 
claims, and assessments obtained with management to determine if, 
subsequent to the date of legal counsel's response, there have been any 
changes in status of the matters, changes in management's evaluation of 
the outcome, or additional matters to be considered. 

2. 
If there are significant changes in the status of the matters or new 
matters, obtain a written confirmation or updated response from legal 
counsel. 

3. Have management include in the management representation letter 
representations related to contingencies and determine if they are 
appropriately accrued and disclosed as required by SFFAS No. 5, as 
amended. If management has not consulted legal counsel, obtain a 
written representation from management that legal counsel has not been 
consulted. This representation may be incorporated in the management 
representation letter (see FAM sections 550 and 1001). 

4. Read the entity's financial statements and notes and: 

a. consider the 
adequacy of financial statement disclosure for contingencies with 
respect to litigation, claims, and assessments. 

b. determine if the financial statement disclosures for contingencies 
with respect to litigation, claims, and assessments are prepared in 
accordance with the OMB guidance on form and content of agency 
financial statements; and. 

c. 
for federal entities involved in litigation for which the Judgment Fund 
is a likely source of judgment or settlement, determine if a note to 
the financial statements discusses the Judgment Fund's role in the 
payment of a possible loss, as required by FASAB Interpretation No. 2, 
Accounting for Treasury Judgment Fund Transactions. 

5. Document conclusions reached concerning the accounting for and 
disclosure of litigation, claims, and assessments, determine if 
adjustments are necessary, and consider whether modification of the 
auditor's report is appropriate (see FAM section 580). 

[End of section]

1002 B - EXAMPLE LEGAL LETTER REQUEST: 

[Audited Entity Letterhead]

Date: [date]

To: General Counsel:

From: Chief Financial Officer [signed]

Subject: [Auditor's] Audits of the Fiscal Years 20X1 and 20X0 
Financial Statements:

Pursuant to 31 U.S.C.3515, [Auditor name] is performing audits of the 
financial statements of [entity] as of and for the fiscal years ended 
September 30, 20X1, and 20X0. In performing audits of government 
entities, auditors comply with Government Auditing Standards, issued by 
the Comptroller General of the United States (the "yellow book"). For 
financial statement audits, Government Auditing Standards incorporate 
the fieldwork and reporting standards of the American Institute of 
Certified Public Accountants (AICPA) and the Statements on Auditing 
Standards that interpret them. Consistent with the procedures contained 
in AU 337 of the AICPA's Codification of Statements on Auditing 
Standards, [Auditor] has inquired about litigation, claims, and 
assessments to obtain evidence as to the financial accounting and 
reporting of such matters with respect to the financial statements. The 
purpose of this letter is to request your assistance in responding to 
that inquiry. The American Bar Association Statement of Policy 
Regarding Lawyers' Responses to Auditors' Request for Information 
(December 1975) provides relevant guidance for the lawyer 's response 
to the Auditor's request. 

In accordance with Statement of Federal Financial Accounting Standards 
(SFFAS) Number 5, Accounting for Liabilities of the Federal Government, 
as amended by SFFAS Number 12, and Interpretation Number 2 of SFFAS 
Numbers 4 and 5, [entity] reports certain information in its financial 
statements and notes concerning contingent liabilities for litigation, 
claims, and assessments. We request that you provide [Auditor] (with a 
copy to me) with information on matters with respect to which you have 
been engaged and to which you have devoted substantive attention on 
behalf of the [entity] in the form of legal consultation or 
representation. You should furnish an interim response by [agreed-upon 
date], including matters that existed as of September 30, 20X1, and 
from that date through at least [interim date]. You should furnish an 
updated response by [agreed-upon date], that is effective no earlier 
than [agreed-upon date], that includes any changes from the interim 
response or furnish a statement that there are no changes. 

Include any cases with respect to which you have been engaged and to 
which you have devoted substantive attention on behalf of the [entity] 
in the form of legal consultation or representation, even those cases 
for which you believe the Judgment Fund or some financing source other 
than [entity]'s budgetary resources will pay any potential loss. Under 
generally accepted accounting principles, these amounts should be 
included as liabilities or disclosure items in the [entity]'s financial 
statements. Cases similar in nature should be aggregated where 
appropriate. It would be helpful if you could list the matters in order 
of the amount of potential loss, starting with the largest. 

Pending or Threatened Litigation (excluding unasserted claims):

We and [Auditor] have determined that any matters for which the amount 
of potential loss exceeds $XX, individually or in the aggregate, could 
be material to the financial statements. Please provide to [Auditor] 
the information described below about pending or threatened litigation 
where the amount of potential loss exceeds $XX:

1. The nature of the matter. Include a description of the case or cases 
and amount claimed, if specified. 

2. The progress of the case to date. 

3. The government's response or planned response (for example, to 
contest the case vigorously or to seek an out-of-court settlement). 

4. An evaluation of the likelihood of unfavorable outcome. Please 
categorize likelihood as probable (an unfavorable outcome is likely to 
occur), reasonably possible (the chance of an unfavorable outcome is 
less than probable but more than remote), or remote (the chance of an 
unfavorable outcome is slight). 

5. An estimate of the amount or range of potential loss, if one can be 
made, for losses considered to be probable or reasonably possible. 

6. The name of the [entity]'s legal counsel handling the case and 
names of any outside legal counsel/other lawyers representing or 
advising the government in the matter (Department of Justice or 
outside law firms). 

Unasserted Claims and Assessments:

[If legal counsel is a part of management use this paragraph. ] Please 
provide the following information for all unasserted claims and 
assessments that you consider to be probable of assertion and which, if 
asserted, would have at least a reasonable possibility (more that 
remote) of an unfavorable outcome in an amount over $XX, individually 
or in the aggregate, involving matters to which you have devoted 
substantive attention. 

[If the legal letter request will be sent to a legal counsel that is 
not part of management, such as an outside legal counsel, use this 
paragraph. ] We have provided an attachment to this request that lists 
the unasserted claims and assessments that we believe are probable of 
assertion and which, if asserted, would have at least a reasonable 
possibility (more than remote) of an unfavorable outcome in an amount 
over $XX, individually or in the aggregate, involving matters to which 
you have devoted substantive attention. Please provide the following 
information for each matter and for any additional matters that you 
believe meet these criteria. 

1. A description of the nature of the matter. 

2. The government's planned response if the claim is asserted. 

3. An evaluation of the likelihooD of an unfavorable outcome. 
(Categorize likelihood as probable (likely to occur) or reasonably 
possible (less than probable but more than remote).):

4. An estimate of the amount or range of potential loss, if one can be 
made. 

Please specifically confirm to [Auditor] that our understanding of the 
following is correct: Whenever, in the course of performing legal 
services for us, with respect to a matter recognized to involve an 
unasserted possible claim or assessment that may call for financial 
statement disclosure, if you have formed a professional conclusion that 
we should disclose or consider disclosure concerning such possible 
claim or assessment, as a matter of professional responsibility to us, 
you will (1) advise us of your conclusion and (2) consult with us 
concerning the question of such disclosure and the applicable 
requirements of SFFAS No. 5, as amended. 

Please separately identify any cases with respect to which you have 
been engaged and to which you have devoted substantive attention on 
behalf of the [entity] in the form of legal consultation or 
representation for which you believe another government entity will be 
responsible for any potential liability. 

Please specifically identify the nature of and reasons for any 
limitations on your response to this request. 

Please address your reply to [Auditor], and contact him/her at (phone 
number), when your reply is available for pick up, and send a copy of 
your reply to me. Do not hesitate to contact me or [Auditor] if you 
have any questions about this request. 

[End of section]

1002 C - EXAMPLE LEGAL REPRESENTATION LETTER: 

[General Counsel Letterhead]

[Date]

[Auditor]

[Title]

[Agency or Firm Name]

[City]

Subject: Legal Response in Connection with the Fiscal Years 20X1 and 
20X0 Financial Statement Audits of [entity name]

Dear [Auditor]:

As General Counsel of [entity], I am writing in response to the legal 
letter request from the [entity]'s Chief Financial Officer (CFO) dated 
[date], in connection with the audit of [entity]'s financial statements 
as of and for the fiscal years ended September 30, 20X1 and 20X0. [In 
an interim response, add "I will, as further requested by the CFO, 
provide an updated response by [date]. "]

I call your attention to the fact that as General Counsel for [entity], 
I have general supervision of [entity]'s legal affairs. [If the general 
legal supervisory responsibilities of the person signing the letter are 
limited, set forth a clear description of those legal matters over 
which such person exercises general supervision, indicating exceptions 
to such supervision and situations where primary reliance should be 
placed on other sources. ] In such capacity, I have reviewed litigation 
and claims threatened or asserted involving [entity] and have consulted 
with outside legal counsel about them when I have deemed appropriate. 

Subject to the foregoing and to the last paragraph of this letter, I 
advise you that since [insert date of beginning of fiscal year period 
under audit] neither I, nor any of the lawyers over whom I exercise 
general legal supervision, have given substantive attention to, or 
represented [entity] in connection with loss contingencies [over the 
amount of (state materiality level agreed to with auditor and stated in 
request letter)] coming within the scope of clause (a) of Paragraph 5 
of the Statement of Policy referred to in the last paragraph of this 
letter, except as follows:

[Describe litigation and claims that fit the foregoing criteria as 
follows (it is recommended that general counsels use the attached 
Department of Justice forms (one for pending or threatened litigation, 
another for unasserted claims) to describe the cases):][Footnote 6]

Pending or Threatened Litigation (excluding unasserted claims):

1. Nature of the matter (include a description of the case or cases and 
amount claimed, if specified). 

2. Progress of the case to date. 

3. Current or intended response. 

4. Evaluation of the likelihood of an unfavorable outcome (categorize 
likelihood as probable, reasonably possible, or remote). 

5. Estimated amount or range of potential loss, if determinable, for 
losses considered to be probable or reasonably possible. 

6. Name of [entity]'s legal counsel handling the case and names of any 
outside legal counsel representing or advising the government in the 
matter. 

With respect to matters that have been specifically identified as 
contemplated by clauses (b) or (c) of paragraph 5 of the ABA Statement 
of Policy, I advise you, subject to the last paragraph of this letter, 
as follows:

Unasserted Claims and Assessments (considered to be probable of 
assertion and which, if asserted, would have at least a reasonable 
possibility of an unfavorable outcome):

1. Nature of the matter. 

2. Intended response if claim would be asserted. 

3. Evaluation of the likelihood of an unfavorable outcome. (Categorize 
likelihood as probable or reasonably possible.):

4. Estimated amount or range of potential loss, if determinable. 

The information set forth herein is [(as of the date of this letter) or 
(as of (insert date), the date on which we commenced our internal 
review procedures for purposes of preparing this response)], except as 
otherwise noted. [If an interim response, add "Upon submission of the 
updated response, which is due on [date],"] I disclaim any undertaking 
to advise you of changes that, thereafter, may be brought to my 
attention or the attention of our lawyers over whom I exercise general 
legal supervision. 

This response is limited by, and in accordance with, the ABA Statement 
of Policy Regarding Lawyers' Responses to Auditors' Requests for 
Information (December 1975); without limiting the generality of the 
foregoing, the limitations set forth in such statement on the scope and 
use of this response (Paragraphs 2 and 7) are specifically incorporated 
herein by reference, and any description herein of any "loss 
contingencies" is qualified in its entirety by Paragraph 5 of the 
statement and the accompanying commentary (which is an integral part of 
the statement). Consistent with the last sentence of Paragraph 6 of the 
ABA Statement of Policy, this will confirm as correct [entity]'s 
understanding that whenever, in the course of performing legal services 
for [entity] with respect to a matter recognized to involve an 
unasserted possible claim or assessment that may call for financial 
statement disclosure, I have formed a professional conclusion that the 
entity must disclose or consider disclosure concerning such possible 
claim or assessment, I, as a matter of professional responsibility to 
[entity], will so advise [entity] and will consult with [entity] 
concerning the question of such disclosure and the applicable 
requirements of Statement of Federal Financial Accounting Standards 
(SFFAS) Number 5, Accounting for Liabilities of the Federal Government, 
as amended by SFFAS Number 12, and Interpretation Number 2 of SFFAS 
Numbers 4 and 5. [Describe any other or additional limitation as 
indicated by Paragraph 4 of the statement. ]

Sincerely yours,

[Name of General Counsel]

[Title]

cc: Chief Financial Officer:



SUGGESTED DEPARTMENT OF JUSTICE FORM: PENDING OR THREATENED 
LITIGATION. 

AGENCY/COMPONENT:

Amount of potential loss exceeds the agency/component materiality 
threshold of: 

1. Case name. (Include case citation, case number, and other names by 
which the case or group of cases is commonly known.): 

2. Nature of matter. (Include a description of the case or cases and 
amount claimed, if specified.): 

3. Progress of the case: 

4. The government's response or planned response. (For example, to 
contest the case vigorously or to seek an out-of-court settlement.):

5. An evaluation of the likelihood of unfavorable outcome. (Choose 
one.):

PROBABLE - An unfavorable outcome is likely to occur:

REASONABLY POSSIBLE - the chance of an unfavorable outcome is less 
than probable but more than remote: 

REMOTE - the chance of an unfavorable outcome is slight:

6. An estimate of the amount or range of potential loss (if one can be 
made, for losses considered to be probable or reasonably possible):

7. The name and phone number of the government attorney handling the 
case (and names and phone numbers of any outside legal counsel/other 
lawyers representing or advising the government in the matter.):

8. The sequence number (based on the total number of pending or 
threatened cases in litigation, claims, and assessments the agency/
component is submitting. e.g., Number of ) (#) (total):

SUGGESTED DEPARTMENT OF JUSTICE FORM: 

UNASSERTED CLAIMS AND ASSESSMENTS: 

[See PDF for image]

[End of figure]

[End of section]

1002 D - Example Management Summary Schedule: 

[See PDF for image]

[End of figure]

[End of section]

1003 - FINANCIAL STATEMENT AUDIT COMPLETION CHECKLIST: 

Entity: 

Job Code: 

Principal Report: 

Other Reports (including management letters and testimonies): 

INSTRUCTIONS:

.01: 
This checklist is a tool to help auditors of financial statements 
comply with generally accepted government auditing standards (GAGAS) 
and with OMB audit guidance. This checklist should be completed before 
the report is issued and should be prepared by the audit manager and 
reviewed by the assistant director and audit director. If the audit is 
conducted at multiple sites, the site supervisor may complete parts of 
the checklist for each site (with the audit manager completing an 
overall checklist). While parts of the checklist are useful in audit 
planning, no specific signatures are required on the checklist in the 
planning phase. 

.02: 
The detailed questions in this checklist are to be answered "N/A" (not 
applicable), "Yes," or "No. " Check N/A when the item does not exist or 
when the item exists but is judged to be not material. It is not 
necessary to create additional documentation to support the Yes 
answers, but a column is provided to give a workpaper reference ("W/
P"). All No answers should be discussed at the end of this checklist. 
Because the checklist is designed for the wide range of financial 
statement audits, there will be many "not applicable" 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. 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; 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 consider their reporting style and quality 
controls. 

.04: 
As noted in FAM 650, auditors whose work GAO and the IGs use may 
complete this checklist and the "Checklist for Reports Prepared under 
the CFO Act. " Where this has been done, GAO or IG auditors should 
review the checklists prepared by the other auditors. 

.05: 
The FAM includes a separate "Checklist for Reports Prepared under the 
CFO Act" (section 1004) that covers accounting, financial reporting, 
and disclosure issues and should be completed for all entities 
reporting under generally accepted accounting principles promulgated by 
FASAB. When the report covers financial statements prepared using 
generally accepted accounting principles promulgated by FASB, the 
auditor should prepare the appropriate AICPA disclosure checklist. 

.06: 
GAO auditors should prepare the "GAO workpaper set" that provides 
guidance on workpapers. IG and other auditors may develop similar 
tools. 

.07: 
For GAO's financial audits, a second partner review should be performed 
and the Chief Accountant should read the report. These reviews by the 
second partner and/or Chief Accountant are documented on the last two 
pages of this checklist. IG auditors and other auditors should consider 
the need for similar reviews. 

CONTENTS:

Section:

I. Planning and Concluding the Audit:

II. Key Audit Areas:

III. Consultation:

IV. Report:

V. GAO's Report Considerations:

VI. GAO's Quality Control:

VII. Explanation of "No" Answers and Other Comments:

VIII. Conclusions:

IX. Second Partner's concurrence:

X. Chief Accountant's concurrence:

References:

AICPA Professional Standards (vol.1): AU:

GAO/PCIE Financial Audit Manual: FAM:

Government Auditing Standards, as amended: GAGAS:

section I: Planning and Concluding the Audit:

1. Do the workpapers document that the audit team has established an 
understanding with the client as to the objectives of the work, 
management's responsibilities, auditors' responsibilities, and 
limitations of the work? (FAM 280); 


2. Were entrance conferences held?

3. Does the entity profile (or equivalent) document an understanding 
of the entity sufficient to plan the audit? (FAM 290.03); 


4. Do the workpapers contain an adequate general risk analysis or the 
equivalent? (FAM 290.04);

5. Did the audit team adequately perform and document the following 
planning steps? (FAM 290.04); 

a. Perform preliminary analytical procedures (FAM 225); 

b. Determine planning, design, and test materiality (FAM 230); 

c. Identify significant laws and regulations (FAM 245); 

d. Identify relevant budget restrictions (FAM 250); 

e. Understand the budget formulation process (FAM 260.51); 

f. 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); 

g. Assess the risk of fraud (FAM 260); 

h. Design the audit to achieve 
an acceptable level of audit assurance that the financial statements 
are not materially misstated (GAO uses 95 percent) (FAM 260.04); 

i. Consider the effects of information technology, including service 
centers (FAM 220, 260.17, 260.41-42, and 270); 

j. Assess the FMFIA process (FAM 260.43); 

k. Consider operations controls to be tested (FAM 275); 

l. Understand performance measures controls (FAM 275); 

m. Plan other procedures (representation letters, related party 
transactions, sensitive payments) (FAM 280); 

n. Consider locations to be visited (FAM 285); 

o. Plan procedures to test whether the entity's financial management 
systems substantially comply with the requirements of FFMIA 
(FAM 350.20); 

p. Consider staffing requirements; 

q. Consider timing of procedures and milestones (FAM 295 D); 

r. Consider assistance from entity personnel; 

6. Does the general risk analysis or the equivalent reflect 
appropriate consideration of findings and recommendations from previous 
audits that could affect the current audit objectives? (GAGAS, par. 
4.10);

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, 310.05, 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, 330.09); 

9. If the audit team used the work of others (CPA firms, IGs, internal 
auditors, or specialists), did the audit team meet the requirements of 
FAM 650?

10. Did the audit team perform overall analytical procedures, 
including documentation of the following?; 

a. Expectations; 

b. Data/sources; 

c. Parameters; 

d. Explanations/corroboration; 

e. Conclusions (FAM 590.04); 

11. Do the workpapers indicate that the audit team properly performed 
the following procedures in the reporting phase of the audit? (FAM 
590.01); 

a. Evaluate misstatements (FAM 540); 

b. Bring all misstatements to the attention of entity management (FAM 
540.07); 

c. Obtain attorneys' representations (FAM 550.02); 

d. Review subsequent events (FAM 550.04 and 1005); 

e. Obtain management representations (FAM 550.08 and 1001); 

f. Identify and test related party transactions (FAM 550.12 and 1006); 

g. Review the consistency of other information accompanying the 
financial statements (FAM 580.76); 

12. Does the audit summary memorandum or equivalent properly summarize 
or refer to workpapers addressing the following? (FAM 590.02-.03); 

a. Changes from original risk assessments; 

b. Additional fraud risk factors or other conditions identified during 
the audit calling for an additional response and the additional 
response; 

c. The basis for conclusions on significant auditing, accounting, and 
reporting issues; 

d. Conclusions on adequacy of procedures; 

e. Unadjusted misstatements; 

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 principal statements; 

13. Do the workpapers document that the following occurred?; 

a. Deviations from the "should" procedures in the FAM and the basis 
therefor were approved by the assistant director with copies of the 
documentation sent to the audit director and the Reviewer; 

b. Deviations from the "must" procedures in the FAM were approved by 
the Reviewer (FAM 100.27); 

Section II: Key Audit Areas: 

Answer these questions for each key audit area or cycle. Indicate the 
key audit areas and cycles these questions apply to: 

1. Did the audit 
team prepare the following documentation summarizing considerations in 
planning and performing the work in the key audit areas and cycles?; 

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 290.05); 

b. Account Risk Analysis or an equivalent (FAM 290.06); 

c. Cycle Memorandum and/or flowchart or equivalents (FAM 390.04-.05); 

d. Specific Control Evaluation or an equivalent (FAM 390.06); 

e. Written audit program (AU 311.05); 

2. If conditions changed during the course of the audit, was the audit 
program modified as appropriate in the circumstances? (AU 311.05); 

3. When the audit team performed sampling, did it properly determine 
and document the following?; 

a. The method used in relation to test objectives; 

b. Sample size and the method of determining it; 

c. Tests performed; 

d. Results (misstatements and deviations found); 

e. Evaluation (including projection to the population); 

f. Conclusion (FAM 490.06); 

4. When the audit team performed substantive analytical procedures, 
did it properly document the following?; 

a. Expectations and the method used to develop them; 

b. Data sources/reliability; 

c. Limit/criteria; 

d. Client explanations and corroborating evidence; 

e. Additional steps needed; 

f. Conclusions (FAM 490.06); 

5. When the audit team performed interim testing, did it do the 
following?; 

a. Test the rollforward period; 

b. Properly document: 

i. The basis for using interim testing; 

ii. The procedures performed; 


iii. The effects of any misstatements found (FAM 495C.06); 

6. Did the audit team evaluate the reasonableness of significant 
accounting estimates made by management? (AU 342); 

7. Were known and likely misstatements identified in the testing of 
the key area carried forward to the summary of possible adjustments? 
(FAM 540.04)

8. Did an information systems auditor 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 350.09); 

9. Based on the inherent and control risk, did the audit team perform 
adequate substantive tests of the following? (If not a key area, check 
the N/A box.); 

Fund Balance with Treasury (FBWT); 

Consider these issues: 

* Did the audit team test the agency's year-end reconciliation 
of Fund Balances with Treasury to Treasury account ledgers and trial 
balance reports (Financial Management Service (FMS) Forms 6653, 6655)?;

 
* Did the audit team determine whether the auditee did the following?; 


a. Researched and resolved differences before making adjustments; 

b. Recorded any necessary adjustments in the agency's FBWT accounts; 

c. Reported the adjustments to Treasury; 

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 
agency during the year?; 

* Fund Balance with Treasury (continued); Did the audit team assess 
(at absolute value) the materiality of unreconciled differences, such 
as those reported on the Statement of Differences (FMS form 6652) and 
those included in budget clearing accounts (such as budget accounts 
F3875, F3878, F3879)? (GAO/AIMD-97-104R); 

Receivables; Consider these issues: 

* Where practical, were 
accounts receivable confirmed and appropriate follow-up steps taken, 
including second requests and alternate procedures? (AU 330.30-.31); 


* If substantive test 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); 

* If a significant number and amount of 
accounts receivable were not confirmed, were other appropriate auditing 
procedures performed? (AU 330.31-.32)

Inventories; Consider these issues: 

* Were physical inventories 
observed at all locations where material amounts were located? (AU 
331); 

* If perpetual inventory records are maintained, do the 
workpapers indicate that differences disclosed by the physical 
inventory (or cycle counts) are properly reflected in the financial 
statements? (AU 331); 

* 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); 

* Do the 
workpapers 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 331.09); 

* Were there adequate tests of the 
following?; 

a. Clerical accuracy of the inventory; 

b. Costing methods and substantiation of costs used in pricing all 
elements of the inventory; 

c. Cutoff; 

* Were analytical procedures used to test the overall valuation of 
inventories?

Investments; Consider these issues: 

* 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?; 

* Were securities either examined or confirmed? (AU 332.04)

Property, Plant, and Equipment; Consider these issues: 

* Was a summary schedule prepared (or obtained) to show beginning 
balances, changes during the period and ending balances for the 
following?; 

a. Property, plant, and equipment; 

b. Accumulated depreciation; 

* If samples were used to determine opening balances, were the 
samples appropriate?; 

* Did the audit team perform tests of completeness, such 
as by testing from disbursements to property records?; 

* Do the tests appear adequate and were proper conclusions drawn?;  

Liabilities; Consider these issues: 

* Did the audit team perform an adequate search for unrecorded 
liabilities?; 

*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?; 

Revenue and Expenses; Consider these issues: 

* 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); 

* Were significant variances and fluctuations from expectations 
explained? (AU 329); 

* Did the audit team consider the following?; 

a. The entity's revenue recognition policy; 

b. Unusual transactions; 

* Do tests appear adequate and were proper conclusions drawn?; 

Statement of Budgetary Resources; Consider these issues: 

* Were appropriate procedures applied, such as the following?; 

a. Understanding and testing the budget execution controls; 

b. Tests of the process of preparing the statement; 

c. Tests of undelivered orders; 

d. Review of reconciliation to the President's Budget

Section III: Consultation:  

1. Where warranted by the complexity or unusual nature of an issue 
(for example, issues where the FAM requires consultation, issues not 
discussed in FAM or professional standards, going concern, economic 
dependency, issues arising after report issuance), was there 
appropriate consultation with specialists, including the following?; 


* The Reviewer (FAM Appendix A); 

* The Statistician (FAM Appendix A); 

* The Office of General Counsel (FAM Appendix A); 

* The Technical Accounting and Auditing Expert? (FAM 100.25); 

2. Were significant consultations appropriately documented? (FAM 
100.24);

3. Were the persons consulted made aware of all relevant facts and 
circumstances?; 

Section IV: Report: 

1. Does the auditor's report include the following?; 

a. Introduction; 

b. Significant matters (if applicable); 

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); 

iv. Compliance with laws and regulations; 

v. Consistency of other information with financial statements; 

d. Objectives, scope, and methodology, including description of all 
instances where GAGAS and OMB audit guidance were not followed; 

e. Agency comments (FAM 580.04, 580. 81); 

2. Is the auditor's report appropriate as to the following?; 

a. Wording; 

b. Scope of work; 

c. Generally accepted accounting principles; 

d. Explanatory paragraphs; 

e. Opinion on financial statements; 

f. Conclusions on internal control; 

g. Conclusions on whether the entity's financial management systems 
substantially comply with the requirements of FFMIA; 

h. Reporting on compliance with laws and regulations (FAM 580); 

3. Is background material (purpose, authority, and functions of 
programs/activities) limited to what is necessary?; 

4. Is the auditor's report dated in conformity with professional 
standards? (AU 530) (FAM 1601); 

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 580.79); 

8. a. When illegal acts involve funds received from other governmental 
entities, did the audit team 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. 5.23); 


9. Does the auditor's report include the following?; 

a. Identification of which matters are reportable conditions and which 
of the reportable conditions are material weaknesses (GAGAS, par. 
5.27); 

b. Reference to a separate letter, if applicable, describing 
nonreportable conditions (GAGAS, par. 5.28); 

c. Presentation of fraud, illegal acts, and reportable noncompliance 
with laws and regulations (GAGAS, par. 5.18); 

10. When appropriate, did the audit team issue a separate report on 
fraud, abuse, or illegal acts or indications of such acts? (GAGAS, par 
5.21)

11. Did the report disclose the status of all known, but uncorrected, 
significant or material findings and recommendations from prior audits 
that affect current audit objectives? (GAGAS par. 4.10); 


12. Do the workpapers document a reasonable basis for the following?; 


a. The opinion about whether the financial statements and disclosures 
comply in all material respects with generally accepted accounting 
principles (FAM 560); 

b. The conclusions on internal control; 

c. The conclusions on whether the entity's financial management 
systems substantially comply with the requirements of FFMIA; 

d. The conclusions about compliance with laws and regulations; 

13. Do the workpapers document a reasonable basis for reported 
findings, including the following? (FAM 590.05-06); 

a. Internal control weaknesses; 

b. Instances of the entity's financial management systems lack of 
substantial compliance with the requirements of FFMIA; 

c. Instances of noncompliance with laws and regulations; 
 
14. Do the findings include (where appropriate) the following?; 

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); 

d. Effect (describe the result of the difference between the condition 
and criteria); 

15. Are recommendations and suggestions reasonable, doable, and cost-
effective?

16. Does the presentation of agency comments include the following?; 


a. Type of comments obtained (oral, written); 

b. Title of the most senior official(s) involved; 

c. Accurate characterization of general agreement or disagreement with 
the report; 

d. Description of the substance of the comments; 

e. Resolution of all substantive comments; 

Section V: GAO's Report Considerations: 

1. Overall, does the report have the following characteristics?; 

a. 
Professional (the work reflects an understanding of the issues, an 
awareness of the external environment, including sensitivity to 
relevant trends, and a practical approach to what can be done to deal 
with the problems noted); 

b. Accurate (presents information or 
findings accurately; contains no notable errors in logic or 
reasoning); 

c. Objective (presentation is fair and impartial; tone is constructive 
and objective); 

d. Fact-based (states information and findings 
completely, includes all necessary facts and/or explanations, 
distinguishes between fact and unproven or uncorroborated material, 
resolves conflicting evidence); 

e. Balanced (presents sound and 
logical evidence to support conclusions, does not use adjectives or 
adverbs to characterize evidence in a way that implies criticism or 
conclusions by innuendo, appropriately recognizes positive aspects of 
the programs or issues reviewed); 

f. Timely and useful (provides 
relevant and timely information); 

g. Clear and concise (presentation 
is clear, concise, and well organized; message is presented logically; 
writing style is adapted to the audience); 

Section VI: GAO's Quality Control: 

1. Was the report reviewed by the following?; 

a. Audit Director; 

b. Office of the General Counsel; 

c. Chief Accountant; 

d. Second Partner; 

2. Did the audit director review the following? (FAM 1301.17); 

a. General risk analysis or equivalent; 

b. Account risk analyses or equivalent for material areas with high 
combined risk; 

c. Memoranda on key accounting and auditing issues;

d. Summary memoranda for material areas with high or moderate combined 
risk; 

e. Management representation letter; 

f. Legal representation letter; 

g. Summary of 
unadjusted misstatements; 

h. Audit summary memorandum; 

i. Exit conference memorandum; 

j. Financial statements; 

k. GAO workpaper set (FAM 1301.17); 

3. Did the assistant director review the following? (FAM 1301.17); 

a. Entity profile or equivalent; 

b. General risk analysis or equivalent; 

c. Account risk analyses or equivalent; 

d. Initial audit programs; 

e. Lead schedules; 

f. Completed audit programs; 

g. Memoranda on key accounting and auditing issues; 

h. Summary memoranda; 


i. Checklist for reports prepared under the CFO Act (for statements 
using GAAP promulgated by FASAB); 

j. Financial reporting and 
disclosure checklist (for statements using GAAP promulgated by FASB); 


k. Management representation letter; 

l. Legal representation letter; 


m. Summary of unadjusted misstatements; 

n. Exit conference memorandum; 


o. Audit summary memorandum; 

p. Financial statements; 

q. GAO workpaper set (FAM 1301.17); 




4. Did the assistant director or audit manager determine that all 
significant review notes were resolved appropriately? (FAM 1301.24); 


5. Did an assistant director initial all workpaper bundle covers to 
indicate that all workpapers were sufficiently reviewed? (FAM 1301.05); 


6. Were review notes, superseded versions of workpapers, and draft 
reports (except the referenced draft and the draft sent to the agency 
for comment), including review notes and superseded versions in 
electronic form, placed in a separate folder to be retained until the 
report is issued (unless the audit director decides to retain them 
until the next audit)? (FAM 1301.24); 


7. Were review responsibilities communicated to all individuals on the 
assignment? (FAM 1301.19); 
 

8. Were workpapers prepared by an information systems auditor reviewed 
by an information systems auditor for technical content and by a member 
of the audit team to determine that related audit objectives were 
achieved? (FAM 1301.20); 
 



9. For areas that are both material and have high combined risk, did 
the audit director or assistant director perform secondary reviews of 
the workpapers? (FAM 1301.12); 
 

10. Were all workpapers prepared by the audit director or assistant 
directors read by audit managers or auditors in charge to determine 
their consistency with any related workpapers? (FAM 1301.15); 


11. If the workpapers 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 following pages are provided for comments on all "no" answers or to 
expand upon any of the "yes" answers. 

[See PDF for image]

[End of figure]

Section VIII: Conclusions: Based on your review and knowledge, do you 
believe the following?; Yes; No*. 

1. The audit team performed the engagement, in all material respects, 
in accordance with generally accepted government auditing standards 
(which include generally accepted auditing standards) and applicable 
OMB guidance or the auditor's report was appropriately modified; 


2. The financial statements conformed, in all material respects, with 
generally accepted accounting principles 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 
opinion on the financial statements; The auditor's conclusions on 
internal control; The auditor's conclusions on whether the entity's 
financial; management systems substantially comply with the 
requirements of FFMIA; The auditor's 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 completion of fieldwork:

Audit Manager Date:

Assistant Director Date:

Audit Director Date:

Section IX: Second Partner's Concurrence: 

Objective of second partner review: To objectively review 
significant auditing, accounting, and reporting matters and to 
conclude, based on all facts the second partner has knowledge of, that, 
except as discussed in the report, no matters were found that caused 
the second partner to believe that (1) the audit was not performed in 
accordance with GAGAS and OMB audit guidance (if applicable), (2) the 
financial statements are not, in all material respects, in accordance 
with generally accepted accounting principles, and (3) the report does 
not meet professional standards and GAO's policies and core values. 


Procedures: Before the report was issued, I performed the following 
procedures. Discussed significant auditing, accounting, and 
reporting issues with the Audit Director, Discussed the audit team's 
identification of high-risk balances and transactions and the audit of 
those balances and transactions, Reviewed documentation on the 
resolution of significant auditing, accounting, and reporting issues, 
including documentation of consultation with specialists such as the 
Chief Accountant, Statistician and IS professionals, Reviewed the 
summary of unadjusted misstatements, Read the financial statements and 
audit report, Confirmed with the Audit Director that there are no 
unresolved issues. 

Conclusion: Based on all the relevant facts of 
which I have knowledge, I found no matters, except as discussed in the 
report, that cause me to believe that (1) the audit was not performed 
in accordance with GAGAS and OMB audit guidance (if applicable), 
(2) the financial statements are not, in all material respects, in 
accordance with generally accepted accounting principles, and (3) the 
report is not in accordance with professional standards and GAO's 
policies and core values. 

Section X: Chief Accountant's Concurrence. 

When the Chief Accountant is not the second partner, the Chief 
Accountant should read the report. The Chief Accountant should then 
sign the conclusion below. Conclusion: Based on my reading of the 
report, I found no matters, except as discussed in the report, that 
cause me to believe that (1) the audit was not performed in accordance 
with GAGAS and OMB audit guidance (if applicable), (2) the financial 
statements are not, in all material respects, in accordance with 
generally accepted accounting principles, and (3) the report is not in 
accordance with professional standards and GAO policies and core 
values. 

[End of section]

Reporting:

1004 - Financial Reporting: Checklist for Reports Prepared Under the 
CFO Act:

Contents:

Abbreviations:

Sections:

I: Overview:

II: General Items:

III: Balance Sheet:

IV: Statement of Net Cost:

V: Statement of Changes in Net Position:

VI: Statement of Budgetary Resources:

VII: Statement of Financing:

VIII: Statement of Custodial Activity:

IX: Notes to Financial Statements (Significant Accounting Policies):

X: Supplementary Information:

Abbreviations:

AcSEC: Accounting Standards Executive Committee:

AICPA: American Institute of Certified Public Accountants:

CFO Act: Chief Financial Officers Act of 1990:

COTS: commercial-off-the-shelf software:

CSRS: Civil Service Retirement System:

FASAB: Federal Accounting Standards Advisory Board:

FASB: Financial Accounting Standards Board:

FERS: Federal Employees Retirement System:

FFMIA: Federal Financial Management Act:

FIFO: first-in, first-out:

FY: fiscal year:

GAAP: generally accepted accounting principles:

GDP: gross domestic product:

GPRA: Government Performance and Results Act of 1993:

HI: Hospital Insurance (Medicare Part A):

IMF: International Monetary Fund:

Imple. Guide: Implementation Guide:

IRS: Internal Revenue Service:

LIFO: last-in, first-out:

MD&A: Management Discussion and Analysis:

MRS: Military Retirement System:

NRV: net realizable value:

OASDI: Old Age, Survivors, and Disability Insurance (Social Security):

OMB: Office of Management and Budget:

OMB Bull.: OMB Bulletin:

OPEB: Other Postemployment Benefits:

ORB: Other Retirement Benefits:

PP&E: property, plant, and equipment:

RRB: Railroad Retirement Benefits:

RSSI: Required Supplementary Stewardship Information:

SFAS: Statement of Financial Accounting Standards:

SFFAC: Statements of Federal Financial Accounting Concepts:

SFFAS: Statements of Federal Financial Accounting Standards:

SGL: U.S. Government Standard General Ledger:

SMI: Supplementary Hospital Insurance (Medicare Part B):

SOP: Statement of Position:

UI: unemployment insurance:

UTF: Unemployment Trust Fund:

Section I Overview:

Introduction:

The Chief Financial Officers Act of 1990 and the Government Management 
and Reform Act of 1994 require, among other mandates, that agencies' 
chief financial officers submit annual reports to their agency heads 
and to the Office of Management and Budget (OMB). These annual reports 
should contain audited financial statements of their agencies. The 
financial statements are to be presented in accordance with the Federal 
Accounting Standards Advisory Board's (FASAB) approved statements and 
OMB Bulletin 97-01, Form and Content of Financial Statements, as 
revised. 

The checklist has been issued to assist agencies in preparing these 
statements and auditors in auditing them. Use of this checklist is not 
a requirement. Rather, it is intended to help provide for a systematic, 
organized, and structured approach to preparing or reviewing agency 
financial statements. Furthermore, it must be noted that, while the 
questions contained in the checklist are taken from authoritative 
sources, the checklist itself is not authoritative, nor is it a 
comprehensive guide. Preparers and auditors should also consult 
financial management regulations for the individual agencies, as the 
regulations may have specific guidance when the standards allow 
alternatives or management flexibility. 

Checklist Organization:

The checklist has 10 sections: an overview section; a section related 
to general items in the financial statements; a section for each of the 
six financial statements; and two additional sections. The six sections 
reflecting the financial statements are organized by the line items in 
financial statements to allow the user to proceed through each 
statement from the beginning to the end. The final two sections cover 
disclosures in the footnotes related to significant accounting policies 
and required supplementary information. 

Since the financial statements are interrelated, some questions 
concerning line items in one financial statement may also pertain to 
line items in another statement. For example, the questions covering 
loans receivable in the balance sheet section may also include 
questions on the related interest income and subsidy expense appearing 
in the statements of financing and net cost. The questions on related 
line items appearing in more than one statement are covered only in the 
first statement in which the line item appears. In the preceding 
example, questions concerning interest income and subsidy expense would 
appear only in the balance sheet. Further, questions related to 
footnote disclosure would also appear only under the line item of the 
initial financial statement and would not be duplicated in the related 
financial statement except for the section on notes to the financial 
statements about significant accounting policies. 

Except for sections I, II, VI, and IX, the first page of each section 
contains a list showing the number of questions in the section. This 
checklist has 715 questions as follows. 

General Items Related to the Financial Statements:

Balance Sheet:

Statement of Net Cost:

Statement of Changes in Net Position:

Statement of Budgetary Resources:

Statement of Financing:

Statement of Custodial Activity:

Notes to Financial Statements (Significant Accounting Policies):

Supplementary Information:

Authoritative Guidance:

Each question in this guide is referenced to a source. The sources 
cited are (1) the Statements of Federal Financial Accounting Standards 
(SFFAS) and (2) OMB Bulletin 97-01, Form and Content of Financial 
Statements (including the 1998 and 2000 revisions). 

FASAB-recommended statements approved by the principals include 
Statements of Federal Financial Accounting Concepts (SFFAC) and 
Statements of Federal Financial Accounting Standards (SFFAS). The three 
approved accounting concept statements are #1 Objectives of Federal 
Financial Reporting, 1993, #2 Entity and Display, 1995, and #3 
Management's Discussion and Analysis - Concepts, 1999. The nineteen 
SFFAS standards are:

1. Accounting for Selected Assets and Liabilities, 1993. 

2. Accounting for Direct Loans and Loan Guarantees, 1993. 

3. Accounting for Inventory and Related Property, 1994. 

4. Managerial Cost Accounting Concepts and Standards, 1995. 

5. Accounting for Liabilities of the Federal Government, 1997. 

6. Accounting for Property, Plant, and Equipment, 1995. 

7. Accounting for Revenue and Other Financing Sources, 1996. 

8. Supplementary Stewardship Reporting, 1996. 

9. Deferral of the Effective Date of Managerial Cost Accounting 
Standards for the Federal Government in SFFAS No.4, 1998. 

10. Accounting for Internal Use Software, 1998. 

11. Amendments to Accounting for Property, Plant, and Equipment - 
Definitional Changes, 1998 - Amending SFFAS No. 6 and SFFAS No 8: 
Accounting for Property Plant and Equipment and Supplementary 
Stewardship Reporting. 

12. Recognition of Contingent Liabilities Arising from Litigation: An 
Amendment of SFFAS No. 5, 1998 - Accounting for Liabilities of the 
Federal Government. 

Deferral of Paragraph 65.2 - Material Revenue-Related Transactions 
Disclosures, 1998 - Amending SFFAS No. 7, Accounting for Revenue and 
Other Financing Sources. 

14. Amendments to Deferred Maintenance Reporting, 1999 - Amending SFFAS 
No. 6, Accounting for Property, Plant, and Equipment and SFFAS No. 8, 
Supplementary Stewardship Reporting. 

Management's Discussion and Analysis, 1999. 

16. Amendments to Accounting for Property, Plant, and Equipment - 
Measurement and Reporting for Multi-Use Heritage Assets, 1999 - 
Amending SFFAS No. 6 and SFFAS No. 8, Accounting for Property, Plant, 
and Equipment and Supplementary Stewardship Reporting. 

17. Accounting for Social Insurance, 1999. 

Amendments to Accounting Standards For Direct Loans and Loans 
Guarantees, 2000. 

Technical Amendments to Accounting Standards for Direct Loans and Loan 
Guarantees In Statement of Federal Financial Accounting Standards No. 2, 
2001. 

OMB Bulletin 97-01 as amended (Jan. 7, 2000) as well as the attachment 
to OMB Memo M-00-05, OMB Bulletin 97-01 Technical Amendments as amended 
January 7, 2000, provide the detailed requirements for the form and 
content of financial statements. 

How to Use This Guide:

To the right of each question are two columns. The first column 
provides for a "yes," "no," or "NA" answer to each question. The third 
column provides for an explanation for the answer checked in one of the 
first three columns. A "yes" answer should indicate that the financial 
statements contain the information asked by the question. For each 
"yes" answer, the explanation column should include the page number or 
location in the financial statements where the information can be 
found. Also, other materials, such as accounting records, studies or 
working papers, or other documents, should be referenced or listed in 
the column where appropriate. 

A "no" answer indicates that the information asked in the question is 
not included in the financial statements. The fourth column should 
provide an explanation. Examples of explanations for a "no" answer 
might include: (1) the federal entity is working to have the 
information available for the statements in subsequent years, (2) 
management believes that the information does not enhance the 
usefulness of the statements, (3) the cost of compiling the information 
exceeds the benefit of providing it, and (4) the items are not 
material. However, it must be noted that explanations 1 - 3 do not 
necessarily imply that the information is not needed for fair 
presentation and compliance with the Federal Financial Management 
Improvement Act (FFMIA) of 1996; only explanation 4 implies this. Also, 
support, such as a cost-benefit analysis, should be referenced or 
listed in the column, where appropriate. 

An "N/A" answer might indicate that the question does not apply to the 
federal entity. For example, most federal agencies do not administer 
loan, loan guarantee, or loan insurance programs and, therefore, do not 
have credit program receivables and related property. Consequently, the 
questions on these receivables, property, and subsidies would not 
apply. A simple explanation indicating that the reporting entity does 
not administer loan programs would appear in the explanation column of 
the first question in the series. 

Section II: General Items Related to the Financial Statements:

There are 28 questions in this section. All the questions relate to the 
overall financial statements and are not further divided into 
categories. 

General Items (1 - 28): 

1. 
Does the entity's annual financial statement consist of the following 
items?; 

a. management's discussion and analysis (MD&A) of the reporting 
entity; 

b. financial statements and related notes; 

c. required supplementary stewardship information; 

d. required supplementary information; 

e. other 
accompanying information that in management's judgment provides users 
with relevant information (OMB Bull. 97-01 as amended (Jan. 7, 2000), 
pp. 4 & 5). 

2. Do the principal statements and notes include the following six 
statements?; 

a. Balance Sheet; 

b. Statement of Net Cost; 

c. Statement of Changes in Net Position; 

d. Statement of Budgetary Resources; 

e. Statement of Financing; 

f. Statement of Custodial Activity (OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 5). 

3. 
Does the entity use the following hierarchy as its sources of guidance 
in preparing its financial statements?; 

a. Statements and interpretations 
of the Federal Financial Accounting Standards Advisory Board (FASAB) as 
well as applicable AICPA and FASB pronouncements; 

b. FASAB technical 
bulletins and, if specifically made applicable to federal government 
entities by FASAB, AICPA Industry Audit and Accounting Guides and AICPA 
Statements of Position; 

c. AICPA AcSEC Practice Bulletins if specifically 
made applicable to federal government entities and cleared by FASAB, as 
well as Technical Releases of the Accounting and Auditing Policy 
Committee of FASAB; 

d. accounting principles published by other authoritative standard-
setting bodies; 

i. in the absence of other guidance in the first three parts of this 
hierarchy, and; 

ii. if the use of such 
accounting principles improves the meaningfulness of the financial 
statements; (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 7; 
Statement on Auditing Standards (SAS) No. 91 - Federal Generally 
Accepted Accounting Principles (GAAP) Hierarchy. 

4. 
Do the descriptions and displays meet the authoritative standard that 
governs the nature and purpose of the statements, the recognition and 
measurement of items in the statements, and the required disclosures? 
(OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 10, item 2); 
 
5. 
When presenting dollar amounts in the statements and the notes, does 
the entity do the following?; 

a. round dollar amounts to the nearest whole 
dollar, thousand, or million based on informative value to the 
reporting entity; 

b. maintain the chosen rounding level throughout the 
financial statements and footnotes; 

c. adjust the individual line items 
for differences created by rounding so that totals equal the sum of the 
addends in a column (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 10, 
item 5). 

6. Does the entity present comparative financial statements with full 
footnote disclosure? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 10, 
item 3). 

7. Are immaterial but related line items combined? (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 10, item 6). 

8.
Are the statement line items, footnotes, and lines or columns that are 
not informative for the reporting entity excluded? (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 10, item 7). 

9.
Are material balances excluded from the "other" category and separately 
reported and designated by name? (OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 10, item 8). 

10.
Are footnotes sequentially numbered? (OMB Bull. 97-01 as amended (Jan. 
7, 2000), p. 10, item 10). 

11. 
Do total amounts presented in the footnotes tie to the amounts 
presented in the body of the financial statements? (OMB Bull. 97-01, p. 
10, item 10). 

Financial statements may be aggregated or disaggregated in different 
ways depending upon the nature of the statements. (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 11, item 11). 

12. When agencies present disaggregated information for component 
organizations, does the total column for the entity as a whole reflect 
consolidated totals net of intra-entity transactions? (OMB Bull. 97-01 
as amended (Jan. 7, 2000), p. 11, item 11). 

When a reporting entity presents its financial statements in a single 
column format, the statements are referred to as consolidating 
statements. Financial statements that use a multicolumn format to 
present information on an entity's major components or lines of 
business as well as the consolidated amounts are referred to as 
consolidating statements. (OMB Bull. 97-01 as amended (Jan. 7, 2000), 
p. 11, item 11). 

13. 
Are intra-entity transactions needed to arrive at the consolidated 
amounts presented in a column on the face of the consolidating 
statements? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 11, item 
11). 

14. 
Does the reporting entity include franchise funds and other 
intragovernmental support revolving funds among the activities covered 
by its financial statements? (OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 11, item 11). 

15. 
If information about the assets, liabilities, costs, and revenues of 
these franchise funds and intragovernmental support revolving funds is 
not separately disclosed in the entity's financial statements, is this 
information reported as required supplementary information? (OMB Bull. 
97-01 as amended (Jan. 7, 2000), p. 11, item 11). 

The Department of the Treasury will issue separate guidance providing 
a crosswalk from the accounts or the Standard General Ledger (SGL) to 
required financial statements (OMB Bulletin 97-01 as amended (Jan. 7, 
2000), p. 11, item 13). 

16. 
If the entity it not yet using the accounts and data elements of the 
SGL, are the ledger accounts and data elements used crosswalked to 
those of the SGL? (OMB Bulletin 97-01 as amended (Jan. 7, 2000), p. 11, 
item 13). 

17.
Does the MD&A provide a clear and concise description of the reporting 
entity and its mission, activities, program and financial results, and 
financial condition? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 
12). 

18. 
Does the MD&A, at a minimum, contain sections that address the 
following items concerning the entity?; 

a. mission and organizational structure; 

b. performance goals, objectives, and results; 

c. financial statements; 

d. systems controls and legal compliance; 

e. forward-looking 
information, either as a separate section of MD&A or incorporated with 
the sections listed above; 

f. important problems that need to be addressed 
and action taken or planned, either as a separate section of the MD&A 
or incorporated with the sections listed above (SFFAS 15, par. 2 - 4; 
OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 12). 

19. Does the entity's mission statement have the following attributes?; 

a. 
a clear articulation of what the entity's major programs and activities 
are intended to accomplish; 

b. consistency with the entity's strategic 
plan? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 12); 

20.
Are the entity's programs and financial results expressed in terms of 
objective and relevant measures that disclose the extent to which its 
programs are achieving their intended objectives? (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 12). 

21.
Has the entity attempted to develop and report objective measures that 
provide information about the cost effectiveness of programs? (OMB 
Bull. 97-01 as amended (Jan. 7, 2000), p. 13). 

22. 
Are the reported measures of program and financial performance 
consistent with the agency's strategic plan? (OMB Bull. 97-01, p. 12); 

23. Do the entity's performance measures meet the following criteria?; 

a. clearly set forth; 

b. objective and quantifiable; 

c. meaningful and relevant; 

d. related to measures developed in the entity's strategic planning 
processes; 

e. capable of presenting the outputs and outcomes of the 
programs, not just inputs or processes (OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 13). 

24. 
Does the entity's presentation of its performance measures include the 
following?; 

a. both positive and negative results; 

b. presentation of future 
and historical trends, if possible; 

c. use of charts and graphs, whenever 
possible, for easy identification of trends; 

d. explanation of the significance of trends; 

e. comparisons of actual results to goals or benchmarks; 

f. variations from goals and trends; 

g. other explanatory 
information that helps readers understand the significance of the 
measures, results, and any variations from goals or plans (OMB Bull. 
97-01 as amended (Jan. 7, 2000), p. 13). 

25. 
Does the entity explain what needs to be done and what is planned to 
improve financial or program performance? (OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 14). 

26. 
Do the performance measures presented in the MD&A include the following 
criteria?; 

a. related to program purposes and goals; 

b. consistent with 
measures previously included in budget documents and other materials 
related to implementation of the Government Performance and Results Act 
(GPRA); 

c. linked to the programs presented in the Statement of Net Cost; 

d. 
limited to the entity's most significant program and financial measures 
(OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 14). 

27.
Are the less significant program and financial measures presented as 
"other accompanying information?" (OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 14). 

28.
Does the entity note the following in the section on limitations of the 
"Financial Statements?"; 

a. the financial statements have been prepared to 
report the financial position and results of operations of the entity, 
pursuant to the requirements of 31 U.S.C.3515(b); 

b. while the statements 
have been prepared from the books and records of the entity in 
accordance with the formats prescribed by OMB, the statements are in 
addition to the financial reports used to monitor and control budgetary 
resources that are prepared from the same books and records; 

c. the 
statements should be read with the realization that they are for a 
component of the U.S. government (OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 14). 

Section III: Balance Sheet: 

The questions related to the balance sheet are contained under 23 line 
items. The question numbers related to each line item follow. 

Question numbers:

General items: 1 - 4:

Assets:

1. Fund Balance with Treasury: 5 - 17:

2. Investments: 18 - 26:

3. Accounts Receivable (Net): 27 - 47:

4. Interest Receivable (Net): 48 - 51:

5. Credit Program Receivables: 52 - 92:

6. Cash and Other Monetary Assets: 93 - 95:

7. Inventory and Related Property: 96 - 112:

8. Operating Materials and Supplies: 113 - 120:

9. Stockpile Materials: 121 - 131:

10. Seized Property: 132 - 141:

11. Forfeited Property: 142 - 149:

12. Goods Held Under Price Support and Stabilization Programs: 
150 - 163:

13. General Property, Plant, and Equipment (Net): 164 - 195:

14. Software: 196 - 226:

15. Other Assets: 227 - 238:

Liabilities:

16. Liabilities in General: 239 - 240:

17. Interest Payable: 241 - 248:

18. Liabilities for Loan Guarantees: 249 - 262:

19. Lease Liabilities: 263 - 266:

20. Federal Debt and Related Interest: 267 - 278:

21. Pensions, Other Retirement Benefits, and Postemployment Benefits: 
279 - 287:

22. Other Liabilities: 288 - 318:

Net Position:

23. Unexpended Appropriations and Cumulative Results of Operations: 
319 - 322:

General Items (1 - 4): Explanation. 

The Balance Sheet presents, as of a specific time, amounts of future 
economic benefits (assets) owned or managed by the reporting entity 
exclusive of items subject to stewardship reporting, amounts owed by 
the entity (liabilities), and amounts that comprise the difference (net 
position). (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 17). 

1. 
Does the Balance Sheet display assets, liabilities, and net position? 
(OMB Bull. 97-01 as amended (Jan. 7, 2000), pp. 15 & 16); 


Entity assets are assets that the reporting entity has authority to use 
in its operations. Nonentity assets are assets that are held by an 
entity but are not available to the entity as, for example, income tax 
receivables. (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 17). 

2. 
Are entity assets separately reported from nonentity assets? (OMB Bull. 
97-10 as amended (Jan. 7, 2000), pp. 15 & 17). 

Intragovernmental assets are claims of a federal entity against other 
federal entities; conversely, intragovernmental liabilities are claims 
against the entity by other federal entities. (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), pp. 17 & 22). 

3. 
Are intragovernmental assets and liabilities reported separately from 
governmental assets and liabilities that arise from transactions of the 
federal government or a federal government entity with nonfederal 
entities, the federal reserve, and government-sponsored enterprises? 
(OMB Bull. 97-01 as amended (Jan. 7, 2000), pp. 15, 17, & 22); 
. 

Liabilities covered by budgetary resources are liabilities covered by 
realized budgetary resources as of the balance sheet date. Budgetary 
resources include: (1) new budget authority, (2) spending authority 
from offsetting collections credited to an appropriation or fund 
account, (3) recoveries of unexpired budget authority through downward 
adjustment or prior year obligations (4) unobligated balances of 
budgetary resources of the beginning of the year or net transfers or 
prior-year balances during the year, and (5) permanent indefinite 
appropriations or borrowing authority, which have been enacted and 
signed into law as of the balance sheet date and may be apportioned by 
OMB without further congressional action or a contingency having to be 
met. (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 22). 

4.
Are liabilities covered by budgetary resources separately reported from 
liabilities not covered by budgetary resources? (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 22). 

Assets; Fund Balance with Treasury (5 - 17):  

A federal entity's fund balance with the Treasury is the aggregate 
amount of funds in the entity's accounts with Treasury for which the 
entity is authorized to make expenditures and pay liabilities. From the 
reporting entity's perspective, a fund balance with Treasury is an 
asset. From the perspective of the federal government as a whole, the 
fund balance is neither an asset nor a liability. It instead represents 
a commitment to make resources available to federal or other entities. 
(SFFAS 1, par. 31). 

5. Is the fund balance with Treasury reported as an intragovernmental 
asset? (SFFAS 1, par. 31; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 
15). 

6. Are amounts disclosed as fund balances in deposit, suspense, and 
clearing accounts that are not available to finance entity activities 
reported as nonentity assets? (OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 18). 

7. Is foreign currency translated into U.S. dollars at exchange rates 
determined by the Treasury at the financial reporting date? (SFFAS 1, 
par. 32; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 18); 

8. Does the entity's fund balance with Treasury also include the 
following?; 

a. clearing account balances; 

b. balances for direct loan and loan guarantee activities; 

c. funds actually borrowed from Treasury under statutory authority; 

d. the dollar equivalent of foreign currency account balances (SFFAS 
1, par. 32 & 35). 

9. 
Does the entity's fund balance with Treasury exclude contract authority 
or unused authority to borrow? (SFFAS 1, par. 34). 

10. 
Does the entity record an increase in its fund balance with Treasury 
when it does at least one of the following?; 

a. receives appropriations, 
reappropriations, continuing resolutions, appropriation restorations, 
and allocations; 

b. receives transfers and reimbursements from other agencies; 

c. borrows from the Treasury, Treasury, Federal Financing Bank, 
or other entity; 

d. collects and credits amounts to its appropriations or 
fund accounts that the entity is authorized to spend or use to offset 
its expenditures (SFFAS 1, par. 33). 

11. 
Does the entity record a decrease in its fund balance with Treasury 
when at least one of the following occurs?; 

a. Treasury makes disbursements to pay liabilities or to purchase 
assets, goods, and services; 

b. Treasury makes investments in U.S. securities. 

c. Treasury's expired appropriations are cancelled. 

d. Treasury makes transfers and 
reimbursements to other entities or the Treasury. 

e. Treasury's 
appropriations are rescinded or sequestered. (SFFAS 1, par. 36); 
 
12. 
Are any restrictions related to future uses of fund balances disclosed? 
(SFFAS 1, par. 38; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 44, 
item B). 

13. 
Are discrepancies between fund balances in Treasury's records and 
general ledger accounts explained and corrected, if necessary? (SFFAS 
1, par. 39; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 44, item B); 

14. 
Are amounts held for special purposes (such as collections pending 
litigation outcome or held as an agent for others) disclosed as "other 
fund types?" (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 44, item 
A). 

15. Are fund balances representing amounts (1) obligated but not yet 
disbursed and (2) unobligated: disclosed separately? (SFFAS 1, par. 37 
& 38). 

16. 
Are fund balances disclosed by fund type? (OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 43 & 44, item A). 

17. 
Are unexpended appropriations recognized as capital and included under 
funds with Treasury when they are made available for apportionment? 
(SFFAS 7, par. 71). 

Assets; Investments (18 - 26):  

Investments in federal securities include (a) nonmarketable par value 
Treasury securities, (b) market-based Treasury securities, (c) 
marketable Treasury securities, and (d) securities issued by other 
federal entities. Nonfederal securities include those issued by state 
and local governments, private corporations, and government-sponsored 
enterprises. (SFFAS 1, par. 62; OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 18). 

18. Are investments in federal securities reported separately from 
investments in nonfederal securities? (SFFAS 1, par. 67; OMB Bull. 97-
01 as amended (Jan. 7, 2000), p. 18). 

19. 
Are investments initially recorded and reported at their acquisition or 
amortized costs? (SFFAS 1, par. 68 & 69; OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 18 & pp. 46 & 47, note 4). 

20. 
Are investments acquired in exchange for nonmonetary assets recognized 
at the fair value of either (whichever is more determinable) the 
securities acquired or the assets given up? (SFFAS 1, par. 68); 

21. 
Subsequent to acquisition, are investments reported at their carrying 
amount adjusted for amortized premium or discount? (SFFAS 1, par. 70 - 
71; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 18 & pp. 46 & 47, 
note 4). 

22. 
Is the interest method (i.e., effective interest rate multiplied by the 
carrying amount) used in amortizing the premium or discount over the 
life of the security? (SFFAS 1, par. 71). 

23. Is the market value of market-based and marketable securities 
disclosed? (SFFAS 1, par. 72; OMB Bull. 97-01 as amended (Jan. 7, 
2000), pp. 46 & 47, note 4). 

24. Are investments grouped by type of security, such as marketable or 
market-based Treasury securities? (SFFAS 1, par. 72). 

25. 
Are investment securities, which initially were expected to be held to 
maturity, reported at market value in the balance sheet if they are for 
sale and have experienced more than a temporary reduction in value? 
(SFFAS 1, par. 72 & 73; OMB Bull. 97-01 as amended (Jan. 7, 2000), pp. 
46 & 47, note 4). 

26. Does the entity disclose any other information relative to 
understanding the nature of reported investments, such as permanent 
impairments? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 47); 

Assets; Accounts Receivable (Net) (27 - 47):  

Entity receivables are amounts due from other federal or nonfederal 
entities. Nonentity receivables are amounts that the entity is to 
collect on behalf of the federal government or other entities. Not 
included in this category are receivables related to direct or 
guaranteed loans, which are reported separately. (SFFAS 1, par. 43; OMB 
Bull. 97-01 as amended (Jan. 7, 2000), p. 47, note 5). 

27. 
Is a receivable recognized when a federal entity establishes a claim 
based on legal provisions or when goods or services are provided? 
(SFFAS 1, par. 41). 

28. If the exact amount of a receivable is unknown, is a reasonable 
estimate made? (SFFAS 1, par. 41). 

29. Are entity and nonentity accounts receivable reported separately? 
(SFFAS 1, par. 43; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 15 & 
p. 47, note 5). 

30. 
If cash has not been received at the time revenue is recognized, is a 
receivable recorded and allowance for bad debts, if needed, 
established? (SFFAS 7, par. 39 & 129 - 131). 

31. Is an account receivable arising from a nonexchange transaction 
recognized when a collecting entity establishes a specifically 
identifiable, measurable, and legally enforceable claim to cash or 
other assets? (SFFAS 7, par. 53, 61 & 62 & footnote 9; SFFAS 1, par. 
41). 

32. Is a receivable associated with nonexchange revenue for taxes and 
duties recognized upon completion of the entity's established 
assessment process? (SFFAS 7, par. 53). 

33. 
Is an interentity receivable recognized when (1) a legally enforceable 
claim exists between a collecting entity and a recipient entity for the 
transfer or repayment of taxes or duties and (2) payment of such a 
claim is probable and measurable (SFFAS 7, par. 60). 

34. 
Are assessments recognized as accounts receivable if an enforceable 
claim for taxes and duties exists in the following instances?; 

a. tax returns filed by the taxpayer; 

b. customs documents filed by the importer; 

c.
taxpayer agreements to assessments at the conclusion of an audit or as 
a substitute for a tax return (or importer agreements to supplemental 
assessments); 

d. court actions determining an assessment; 

e. taxpayer (or importer) agreements to pay an assessment on an 
installment plan; 

f. 
receivables determined to be currently not collectable but with future 
collection potential (SFFAS 7, par. 53, 54, 170, & 171); 

Compliance assessments are proposed assessments by the collecting 
entity in definitive amounts, but with which the taxpayer (or importer) 
still has the right to disagree or object. (SFFAS 7, par. 55.1); 

Preassessment works-in-process are assessments not yet officially 
asserted by the collecting entity that are subject to a taxpayer's 
right to conference in response to initial information notices. (SFFAS 
7, par. 55.2). 

35. 
Do nonexchange-related accounts receivable for taxes and duties exclude 
the following?; 

a. amounts received or due with tax returns received after 
the close of the reporting period; 

b. compliance assessments; 

c. preassessment work-in-process amounts (SFFAS 7, par. 54);  

36. 
Are compliance assessments reclassified and recognized as an account 
receivable in the following instances?; 

a. the taxpayer files an amended tax return; 

b. a protest or retention period lapses; 

c. a court action settles the matter in the government's favor; 

d. the taxpayer (or importer) agrees to pay or; 

e. a compromise payment plan is accepted (SFFAS 7, par. 55.1 & 178 - 
180). 

37. 
Is an allowance for uncollectible amounts based on an analysis of both 
individual accounts receivable and groups of accounts receivable as 
prescribed by SFFAS No.1? (SFFAS 1, par. 44 - 51; SFFAS 7, par. 56); 

38. 
Is this allowance for estimated uncollectable accounts receivables 
periodically adjusted to reflect the latest information? (SFFAS 1, par. 
45). 

39. 
Are amounts for preassessment work in progress excluded from accounts 
receivable? (SFFAS 7, par. 55. B). 

40. 
Are intragovernmental accounts receivable reported separately from 
receivables from nonfederal entities? (SFFAS 1, par. 42; OMB Bull. 97-
01 as amended (Jan. 7, 2000), p. 15). 

41. 
Are losses due to uncollectable amounts measured through a systematic 
methodology, which is based on an analysis of both individual accounts 
and a group of accounts as a whole? (SFFAS 7, par. 46); 

42. 
Are accounts that represent significant amounts individually analyzed 
to determine the loss allowance? (SFFAS 1, par. 47). 

43. 
Is the loss estimation for individual accounts based on the following?;

a. the debtor's ability to pay; 

b. the debtor's payment record and willingness to pay; 

c. the probable recovery of amounts from secondary 
sources including liens, garnishments, cross collections, and other 
applicable collection tools (SFFAS 1, par. 47). 

44. 
If information is not available or if the nature of the receivables 
does not lend itself to individual account analysis, are the potential 
losses assessed on a group basis? (SFFAS 1, par. 48). 

45. 
If potential losses are assessed on a group basis, are the receivables 
separated into groups of homogeneous accounts with similar risk 
characteristics? (SFFAS 1, par. 49 - 51). 

46. Does the reporting entity disclose the following?; 

a. the major categories of account receivables by amount and type; 

b. the methodology used to estimate the allowance for uncollectible 
amounts; 

c. the dollar 
amount of the allowance for uncollectable accounts (SFFAS 1, par. 52; 
OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 18 & p. 47, note 5); 

47. 
Are losses on receivables recognized when it is more likely than not 
that the receivables will not be totally collected (i.e., there is a 
greater than 50 percent chance of loss)? (SFFAS 1, par. 44); 

Assets; Interest Receivable (Net) (48 - 51):  

48. 
Is interest earned but not received recognized as interest receivable 
and reported as interest receivable? (SFFAS 1, par. 53; OMB Bull. 97-01 
as amended (Jan. 7, 2000), p. 18). 

49. 
Does interest receivable exclude interest on accounts receivable and 
investments determined to be uncollectible? (SFFAS 1, par. 54; OMB 
Bull. 97-01 as amended (Jan. 7, 2000), p. 18). 

50. 
Is interest accrued on uncollectible amounts receivable disclosed 
until: (1) the interest payment requirement has been officially waived 
or (2) the related debt has been written off? (SFFAS 1, par. 55); 

51. 
Is interest receivable from federal entities reported separately from 
interest receivable from nonfederal entities? (SFFAS 1, par. 56); 

Assets; Credit Program Receivables (52 - 92):  

The Federal Credit Reform Act of 1990 divides loans and loan guarantees 
into two groups: pre-1992 and post-1991. Pre-1992 refers to direct loan 
obligations or loan guarantee commitments made prior to fiscal year 
1992; 
post-1991 refers to direct loan obligations or loan guarantee 
commitments made after fiscal year 1991. (OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 55). 

52. 
Is interest receivable related to pre-1992 and post-1991 direct loans 
and are acquired defaulted guaranteed loans reported as a component of 
credit program receivables and related foreclosed property? (OMB Bull. 
97-01 as amended (Jan. 7, 2000), p 18). 

53. 
Are loan amounts broken out by group (pre-1992 and post-1991) and loan 
program and disclosed in a note to the financial statements? (OMB Bull. 
97-01 as amended (Jan. 7, 2000), pp. 49 & 50). 

54. 
Are credit program receivables considered an entity asset if at least 
one of the following criteria is met?; 

a. The entity has the authority 
to either determine the use of the funds collected. 

b. The entity is 
legally obligated to use the funds to meet entity obligations (e.g., 
loans to Treasury). (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 19); 

55. 
If a loan guarantee program is generating a negative subsidy and the 
lender had not disbursed the loan as of the balance sheet date, does 
the entity record and include this amount as part of the total 
undelivered orders? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 19 & 
p. 71, note 15). 

56. 
Are special receipt accounts for negative subsidies and downward 
subsidy reestimates included in the credit reporting entity's financial 
statements? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 19); 

57. 
Are any assets in these special receipt accounts shown as nonentity 
assets offset by intragovernmental liabilities covered by budgetary 
resources? (OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 19); 

58. Do the notes disclose other relevant and appropriate information 
related to direct loans and loan guarantees including the following?
 
a. commitments to guarantee; 

b. management's method for accruing interest 
revenue and recording interest receivable; 

c. management's policy for 
accruing interest on nonperforming loans (OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 58, item K). 

For post-1991 loans and guarantees, a subsidy expense is recognized in 
the year it is disbursed. For pre-1992 loans and guarantees, a loss and 
liability need not be recognized until it is more likely than not that 
a loan (either direct or guaranteed) will go into default. (SFFAS 2, 
par. 24 & 39). 

59. 
Are post-1991 direct loans recognized as assets at the present value 
(discounted at a comparable Treasury rate) of their estimated net cash 
inflows? (SFFAS 2, par. 22 & app. B, part I A). 

60. 
Is the difference between the outstanding principal of post-1991 direct 
loans and the present value of their net cash flows recognized as a 
subsidy cost allowance? (SFFAS 2, par. 22 & app. B, part I A); 

61. 
Are the components of the present value of post-1991 direct loans 
receivable (i.e., principal, interest, estimated net value of 
foreclosed property, and allowance for subsidy costs) disclosed? (OMB 
Bull. 97-01 as amended (Jan. 7, 2000), pp. 50 & 56, item C); 


62. 
When post-1991 guaranteed loans go into default, is the value of the 
assets related to defaulted guaranteed loans receivable included in the 
reported credit program receivables? (OMB Bull. 97-01 as amended (Jan. 
7, 2000), pp. 51 & 57, item E). 

63. 
When post-1991 loans are written off, is the unpaid principal removed 
from unpaid loans receivable and charged against the allowance for 
subsidy costs? (SFFAS 2, par. 61). 

64. 
Are the following components of the assets that are related to post-
1991 direct and defaulted guaranteed loans receivable disclosed by loan 
program?; 

a. loans receivable, gross; 

b. interest receivable; 

c. estimated net realizable value of foreclosed property; 

d. allowance for subsidy costs (present value); 

e. the total value of related assets (i.e., the 
sum of a - c less d) (OMB Bull. 97-01 as amended (Jan. 7, 2000), items 
C & E, pp. 50, 51, 56 item C, & 57 item E). 

65. Are losses of pre-1992 direct loans obligated recognized (and a 
corresponding allowance amount set up) when it is more likely than not 
that the direct loans will not be totally collected? (SFFAS 2, par. 39 
& app. B, part II A). 

66. 
Are allowances for uncollectible pre-1992 loans reestimated each year? 
(SFFAS 2, par. 39). 

67. 
Are the following components of assets related to pre-1992 direct loans 
receivable disclosed by loan program?; 

a. loans receivable, gross; 

b. interest receivable; 

c. foreclosed property; 

d. present value allowance (if the present value method is used); 

e. allowance for loan losses (if the 
allowance method is used) (SFFAS 2, par. 39; OMB Bull. 97-01 as amended 
(Jan. 7, 2000), pp. 49 & 56 item B). 

68. 
Are the following components of defaulted guaranteed loans from pre-
1992 guarantees disclosed by loan program?; 

a. defaulted guaranteed loans receivable, gross; 

b. interest receivable; 

c. the estimated net value of related foreclosed property; 

d. the present value allowance (if the present value method is used); 

e. the allowance for loan losses (if the allowance for loss method is 
used); 

f. defaulted guaranteed loans 
receivable, net (i.e., depending on the method used: the sum of a, b, & 
c less d or a, b, & c less e) (OMB Bull. 97-01 as amended (Jan. 7, 
2000), items D1 & D2, pp. 50, 56, & 57). 

A loan modification is a federal government action that directly or 
indirectly alters the estimated subsidy cost and the present value of 
outstanding loans or the liability of loan guarantees. A direct 
modification changes the subsidy cost by altering the terms of existing 
contracts or through the sale of direct loans. An indirect modification 
changes the subsidy costs by altering the way loans and loan guarantees 
are administered. A modification does not include subsidy cost 
reestimates, routine administrative workouts of troubled loans, and 
other actions permitted within existing contract terms. (SFFAS 2, par. 
41-44). 

69. 
When post-1991 loans are modified, is their existing book value changed 
to an amount equal to the present value (discounted at the Treasury 
rate in effect when the loans were first disbursed after adjusting for 
the interest rate re-estimate) of the loans' net cash inflows that are 
projected under the modified terms from the time of the modification to 
the loans' maturity? (SFFAS 2, par. 46 & app. B, part I D(4)); 

70. 
When pre-1992 loans are directly modified do they meet the following 
conditions?; 

a. They are transferred from the liquidating account to a 
financing account. 

b. Their book value is recorded at their post-
modification value (i.e., the present value of the net cash flows under 
post-modification terms discounted at the current Treasury rate). 
(SFFAS 2, par. 47 & app. B, part II B(4)). 

71. 
Are subsequent (direct) modifications of pre-1992 loans treated as a 
modification of post-1991 loans? (SFFAS 2, par. 47). 

72. 
When pre-1992 loans are indirectly modified do they meet the following 
conditions?; 

a. they are kept in a liquidating account; 

b. their bad debt 
allowance is reassessed and adjusted to reflect amounts that would not 
be collected due to the modification (SFFAS 2, par. 47); 

73. 
Does the entity disclose the following by program in the notes to the 
financial statements?; 

a. the nature of the modification of direct loans 
or loan guarantees; 

b. the discount rate used in calculating the modification expense; 

c. the basis for recognizing a gain or loss related 
to the modification (SFFAS 2, par. 56 & OMB Bull. 97-01 as amended 
(Jan. 7, 2000), pp. 54 & 58 item K). 

74. 
When post-1991 and pre-1992 loans are sold is the sale treated as a 
direct modification? (SFFAS 2, par. 53). 

75. 
Does the agency disclose the expectation that proceeds from the sale of 
its loans will differ from the reported face value of the loans or the 
value of their related assets? (OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 55, item A, 5[TH] par.). 

Foreclosed property is any asset, which is assumed to be held for sale, 
that is received in satisfaction of a loan receivable or as a result of 
payment of a claim under a guaranteed or insured loan (excluding 
commodities acquired under price support programs). Pre-1992 foreclosed 
property refers to property associated with direct loans obligated or 
loan guarantees committed before October 1, 1991. Post-1991 foreclosed 
property refers to property associated with direct loans obligated or 
loan guarantees committed after September 30, 1991 (SFFAS 3, par. 79 & 
80). 

76. 
Is post-1991 foreclosed property valued at the net present value of the 
projected future cash flows associated with the property? (SFFAS 3, 
par. 81). 

77. 
Is pre-1992 foreclosed property recorded at cost and adjusted to the 
lower of cost or net realizable value? (SFFAS 3, par. 81); 

78. 
Is any difference between cost and net realizable value carried in a 
valuation allowance? (SFFAS 3, par. 81). 

79. 
In estimating sales proceeds, has the entity considered its historical 
experience in selling property as well as the nature of the sale? 
(SFFAS 3, par. 82). 

80. Were the estimated future cash flows of post-1991 foreclosed property 
(i.e., sales proceeds, rent, holding and selling expenses) or acquired 
loans discounted at the original (or Treasury) discount rate in effect 
at the time the underlying loan or guarantee was granted? (SFFAS 2, 
par. 57, 59; SFFAS 3, par. 82 - 83; SFFAS 19, par. 7(e)); 

81. 
Is the net present value of post-1991 foreclosed property adjusted 
periodically to recognize both changes in the expected future cash 
flows and accrual of interest due to the passage of time? (SFFAS 3, 
par. 84). 

82. 
Are any adjustments in the carrying amounts of post-1991 foreclosed 
property included in the presentation of "interest income" and the 
reestimate of "subsidy expense?" (SFFAS 3, par. 84). 

83. For post-1991 foreclosed property are the following true?; 

a. Third party claims are recorded at their net present value at the 
time of the foreclosure. 

b. Any periodic changes in net present value of the claim 
are reflected in "interest income" and "subsidy expense. " (SFFAS 3, 
par. 87). 

84. Are receipts or disbursements associated with acquiring and holding 
post-1991 foreclosed property charged or credited to foreclosed 
property? (SFFAS 3, par. 88). 

85. When the government acquires foreclosed assets in full or partial 
settlement of post-1991 loans, is the present value of the government's 
claim against the borrowers reduced by the amount settled as a result 
of the foreclosure? (SFFAS 2, par. 60). 

86. 
If a lender, debtor, or other third party has a legitimate claim to a 
post-1991 foreclosed asset, is the net present value of the estimated 
claim recognized as a special contra-valuation allowance? (SFFAS 2, 
par. 58; SFFAS 3, par. 87). 

87. 
Is pre-1992 foreclosed property recorded at cost and adjusted, if 
necessary, to the lower of cost or net realizable value? (SFFAS 3, par. 
81 & 85). 

88. 
Is the net realizable value based on an estimate of the market value of 
the property adjusted for any expected losses consistent with 
historical experience, abnormal market conditions, and time limitations 
as well as any other costs of the sale? (SFFAS 3, par. 81 & 86); 

89. Is the estimate of market value based on one of the following 
criteria?; 

a. the market value of the property if an active market exists; 

b. the market value of similar properties if no active market exists; 

c. a reasonable forecast of expected cash flows adjusted for 
estimates of all holding costs, including any cost of capital (SFFAS 3, 
par. 85). 

90. 
For pre-1992 foreclosed property, are third-party claims recorded at 
the expected amount of cash required to settle the claims? (SFFAS 3, 
par. 87). 

91. 
If foreclosed property is not sold but placed into operation, is the 
asset transfer treated in the same manner as a sale to a third party? 
(SFFAS 3, par. 90). 

92. 
When the government acquires foreclosed assets in full or partial 
settlement of a direct or guaranteed loan (pre-1992 and post-1991), is 
the following information disclosed?; 

a. valuation basis for foreclosed property; 

b. changes from prior-year's accounting methods, if any; 

c. restrictions on the use/disposal of property; 

d. balances by categories (i.e., pre-1992 and post-1991 foreclosed 
property); 

e. number of 
properties held and average holding period by type or category and;

f. 
number of properties for which foreclosure proceedings are in process 
at the end of the period (SFFAS 3, par. 91; OMB Bull. 97-01 as amended 
(Jan. 7, 2000), item K, pp. 58 & 59). 

Assets; Cash and Other Monetary Assets (93 - 95):  

Cash (including imprest funds) consists of: coins, paper currency, 
negotiable instruments (such as checks, money orders, and bank drafts), 
demand deposits, and foreign currencies stated in U.S. dollars at the 
financial statement date exchange rate. (SFFAS 1, par. 27; OMB Bull. 
97-01 as amended (Jan. 7, 2000), p. 19); 

Other monetary assets 
consist of other items such as gold, special drawing rights, and U.S. 
reserves in the International Monetary Fund (IMF). (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 19 & p. 45, item C). 

93. 
Are entity cash (amounts held and authorized to be spent by the entity) 
and nonentity cash (amounts held on behalf of other entities such as 
Treasury) separately reported? (SFFAS 1, par. 28 & 29; OMB Bull. 97-01 
as amended (Jan. 7, 2000), p. 19). 

94. 
Are the components of cash and other monetary assets disclosed and 
described in a note to the financial statements? (OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 19 & pp. 44 & 45, note 3). 

95. 
If cash is restricted, is the nature and reason disclosed? (SFFAS 1, 
par. 30; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 45, note 3, item 
E). 

Assets; Inventory and Related Property (96 - 112); Yes, No, or; N/
A:  

Inventory is tangible personal property that is (a) held for sale, (b) 
in process of production for sale, or (c) to be consumed in the 
production of goods for sale or in the provision of services for a fee. 
Inventory does not include other assets held for sale such as (a) 
stockpile materials, (b) seized and forfeited property, (c) foreclosed 
property, and (d) goods held under price support and stabilization 
programs. (SFFAS 3, par. 17). 

96. 
Is inventory categorized and either separately reported or disclosed in 
the notes as the following?; 

a. inventory held for current sale; 

b. inventory held in reserve for future sale; 

c. excess, obsolete, and unserviceable inventory; 

d. inventory held for repair (SFFAS 3, par. 18, 
27, 29, & 32; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 59, note 
8). 

97. 
Is inventory valued at historical cost, latest acquisition cost, or net 
realizable value? (SFFAS 3, par. 20 & 26). 

98. 
If inventory is valued at historical cost, does that cost include the 
purchase amount and all other costs incurred to bring the inventory 
into its current condition and location? (SFFAS 3, par. 21); 

99. 
Are one of the following historical cost flow assumptions used to value 
inventory?; 

a. first-in, first out (FIFO); 

b. weighted average; 

c. moving average; 

d. any other valuation method (such as a standard cost system) 
whose results reasonably approximate "a" "b" or "c" (SFFAS 3, par. 22); 

100. 
Are abnormal costs, such as excessive handling or rework costs, charged 
to expenses for the period? (SFFAS 3, par. 21). 

101. 
Is donated inventory valued at its fair value at the time of donation? 
(SFFAS 3, par. 21). 

102. 
Is inventory acquired through exchange of nonmonetary assets (e.g., 
barter) valued at the fair value of the asset received at the time of 
the exchange? (SFFAS 3, par. 21). 

103. 
If the latest acquisition cost method of inventory valuation is used, 
is the latest invoice price (actual cost) applied to all like units, 
including those acquired through donation and nonmonetary exchange? 
(SFFAS 3, par. 23). 

104. 
Under the latest acquisition cost method, is the inventory revalued 
periodically (or at least by the end of the fiscal year)? (SFFAS 3, 
par. 23). 

105. 
If the latest acquisition cost method is used to value inventory, is 
the reported cost of goods sold adjusted by the difference between the 
beginning and ending unrealized holding gains and losses? (SFFAS 3, 
par. 25). 

106. 
If inventory is valued at net realizable value, does it meet the 
following criteria?; 

a. There is an inability to determine approximate cost. 

b. There is immediate marketability at quoted prices. 

c. There 
is unit interchangeability (e.g., petroleum reserves). (SFFAS 3, par. 
26). 

107. 
Is excess, obsolete, and unserviceable inventory valued at its expected 
net realizable value? (SFFAS 3, par. 30). 

108. 
When inventory is declared excess, obsolete, or unserviceable is the 
difference between the carrying amount and the expected net value 
recognized as a loss (or gain) and either separately reported or 
disclosed? (SFFAS 3, par. 30). 

109. 
Are any subsequent adjustments to the inventory's net value or any loss 
(or gain) upon disposal recognized as losses (or gains)? (SFFAS 3, par. 
30). 

110. 
When inventory is held for repair is it valued using either of the 
following?; 

a. the allowance method (i.e., it is valued at the same 
value as a serviceable item and a contra-asset repair allowance account 
is set up); 

b. the direct method (original carrying value of the 
inventory less estimated repair costs) (SFFAS 3, par. 32 & 33); 

111. 
If inventory is transferred to "inventory held for repair," are 
estimated prior-period repair costs either credited to the repair 
allowance or to the inventory and reported as an adjustment to equity? 
(SFFAS 3, par. 34). 

112: Does the entity disclose the following about its inventory?; 

a. the general composition; 

b. the basis for determining inventory values 
(including the valuation method and any cost flow assumptions); 

c. changes from prior years' accounting methods, if any; 

d. balances for the major categories of inventory if not broken out in 
the financial statements; 

e. restrictions on the sale of inventory; 

f. the decision criteria for categorizing inventory; 

g. changes in the criteria for 
categorizing inventory (SFFAS 3, par. 28, 31, & 35; OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 59, note 8)

Assets; Operating Materials and Supplies (113 - 120); Yes, No, or; 
N/A:  

Operating materials and supplies are tangible personal property to be 
consumed in normal operations. Excluded are (a) operating materials and 
supplies acquired to construct real property and equipment for the 
entity's use, (b) stockpile materials, (c) price stabilization goods, 
(d) foreclosed property, (e) seized and forfeited property, and (f) 
inventory. (SFFAS 3, par. 36). 

113. 
Are operating materials and supplies categorized and reported or 
disclosed as the following?; 

a. operating materials and supplies held for use; 

b. operating materials and supplies held in reserve for future use; 

c. excess, obsolete, or unserviceable operating materials and 
supplies (SFFAS 3, par. 36, 37, 45, & 47; OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 60, note 8)

114. 
Are operating materials and supplies recognized and reported as assets 
when produced or purchased? (SFFAS 3, par. 38). 

115. 
Are operating materials and supplies valued at historical cost, 
including all appropriate purchase and production costs incurred to 
bring the items to their current condition and location? (SFFAS 3, par. 
43). 

116. 
Are donated operating materials and supplies valued at their fair value 
at the time of donation? (SFFAS 3, par. 43). 

117. 
Are operating materials and supplies acquired through exchange of 
nonmonetary assets (e.g., barter) valued at the fair value of the asset 
received at the time of the exchange? (SFFAS 3, par. 43); 

118. 
Is one of the following historical cost flow assumptions used to value 
ending materials and supplies under the consumption method?; 

a. first-in, first out (FIFO); 

b. weighted average; 

c. moving average or; 

d. any other 
valuation method (such as a standard cost system) whose results 
reasonably approximate "a," "b," or "c" (SFFAS 3, par. 42 & 44); 

119. 
Does the entity disclose the following information about its operating 
materials and supplies?; 

a. general composition; 

b. balances in each operating material and supply category; 

c. change from prior years' accounting methods; 

d. basis for valuation (including valuation method 
and any cost flow assumptions); 

e. restrictions on the use of materials and supplies, if any; 

f. decision criteria for identifying each category 
to which material and supplies are assigned; 

g. changes in the criteria 
for identifying the category to which the operating materials and 
supplies are assigned (SFFAS 3, par. 46, 49 & 50; OMB Bull. 97-01 as 
amended (Jan. 7, 2000), p. 60). 

120. 
Are excess, obsolete, and unserviceable operating materials valued at 
their estimated net realizable value? (SFFAS 3, par. 48); 

Assets; Stockpile Materials; (121 - 131):  

Stockpile materials are strategic and critical materials held due to 
statutory requirements for use in national defense, conservation, or 
national emergencies. Not included under this category are (a) items 
held for sale or use in normal operations, (b) items held for use in 
the event of an agency's operating emergency or contingency, and (c) 
price support and stabilization goods. (SFFAS 3, par. 51). 

121. 
Are stockpile materials recognized and reported as assets when acquired 
(i.e., recognized as assets using the consumption method)? (SFFAS 3, 
par. 52). 

122. 
Are stockpile materials valued using an acceptable historical cost flow 
method (i.e., FIFO, weighted average, moving average, or other 
equivalent method)? (SFFAS 3, par. 53). 

123. 
Does the cost of stockpile materials include all appropriate costs 
incurred in bringing the materials to their current condition and 
location? (SFFAS 3, par. 53). 

124. 
If stockpile materials have either suffered a permanent decline in 
value below cost or have become damaged or decayed, has their value 
been reduced to net realizable value? (SFFAS 3, par. 54); 
. 

125. 
Is the resultant decline in value recognized as a loss or expense in 
the period in which it occurs? (SFFAS 3, par. 54). 

126. 
When stockpile materials are authorized to be sold, are those materials 
disclosed as stockpile materials held for sale? (SFFAS 3, par. 55); 

127. 
Are the stockpile materials authorized for sale valued using the same 
basis used before they were authorized for sale? (SFFAS 3, par. 55); 

128. 
Is any difference between the carrying amount (i.e., purchase price or 
cost) of the stockpile materials held for sale and their estimated 
selling price disclosed? (SFFAS 3, par. 55). 

129. 
If stockpile materials are sold, is the cost removed from stockpile 
materials and reported as a cost of goods sold? (SFFAS 3, par. 55); 
. 

130. 
Is any gain (or loss) from the sale of stockpile materials recognized 
as a gain (or loss) at that time? (SFFAS 3, par. 55). 

131. 
Does the entity disclose the following information about its stockpile 
materials?; 

a. general composition; 

b. basis for valuing stockpile materials, 
including valuation method and any cost flow assumptions; 

c. changes from prior-year's accounting methods, if any; 

d. restrictions on the use of the 
material; 

e. balances in each category of stockpile material (i.e., 
stockpile materials held and held for sale); 

f. criteria for grouping stockpile material held for sale; 

g. any changes in criteria for 
categorizing stockpile materials held for sale (SFFAS 3, par. 56; OMB 
Bull. 97-01 as amended (Jan. 7, 2000), p. 60). 

Assets; Seized Property (132 - 141):  

Seized property includes monetary instruments, real property, and 
tangible personal property belonging to others in actual or 
constructive possession of a custodial agency. (SFFAS 3, par. 59); 
There may be as many as three government entities involved with seized 
property: (1) the seizing agency, (2) the custodial agency and (3) a 
"central fund" set up for financial record-keeping. (SFFAS 3, par. 57). 

132.
If seized monetary assets are reported, is a corresponding liability 
also reported? (SFFAS 3, par. 61; and OMB Bull. 97-01 as amended (Jan. 
7, 2000), p. 20). 

133. 
If the central fund is other than the seizing or custodial entity, does 
the custodial entity maintain sufficient internal records to carry out 
its stewardship responsibility? (SFFAS 3, par. 60). 

134. 
Does the custodial agency recognize seized monetary instruments as 
assets at their market values and set up corresponding liabilities? 
(SFFAS 3, par. 61 & 65). 

135. 
Is the existence of seized property other than monetary instruments 
disclosed in a note to the statements and accounted for in the entity's 
property management records? (SFFAS 3, par. 62). 

136. 
Is seized property valued at its market value when seized (or as soon 
thereafter as reasonably possible if the market value cannot be readily 
determined)? (SFFAS 3, par. 63). 

137. 
Is the market value of seized property based on the value of the 
property assuming an active market exists for the property? (SFFAS 3, 
par. 63). 

138. 
If no active market exists for the property in the general area in 
which it was seized, is a value in the principle market nearest the 
place of seizure used? (SFFAS 3, par. 63). 

139. 
Is the valuation of property seized under the Internal Revenue Code 
based on the taxpayer's equity (market value less any third-party 
liens)? (SFFAS 3, par. 64). 

140. 
Does the entity disclose and present by type of seized property in its 
custody the following?; 

a. an explanation of what constitutes a seizure and a general 
description of the property; 

b. valuation method(s); 

c. changes from prior years' accounting methods, if any and; 

d. analysis of change 
in seized property (including dollar value and number of seized 
properties) that are on hand at the beginning of the year, seized 
during the year, disposed of during the year, and on hand at the end of 
the year (SFFAS 3, par. 66; OMB Bull. 97-01 as amended (Jan. 7, 2000), 
p. 61). 

141. Does the entity also disclose the method of disposal of seized 
property, if material? (SFFAS 3, par. 66; OMB Bull. 97-01 as amended 
(Jan. 7, 2000), p. 61). 

Assets; Forfeited property(142 - 149):  

Forfeited property consists of (a) property acquired through forfeiture 
proceedings, (b) property acquired to satisfy a tax liability, and (c) 
unclaimed and abandoned merchandise. (SFFAS 3, par. 67 & 68). 

142. When a forfeiture judgment is obtained for seized monetary 
instruments: 

a. Are they reclassified as forfeited monetary instruments 
at the current market value?; 

b. Is a revenue credit recognized in an 
amount equal to the value of the monetary asset?; 

c. Is the liability 
associated with the seized monetary instrument classification removed? 
(SFFAS 3, par. 69). 

143. When a forfeiture judgment is obtained for real, tangible, and 
intangible property: 

a. Is the property recorded as an asset at its fair 
value at the time of forfeiture?; 

b. Is an allowance account (contra-asset 
account) established for liens or claims from third party claimants 
against forfeited property?; 

c. Is an offsetting deferred revenue credit recognized?; 

d. Is revenue recognized upon sale and the merchandise and 
deferred revenue (referred to in "a" and "c" above) removed from the 
accounts? (SFFAS 3, par. 70, 72, 75, 76, & 77; SFFAS 6, par. 33); 

144. 
Does the entity disclose the following information about forfeited 
property under its control (including forfeited property) which may be 
donated or destroyed but not booked as an asset or sold due to legal 
restrictions?; 

a. composition of the property; 

b. valuation method(s); 

c. changes from prior year's accounting methods; 

d. analysis of the changes 
in forfeited property by type and dollar amount that includes: 

i. number of forfeitures on hand at the beginning of the year; 

ii. additions; 

iii. disposals and method of disposition; 

iv. end of the year balances; 

e. restrictions on use or disposition of the property and, if 
available; 

f. estimates of the value of property to be distributed to other 
federal, 
state, and local agencies in future reporting periods? (SFFAS 3, par. 
71 & 78; OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 61); 

145. 
If the entity reclassifies forfeited property not held for sale to 
property held for donation or use: 

a. Is revenue recognized upon approval of distribution or use of 
property?; 

b. Is the associated deferred revenue reversed on the books? (SFFAS 3, 
par. 73 & 74). 

146. 
Is a distinction maintained in the entity's accounting reports between 
revenue arising from the sale of forfeited property and revenue arising 
from forfeited property being transferred, donated, or placed into 
official use? (SFFAS 3, par. 75). 

147. Is property acquired by the government to satisfy a taxpayer's 
liability recorded when title to the property passes to the federal 
government, and is a credit made to the related account receivable? 
(SFFAS 3, par. 76). 

148. 
Is the property forfeited in satisfaction of a taxpayer's liability 
valued at its market value less any third party liens? (SFFAS 3, par. 
76). 

149. 
Upon sale of the forfeited property mentioned in the previous question, 
is revenue recognized in the amount of the sale proceeds, and are the 
property and third party liens removed from the accounts? (SFFAS 3, 
par. 76). 

Assets; Goods Held Under Price Support; and Stabilization Programs (150 
- 163):  

Goods acquired under price support and stabilization programs (i.e., 
commodities) are items of commerce or trade (usually farm commodities) 
having an exchange value. Producers of the goods: (1) are either given 
nonrecourse loans under which they can, at their option, repay the loan 
with interest or surrender their commodity pledged as collateral for 
the loan or (2) may enter into purchase agreements that allow the 
producer of the option to sell commodities to the government (the 
Commodity Credit Corporation) at the price support rate. (SFFAS 3, par. 
92, 93, & 94). 

150. 
Are nonrecourse loans recognized as assets at face value when the loan 
principal is disbursed? (SFFAS 3, par. 96). 

151. Is interest accrued on nonrecourse loans? (SFFAS 3, par. 96); 

152. 
Is a valuation allowance set up to recognize losses on nonrecourse 
loans when it is "more likely than not" (i.e., more than a 50-percent 
chance) that loans will not be totally collected? (SFFAS 3, par. 102); 

153. 
Is this allowance reestimated on each financial reporting date? (SFFAS 
3, par. 102). 

154. 
When the entity has entered into a purchase agreement and there is an 
expected loss: 

a. Is a loss (i.e., the difference between the contract 
price and the net realizable value of the commodities) recognized if it 
is probable that a loss has been incurred and is reasonably 
measurable?; 

b. Is a corresponding liability recognized? (SFFAS 3, par. 97 
& 103). 

155. If the contingent loss arising from a purchase agreement is not 
recognized because it is less than probable or is not reasonably 
measurable, is the contingent loss disclosed if it is at least 
"reasonably possible that a loss may occur?" (SFFAS 3, par. 98); 


156. 
When commodities are acquired to satisfy a nonrecourse loan or purchase 
agreement, are they recognized and reported as assets at the lower of 
cost or net realizable value? (SFFAS 3, par. 99 & 104); 

157. 
Does the cost for the commodities acquired through a nonrecourse loan 
settlement include the following amounts?; 

a. loan principal (excluding interest); 

b. processing and packaging costs incurred after acquisition; 

c. other costs (e.g., transportation) incurred in taking title to the 
commodity (SFFAS 3, par. 105). 

158. 
Does the cost for commodities acquired though a purchase agreement 
include the following amounts?; 

a. the unit price agreed upon in the 
purchase agreement multiplied by the number of units purchased; 

b. other costs incurred in taking title to the commodity (SFFAS 3, 
par. 106); 

159. Is any adjustment necessary to reduce the carrying amount of the 
acquired commodities to the lower of cost or net realizable value 
recognized as a loss in the current period and recorded in a commodity 
valuation allowance? (SFFAS 3, par. 99 & 107). 

160. 
Conversely, are recoveries of previously recorded losses in the current 
period recognized up to the point of any previously recognized losses 
on the commodities, and is the commodity valuation allowance reduced 
accordingly? (SFFAS 3, par. 107). 

161. 
When commodities acquired to satisfy the terms of a nonrecourse loan or 
purchase agreement are sold: 

a. Are revenues recognized?; 

b. Is the carrying 
amount of the commodities removed from the asset account and reported 
as a cost of goods sold? (SFFAS 3, par. 100). 

162. 
When commodities are held for purposes other than sale, is the carrying 
amount reported as an expense and removed from the commodity asset 
account upon transfer? (SFFAS 3, par. 101). 

163. 
Is the following information related to goods held under price support 
and stabilization programs disclosed?; 

a. basis for valuing commodities 
including valuation method and cost flow assumptions (e.g., FIFO, 
weighted average); 

b. changes from prior-year's accounting methods; 

c. restrictions on the use, disposal, or sale of commodities; 

d. analysis of 
the changes in dollar amount and volume of commodities, including 
those; 

i. on hand at the beginning of the year; 

ii. acquired during the year; 
disposed of during the year by method of disposition; 

iii. on hand at the end of the year; 

iv. on hand at year's end and estimated to be donated or 
transferred during the coming period; 

v. received as a result of surrender of collateral related to 
nonrecourse loans outstanding; 

vi. dollar value 
and volume of purchase agreement commitments (SFFAS 3, par. 108 & 109; 
OMB Bull. 97-01 as amended (Jan. 7, 2000), p. 62). 

Assets; General Property/Plant/Equipment (Net); (164 - 195); Yes, No, 
or; N/A:  

General property, plant, and equipment (PP&E) are any property, plant, 
and equipment used in providing goods or services. (SFFAS 6, par. 23). 

164. 
Has the entity established, disclosed, and consistently followed 
appropriate capitalization thresholds for property, plant, and 
equipment (PP&E) suitable to its financial and operational conditions? 
(SFFAS 6, par. 13, 148, & 149). 

165. 
Does the entity follow a policy that ensures that its PP&E consists of 
tangible assets that meet the following criteria?; 

a. They have estimated useful lives of 2 years or more. 

b. They are not intended for sale in the 
ordinary course of operations. 

c. They are acquired or constructed with 
the intention of being used or being available for use by the entity. 
(SFFAS 6, par. 17). 

166. Does PP&E also consist of the following items?; 

a. assets acquired through capital leases; 

b. property owned by the reporting entity in the hands of 
others (e.g., state and local governments, colleges and universities, 
federal contractors); 

c. land rights (SFFAS 6, par. 18). 

Capital leases are leases that transfer substantially all the benefits 
and risks of ownership to the lessee. Operating leases are leases in 
which the federal entity does not assume the risks of ownership of 
PP&E. Multiyear service contracts and multiyear purchase agreements for 
expendable commodities are not capital leases. (SFFAS 6, par. 20, 
footnote 22; SFFAS 5, par. 43). 

167. 
Does the entity classify a lease as a capital lease if at its inception 
the lease meets one or more of the following criteria?; 

a. The lease 
transfers ownership of the property to the lessee by the end of the 
lease term. 

b. The lease contains an option to purchase the leased 
property at a bargain price. 

c. The lease term is equal to or greater 
than 75 percent of the estimated economic life of the leased property, 
and the beginning of the lease term does not fall within the last 25 
percent of the total estimated economic life of the property. 

d. The 
present value of rental and other minimum lease payments, excluding 
that portion of the payments representing executory cost, equals or 
exceeds 90 percent of the fair value of the leased property, and the 
beginning of the lease term does not fall within the last 25 percent of 
the total estimated economic life of the property. (SFFAS 6, par. 20; 
SFFAS 5 par. 43). 

168. 
Does the general PP&E asset line item exclude the following items?;


a. items held in anticipation of physical consumption such as operating 
materials and supplies; 

b. items the federal entity has a reversionary interest in; 

c. national defense PP&E; 

d. heritage assets (except multiuse heritage assets); 

e. stewardship land (i.e., land not included in general 
PP&E) (SFFAS 6, par. 19, 21, 57, 58, 150 & 151; SFFAS 11, par. 7; SFFAS 
16, par. 6). 

169. 
In determining the level at which the entity categorizes its PP&E, has 
the entity considered the following factors?; 

a. the cost of maintaining 
different accounting methods for property and the usefulness of the 
information; 

b. the diversity of the PP&E (e.g., useful lives, value, 
alternative uses); 

c. the future disposition of the PP&E; 

d. the programs being served by the PP&E (SFFAS 6, par. 22). 

170. 
Does the entity categorize an asset under general PP&E if it has one or 
more of the following characteristics?; 

a. It could be used for alternative purposes (e.g., by other federal 
programs, state or local 
governments, or nongovernmental entities) but is used to produce goods 
or services or to support the mission of the entity. 

b. It is used for 
business-type activities. 

c. It is used by entities in activities whose 
costs can be compared to those of other entities performing similar 
activities (e.g., federal hospital services in comparison to other 
hospitals). (SFFAS 6, par. 23; OMB Bull. 97-01 as amended (Jan. 7, 
2000), p. 21). 

171. 
Is PP&E of entities operating as business-type activities categorized 
as general PP&E whether or not it meets the definition of other PP&E 
categories (e.g., heritage assets)? (SFFAS 6, par. 24; OMB Bull. 97-01 
as amended (Jan. 7, 2000), p. 21). 

172. 
Are lands and land rights specifically acquired for or in connection 
with general PP&E included in general PP&E? (SFFAS 6, par. 25; OMB 
Bull. 97-01 as amended (Jan. 7, 2000), p. 21). 

173. 
Is all general PP&E recorded at cost? (SFFAS 6, par. 26); 

174. 
Does the cost of general PP&E include all costs incurred to bring the 
PP&E to a form and location suitable for its intended use, such as the 
following?; 

a. amounts paid to vendors; 

b. transportation charges to the point of initial use; 

c. handling and storage costs; 

d. labor and other 
direct or indirect production costs (for assets produced or 
constructed); 

e. costs of engineering, architectural, and other outside 
services for designs, plans, specifications, and surveys; 

f. acquisition 
and preparation costs of buildings and other facilities; 

g. an appropriate 
share of the cost of the equipment and facilities used in construction 
work; 

h. fixed equipment and related installation costs required for 
activities in a building or facility; 

i. direct costs of inspection, 
supervision, and administration of construction contracts and 
construction work; 

j. legal and recording fees and damage claims; 

k. fair 
value of facilities and equipment donated to the government; 

l. material amounts of interest costs paid (SFFAS 6, par. 26). 

175. 
Is the recognized cost of general PP&E acquired under a capital lease 
the lower of either the fair value of the asset or liability for the 
capital lease at its inception? (SFFAS 6, par. 29). 

176. 
Is the cost of general PP&E acquired through donation, will, or 
judicial process, excluding forfeiture, capitalized at estimated fair 
value at the time acquired by the government? (SFFAS 6, par. 30); 

177. 
Is general PP&E transferred from other federal entities capitalized at 
the book value recorded by the transferring entity? (SFFAS 6, par. 31); 
. 

178. 
Is the asset capitalized at the fair value at the time of the transfer 
from another federal entity if the receiving entity cannot reasonably 
ascertain the book value of the PP&E transferred? (SFFAS 6, par. 31); 
. 

179. 
If general PP&E is acquired through exchange with a nonfederal entity, 
is it capitalized at the fair value of the PP&E surrendered at the time 
of the exchange? (SFFAS 6, par. 32). 

180. 
If, however, the fair value of the PP&E acquired through exchange is 
more readily determinable than that of the PP&E surrendered, is the 
acquired general PP&E capitalized at the acquired PP&E's fair value? 
(SFFAS 6, par. 32). 

181.
If the fair values of the exchanged PP&E are not determinable, is the 
acquired general PP&E capitalized at the book value of the PP&E 
surrendered? (SFFAS 6, par. 32). 

182. 
If cash is included in an exchange of general PP&E, is the cost of PP&E 
acquired increased or decreased, respectively, by the amount of cash 
surrendered or received? (SFFAS 6, par. 32). 

183. 
Is PP&E recognized when title passes to the acquiring entity or when 
PP&E is delivered to the entity or to an agent of the entity? (SFFAS 6, 
par. 34). 

184. 
If general PP&E is under construction, is it recorded as construction 
work in process until it is placed into service? (SFFAS 6, par. 34); 

185. 
Do estimates of useful life of general PP&E consider such factors as