^\[OMB\ letterhead\]^

^OMB\ BULLETIN\ 99-\_\_^

^TO\ THE\ HEADS\ AND\ INSPECTORS\ GENERAL\ OF\ EXECUTIVE\ DEPARTMENTS\ AND\ ESTABLISHMENTS^

^SUBJECT:\ Audit\ Requirements\ for\ Federal\ Financial\ Statements^

^1.\ [Purpose]{.underline}.\ This\ Bulletin,\ which\ includes\ an\ Attachment\ and\ Appendices\ A\ through\ I,\ establishes\ minimum\ requirements\ for\ audits\ of\ Federal\ financial\ statements.\ The\ Bulletin\ is\ issued\ under\ the\ authority\ of\ the\ Budget\ and\ Accounting\ Act\ of\ 1921,\ as\ amended,\ and\ the\ Budget\ and\ Accounting\ Procedures\ Act\ of\ 1950,\ as\ amended.\ It\ implements\ the\ audit\ provisions\ of\ the\ Chief\ Financial\ Officers\ (CFOs)\ Act\ of\ 1990\ (P.L.\ 101‑576),\ as\ amended,\ the\ Government\ Management\ Reform\ Act\ (GMRA)\ of\ 1994\ (P.L.\ 103-356),\ and\ the\ Federal\ Financial\ Management\ Improvement\ Act\ of\ 1996\ (P.L.\ 104-208).\ The\ requirements\ of\ this\ Bulletin\ are\ set\ forth\ in\ the\ Attachment.^

^2.\ [Applicability]{.underline}.\ The\ provisions\ of\ the\ Bulletin\ apply\ to\ audits\ of\ financial\ statements\ of\ executive\ departments\ and\ agencies\ and\ certain\ components\ of\ these\ agencies,\ listed\ in\ Appendices\ A\ and\ B,\ respectively.^

^3.\ [Effective\ Date]{.underline}.\ The\ provisions\ of\ this\ Bulletin\ are\ effective\ for\ audits\ of\ financial\ statements\ for\ fiscal\ years\ ending\ on\ or\ after\ September\ 30,\ 1999.\ Audit\ reports\ shall\ be\ submitted\ to\ the\ agency\ head\ in\ sufficient\ time\ to\ enable\ the\ agency\ head\ to\ meet\ the\ due\ date\ for\ submitting\ the\ audited\ financial\ statement\ under\ GMRA,\ no\ later\ than\ March\ 1\ following\ the\ end\ of\ the\ fiscal\ year\ for\ which\ the\ financial\ statements\ are\ prepared.^

^4.\ [Inquiries]{.underline}.\ Further\ information\ concerning\ this\ Bulletin\ may\ be\ obtained\ by\ contacting\ the\ Office\ of\ Management\ and\ Budget\ (OMB),\ Office\ of\ Federal\ Financial\ Management,\ Washington,\ DC\ 20503,\ telephone\ (202)\ 395‑3993.^

^5.\ [Copies]{.underline}.\ Individual\ copies\ of\ this\ Bulletin\ may\ be\ obtained\ from\ the\ OMB\ home\ page\ on\ the\ Internet\ at\ [http://www.whitehouse.gov/WH/EOP/omb]{.underline}.^

^Jacob\ J.\ Lew^

^Director^

^Attachment^

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+-------+-------+-------+-------+-------+-------+-------+-------+-------+

^OMB\ Bulletin\ No.\ 99-\_\_\ \ ^

^AUDITS\ OF\ FEDERAL\ FINANCIAL\ STATEMENTS^

^1.\ BACKGROUND.\ The\ Government\ Management\ Reform\ Act\ (GMRA)\ of\ 1994\ amended\ the\ requirements\ of\ the\ Chief\ Financial\ Officers\ (CFOs)\ Act\ of\ 1990\ by\ requiring,\ among\ other\ things,\ the\ annual\ preparation\ and\ audit\ of\ organizationwide\ financial\ statements\ of\ 24\ executive\ departments\ and\ agencies\ (Appendix\ A).\ The\ GMRA\ also\ requires\ audited\ financial\ statements\ of\ components\ of\ executive\ departments\ and\ agencies\ designated\ by\ the\ Director\ of\ the\ Office\ of\ Management\ and\ Budget\ (OMB),\ which\ are\ identified\ in\ Appendix\ B.\ In\ addition,\ the\ Federal\ Financial\ Management\ Improvement\ Act\ (FFMIA)\ of\ 1996\ requires,\ among\ other\ things,\ that\ the\ report\ on\ these\ audits\ state\ whether\ the\ agency\ financial\ management\ systems\ comply\ substantially\ with\ Federal\ financial\ management\ systems\ requirements,\ applicable\ Federal\ accounting\ standards,\ and\ the\ U.S.\ Government\ Standard\ General\ Ledger\ at\ the\ transaction\ level.\ ^

^2.\ DEFINITIONS.\ For\ the\ purposes\ of\ this\ Bulletin,\ the\ following\ definitions\ apply:^

^a.\ \"Annual\ Financial\ Statement\"\ means\ the\ financial\ statement\ of\ a\ reporting\ entity\ as\ described\ in\ Section\ 3515\ of\ Title\ 31\ of\ the\ United\ States\ Code\ and\ OMB\ Bulletin\ 97-01,\ \"Form\ and\ Content\ of\ Agency\ Financial\ Statements\"\ and\ subsequent\ issuances\ (OMB\'s\ Form\ and\ Content\ Bulletin),\ and,\ shall\ be\ comprised\ of:^

^(1)\ Overview\ of\ the\ Reporting\ Entity\ (also\ called\ Management\'s\ Discussion\ and\ Analysis).^

^(2)\ Principal\ Statements\ and\ Related\ Notes.\ The\ Principal\ Statements^[^1]^\ include\ the\ following\ financial\ statements\ and\ notes\ thereto:^

^(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,\ if\ applicable.^

^(g)\ Notes\ to\ Principal\ Statements.^

^(3)\ Required\ Supplementary\ Stewardship\ Information,\ if\ applicable.^

^(4)\ Required\ Supplementary\ Information,\ if\ applicable.^

^(5)\ Other\ Accompanying\ Information,\ if\ applicable.^

b.  [Codification of Statements on Auditing Standards]{.underline} is a
    codification of Statements on Auditing Standards issued by the
    American Institute of Certified Public Accountants (AICPA). The
    AICPA\'s standards of field work and reporting are incorporated in
    their entirety in [Government Auditing Standards]{.underline} by
    reference.

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b.  \"Federal accounting standards\" are those standards included in the
    hierarchy of Federal accounting standards described in paragraph 5
    of this Bulletin.

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b.  \"Federal financial management systems requirements\" are those
    requirements described in OMB Circular A-127, "Financial Management
    Systems."

^\ e.\ [Government\ Auditing\ Standards]{.underline}\ are\ those\ standards\ issued\ by\ the\ Comptroller\ General\ of\ the\ United\ States.^

^f.\ \"Independent\ auditor\"\ means\ an\ auditor\ who\ meets\ the\ independence\ standards\ specified\ in\ the\ [Government\ Auditing\ Standards]{.underline}.^

^g.\ \"Internal\ control,\"\ as\ it\ relates\ to\ the\ Principal\ Statements\ and\ Required\ Supplementary\ Stewardship\ Information,\ is\ a\ process,\ effected\ by\ the\ agency\'s\ management\ and\ other\ personnel,\ designed\ to\ provide\ reasonable\ assurance\ that\ the\ following\ objectives\ are\ met:^

^(1)\ Reliability\ of\ financial\ reporting\ -\ transactions\ are\ properly\ recorded,\ processed,\ and\ summarized\ to\ permit\ the\ preparation\ of\ the\ Principal\ Statements\ and\ Required\ Supplementary\ Stewardship\ Information\ in\ accordance\ with\ Federal\ accounting\ standards,\ and\ the\ safeguarding\ of\ assets\ against\ loss\ from\ unauthorized\ acquisition,\ use,\ or\ disposition;^

^(2)\ Compliance\ with\ applicable\ laws\ and\ regulations\ -\ transactions\ are\ executed\ in\ accordance\ with:\ (a)\ laws\ governing\ the\ use\ of\ budget\ authority\ and\ other\ laws\ and\ regulations\ that\ could\ have\ a\ direct\ and\ material\ effect\ on\ the\ Principal\ Statements\ or\ Required\ Supplementary\ Stewardship\ Information,\ and\ (b)\ any\ other\ laws,\ regulations,\ and\ governmentwide\ policies\ identified\ by\ OMB\ in\ Appendix\ C\ of\ this\ Bulletin;\ and^

^(3)\ 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.^

^\ h.\ \"Management\ letter\"\ means\ a\ letter\ prepared\ by\ the\ auditor\ which\ discusses\ findings\ and\ recommendations\ for\ improvements\ in\ internal\ control,\ that\ were\ identified\ during\ the\ audit\ and\ were\ not\ required\ to\ be\ included\ in\ the\ auditor\'s\ report\ on\ internal\ control,\ and\ other\ management\ issues.\ See\ Chapter\ 5,\ paragraph\ 5.28\ of\ [Government\ Auditing\ Standards]{.underline}.^

i\. \"Material weaknesses in internal control\" are reportable
conditions in which the design or operation of the internal control does
not reduce to a relatively low level the risk that errors, fraud or
noncompliance in amounts that would be material in relation to the
Principal Statements or Required Supplementary Stewardship Information
being audited or material to a performance measure or aggregation of
related performance measures may occur and not be detected within a
timely period by employees in the normal course of performing their
assigned functions. The auditor shall use this definition of material
weaknesses to report on an entity\'s internal control in accordance with
the requirements of [Government Auditing Standards]{.underline} and this
Bulletin rather than the definition of material weaknesses used by
management to prepare an agency\'s Federal Managers\' Financial
Integrity Act (FMFIA) of 1982 report.

^j.\ \"Overview\ of\ the\ Reporting\ Entity\"\ means\ a\ brief\ narrative\ overview,\ prepared\ by\ management,\ also\ called\ Management\'s\ Discussion\ and\ Analysis\ (MD&A),\ which\ describes\ the\ reporting\ entity\ and\ its\ mission,\ activities,\ program\ and\ financial\ results,\ and\ financial\ condition.\ OMB's\ Form\ and\ Content\ Bulletin\ further\ defines\ the\ \"Overview\ of\ the\ Reporting\ Entity.\"^

k\. \"Reportable conditions\" are matters coming to the auditor\'s
attention that, in the auditor\'s judgment, should be communicated
because they represent significant deficiencies in the design or
operation of internal control, that could adversely affect the
organization\'s ability to meet the objectives in paragraph 2.g. of this
Bulletin.

^l.\ \"Reporting\ Entity\"\ means\ one\ of\ the\ executive\ departments\ and\ agencies\ and\ components\ of\ such\ departments\ and\ agencies\ listed\ in\ Appendices\ A\ and\ B,\ or\ an\ agency,\ bureau,\ or\ other\ organization\ that\ represents\ a\ meaningful\ unit\ for\ program\ management,\ for\ which\ a\ financial\ statement\ is\ prepared,\ and\ for\ which\ management\ chose\ to\ have\ an\ audit\ performed\ in\ accordance\ with\ this\ Bulletin.\ OMB's\ Form\ and\ Content\ Bulletin\ further\ defines\ \"Reporting\ Entity.\"^

m\. \"United States Government Standard General Ledger (SGL)\" means the
uniform chart of accounts prescribed by the Department of the Treasury
in its [Treasury Financial Manual]{.underline}.

^3.\ FREQUENCY\ OF\ AUDIT.\ Audits\ shall\ be\ performed\ annually.^

^4.\ RESPONSIBILITY\ FOR\ AUDIT.\ For\ purposes\ of\ this\ Bulletin,\ the\ following\ responsibilities\ apply:^

^a.\ For\ the\ 24\ executive\ departments\ and\ agencies\ and\ selected\ components\ of\ such\ departments\ and\ agencies\ listed\ in\ Appendices\ A\ and\ B,\ the\ audits\ of\ financial\ statements\ shall\ be\ performed\ by\ the\ Inspector\ General\ (IG)\ of\ the\ executive\ department\ or\ agency\ or\ by\ an\ independent\ auditor\ as\ determined\ by\ the\ IG.^

^b.\ GMRA\ provides\ that,\ in\ lieu\ of\ an\ audit\ otherwise\ required,\ the\ Comptroller\ General\ of\ the\ United\ States\ may,\ at\ his\ or\ her\ discretion\ and\ following\ consultation\ with\ the\ IG,\ perform\ the\ audit.^

^5.\ ACCOUNTING\ PRINCIPLES\ AND\ STANDARDS.\ The\ Federal\ Accounting\ Standards\ Advisory\ Board\ (FASAB)\ was\ established\ by\ the\ Secretary\ of\ the\ Treasury,\ the\ Director\ of\ OMB,\ and\ the\ Comptroller\ General\ (the\ Principals)\ to\ recommend\ Federal\ accounting\ standards\ to\ the\ Principals.\ Specific\ standards\ agreed\ upon\ by\ the\ Principals\ are\ issued\ by\ the\ Director\ of\ OMB\ and\ the\ Comptroller\ General\ as\ Statements\ of\ Federal\ Financial\ Accounting\ Standards\ (SFFASs).\ Federal\ agencies\ are\ required\ to\ follow\ these\ standards\ in\ the\ preparation\ of\ financial\ statements\ pursuant\ to\ GMRA.\ Recognizing\ that\ the\ SFFASs\ may\ not\ explicitly\ address\ all\ transactions\ of\ departments\ and\ agencies,\ the\ Principals\ adopted\ the\ following\ hierarchy\ of\ Federal\ accounting\ standards:^

^a.\ Individual\ standards\ (SFFASs)\ agreed\ to\ by\ the\ Director\ of\ OMB,\ the\ Comptroller\ General,\ and\ the\ Secretary\ of\ the\ Treasury\ and\ published\ by\ OMB\ and\ the\ General\ Accounting\ Office.^

^b.\ Interpretations\ related\ to\ the\ SFFASs\ issued\ by\ OMB\ in\ accordance\ with\ the\ procedures\ outlined\ in\ OMB\ Circular\ A-134,\ \"Financial\ Accounting\ Principles\ and\ Standards.\"^

^c.\ Requirements\ contained\ in\ OMB\'s\ Form\ and\ Content\ Bulletin\ in\ effect\ for\ the\ period\ covered\ by\ the\ financial\ statements.^

^d.\ Accounting\ principles\ published\ by\ other\ authoritative\ standard-setting\ bodies\ and\ other\ authoritative\ sources\ (a)\ in\ the\ absence\ of\ other\ guidance\ in\ the\ first\ three\ parts\ of\ this\ hierarchy,\ and\ (b)\ if\ the\ use\ of\ such\ accounting\ principles\ improves\ the\ meaningfulness\ of\ the\ financial\ statements.^

^6.\ SCOPE\ OF\ AUDIT.\ Financial\ statements\ shall\ be\ audited\ in\ accordance\ with\ [Government\ Auditing\ Standards]{.underline}\ and\ the\ provisions\ of\ this\ Bulletin.\ ^

a\. With respect to the Principal Statements and Required Supplementary
Stewardship Information, the auditor shall:

^(1)\ Determine\ whether\ the\ Principal\ Statements\ present\ fairly,\ in\ all\ material\ respects,\ in\ conformity\ with\ Federal\ accounting\ standards,\ the\ assets,\ liabilities,\ and\ net\ position;\ net\ costs;\ changes\ in\ net\ position;\ budgetary\ resources;\ reconciliation\ of\ net\ costs\ to\ budgetary\ obligations;\ and,\ if\ applicable,\ custodial\ activity.^

^\ \ \ (a)\ If\ consolidating\ statements\ are\ presented,\ the\ auditor\ shall\ consider\ the\ consolidating\ statements\ supplemental\ information\ and\ report\ in\ accordance\ with\ paragraph\ 7.c.(1)(a)\ of\ this\ Bulletin,\ unless\ the\ auditor\'s\ objective\ is\ to\ express\ an\ opinion\ on\ the\ consolidating\ statements.^

^(b)\ If\ the\ auditor\ is\ unable\ to\ determine\ whether\ the\ Principal\ Statements\ are\ fairly\ presented\ because,\ for\ example,\ of\ the\ auditor\'s\ inability\ to\ obtain\ sufficient\ competent\ evidential\ matter\ due\ to\ inadequate\ accounting\ records,\ the\ auditor\ shall,\ to\ the\ extent\ practicable,\ obtain\ sufficient\ evidence\ about\ closing\ balances\ to\ enable\ the\ auditor\ to\ opine\ on\ the\ subsequent\ year\'s\ financial\ statements.^

^(2)\ Consider\ stewardship\ property,\ plant,\ and\ equipment\ (PP&E)\ required\ supplementary\ information\ and\ perform\ the\ procedures\ described\ in\ AU\ Section\ 558,\ \"Required\ Supplementary\ Information,\"\ of\ the\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.\ Pending\ modifications\ of\ the\ applicable\ accounting\ standards\ that\ require\ reporting\ on\ the\ condition\ of\ stewardship\ PP&E,\ for\ fiscal\ year\ 2000\ and\ beyond,\ OMB\ will\ require\ examination\ level\ assurance\ for\ stewardship\ PP&E\ using\ the\ AICPA's\ Attestation\ Standards.^

^(3)\ \ Consider\ stewardship\ investments\ (including\ non-Federal\ physical\ property\ (such\ as\ highways),\ human\ capital\ (expenditures\ for\ training\ and\ education),\ and\ research\ and\ development)\ required\ supplementary\ information\ and\ perform\ the\ procedures\ described\ in\ AU\ Section\ 558,\ \"Required\ Supplementary\ Information,\"\ of\ the\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.\ For\ fiscal\ year\ 2000\ and\ beyond,\ OMB\ will\ require\ examination\ level\ assurance\ for\ stewardship\ investments\ using\ the\ AICPA's\ Attestation\ Standards.^

4.  Determine whether risk-assumed information (including projections of
    pension, deposit, and other insurance programs required by SFFAS No.
    5, \"Accounting for Liabilities of the Federal Government\") is
    presented fairly in all material respects, in accordance with the
    requirements of SFFAS No. 5, and any subsequent revisions. In
    assessing the reasonableness of risk-assumed information, the
    auditor shall consider the need to follow the guidance in Auditing
    (AU) Section 336, "Using the Work of a Specialist," of the
    [Codification of Statements on Auditing Standards]{.underline}.

    5.  Consider social insurance information, when presented, other
        accompanying information. See AU Section 551, [Codification of
        Statements on Auditing Standards]{.underline}. For future
        periods, OMB will modify the audit requirements for social
        insurance information when the applicable accounting standards
        become effective.

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b.  With respect to the internal control objectives described in
    paragraphs 2.g. (1) and (2) of this Bulletin relating to the
    Principal Statements and Required Supplementary Stewardship
    Information, the auditor shall obtain an understanding of the
    components of internal control (see AU Section 319.07, [Codification
    of Statements on Auditing Standards]{.underline}) and assess the
    level of control risk relevant to the assertions embodied in the
    classes of transactions, account balances, and disclosure components
    of the financial statements. Such controls include relevant EDP
    general and application controls and controls relating to
    intra-agency and intra-governmental transactions and balances. For
    those internal controls that have been properly designed and placed
    in operation, the auditor shall perform sufficient tests to support
    a low assessed level of control risk. See AU Section 319.45-.63 of
    the [Codification of Statements on Auditing Standards]{.underline}.
    Those internal controls that have not been properly designed or
    placed in operation and those internal controls that are found to be
    ineffective shall be reported in accordance with paragraph 7 of this
    Bulletin.

    5.  In obtaining an understanding of the components of internal
        control, particularly the risk assessment component, and
        assessing control risk, the auditor shall obtain an
        understanding of the process by which the agency identifies and
        evaluates weaknesses required to be reported under FMFIA and
        related agency implementing procedures.

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    5.  The auditor shall compare material weaknesses disclosed during
        the audit with those material weaknesses reported in the
        agency\'s FMFIA report that relate to the financial statements
        of the entity under audit and document material weaknesses
        disclosed by audit that were not reported in the agency's FMFIA
        report. The auditor should consider whether the failure to
        detect and report material weaknesses constitutes a reportable
        condition or material weakness in the entity's internal control.

^c.\ With\ respect\ to\ the\ internal\ control\ objective\ described\ in\ paragraph\ 2.g.\ (3)\ of\ this\ Bulletin\ relating\ to\ performance\ measures,\ the\ auditor\ shall\ obtain\ an\ understanding\ of\ the\ components\ of\ internal\ control\ relating\ to\ the\ existence\ and\ completeness\ assertions\ relevant\ to\ the\ performance\ measures\ included\ in\ the\ Overview\ of\ the\ Reporting\ Entity.\ Those\ internal\ controls\ that\ have\ not\ been\ properly\ designed\ and\ placed\ in\ operation\ shall\ be\ reported\ in\ accordance\ with\ paragraph\ 7\ of\ this\ Bulletin.\ The\ objective\ of\ gaining\ an\ understanding\ of\ internal\ control\ in\ this\ subparagraph\ is\ to\ report\ deficiencies\ in\ the\ design\ of\ internal\ control,\ rather\ than\ to\ plan\ the\ financial\ statement\ audit.\ For\ future\ periods,\ OMB\ is\ considering\ expanding\ audit\ coverage\ to\ include\ gaining\ an\ understanding\ of\ components\ of\ internal\ control\ relating\ to\ each\ of\ the\ five\ assertions\ (existence\ or\ occurrence;\ completeness;\ rights\ and\ obligations;\ valuation\ or\ allocation;\ and\ presentation\ and\ disclosure)\ relevant\ to\ the\ performance\ measures\ included\ in\ the\ Overview\ of\ the\ Reporting\ Entity.\ ^

^d.\ With\ respect\ to\ compliance\ with\ applicable\ laws\ and\ regulations,\ the\ auditor\ shall\ perform\ tests\ of\ compliance\ with\ laws\ and\ regulations\ that\ could\ have\ a\ direct\ and\ material\ effect\ on\ the\ Principal\ Statements\ and\ Required\ Supplementary\ Stewardship\ Information,\ and\ any\ other\ laws,\ regulations,\ and\ governmentwide\ policies\ identified\ by\ OMB\ in\ Appendix\ C\ of\ this\ Bulletin.^

e\. With respect to compliance with governmentwide policies contained in
OMB Circular A-127, using the guidance in Appendix D, the auditor shall
perform tests of compliance with Federal financial management systems
requirements[^2], applicable Federal accounting standards, and the SGL
at the transaction level. This provision only applies to audits of
entities listed in Appendices A and B. Circular A-127 requires the
agency to establish and maintain a single, integrated financial
management system that complies with characteristics stated therein,
that include maintaining accounting data to permit reporting in
accordance with Federal accounting standards, application of the SGL at
the transaction level, and incorporation of the functional requirements
issued by the Joint Financial Management Improvement Program (JFMIP) in
its series [Federal Financial Management Systems
Requirements]{.underline} (FFMSR). As of the date of this Bulletin, the
issuances in this series are:

^\--\ [Framework\ for\ Federal\ Financial\ Management\ Systems]{.underline},\ FFMSR-0,\ January\ 1995,^

^\--[\ ]{.underline}[Core\ Financial\ System\ Requirements]{.underline},\ JFMIP-SR-99-4,\ February\ 1999,\*^

^\--\ [Human\ Resources\ and\ Personnel-Payroll\ System\ Requirements]{.underline},\ JFMIP-SR-99-5,\ April\ 1999,\*^

^\--\ [Travel\ System\ Requirements]{.underline},\ FFMSR-3,\ January\ 1991,^

^\--\ [Seized/Forfeited\ Asset\ System\ Requirements]{.underline},\ FFMSR-4,\ March\ 1993,^

^\--\ [Direct\ Loan\ System\ Requirements]{.underline},\ JFMIP-SR-99-8,\ June\ 1999\*^

^\--\ [Guaranteed\ Loan\ System\ Requirements]{.underline},\ FFMSR-6,\ December\ 1993,^

^\--\ [Inventory\ System\ Requirements]{.underline},\ FFMSR-7,\ June\ 1995,\ and^

^\--\ [Managerial\ Cost\ Accounting]{.underline},\ FFMSR-8,\ February\ 1998.^

\*denotes requirements that have been updated and re-issued during FY
1999[^3]

^f.\ With\ respect\ to\ information\ accompanying\ the\ Principal\ Statements,\ the\ auditor\ shall\ assess\ whether\ the\ information\ and\ manner\ of\ its\ presentation\ in\ the\ Overview\ of\ the\ Reporting\ Entity\ (or\ MD&A)\ and\ any\ other\ accompanying\ information\ is\ materially\ inconsistent\ with\ the\ information\ in\ the\ Principal\ Statements.^

^g.\ With\ respect\ to\ required\ supplementary\ information\ referred\ to\ in\ paragraph\ 2.a.(4)\ of\ this\ Bulletin,\ the\ auditor\ shall\ perform\ the\ procedures\ described\ in\ AU\ Section\ 558,\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.^

^h.\ The\ auditor\ shall\ obtain\ written\ representation\ from\ management\ as\ part\ of\ an\ audit\ conducted\ in\ accordance\ with\ this\ Bulletin.\ See\ AU\ Section\ 333,\ \"Management\ Representations,\"\ of\ the\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.\ An\ illustrative\ management\ representation\ letter\ is\ provided\ in\ Appendix\ E.^

^7.\ AUDIT\ REPORT.^

^a.\ An\ audit\ report,\ or\ separate\ audit\ reports,\ on\ the\ Principal\ Statements,\ internal\ control,\ and\ compliance\ shall\ be\ prepared\ at\ the\ completion\ of\ the\ audit.\ The\ audit\ report(s)\ shall\ be\ submitted\ to\ the\ agency\ head\ in\ sufficient\ time\ to\ enable\ the\ agency\ head\ to\ meet\ the\ due\ date\ for\ submitting\ the\ audited\ financial\ statement\ under\ GMRA,\ no\ later\ than\ March\ 1\ following\ the\ end\ of\ the\ fiscal\ year\ for\ which\ the\ financial\ statements\ were\ prepared.\ The\ audit\ results\ shall\ be\ discussed\ with\ management\ as\ soon\ as\ practicable\ but,\ in\ any\ case,\ prior\ to\ issuance\ of\ the\ audit\ report.\ ^

^b.\ The\ audit\ report(s)\ shall\ state\ that\ the\ audit\ was\ made\ in\ accordance\ with\ [Government\ Auditing\ Standards]{.underline}\ and\ the\ provisions\ of\ this\ Bulletin.^

^c.\ The\ audit\ report(s)\ shall\ include:^

^(1)\ An\ opinion\ as\ to\ whether\ the\ reporting\ entity\'s\ Principal\ Statements\ are\ fairly\ presented\ in\ all\ material\ respects\ in\ conformity\ with\ Federal\ accounting\ standards.\ See\ AU\ Section\ 623.05\ of\ the\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.^

^(a)\ With\ respect\ to\ reporting\ on\ other\ accompanying\ information,\ which\ includes\ the\ information\ referred\ to\ in\ paragraphs\ 2.a.(1),\ 2.a.(5),\ and\ 6.a.(5)\ of\ this\ Bulletin,\ the\ auditor\ shall\ follow\ AU\ Section\ 551,\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.^

^(b)\ When\ stewardship\ PP&E\ and\ stewardship\ investments\ referred\ to\ in\ paragraphs\ 6.a.(2)\ and\ (3),\ respectively,\ and\ required\ supplementary\ information\ referred\ to\ in\ paragraph\ 2.a.(4)\ of\ this\ Bulletin\ are\ presented,\ the\ auditor\ shall\ follow\ AU\ Section\ 551.15,\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.^

^(c)\ If\ the\ Principal\ Statements\ are\ not\ prepared\ in\ accordance\ with\ Federal\ accounting\ standards,\ the\ auditor\ shall\ report\ the\ departure(s)\ from\ those\ standards\ and,\ if\ practicable,\ the\ effects\ of\ the\ departure(s)\ on\ assets,\ liabilities,\ and\ net\ position;\ net\ costs;\ changes\ in\ net\ position;\ budgetary\ resources;\ reconciliation\ of\ net\ costs\ to\ budgetary\ obligations;\ and,\ if\ applicable,\ custodial\ activity\ either\ directly\ in\ the\ auditor\'s\ report\ on\ the\ Principal\ Statements\ or\ by\ reference\ in\ the\ auditor\'s\ report\ to\ an\ explanatory\ note\ in\ the\ Notes\ to\ Principal\ Statements\ prepared\ by\ management.^

^(d)\ If\ the\ auditor\ disclaims\ an\ opinion,\ the\ report\ shall\ describe\ why\ the\ auditor\ was\ unable\ to\ conduct\ the\ audit\ in\ accordance\ with\ [Government\ Auditing\ Standards]{.underline}\ and\ this\ Bulletin.\ If\ material\ weaknesses\ and\ other\ reportable\ conditions\ prevented\ the\ conduct\ of\ the\ audit\ in\ accordance\ with\ [Government\ Auditing\ Standards]{.underline}\ and\ this\ Bulletin,\ such\ conditions\ shall\ be\ included\ in\ the\ report\ on\ internal\ control\ described\ in\ paragraph\ 7.c.(2),\ along\ with\ recommendations\ for\ correcting\ the\ condition(s).^

^(e)\ When\ there\ is\ a\ change\ in\ accounting\ principles,\ for\ example,\ changes\ to\ comply\ with\ SFFASs,\ the\ auditor's\ report\ on\ the\ Principal\ Statements\ shall\ include\ an\ explanatory\ paragraph\ identifying\ the\ nature\ of\ the\ change\ and\ referring\ the\ reader\ to\ the\ note\ to\ the\ Principal\ Statements\ that\ discusses\ the\ change\ in\ detail.^

^(2)\ A\ report\ on\ internal\ control^[^4]^,\ which\ shall\ at\ a\ minimum:^

^(a)\ State\ that,\ with\ respect\ to\ internal\ control\ over\ financial\ reporting\ as\ described\ in\ paragraphs\ 2.g.(1)\ and\ (2)\ of\ this\ Bulletin,\ the\ auditor\ obtained\ an\ understanding\ of\ the\ design\ of\ internal\ controls,\ determined\ whether\ they\ have\ been\ placed\ in\ operation,\ assessed\ control\ risk,\ and\ performed\ tests\ of\ the\ reporting\ entity\'s\ internal\ controls.^

^\ \ \ (b)\ State\ that,\ with\ respect\ to\ the\ internal\ control\ objective\ described\ in\ paragraph\ 2.g.(3)\ of\ this\ Bulletin,\ and\ relating\ to\ the\ performance\ measures\ included\ in\ the\ Overview\ of\ the\ Reporting\ Entity,\ the\ auditor\ obtained\ an\ understanding\ of\ the\ design\ of\ internal\ controls\ relating\ to\ the\ existence\ and\ completeness\ assertions\ and\ determined\ whether\ they\ have\ been\ placed\ in\ operation.^

^(c)\ State\ whether\ or\ not\ the\ tests\ performed\ provided\ sufficient\ evidence\ to\ support\ an\ opinion\ on\ internal\ controls.^

^(d)\ Describe\ reportable\ conditions\ and\ material\ weaknesses\ identified\ during\ the\ audit.^

^(e)\ \ Identify\ those\ material\ weaknesses\ disclosed\ by\ audit\ that\ were\ not\ reported\ in\ the\ reporting\ entity's\ FMFIA\ report.^

^(3)\ A\ report\ on\ the\ reporting\ entity\'s\ compliance\ with\ applicable\ laws,\ regulations,\ and\ governmentwide\ policy\ requirements.^[^5]

^\ \ \ (a)\ The\ auditor\ shall\ report\ noncompliance\ with\ laws\ and\ regulations\ disclosed\ by\ audit,\ except\ for\ those\ instances\ of\ noncompliance\ that,\ in\ the\ auditor\'s\ judgment,\ are\ clearly\ inconsequential.\ In\ meeting\ this\ requirement,\ the\ auditor\ shall\ list\ those\ laws\ and\ regulations\ that\ tests\ disclosed\ reportable\ instances\ of\ noncompliance.^

b.  With respect to laws and regulations tested for which the audit
    disclosed no reportable instances on noncompliance, the report shall
    state that the audit disclosed no reportable instances of
    noncompliance with these laws and regulations. A listing of these
    laws and regulations is not required.

\(c\) For compliance with governmentwide policy requirements contained
in OMB Circular A-127 and referred to in FFMIA, the auditor shall report
whether the reporting entity's financial management systems
substantially comply with Federal financial management systems
requirements, Federal accounting standards, and the SGL at the
transaction level. To meet this requirement, the auditor's report shall
state the auditor's reporting requirement and that the auditor performed
tests of compliance in accordance with the requirements of this Bulletin
(see Appendix D). The audit report shall reflect instances in which the
reporting entity's systems did not substantially comply with the three
Federal financial management systems requirements, or state that the
audit disclosed no instances in which the reporting entity's systems did
not substantially comply with the three requirements. In addition, as
required by FFMIA, where tests disclosed that the reporting entity's
systems did not substantially comply with the three requirements, the
auditor's report on compliance shall:

i.  Identify the entity or organization responsible for the financial
    management systems that were found not to comply with the
    requirements.

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i.  Include all facts pertaining to the noncompliance, including the
    nature and extent of the noncompliance, the primary reason or cause
    of the noncompliance, and any relevant comments from reporting
    entity management or employees responsible for the noncompliance.

^(iii)\ \ Provide\ recommended\ remedial\ actions\ and\ the\ time\ frames\ to\ implement\ such\ actions.^

d.  With respect to the objectives of tests of compliance generally, the
    auditor's report on compliance shall state whether or not providing
    an opinion on compliance was an objective of the audit and whether
    or not the tests performed provided sufficient evidence to support
    an opinion.

^d.\ In\ preparing\ the\ reports\ in\ paragraph\ 7.c.,\ the\ auditor\ shall\ report\ the\ status\ of\ known\ but\ uncorrected\ material\ findings\ and\ recommendations\ from\ prior\ audits\ that\ affect\ the\ current\ audit\ objectives.\ See\ Chapter\ 4,\ paragraphs\ 4.7,\ 4.10,\ and\ 4.11\ of\ [Government\ Auditing\ Standards]{.underline}.^

^e.\ The\ reporting\ entity\ shall\ provide\ comments\ on\ the\ auditor\'s\ findings\ and\ recommendations\ included\ in\ the\ audit\ report,\ including\ corrective\ actions\ taken\ or\ planned\ and\ comments\ on\ the\ status\ of\ corrective\ actions\ taken\ on\ prior\ findings.\ To\ the\ extent\ practical,\ these\ comments\ shall\ be\ included\ in\ the\ audit\ reports\ on\ internal\ control\ or\ report\ on\ compliance.\ If\ corrective\ actions\ are\ not\ necessary,\ an\ explanatory\ statement\ shall\ be\ included\ in\ the\ applicable\ audit\ report.^

^f.\ Copies\ of\ the\ audit\ report\ shall\ be\ distributed\ to\ the\ head\ of\ the\ executive\ department\ or\ agency\ and\ subsequently\ included\ in\ the\ CFO's\ annual\ report\ or\ the\ agency's\ Accountability\ Report.^

^8.\ LEGAL\ LETTERS.\ The\ auditor\ shall\ request\ entity\ management\ to\ send\ a\ letter\ of\ inquiry\ to\ those\ lawyers\ with\ whom\ management\ consulted\ concerning\ litigation,\ claims,\ and\ assessments.\ See\ AU\ Section\ 337,\ \"Inquiry\ of\ a\ Client\'s\ Lawyer\ Concerning\ Litigation,\ Claims,\ and\ Assessments,\"\ of\ the\ [Codification\ of\ Statements\ on\ Auditing\ Standards]{.underline}.\ ^

^a.\ The\ letter\ of\ inquiry\ shall\ be\ sent\ to\ legal\ counsel\ no\ later\ than\ October\ 15\ and\ shall\ include\ a\ request\ for\ an\ interim\ response\ to\ be\ effective\ no\ earlier\ than\ December\ 1,\ except\ as\ noted\ in\ paragraph\ 8.d,\ and\ submitted\ to\ the\ auditor\ by\ December\ 15\ following\ the\ end\ of\ the\ fiscal\ year\ for\ which\ the\ financial\ statements\ are\ prepared.\ In\ addition,\ the\ letter\ of\ inquiry\ shall\ include\ a\ request\ for\ an\ updated\ response\ to\ be\ effective\ no\ earlier\ than\ February\ 15\ and\ submitted\ to\ the\ auditor\ by\ March\ 1\ following\ the\ end\ of\ the\ fiscal\ year\ for\ which\ the\ financial\ statements\ are\ prepared.\ (See\ Appendix\ H-1\ for\ illustrative\ letter\ of\ inquiry\ from\ entity\ management\ to\ legal\ counsel\ and\ Appendix\ H-2\ for\ illustrative\ letter\ of\ response\ from\ legal\ counsel\ to\ the\ auditor.)^

^b.\ The\ CFO\ shall\ prepare\ and\ the\ auditor\ shall\ review\ a\ summary\ of\ the\ information\ contained\ in\ the\ legal\ counsel's\ response.\ (See\ Appendix\ H-3\ for\ format\ to\ be\ used\ to\ compile\ legal\ representation\ letter\ data\ for\ financial\ reporting\ purposes.)^

^c.\ The\ IG\ shall\ submit\ to\ OMB\ (Deputy\ Controller,\ Office\ of\ Federal\ Financial\ Management),\ Department\ of\ the\ Treasury\ (Commissioner,\ Financial\ Management\ Service),\ and\ the\ General\ Accounting\ Office\ (Assistant\ Comptroller\ General,\ Accounting\ and\ Information\ Management\ Division)\ copies\ of\ the\ interim\ and\ updated\ legal\ responses\ described\ in\ paragraph\ 8.a.,\ and\ a\ copy\ of\ the\ CFO's\ summary\ described\ in\ paragraph\ 8.b.\ by\ December\ 31\ and\ March\ 10,\ respectively.^

d.  If the audit is completed prior to December 1, the legal response
    provided in connection with the audit may be used in place of the
    interim response described in paragraph 8.a. In addition, an updated
    legal response to be effective no earlier than February 15 shall be
    provided. These legal responses and copies of the CFO's summaries
    described in paragraph 8.b. shall be submitted in accordance with
    paragraph 8.c.

9\. MANAGEMENT LETTER. Conditions that are not required to be included
in the audit report, but that the auditor considers necessary to
communicate, should be separately communicated to management of the
reporting entity in a management letter. If a management letter is
issued, the auditor shall refer to that management letter in the
auditor\'s report on internal control (see paragraph 5.28 of [Government
Auditing Standards]{.underline}).

10\. AGREED-UPON PROCEDURES: RETIREMENT, HEALTH BENEFITS, AND LIFE
INSURANCE WITHHOLDINGS/CONTRIBUTIONS AND SUPPLEMENTAL SEMIANNUAL
HEADCOUNT REPORT SUBMITTED TO THE OFFICE OF PERSONNEL MANAGEMENT
(OPM).** **The Agreed-Upon Procedures (AUPs) enumerated in Appendix I-1
shall be performed annually for each entity listed in Appendix A. See AU
Section 622, \"Engagements to Apply Agreed-Upon Procedures to Specified
Elements, Accounts, or Items of a Financial Statement\" of the
[Codification of Statements on Auditing Standards]{.underline}. The AUPs
are designed to assist OPM in assessing the reasonableness of the
Retirement, Health Benefits, and Life Insurance
withholdings/contributions as well as semiannual Headcount information
submitted by agencies. The AUPs shall be applied to the 12 months ended
September 30 of each year.

a.  The AUPs shall be applied separately, and the results reported
    separately, for each Agency Payroll Office (APO) that services
    30,000 or more employees.

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1.  If an agency does not have an APO* *that services 30,000 or more
    employees, it shall perform the AUPs on its largest APO.

^\ \ (2)\ If\ an\ agency\ performs\ payroll\ cross-servicing\ functions\ for\ other\ agencies\ (referred\ to\ as\ client\ agencies),\ the\ auditor\ of\ the\ cross-servicing\ agency\ will\ be\ the\ principal\ auditor\ for\ the\ purpose\ of\ applying\ these\ AUPs.\ Accordingly,\ the\ auditor\ for\ an\ agency\ performing\ payroll\ cross-servicing\ functions\ shall\ apply\ the\ AUPs\ and\ report\ the\ results\ separately\ for\ each\ APO\ that\ services\ 30,000\ or\ more\ employees.\ The\ extent\ of\ participation\ by\ the\ auditors\ for\ the\ client\ APOs\ should\ be\ determined\ in\ conjunction\ with\ the\ principal\ auditor.^

b.  The report on the application of these procedures shall be submitted
    no later than the December 15 following the end of the fiscal year
    for which the financial statements are prepared. To the extent
    practical, management's comments on the auditor's findings shall be
    included in the report. Agencies shall notify OPM by November 15 of
    each year of any anticipated delays or difficulties in completing
    the AUPs and submitting the required report by the December 15
    deadline.

^\ c.\ \ Agencies\ shall\ submit\ three\ copies\ of\ the\ report\ on\ the\ application\ of\ these\ procedures\ to\ the\ Inspector\ General\ of\ OPM\ at\ the\ following\ address:^

^\ \ U.S.\ Office\ of\ Personnel\ Management^

^\ \ \ Office\ of\ Inspector\ General^

^\ \ Room\ 6400^

^\ \ 1900\ E\ Street,\ N.W.^

^\ \ Washington,\ DC\ 20415^

^11.\ INSPECTOR\ GENERAL\ OVERSIGHT.^

a.  IGs shall:

^(1)\ Ensure\ that\ audits\ are\ performed\ and\ audit\ reports\ completed\ in\ a\ timely\ manner\ and\ in\ accordance\ with\ the\ requirements\ of\ this\ Bulletin.\ This\ responsibility\ pertains\ to\ audits\ conducted\ directly\ by\ IG\ staff\ and\ audits\ conducted\ by\ independent\ auditors\ under\ contract.^

^(2)\ Provide\ technical\ advice\ and\ liaison\ to\ agency\ officials\ and\ independent\ external\ auditors.^

^(3)\ Obtain\ or\ make\ quality\ control\ reviews\ of\ audits\ made\ by\ independent\ external\ auditors\ and\ provide\ the\ results,\ when\ appropriate,\ to\ other\ interested\ organizations.^

^(4)\ Monitor\ and\ report\ on\ management\'s\ progress\ in\ resolving\ audit\ findings\ related\ to\ audits\ made\ pursuant\ to\ this\ Bulletin,\ in\ accordance\ with\ the\ Inspector\ General\ Act\ of\ 1978,\ as\ amended,\ the\ provisions\ of\ OMB\ Circular\ A‑50,\ \"Audit\ Followup,\"\ and\ FFMIA.^

b.  IGs are encouraged to work with CFOs to accelerate the preparation
    of financial statements, and to accelerate the completion of audits.

**^Table\ of\ Appendices^**

^Appendix\ A:\ Executive\ Departments\ and\ Agencies\ Required\ to\ Prepare\ Financial\ Statements^

^Appendix\ B:\ Components\ of\ Executive\ Departments\ and\ Agencies\ Required\ to\ Prepare\ Financial\ Statements^

^Appendix\ C:\ General\ Laws^

^Appendix\ D:\ The\ Federal\ Financial\ Management\ Improvement\ Act\ of\ 1996--OMB\ Implementation\ Guidance\ for\ CFOs\ and\ IGs^

^Appendix\ E:\ Illustrative\ Management\ Representation\ Letter^

^Appendix\ F:\ Illustrative\ Auditor's\ Report\ on\ Internal\ Control^

^Appendix\ G:\ Illustrative\ Auditor's\ Report\ on\ Compliance\ with\ Laws\ and\ Regulations^

^Appendix\ H:\ Guidance\ Regarding\ Legal\ Letters^

^Appendix\ I:\ Agreed-Upon\ Procedures:\ Retirement,\ Health\ Benefits,\ and\ Life\ Insurance\ Withholdings/Contributions\ and\ Supplemental\ Semiannual\ Headcount\ Report\ Submitted\ to\ the\ Office\ of\ Personnel\ Management^

**^APPENDIX\ A^**

**^EXECUTIVE\ DEPARTMENTS\ AND\ AGENCIES\ REQUIRED\ TO\ PREPARE\ FINANCIAL\ STATEMENTS^**

^Department\ of\ Agriculture^

^Department\ of\ Commerce^

^Department\ of\ Defense^

^Department\ of\ Education^

^Department\ of\ Energy^

^Department\ of\ Health\ and\ Human\ Services^

^Department\ of\ Housing\ and\ Urban\ Development^

^Department\ of\ the\ Interior^

^Department\ of\ Justice^

^Department\ of\ Labor^

^Department\ of\ State^

^Department\ of\ Transportation^

^Department\ of\ the\ Treasury^

^Department\ of\ Veterans\ Affairs^

^Agency\ for\ International\ Development^

^Environmental\ Protection\ Agency^

^Federal\ Emergency\ Management\ Agency^

^General\ Services\ Administration^

^National\ Aeronautics\ and\ Space\ Administration^

^National\ Science\ Foundation^

^Nuclear\ Regulatory\ Commission^

^Office\ of\ Personnel\ Management^

^Small\ Business\ Administration^

^Social\ Security\ Administration^

**^APPENDIX\ B^**

**^COMPONENTS\ OF\ EXECUTIVE\ DEPARTMENTS\ AND\ AGENCIES\ REQUIRED\ TO\ PREPARE\ FINANCIAL\ STATEMENTS^**[^6]

^[Department\ of\ Agriculture]{.underline}^

^Food\ and\ Nutrition\ Service^

^Forest\ Service^

^Rural\ Development\ Mission\ Area^

^[Department\ of\ Defense]{.underline}^

^Department\ of\ Army\ General\ Funds^

^Department\ of\ Navy\ General\ Funds^

^Department\ of\ Air\ Force\ General\ Funds^

^Military\ Retirement\ Trust\ Fund\ ^

^U.S.\ Army\ Corps\ of\ Engineers\ Civil\ Works\ Program^

^Department\ of\ Army\ Working\ Capital\ Fund^

^Department\ of\ Navy\ Working\ Capital\ Fund^

^Department\ of\ Air\ Force\ Working\ Capital\ Fund^

^[Department\ of\ Health\ and\ Human\ Services]{.underline}^

^Health\ Care\ Financing\ Administration^

^[Department\ of\ Labor]{.underline}^

^Unemployment\ Trust\ Fund^

^[Department\ of\ Transportation]{.underline}^

^Federal\ Aviation\ Administration^

^Highway\ Trust\ Fund^

^[Department\ of\ the\ Treasury]{.underline}^

^Bureau\ of\ Alcohol,\ Tobacco\ and\ Firearms\ ^

^Internal\ Revenue\ Service^

^United\ States\ Customs\ Service^

^[Office\ of\ Personnel\ Management]{.underline}^

^Civil\ Service\ Retirement\ and\ Disability\ Fund^

^Federal\ Employees\ Health\ Benefits\ Program^

^Federal\ Employees\ Life\ Insurance\ Program^

**^APPENDIX\ C^**

**^GENERAL\ LAWS^**[^7]^\ ^

^Anti‑Deficiency\ Act\ (codified\ as\ amended\ in\ 31\ U.S.C.\ 1341,\ 1342,\ 1351,\ 1517)^

-   31 U.S.C. 1341(a)(1)(A) and (C)

-   ^\ 31\ U.S.C.\ 1517\ (a)^

Provisions Governing Claims of the United States Government as provided
primarily in sections 3711-3720E of Title 31, United States Code
(including provisions of the Debt Collection Improvement Act of 1996,
Pub. L. No. 104-134, 110 Stat. 1321-358, which also is codified in
various sections of 5 U.S.C., 18 U.S.C., 26 U.S.C., 28 U.S.C., 31
U.S.C., 42 U.S.C.)

-   21 U.S.C. 3711 21

-   ^\ 21\ U.S.C.\ 3717\ (a),\ (b),\ (c),\ (e)\ and\ (f)^

-   ^\ 21\ U.S.C.\ 3719^

Federal Credit Reform Act of 1990, Pub. L. No. 101‑508, 104 Stat.
1388‑610 (codified in various sections of 2 U.S.C.)

-   2U.S.C. 661c(b) and (e)

Pay and Allowance System for Civilian Employees as provided primarily in
Chapters 51-59 of Title 5, United States Code

-   5 U.S.C. 5332 and 5343

-   ^\ 29\ U.S.C.\ 206^

Prompt Payment Act (codified as amended in 31 U.S.C. 3901-3907)

-   31 U.S.C. 3902(a) and (b)

-   ^31\ U.S.C.\ 3902\ (f)^

-   ^31\ U.S.C.\ 3904^

-   ^31\ U.S.C.\ 3906(a)(1)^

**APPENDIX D**

**^THE\ FEDERAL\ FINANCIAL\ MANAGEMENT\ IMPROVEMENT\ ACT\ OF\ 1996\ ^**

**^OMB\ IMPLEMENTATION\ GUIDANCE\ FOR\ CFOs\ and\ IGs\ ^**

**^[Introduction]{.underline}^**

^The\ Federal\ Financial\ Management\ Improvement\ Act\ of\ 1996\ (FFMIA),\ 31\ U.S.C.\ 3512,\ fundamentally\ does\ two\ things:^

-   establishes in statute certain financial management system
    requirements that are already established by Executive Branch
    policies, and

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-   establishes new requirements for auditors to report on agency
    compliance with these basic requirements, and for agency heads and
    agency management to correct deficiencies within a certain time
    period.

The Act applies only to audits of the entities listed in Appendices A
and B of the Bulletin.

**[Substantive statutory requirement]{.underline}**

The 1997 Omnibus Consolidated Appropriations Act includes Title VIII,
the Federal Financial Management Improvement Act of 1996. Section 803(a)
of the Act states:

^"In\ General--Each\ agency\ shall\ implement\ and\ maintain\ financial\ management\ systems\ that\ comply\ substantially\ with\ Federal\ financial\ management\ systems\ requirements,\ applicable\ Federal\ accounting\ standards,\ and\ the\ United\ States\ Government\ Standard\ General\ Ledger\ (SGL)\ at\ the\ transaction\ level."^

^These\ three\ requirements--Federal\ financial\ management\ system\ requirements,\ applicable\ Federal\ accounting\ standards,\ and\ the\ SGL--are\ already\ well‑established\ in\ Executive\ Branch\ policy\ documents.\ These\ documents,\ which\ are\ described\ in\ more\ detail\ below,\ include:\ OMB\ Circulars\ (A‑127,\ "Financial\ Management\ Systems"\ and\ A‑134,\ "Financial\ Accounting\ Principles\ and\ Standards"),\ Joint\ Financial\ Management\ Improvement\ Program\ (JFMIP)\ documents\ (such\ as\ the\ Core\ System\ Requirements),\ and\ Treasury\ Department\ policies.^

^Section\ 803\ (a)\ of\ FFMIA\ does\ not\ establish\ any\ new\ financial\ system\ requirements,\ but\ it\ provides\ statutory\ authority\ for\ existing\ Executive\ Branch\ financial\ system\ requirements.^

^Other\ sections\ of\ FFMIA\ establish\ new\ procedural\ requirements.\ However,\ these\ new\ requirements\ follow\ the\ basic\ principles\ established\ in\ Federal\ audit\ policies:^

-   Section 803 (b)(1) requires that auditors report whether agency
    systems substantially comply with Federal financial management
    systems requirements;

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-   Section 803 (c)(1) requires that the head of each agency determine
    whether the agency's financial management systems comply with the
    Act, based on a review of the report on the applicable agency wide
    audited financial statement and any other information the head of
    the agency considers relevant and appropriate;

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-   Section 803 (c)(3) requires that, when the agency head disagrees
    with the auditor's findings, the Director of OMB shall review such
    determinations and provide a report on the findings to the
    appropriate committees of the Congress;

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-   Section 803 (c)(3) requires that when the agency head agrees with
    the auditor's findings of noncompliance, a remediation plan shall be
    developed, in consultation with OMB, that describes the resources
    and milestones for achieving compliance; and

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-   Section 804 (b) requires that the Inspector General (IG) report on
    agency progress in achieving compliance in the IG's semiannual
    report required by the IG Act, as amended.

In addition to these reporting requirements, both OMB and GAO have
annual reporting requirements under the Act. More detailed information
regarding agency responsibilities follows.

**[Relationship to Section 4 of FMFIA (the Integrity Act)]{.underline}**

There is a close, if not overlapping, relationship between FFMIA and the
Federal Managers' Financial Integrity Act (FMFIA). Since the acronyms
are similar, this guidance refers to FMFIA as the Integrity Act. The
Integrity Act requires that the agency head, on an annual basis no later
than December 31, provide an assurance statement with respect to agency
management controls (Section 2) and agency compliance with financial
management system requirements (Section 4). For the most part, in many
agencies, the Integrity Act statement of assurance for Section 4
provides management's assertion of compliance with section 803(a) of
FFMIA.

**[Section 803, Implementation of FFMIA]{.underline}**

Section 803 (a), cited above, states: "In General ‑‑ Each agency shall
implement and maintain financial management systems that comply
substantially with Federal financial management systems requirements,
applicable Federal accounting standards, and the United States
Government Standard General Ledger (SGL) at the transaction level."

This section of the guidance more fully describes (1) Federal financial
management systems requirements; (2) applicable Federal accounting
standards; and (3) the SGL at the transaction level. In each section,
information is provided on substantial compliance and types of
indicators to be used in assessing whether an agency is in substantial
compliance. The criteria are broad and flexible; yet, they provide a
practical basis for measuring achievement in complying with the FFMIA
requirements.

[(1) Federal financial management systems requirements]{.underline}

Circular A‑127 prescribes policies and standards for agencies to follow
in developing, operating, evaluating, and reporting on financial
management systems. In addition, Circular A‑127 also incorporates by
reference: Circular A‑123, "Management Accountability and Control;"
Circular A‑130, "Management of Federal Information Resources;" other
operating policies and related requirements prescribed by OMB; and
Federal Financial Management Systems Requirements issued by JFMIP.

The financial management systems subject to the requirements of FFMIA
are included in the inventory of financial management systems subject to
the requirements of Section 4 of the Integrity Act.

Compliance with the financial management systems requirements of FFMIA
applies to all financial management systems essential to meeting
financial statement preparation and budgetary reporting requirements.

An agency of the Federal Government is considered to be in substantial
compliance with financial management system requirements if:

-   Financial management systems meet Circular A‑127 requirements which,
    for purposes of complying with this Act, call for systems to:
    support management's fiduciary role; support the legal, regulatory,
    and other special management requirements of the agency; support the
    budget execution functions; support fiscal management of program
    delivery and program decision-making; comply with internal and
    external reporting requirements, including, as necessary, the
    requirement for financial statements prepared in accordance with the
    form and content prescribed by OMB and reporting requirements
    prescribed by Treasury; and be monitored by agency staff to ensure
    the integrity of financial data. This is accomplished through a
    unified set of systems comprised of financial systems and financial
    portions of mixed systems. These systems may or may not be operated
    by the CFO's office.

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-   Financial management systems follow requirements published in
    JFMIP's Federal Financial Management System Requirements series
    which prescribe the functions that must be performed by systems to
    capture information for financial statement preparation.

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-   Compensating procedures are applied to financial management
    information produced by third parties, such as service bureaus, when
    it is determined that systems used by third parties to provide those
    services do not comply with the provisions of the FFMIA.

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-   Security over financial information is provided in accordance with
    Circular A‑130, Appendix 3.

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-   Internal controls over financial management systems are designed
    properly and operating effectively. Internal controls are described
    in paragraph 2 of OMB Bulletin 99-\_\_. It is not expected that the
    scope of the auditor's work in this area would extend beyond the
    requirements of the Bulletin.

Indicators:

-   Annual assurance statement issued pursuant to the Section 4
    Integrity Act report does not reflect any material non-conformance
    related to financial management systems covered by FFMIA.

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-   Audit procedures performed for the purpose of obtaining evidence in
    support of the auditor's opinion on the financial statements did not
    disclose material weaknesses or noncompliance with legal or
    regulatory requirements of the agency.[^8]

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-   ^Standard\ budget\ execution\ information\ (e.g.,\ FACTS\ II\ reporting\ for\ those\ accounts\ required\ to\ comply\ with\ FACTS\ II)\ is\ provided\ on\ a\ timely\ basis\ to\ OMB\ and\ Treasury\ in\ the\ manner\ requested\ and\ is\ consistent\ with\ budget\ execution\ information\ used\ internally\ within\ the\ agency.^

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-   Agency senior management and program managers have access to timely
    financial information on the status of funds (commitments,
    reservation and obligations) by operating units and programs that
    allows analysis of data for decision-making.

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-   Funds control decisions are based on information provided from the
    agency's financial management systems.

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-   The agency core financial system, supported by other systems
    containing the detailed data summarized in the core financial
    system, is the source of information used in the preparation of the
    annual financial statements and other internal and external
    reporting requirements, including certain actual data presented in
    the President's Budget. Detailed information contained in these
    other systems also may be used as the source information for
    reporting where summarized information contained in the agency core
    system does not provide the details necessary to meet reporting
    requirements.

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-   The agency has a management control program that identifies and
    reports deficiencies in financial management systems, including
    deficiencies resulting in a lack of substantial compliance with the
    three requirements of FFMIA, and ensures such deficiencies are
    corrected.

^[(2)\ Federal\ Accounting\ Standards]{.underline}^

^An\ agency\ of\ the\ Federal\ Government\ will\ be\ considered\ in\ substantial\ compliance\ with\ Federal\ accounting\ standards\ if\ the\ agency\ prepares\ audited\ financial\ statements\ in\ accordance\ with\ the\ hierarchy\ of\ Federal\ accounting\ standards\ included\ in\ paragraph\ 5\ of\ OMB\ Bulletin\ 99-\_\_.\ Substantial\ compliance\ does\ not\ require\ all\ transactions\ to\ be\ in\ full\ compliance\ with\ Federal\ accounting\ standards\ at\ the\ point\ of\ original\ entry,\ but\ that\ financial\ information\ used\ in\ the\ preparation\ of\ financial\ statements,\ based\ on\ such\ transactions,\ is\ adequately\ supported\ by\ detailed\ financial\ records\ (automated\ or\ manual).^

^Indicators:^

-   An unqualified opinion on the agency's financial statements. For a
    qualified opinion, a review of the underlying reasons for the
    qualified opinion is needed to determine whether or not the agency
    is in substantial compliance with this requirement. In limited
    circumstances, a qualified opinion on the agency's financial
    statements may indicate substantial compliance with this requirement
    when it is solely due to reasons other than the agency's ability to
    prepare auditable financial statements. Further, a disclaimer of
    opinion may not indicate that there is a lack of substantial
    compliance with this requirement when it results from a material
    uncertainty, such as resolution of litigation or projecting future
    economic events.

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-   The audit disclosed no material weaknesses in internal controls that
    affect the agency's ability to prepare auditable financial
    statements and related disclosures.[^9]

^[(3)\ SGL\ at\ the\ Transaction\ Level]{.underline}^

^Implementing\ the\ SGL\ at\ the\ transaction\ level\ requires\ that\ the\ Core\ Financial\ System\ General\ Ledger\ Management\ Function\ is\ in\ full\ compliance\ with\ the\ SGL\ chart\ of\ accounts\ descriptions,\ related\ attributes,\ and\ posting\ rules;\ transactions\ from\ feeder\ systems\ are\ summarized\ and\ fed\ into\ the\ Core\ Financial\ System\'s\ General\ Ledger\ following\ SGL\ requirements\ through\ an\ interface\ (automated\ or\ manual);\ detail\ supporting\ the\ interface\ transactions\ can\ be\ traced\ back\ to\ the\ source\ transactions\ in\ the\ feeder\ systems;\ and\ the\ feeder\ systems\ process\ transactions\ consistent\ with\ SGL\ account\ descriptions,\ related\ attributes,\ and\ posting\ rules.^

^An\ agency\ of\ the\ Federal\ Government\ will\ be\ considered\ in\ substantial\ compliance\ with\ the\ SGL\ at\ the\ transaction\ level\ requirement\ if\ the\ agency's\ classification\ of\ financial\ events\ for\ its\ financial\ statements\ and\ required\ financial\ information\ provided\ to\ the\ Department\ of\ the\ Treasury\ and\ OMB,\ including\ year-end\ budget\ reporting,\ is\ consistent\ with\ the\ account\ descriptions,\ related\ attributes,\ and\ posting\ rules,\ as\ approved\ by\ the\ SGL\ Board\ and\ published\ by\ the\ Treasury\ Department's\ Financial\ Management\ Service\ in\ the\ [Treasury\ Financial\ Manual]{.underline}.^

^Indicators:\ ^

-   The agency's core financial system uses the SGL number to capture
    financial information, or the agency uses an alternative code
    (pseudo‑code) following the same account descriptions, related
    attributes, and posting rules that are used by the SGL to capture
    financial information, and the information can be appropriately
    matched to SGL codes for reporting to OMB or Treasury and for
    preparing financial statements. The use of the SGL code in the
    feeder system is not necessary as long as the code definitions used
    to capture information are consistent with the SGL definitions.

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-   Systems must capture information using the same descriptions and
    posting rules as in the SGL. Detailed information captured in feeder
    systems can be summarized in the Core Financial System; however,
    information shall be captured and summarized so that it follows the
    SGL descriptions and posting rules and is captured at the level
    necessary to meet OMB or Treasury reporting requirements (e.g.,
    FACTS II reporting for those accounts required to comply with
    FACTS II) and for preparing financial statements.

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-   Transactions can be traced back to the source/point‑of‑entry in the
    feeder systems and to supporting information.

**[Audit Considerations]{.underline}**

Based on the foregoing, the auditor shall use professional judgment in
determining substantial compliance with the systems requirements of
FFMIA. However, lack of substantial compliance with the requirements in
any one or more of the three areas included in FFMIA--Federal financial
management system requirements, Federal accounting standards, and the
SGL--would result in lack of substantial compliance with FFMIA.

Further, a lack of substantial compliance with any one or more of the
indicators described herein would typically result in a lack of
substantial compliance with one or more of the three areas described
above and, thus, a lack of substantial compliance with the systems
requirements of FFMIA. Judgment shall be used in determining a lack of
substantial compliance with an indicator. For instance, if an auditor
finds that a few budget execution reports were submitted late to OMB and
contained minor inaccuracies, this may not result in a lack of
substantial compliance with the indicator regarding standard budget
execution information.

**^APPENDIX\ E^**

**^ILLUSTRATIVE\ MANAGEMENT\ REPRESENTATION\ LETTER^**[^10]

^\[Entity\ Letterhead\]^

^\[Date\ of\ auditor\'s\ report\]^

^\[Name\ and\ title\ of\ head\ of\ audit\ organization\]^

^\[Address\ of\ audit\ organization\]^

^Dear\ \[name\ of\ head\ of\ audit\ organization\]:^

^This\ letter\ is\ in\ connection\ with\ your\ audits\ of\ the\ \[entity\'s\]\ Principal\ Statements\ (also\ referred\ to\ as\ "financial\ statements\")\ \[list\ Principal\ Statements\]\ as\ of\ \[end\ of\ year(s)\ covered\ by\ Principal\ Statements\ and\ for\ the\ year(s)\ then\ ended\]\ for\ the\ purposes\ of\ (1)\ expressing\ an\ opinion\ as\ to\ whether\ the\ Principal\ Statements\ are\ presented\ fairly,\ in\ all\ material\ respects,\ in\ conformity\ with\ Federal\ accounting\ standards,\ and\ (2)\ reporting\ whether\ the\ agency's\ financial\ management\ systems\ substantially\ comply\ with\ Federal\ financial\ management\ systems\ requirements,\ applicable\ Federal\ accounting\ standards,\ and\ the\ U.S.\ Government\ Standard\ General\ Ledger\ at\ the\ transaction\ level\ as\ of\ \[the\ end\ of\ the\ period(s)\ covered\ by\ the\ financial\ statements\].^

^We\ confirm,\ to\ the\ best\ of\ our\ knowledge\ and\ belief,\ the\ following\ representations\ made\ to\ you\ during\ your\ audits,\ that\ these\ representations\ are\ as\ of\ the\ date\ of\ your\ auditor's\ report,\ and\ pertain\ to\ the\ period\ \[or\ periods\]\ covered\ by\ the\ financial\ statements.\ \[^*^If\ comparative\ statements\ are\ presented\ the\ following\ sentence\ should\ be\ added:^*^\ "These\ representations\ update\ the\ representations\ we\ provided\ in\ conjunction\ with\ your\ audit\ of\ the\ financial\ statements\ as\ of\ and\ for\ the\ year\ ended\ (state\ year)."\]^

^1.\ We\ are\ responsible\ for\ the\ fair\ presentation\ of\ the\ Principal\ Statements\ and\ Required\ Supplementary\ Stewardship\ Information\ in\ conformity\ with\ Federal\ accounting\ standards\ \[or,\ where\ applicable,\ for\ the\ fair\ presentation\ of\ the\ financial\ statements\ in\ conformity\ with\ generally\ accepted\ accounting\ principles\].^

^2.\ The\ financial\ statements\ are\ fairly\ presented\ in\ conformity\ with\ Federal\ accounting\ standards\ \[or,\ where\ applicable,\ generally\ accepted\ accounting\ principles\].^

^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 \[or
other similar bodies\] or summaries of actions of recent meetings for
which minutes have not been prepared; and

c\. communications from 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.\ The\ \[entity\]\ has\ satisfactory\ title\ to\ all\ owned\ assets,\ including\ stewardship\ property,\ plant,\ and\ equipment;\ such\ assets\ have\ no\ liens\ or\ encumbrances,\ nor\ have\ any\ assets\ been\ pledged.^

^6.\ We\ have\ no\ plans\ or\ intentions\ that\ may\ materially\ affect\ the\ carrying\ value\ or\ classification\ of\ assets\ and\ liabilities.^

7\. Guarantees under which the agency is contingently liable have been
properly reported or disclosed.

8\. Related party transactions and related accounts receivable or
payable, including assessments, loans, and guarantees have been properly
recorded and disclosed.

^9.\ All\ intra-agency\ transactions\ and\ balances\ have\ been\ appropriately\ identified\ and\ eliminated\ for\ financial\ reporting\ purposes,\ unless\ otherwise\ noted.\ All\ intra-governmental\ transactions\ and\ balances\ have\ been\ appropriately\ recorded,\ reported,\ and\ disclosed.\ Also,\ we\ have\ reconciled\ significant\ intra-governmental\ transactions\ and\ balances\ with\ the\ appropriate\ trading\ partners,\ including\ the\ following\ type\ of\ activities:\ Investments\ in\ Public\ Debt\ Securities,\ Borrowings\ from\ Treasury,\ Borrowings\ from\ the\ Federal\ Financing\ Bank,\ interest\ (revenue,\ expense,\ receivable,\ payable)\ related\ to\ investments\ and\ debt,\ agency\ contributions\ to\ employee\ benefit\ plans\ (e.g.,\ OPM\ and\ Department\ of\ Labor),\ and\ intra-governmental\ revenue.^

^10.\ 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\ that\ must\ be\ disclosed,\ that\ have\ not\ been\ disclosed.^

^11.\ We\ have\ complied\ with\ all\ aspects\ of\ contractual\ agreements\ that\ would\ have\ a\ material\ effect\ on\ the\ financial\ statements\ in\ the\ event\ of\ noncompliance.^

^12.\ No\ material\ events\ or\ transactions\ have\ occurred\ subsequent\ to\ \[the\ date\ of\ latest\ audited\ financial\ statements\]\ that\ have\ not\ been\ properly\ recorded\ in\ the\ Principal\ Statements\ and\ Required\ Supplementary\ Stewardship\ Information\ or\ disclosed\ in\ the\ notes\ thereto.^

^13.\ 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\ affect\ on\ the\ Principal\ Statements\ or\ Required\ Supplementary\ Stewardship\ Information)\ or\ any\ fraud\ involving\ management\ or\ employees\ who\ have\ significant\ roles\ in\ internal\ control.\ \[Fraud\ meeting\ foregoing\ criteria\ should\ be\ described.\]^

^14.\ We\ are\ responsible\ for\ establishing\ and\ maintaining\ internal\ control.^

^15.\ 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\ the\ Principal\ Statements\ and\ Required\ Supplementary\ Stewardship\ Information\ in\ accordance\ with\ Federal\ accounting\ standards,\ and\ the\ safeguarding\ of\ assets\ 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\ other\ laws\ and\ regulations\ that\ could\ have\ a\ direct\ and\ material\ effect\ on\ the\ financial\ statements,\ and\ (ii)\ any\ other\ laws,\ regulations,\ and\ government\ wide\ policies\ identified\ by\ the\ Office\ of\ Management\ and\ Budget\ (OMB)\ in\ Appendix\ C\ of\ OMB\ Bulletin\ 99-\_\_;\ 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.^

^16.\ Those\ controls\ in\ place\ on\ September\ 30,\ XXXX\ \[or\ date\ of\ latest\ audited\ financial\ statements\]\ provided\ reasonable\ assurance\ that\ the\ foregoing\ objectives\ are\ met.^

*^If\ there\ are\ material\ weaknesses\ in\ internal\ control,\ the\ forgoing\ representation\ should\ be\ modified\ to\ read:\ ^^"^^Those\ controls\ in\ place\ on\ September\ 30,\ XXXX,\ provided\ reasonable\ assurance\ that\ the\ foregoing\ objectives\ are\ met\ except\ for\ the\ effects\ of\ the\ material\ weaknesses\ discussed\ below\ or\ in\ the\ attachment,^^"^*^\ ^*^or\ a\ statement\ that\ ^^"^^internal\ controls\ are\ not\ effective^^"^^\ or\ ^^"^^do\ not\ meet\ the\ foregoing\ objectives.^^"^*

^17.\ We\ are\ responsible\ for\ implementing\ and\ maintaining\ financial\ management\ systems\ that\ comply\ substantially\ with\ Federal\ financial\ management\ systems\ requirements\ contained\ in\ OMB\ Circular\ A-127,\ "Financial\ Management\ Systems,"\ applicable\ Federal\ accounting\ standards,\ and\ the\ United\ States\ Government\ Standard\ General\ Ledger\ (SGL)\ at\ the\ transaction\ level.^

^18.\ 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\ criteria\ established\ under\ OMB\ Circular\ A-127\ and\ guidance\ issued\ by\ OMB\ and\ included\ in\ Appendix\ D\ of\ OMB\ Bulletin\ 99-\_\_\_.^

^19.\ The\ financial\ management\ systems\ complied\ substantially\ with\ Federal\ financial\ management\ systems\ requirements,\ applicable\ Federal\ accounting\ standards,\ and\ the\ SGL\ at\ the\ transaction\ level\ as\ of\ the\ \[date\ of\ financial\ statements\].^

*^\[If\ the\ financial\ management\ systems\ did\ not\ substantially\ comply,\ the\ following\ paragraphs\ 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.^*

*^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.\ ^*

*^This\ representation\ does\ not\ change\ the\ representation\ in\ paragraph\ 2\ of\ this\ letter.\]^*

^20.\ We\ are\ responsible\ for\ \[entity\'s\]\ compliance\ with\ applicable\ laws\ and\ regulations.^

^21.\ 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.^

^22.\ We\ have\ disclosed\ to\ you\ all\ known\ instances\ of\ noncompliance\ with\ laws\ and\ regulations.^

^\[Signed\ by\ Agency\ Head\]^

^\[Signed\ by\ Chief\ Financial\ Officer\]^

**^APPENDIX\ F^**

**^ILLUSTRATIVE\ AUDITOR^^'^^S\ REPORT\ ON\ INTERNAL\ CONTROL^**

*^\[Addressee\]^*

^We\ have\ audited\ the\ Principal\ Statements\ (hereinafter\ referred\ to\ as\ \"financial\ statements\")\ of\ \[^*^Name\ of\ Federal\ Agency^*^\]\ as\ of\ and\ for\ the\ year\ ended\ September\ 30,\ XXXX,\ and\ have\ issued\ our\ report\ thereon\ dated\ \_\_\_\_\_\_\_\_\_\_\_\_\_.\ We\ conducted\ our\ audit\ in\ accordance\ with\ generally\ accepted\ auditing\ standards;\ the\ standards\ applicable\ to\ financial\ audits\ contained\ in\ [Government\ Auditing\ Standards]{.underline},\ issued\ by\ the\ Comptroller\ General\ of\ the\ United\ States;\ and,\ Office\ of\ Management\ and\ Budget\ (OMB)\ Bulletin\ No.\ 99-\ ,\ \"Audit\ Requirements\ for\ Federal\ Financial\ Statements.\"^

^In\ planning\ and\ performing\ our\ audit,\ we\ considered\ \[^*^Name\ of\ Federal\ Agency^*^\]\'s\ internal\ control\ over\ financial\ reporting\ by\ obtaining\ an\ understanding\ of\ the\ agency's\ internal\ control,\ determined\ whether\ these\ internal\ controls\ had\ been\ placed\ in\ operation,\ assessed\ control\ risk,\ and\ performed\ tests\ of\ controls\ in\ order\ to\ determine\ our\ auditing\ procedures\ for\ the\ purpose\ of\ expressing\ our\ opinion\ on\ the\ financial\ statements.\ We\ limited\ our\ internal\ control\ testing\ to\ those\ controls\ necessary\ to\ achieve\ the\ objectives\ described\ in\ OMB\ Bulletin\ 99-\_\_.\ We\ did\ not\ test\ all\ internal\ controls\ relevant\ to\ operating\ objectives\ as\ broadly\ defined\ by\ the\ Federal\ Managers'\ Financial\ Integrity\ Act\ of\ 1982,\ such\ as\ those\ controls\ relevant\ to\ ensuring\ efficient\ operations.\ The\ objective\ of\ our\ audit\ was\ not\ to\ provide\ assurance\ on\ internal\ control.\ Consequently,\ we\ do\ not\ provide\ an\ opinion\ on\ internal\ control.^[^11]

^Our\ consideration\ of\ the\ internal\ control\ over\ financial\ reporting\ would\ not\ necessarily\ disclose\ all\ matters\ in\ the\ internal\ control\ over\ financial\ reporting\ that\ might\ be\ reportable\ conditions.\ Under\ standards\ issued\ by\ the\ American\ Institute\ of\ Certified\ Public\ Accountants,\ reportable\ conditions\ are\ matters\ coming\ to\ our\ attention\ relating\ to\ significant\ deficiencies\ in\ the\ design\ or\ operation\ of\ the\ internal\ control\ that,\ in\ our\ judgment,\ could\ adversely\ affect\ the\ agency's\ ability\ to\ record,\ process,\ summarize,\ and\ report\ financial\ data\ consistent\ with\ the\ assertions\ by\ management\ in\ the\ financial\ statements.\ Material\ weaknesses\ are\ reportable\ conditions\ in\ which\ the\ design\ or\ operation\ of\ one\ or\ more\ of\ the\ internal\ control\ components\ does\ not\ reduce\ to\ a\ relatively\ low\ level\ the\ risk\ that\ misstatements\ in\ amounts\ that\ would\ be\ material\ in\ relation\ to\ the\ financial\ statements\ being\ audited\ may\ occur\ and\ not\ be\ detected\ within\ a\ timely\ period\ by\ employees\ in\ the\ normal\ course\ of\ performing\ their\ assigned\ functions.\ Because\ of\ inherent\ limitations\ in\ internal\ controls,\ misstatements,\ losses,\ or\ noncompliance\ may\ nevertheless\ occur\ and\ not\ be\ detected.\ However,\ we\ noted\ certain\ matters\ \[^*^discussed\ in\ the\ following\ paragraphs\ or\ accompanying\ schedule^*^\]\ involving\ the\ internal\ control\ and\ its\ operation\ that\ we\ consider\ to\ be\ reportable\ conditions\ \[^*^and\ material\ weaknesses^*^\].\ ^

*^If\ none\ of\ the\ reportable\ conditions\ is\ believed\ to\ be\ a\ material\ weakness,\ the\ report\ should\ state\ the\ following:\ ^^"^^However,\ none\ of\ the\ reportable\ conditions\ is\ believed\ to\ be\ a\ material\ weakness.^^"^*

*^\ ^^If\ no\ reportable\ conditions\ were\ noted\ during\ the\ audit,\ the\ report\ should\ state\ the\ following:\ ^^"^^However,\ we\ noted\ no\ matters\ involving\ the\ internal\ control\ and\ its\ operation\ that\ we\ considered\ to\ be\ material\ weaknesses\ as\ defined\ above.^^"^*

^In\ addition,\ we\ considered\ \[^*^Name\ of\ Federal\ Agency^*^\]'s\ internal\ control\ over\ Required\ Supplementary\ Stewardship\ Information\ by\ obtaining\ an\ understanding\ of\ the\ agency's\ internal\ controls,\ determined\ whether\ these\ internal\ controls\ had\ been\ placed\ in\ operation,\ assessed\ control\ risk,\ and\ performed\ tests\ of\ controls\ as\ required\ by\ OMB\ Bulletin\ 99-\_\_\ and\ not\ to\ provide\ assurance\ on\ these\ internal\ controls.\ Accordingly,\ we\ do\ not\ provide\ assurance\ on\ such\ controls.^

^Finally,\ with\ respect\ to\ internal\ controls\ related\ to\ performance\ measures\ reported\ in\ \[^*^refer\ to\ section\ of\ financial\ statement\ or\ accountability\ report^*^\],\ we\ obtained\ an\ understanding\ of\ the\ design\ of\ significant\ internal\ controls\ relating\ to\ the\ existence\ and\ completeness\ assertions,\ as\ required\ by\ OMB\ Bulletin\ 99-\_\_.\ Our\ procedures\ were\ not\ designed\ to\ provide\ assurance\ on\ internal\ control\ over\ reported\ performance\ measures,\ and,\ accordingly,\ we\ do\ not\ provide\ an\ opinion\ on\ such\ controls.\ ^

*^\ ^^If\ conditions\ came\ to\ the\ auditor^^'^^s\ attention\ that\ in\ his\ or\ her\ judgment\ represent\ significant\ deficiencies\ in\ the\ design\ or\ operation\ of\ internal\ control\ over\ performance\ measures,\ which\ could\ adversely\ affect\ the\ agency^^'^^s\ ability\ to\ collect,\ process,\ record,\ and\ summarize\ performance\ information\ and\ report\ performance\ measures\ in\ accordance\ with\ management^^'^^s\ criteria,\ the\ following\ sentence\ should\ be\ added\ to\ the\ foregoing\ paragraph.\ ^^"^^However,\ we\ noted\ certain\ significant\ deficiencies\ in\ internal\ control\ over\ reported\ performance\ measures\ \[discussed\ in\ the\ following\ paragraphs\ or\ accompanying\ schedule\]\ that,\ in\ our\ judgment,\ could\ adversely\ affect\ the\ agency^^'^^s\ ability\ to\ collect,\ process,\ record,\ and\ summarize\ performance\ information\ and\ report\ performance\ measures\ in\ accordance\ with\ management^^'^^s\ criteria.^^"^^\ ^*

^This\ report\ is\ intended\ solely\ for\ the\ information\ and\ use\ of\ the\ management\ of\ \[^*^Name\ of\ Federal\ Agency^*^\],\ OMB\ and\ Congress,\ and\ is\ not\ intended\ to\ be\ and\ should\ not\ be\ used\ by\ anyone\ other\ than\ these\ specified\ parties.\ We\ caution\ that\ misstatements,\ losses,\ and\ noncompliance\ may\ occur\ and\ not\ be\ detected\ by\ the\ testing\ performed\ and\ that\ such\ testing\ may\ not\ be\ sufficient\ for\ other\ purposes.^

*^\[Signature\]^*

*^\[Date\]^*

**^APPENDIX\ G^**

**^ILLUSTRATIVE\ AUDITOR^^'^^S\ REPORT\ ON\ COMPLIANCE\ WITH\ LAWS\ AND\ REGULATIONS^**

^\[^*^Addressee^*^\]^

^We\ have\ audited\ the\ Principal\ Statements\ (hereinafter\ referred\ to\ as\ \"financial\ statements\")\ of\ \[^*^Name\ of\ Federal\ Agency^*^\]\ as\ of\ and\ for\ the\ year\ ended\ September\ 30,\ XXXX,\ and\ have\ issued\ our\ report\ thereon\ dated\ \_\_\_\_\_\_\_\_\_\_\_\_\_\_.\ We\ conducted\ our\ audit\ in\ accordance\ with:\ generally\ accepted\ auditing\ standards;\ the\ standards\ applicable\ to\ financial\ audits\ contained\ in\ [Government\ Auditing\ Standards]{.underline},\ issued\ by\ the\ Comptroller\ General\ of\ the\ United\ States;\ and,\ Office\ of\ Management\ and\ Budget\ (OMB)\ Bulletin\ No.\ 99-\ ,\ \"Audit\ Requirements\ for\ Federal\ Financial\ Statements.\"^

^The\ management\ of\ \[^*^Name\ of\ Federal\ Agency^*^\]\ is\ responsible\ for\ complying\ with\ laws\ and\ regulations\ applicable\ to\ the\ agency.\ As\ part\ of\ obtaining\ reasonable\ assurance\ about\ whether\ the\ agency's\ financial\ statements\ are\ free\ of\ material\ misstatement,\ we\ performed\ tests\ of\ its\ compliance\ with\ certain\ provisions\ of\ laws\ and\ regulations,\ noncompliance\ with\ which\ could\ have\ a\ direct\ and\ material\ effect\ on\ the\ determination\ of\ financial\ statement,\ amounts\ and\ certain\ other\ laws\ and\ regulations\ specified\ in\ OMB\ Bulletin\ 99-\_\_,\ including\ the\ requirements\ referred\ to\ in\ the\ Federal\ Financial\ Management\ Improvement\ Act\ (FFMIA)\ of\ 1996.\ We\ limited\ our\ tests\ of\ compliance\ to\ these\ provisions\ and\ we\ did\ not\ test\ compliance\ with\ all\ laws\ and\ regulations\ applicable\ to\ \[^*^Name\ of\ Agency^*^\].^

^The\ results\ of\ our\ tests\ of\ compliance\ with\ the\ laws\ and\ regulations\ described\ in\ the\ preceding\ paragraph\ exclusive\ of\ FFMIA^[^12]^\ disclosed\ instances\ of\ noncompliance\ with\ the\ following\ laws\ and\ regulations\ that\ are\ required\ to\ be\ reported\ under\ [Government\ Auditing\ Standards]{.underline}\ and\ OMB\ Bulletin\ 99-\_\_,\ which\ are\ described\ below.^

*^Describe\ any\ instances\ of\ noncompliance\ required\ to\ be\ reported\ and\ list\ laws\ and\ regulations\ for\ which\ noncompliance\ was\ disclosed\ exclusive\ of\ FFMIA^*^\ \[^*^or\ provide\ such\ information\ in\ an\ accompanying\ schedule^*^\]^

^The\ results\ of\ our\ tests\ of\ compliance\ disclosed\ no\ instances\ of\ noncompliance\ with\ other\ laws\ and\ regulations\ discussed\ in\ the\ preceding\ paragraph\ exclusive\ of\ FFMIA\ that\ are\ required\ to\ be\ reported\ under\ [Government\ Auditing\ Standards]{.underline}\ or\ OMB\ Bulletin\ 99-\_\_.^

^Under\ FFMIA,\ we\ are\ required\ to\ report\ whether\ the\ agency's\ financial\ management\ systems\ substantially\ comply\ with\ the\ Federal\ financial\ management\ systems\ requirements,\ Federal\ accounting\ standards,\ and\ the\ United\ States\ Government\ Standard\ General\ Ledger\ at\ the\ transaction\ level.\ To\ meet\ this\ requirement,\ we\ performed\ tests\ of\ compliance\ using\ the\ implementation\ guidance\ for\ FFMIA\ included\ in\ Appendix\ D\ of\ OMB\ Bulletin\ 99-\ .^

^The\ results\ of\ our\ tests\ disclosed\ no\ instances\ in\ which\ the\ agency's\ financial\ management\ systems\ did\ not\ substantially\ comply\ with\ the\ three\ requirements\ discussed\ in\ the\ preceding\ paragraph.^

^\[^*^If\ the\ results\ of\ tests\ disclosed\ that\ the\ agency^^'^^s\ systems\ did\ not\ substantially\ comply\ with\ the\ foregoing\ requirements,\ the\ preceding\ sentence\ should\ be\ replaced\ with\ the\ following:^*

*^The\ results\ of\ our\ tests\ disclosed\ instances,\ described\ below\ (or\ described\ in\ an\ accompanying\ schedule),\ where\ the\ agency^^'^^s\ financial\ management\ systems\ did\ not\ substantially\ comply\ with\ the\ three\ requirements\ discussed\ in\ the\ preceding\ paragraph.^*

*^In\ addition,\ when\ tests\ disclosed\ that\ the\ agency^^'^^s\ systems\ did\ not\ substantially\ comply\ with\ the\ foregoing\ requirements,\ the\ auditor^^'^^s\ report\ on\ compliance\ or\ an\ accompanying\ schedule\ should\ provide\ the\ following\ information\ as\ required\ by\ FFMIA\ and\ paragraph\ 7.c.(3)(c)\ of\ OMB\ Bulletin\ 99-\_\_.^*

*1. The entity or organization responsible for the financial management
systems that were found not to comply with the requirements.*

*2. All facts pertaining to the noncompliance, including: (a) the nature
and extent of the noncompliance, (b) the primary reason or cause of the
noncompliance, and (c) any relevant comments from reporting entity
management or employees responsible for the noncompliance.*

*^3.^^\ ^^Recommended\ remedial\ actions\ and\ the\ time\ frames\ to\ implement\ such\ actions.^*^\]^

Providing an opinion on compliance with certain provisions of laws and
regulations was not an objective of our audit and, accordingly, we do
not express such an opinion.[^13]

This report is intended solely for the information and use of the
management of \[*Name of Federal Agency*\], OMB and Congress, and is not
intended to be and should not be used by anyone other than these
specified parties. We caution that noncompliance may occur and not be
detected by the tests performed and that such testing may not be
sufficient for other purposes.

\[*Signature*\]

\[*Date*\]

**^APPENDIX\ H-1^**

**^ILLUSTRATIVE\ LETTER\ OF\ INQUIRY\ FROM\ AGENCY\ MANAGEMENT\ TO\ LEGAL\ COUNSEL\ CONCERNING\ CONTINGENT\ LIABILITIES\ FOR\ LITIGATION,\ CLAIMS,\ OR\ ASSESSMENTS^**

^\[CFO\ Office\ Letterhead\]^

^Date:\ \ \[No\ later\ than\ October\ 15\]^

^To:\ \ General\ Counsel^

^From:\ \ Chief\ Financial\ Officer^

^Subject:\ \[Auditor's\]\ Audit\ of\ the\ Fiscal\ Year\ XXX0\ Financial\ Statements^

^Pursuant\ to\ 31\ U.S.C.\ §\ 3515,\ the\ \[Auditor\ name\]\ is\ conducting\ an\ audit\ of\ the\ financial\ statements\ of\ the\ \[Government\ entity\]\ as\ of\ and\ for\ the\ fiscal\ year\ ended\ September\ 30,\ XXX0.\ In\ performing\ audits\ of\ government\ entities,\ auditors\ are\ required\ to\ follow\ [Government\ Auditing\ Standards]{.underline}\ issued\ by\ the\ Comptroller\ General\ of\ the\ United\ States\ (the\ "Yellow\ Book").\ For\ financial\ statement\ audits,\ [Government\ Auditing\ Standards]{.underline}\ 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]{.underline},\ \[Auditor\]\ has\ inquired\ about\ litigation,\ claims,\ and\ assessments\ to\ satisfy\ itself\ 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]{.underline},\ "Accounting\ for\ Liabilities\ of\ the\ Federal\ Government,"\ as\ amended\ by\ [SFFAS\ Number\ 12]{.underline},\ and\ [Interpretation\ Number\ 2\ of\ SFFAS\ Numbers\ 4\ and\ 5]{.underline},\ \[Government\ entity\]\ 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\ involving\ matters\ with\ respect\ to\ which\ you\ have\ been\ engaged\ and\ to\ which\ you\ have\ devoted\ substantive\ attention\ on\ behalf\ of\ the\ \[Government\ entity\]\ in\ the\ form\ of\ legal\ consultation\ or\ representation.\ You\ should\ furnish\ an\ interim\ response\ by\ December\ 15,\ XXX0,\ including\ matters\ that\ existed\ as\ of\ September\ 30,\ XXIX,\ and\ from\ that\ date\ through\ at\ least\ December\ 1,\ XXX0.\ You\ should\ furnish\ an\ updated\ response\ by\ March\ 1,\ XXX1,\ including\ matters\ that\ existed\ as\ of\ September\ 30,\ XXX0,\ and\ from\ the\ date\ of\ the\ interim\ response\ through\ no\ earlier\ than\ February\ 15,\ XXX1.^

^Include\ any\ cases\ with\ respect\ to\ which\ you\ have\ been\ engaged\ and\ to\ which\ you\ have\ devoted\ substantive\ attention\ on\ behalf\ of\ the\ \[Government\ entity\]\ in\ the\ form\ of\ legal\ consultation\ or\ representation,\ even\ those\ cases\ where\ you\ believe\ the\ Judgment\ Fund\ or\ some\ financing\ source\ other\ than\ \[Government\ entity\]'s\ budgetary\ resources\ will\ pay\ any\ potential\ loss.\ Under\ Federal\ accounting\ standards,\ such\ amounts\ should\ be\ included\ as\ liabilities\ or\ disclosure\ items\ on\ the\ \[Government\ entity\]'s\ financial\ statements.^

^Pending\ or\ Threatened\ Litigation\ (excluding\ unasserted\ claims)^

^We\ and\ \[Auditor\]\ have\ determined\ that\ any\ matters\ where\ the\ amount\ of\ potential\ loss\ exceeds\ \$X,\ 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\ \$X^[^14]^:^

^\ 1.\ The\ nature\ of\ the\ matter.\ (Include\ a\ description\ of\ the\ case\ 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.\ (Categorize\ likelihood\ as\ probable,\ reasonably\ possible,\ or\ remote.)^

^\ 5.\ An\ estimate\ of\ the\ amount\ or\ range\ of\ potential\ loss,\ if\ one\ can\ be\ made,\ for\ losses\ considered\ to\ be\ probable\ or\ reasonably\ possible.^

^\ 6.\ The\ name\ of\ the\ \[Government\ entity\]'s\ attorney\ 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^

^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\ of\ an\ unfavorable\ outcome\ in\ an\ amount\ over\ \$X,\ involving\ matters\ to\ which\ you\ have\ devoted\ substantive\ attention.^

^\ 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\ or\ reasonably\ possible.)^

^\ 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]{.underline},\ 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\ \[Government\ entity\]\ 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\ regarding\ this\ request.^

^\[Signed\ by\]^

^Chief\ Financial\ Officer^

**^APPENDIX\ H-2^**

**^ILLUSTRATIVE\ RESPONSE\ FROM\ LEGAL\ COUNSEL\ CONCERNING\ ^**

**^LITIGATION,\ CLAIMS,\ AND\ ASSESSMENTS^**[^15]

^\[General\ Counsel\ Letterhead\]^

^Date:\ \ ^

^To:\ \ Inspector\ General\ /\ Independent\ Auditor^

^From:\ \ General\ Counsel^

^SubjectSubject:\ Legal\ Response\ in\ connection\ with\ the\ XXX0\ Financial\ Statement\ Audit\ of\ \[agency\ name\]^

^\ As\ General\ Counsel\ of\ \[Name\ of\ Agency\],\ I\ am\ writing\ in\ response\ t\ the\ letter\ of\ inquiry\ from\ the\ Agency's\ Chief\ Financial\ Officer\ dated\ \_\_\_\_,\ in\ connection\ with\ the\ audit\ of\ \[Name\ of\ Agency\]'s\ financial\ statements\ as\ of\ and\ for\ the\ fiscal\ year\ ended\ September\ 30,\ XXX0.^

^\ I\ call\ your\ attention\ to\ the\ fact\ that\ as\ General\ Counsel\ for\ the\ Agency,\ I\ have\ general\ supervision\ of\ the\ Agency'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\ the\ Agency\ and\ have\ consulted\ with\ outside\ legal\ counsel\ with\ respect\ thereto\ where\ 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\ the\ Agency\ in\ connection\ with\ \[material^[^16]^\]\ loss\ contingencies\ 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:\ \ ^

^\[Describe\ litigation\ and\ claims\ which\ fit\ the\ foregoing\ criteria\ as\ follows:\]^

** [Pending or Threatened Litigation (excluding unasserted
claims]{.underline}**)

**a. Nature of the matter (include a description of the case and amount
claimed, if specified).**

b.  **Progress of the case to date.**

c.  **^Current\ or\ intended\ response.^**

**d. Evaluation of the likelihood of an unfavorable outcome (categorize
likelihood as probable, reasonably possible, or remote).**

**e. Estimated amount or range of potential loss, if determinable, for
losses considered to be probable or reasonably possible.**

**f. Name of \[Government entity\]'s attorney handling the case and
names of any outside legal counsel representing or advising the
government in the matter.**

^\ With\ respect\ to\ matters\ which\ have\ been\ specifically\ identified\ as\ contemplated\ by\ clauses\ (b)\ or\ (c)\ of\ paragraph\ 5\ of\ the\ ABA\ [Statement\ of\ Policy]{.underline},\ 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]{.underline})**

**a. Nature of the matter.**

**b. Intended response if claim would be asserted.**

**c. Evaluation of the likelihood of an unfavorable outcome. (Categorize
likelihood as probable or reasonably possible.)**

**d. 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,\ and\ I\ disclaim\ any\ undertaking\ to\ advise\ you\ of\ changes\ which\ 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]{.underline}[']{.underline}[\ Responses\ to\ Auditors]{.underline}[']{.underline}[\ Requests\ for\ Information]{.underline}\ (December\ 1975);\ without\ limiting\ the\ generality\ of\ the\ foregoing,\ the\ limitations\ set\ forth\ in\ such\ Statement\ on\ the\ scope\ and\ use\ of\ this\ response\ (Paragraphs\ 2\ and\ 7)\ are\ specifically\ incorporated\ herein\ by\ reference,\ and\ any\ description\ herein\ of\ any\ "loss\ contingencies"\ is\ qualified\ in\ its\ entirety\ by\ Paragraph\ 5\ of\ the\ Statement\ and\ the\ accompanying\ Commentary\ (which\ is\ an\ integral\ part\ of\ the\ Statement).\ Consistent\ with\ the\ last\ sentence\ of\ Paragraph\ 6\ of\ the\ ABA\ Statement\ of\ Policy,\ this\ will\ confirm\ as\ correct\ the\ Agency's\ understanding\ that\ whenever,\ in\ the\ course\ of\ performing\ legal\ services\ for\ the\ Agency\ 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\ Agency\ must\ disclose\ or\ consider\ disclosure\ concerning\ such\ possible\ claim\ or\ assessment,\ I,\ as\ a\ matter\ of\ professional\ responsibility\ to\ the\ Agency,\ will\ so\ advise\ the\ Agency\ and\ will\ consult\ with\ the\ Agency\ concerning\ the\ question\ of\ such\ disclosure\ and\ the\ applicable\ requirements\ of\ [Statement\ of\ Federal\ Financial\ Accounting\ Standards\ (SFFAS)\ Number\ 5]{.underline},\ "Accounting\ for\ Liabilities\ of\ the\ Federal\ Government,"\ as\ amended\ by\ [SFFAS\ Number\ 12]{.underline},\ and\ [Interpretation\ Number\ 2\ of\ SFFAS\ Numbers\ 4\ and\ 5]{.underline}.\ \[Describe\ any\ other\ or\ additional\ limitation\ as\ indicated\ by\ Paragraph\ 4\ of\ the\ Statement.\]^

^cc:\ Chief\ Financial\ Officer^

**APPENDIX H-3**

**^FORMAT\ FOR\ SUMMARIZING\ INFORMATION\ CONTAINED\ IN\ LEGAL\ RESPONSES\ ^**

**^FOR\ FINANCIAL\ REPORTING\ PURPOSES^**[^17]

+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| **    | **    | **    | **    | **    |       |       | **    | **    |
| ^1^** | ^2^** | ^3^** | ^4^** | ^5^** |       |       | ^6^** | ^7^** |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
| ^     | ^Am   | ^Na   | ^L    | ^Amou |       |       | ^D    |       |
| Refer | ount^ | me\ o | ikeli | nt\ o |       |       | ispos |       |
| ence^ |       | f\ Ca | hood\ | r\ ra |       |       | ition |       |
|       | ^Cla  | se/\  |  of\  | nge\  |       |       | \ in^ |       |
| ^Key^ | imed^ | Relat | Loss^ | of\ p |       |       |       |       |
|       |       | ed\ C |       | otent |       |       | ^Fi   |       |
|       |       | ases^ |       | ial\  |       |       | nanci |       |
|       |       |       |       | loss^ |       |       | al\ S |       |
|       |       |       |       |       |       |       | tatem |       |
|       |       |       |       |       |       |       | ents^ |       |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
|       |       |       |       | ^(a)\ | ^(b)\ | ^(    | ^     | ^No   |
|       |       |       |       |  \ P^ |  R/P^ | c)\ U | Amt.\ | te\ D |
|       |       |       |       |       |       | pper^ |  Reco | isclo |
|       |       |       |       |       |       |       | rded^ | sure^ |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+
|       | ^\$^  |       |       | ^\$^  | ^\$^  | ^\$^  | ^\$^  |       |
+-------+-------+-------+-------+-------+-------+-------+-------+-------+

**^[Column]{.underline}^^:^**

1.  **Reference Key:** Page number of the legal representation letter
    obtained from General Counsel discussing the case, or other
    reference information.

2.  **^Amount\ Claimed:^**^\ Amount\ claimed\ in\ the\ litigation,\ claim,\ or\ assessment\ (if\ specified).^

3.  **^Name\ of\ Case\ /\ Related\ Cases^**

4.  **^Likelihood\ of\ Loss:\ ^**^List\ the\ General\ Counsel's\ evaluation\ of\ the\ likelihood\ of\ loss:^

Options: P: Probable

R/P: Reasonably Possible

R: Remote

U: Legal Counsel Unable to Determine

1.  **Amount or Range of Potential Loss:**

Options: 5a: Probable (P): Provide single estimate or lower end of
range, if known. Enter "U," if unknown. (Also, provide column totals.)

5b: Reasonably Possible (R/P): provide single estimate or lower end of
range, if known. Enter "U," if unknown. (Also, provide column.)

5c: If the estimate in 5a or 5b is a range, provide upper end of range;
otherwise, enter "n/a."

1.  **Disposition in Financial Statements: Amount Recorded: **If
    applicable, provide dollar amount recorded as a liability in the
    financial statements. (Also, provide column totals.)

2.  **^Disposition\ in\ Financial\ Statements:\ Note\ Disclosure:\ ^**^If\ applicable,\ indicate\ by\ note\ reference\ number\ whether\ case\ information\ is\ separately\ disclosed\ or\ included\ in\ amounts\ disclosed\ in\ notes\ to\ the\ financial\ statements.\ ^

** APPENDIX I-1**

**^AGREED-UPON\ PROCEDURES:\ RETIREMENT,\ HEALTH\ BENEFITS,\ AND\ LIFE\ INSURANCE\ WITHHOLDINGS/CONTRIBUTIONS\ AND\ SUPPLEMENTAL\ SEMIANNUAL\ HEADCOUNT\ REPORT\ SUBMITTED\ TO\ THE\ OFFICE\ OF\ PERSONNEL\ MANAGEMENT^**

***^OBJECTIVE^***

^Assist\ the\ Office\ of\ Personnel\ Management\ (OPM)\ in\ assessing\ the\ reasonableness\ of\ Retirement,\ Health\ Benefits,\ and\ Life\ Insurance\ withholdings\ and/contributions\ as\ well\ as\ enrollment\ information\ submitted\ via\ the\ Semiannual\ Headcount\ Report.^

***^BACKGROUND^***

^The\ Agreed\ Upon\ Procedures\ (AUPs)\ relating\ to\ the\ submission\ to\ OPM\ of\ withholdings/contributions\ for\ Retirement,\ Health\ Benefits,\ and\ Life\ Insurance\ relate\ to\ the\ use\ of\ the\ Retirement\ and\ Insurance\ Transfer\ System\ (RITS).\ RITS\ is\ the\ authorized\ method\ of\ submission\ of\ withholding\ and\ contribution\ information\ to\ OPM.\ Agency\ payroll\ offices\ (APOs)\ that\ are\ technically\ unable\ to\ transmit\ benefit\ information\ to\ OPM\ via\ RITS\ may\ continue\ to\ submit\ withholdings\ and\ contributions\ via\ the\ hard\ copy\ SF\ 2812\ (and\ SF\ 2812-A),\ "Report\ of\ Withholdings\ and\ Contributions\ for\ Health\ Benefits,\ Life\ Insurance\ and\ Retirement\ to\ OPM.."\ The\ AUPs\ to\ be\ applied\ to\ those\ APO's\ submitting\ withholdings\ and\ contributions\ to\ OPM\ via\ the\ hard\ copy\ SF2812\ forms\ are\ similar\ to\ those\ for\ RITS.^

***^PROCEDURES^***

^Gain\ an\ understanding\ of\ the\ APO's\ procedures\ for\ reconciling\ payroll\ information\ to\ RITS\ submissions.\ Obtain\ the\ APO's\ most\ recent\ Semiannual\ Headcount\ Report\ submitted\ to\ OPM\ and\ a\ summary\ of\ RITS\ submissions\ for\ the\ current\ fiscal\ year.\ Randomly\ select\ three\ RITS\ submissions\ for\ the\ current\ fiscal\ year,\ one\ of\ which\ coincides\ with\ the\ most\ recent\ Semiannual\ Headcount\ Report.\ Obtain\ payroll\ information\ for\ the\ periods\ covered\ by\ the\ RITS\ submissions\ selected.\ ^

*^Note\ that,\ as\ used\ in\ these\ AUPs,\ the\ term\ ^^[payroll\ information]{.underline}^^\ refers\ to\ ^^[all]{.underline}^^\ payroll\ information,\ whether\ it\ be\ a\ payroll\ register,\ payroll\ data\ file,\ or\ other\ payroll\ support\ data.^*

^1.\ Compare\ RITS\ submission\ data\ with\ payroll\ information\ by\ performing\ the\ following\ procedures:^

^1.a.\ Foot\ the\ payroll\ information.\ If\ the\ auditor\ chooses\ to\ use\ a\ subset\ of\ payroll\ information,\ the\ subset\ must\ be\ representative\ of\ all\ payroll\ information\ and\ be\ subject\ to\ the\ same\ control\ procedures\ over\ payroll\ information\ associated\ with\ the\ three\ RITS\ submissions\ selected.^

1.b. Trace employee withholding information shown on the payroll
information footed in step 1.a. for Retirement, Health Benefits, and
Life Insurance (as adjusted for reconciling items) to the related
amounts shown on the RITS submission for the corresponding period.

^1.c.\ Obtain\ support\ for\ differences\ between\ amounts\ shown\ on\ the\ payroll\ register\ or\ derived\ from\ files\ footed\ in\ step\ 1.a.\ and\ amounts\ shown\ on\ the\ RITS\ submission\ selected.\ ^

^1.d.\ Trace\ reconciling\ items\ to\ supporting\ documentation\ and\ verify\ agreement.\ ^

^1.e.\ Foot\ each\ RITS\ submission\ selected.\ ^

^Report\ any\ differences\ or\ exceptions\ that\ are\ unsupported\ or\ unsubstantiated,\ or\ represent\ an\ error.\ ^

^2.\ Review\ or\ perform\ a\ reconciliation\ of\ payroll\ information,\ including\ RITS\ data,\ to\ the\ agency's\ general\ ledger.\ For\ the\ three\ pay\ periods\ selected,\ review\ the\ agency's\ reconciliation\ of\ payroll\ transactions\ to\ its\ general\ ledger\ expense\ and\ cash\ disbursement\ accounts\ or,\ if\ such\ reconciliation\ does\ not\ exist,\ perform\ the\ reconciliation.\ Effective\ in\ 1999,\ agencies\ should\ post\ Retirement,\ Health\ Benefits,\ and\ Life\ Insurance\ withholding\ and\ contributions\ to\ Standard\ General\ Ledger\ (SGL)\ account\ 6400--Benefits\ Program\ Expense;\ withholdings\ to\ 6400[N]{.underline}\ and\ contributions\ to\ 6400[G]{.underline}.\ (For\ 1998,\ posting\ to\ account\ 6100--Operating\ Expenses/Program\ Costs--was\ acceptable.)\ Report\ when\ the\ APO\ did\ not\ prepare\ the\ reconciliation.\ Also\ report\ any\ unsupported\ or\ unsubstantiated\ differences\ (i.e.,\ gross\ rather\ than\ net)\ in\ the\ total\ payroll\ paid\ for\ the\ selected\ pay\ period\ and\ the\ amount\ recorded\ in\ the\ general\ ledger\ that\ exceeds\ 5\ percent\ of\ total\ payroll.\ Report\ any\ differences\ (i.e.,\ gross\ rather\ than\ net)\ between\ the\ withholding\ and\ contributions\ reported\ on\ the\ RITS\ submissions\ and\ the\ amounts\ posted\ to\ the\ SGL\ accounts\ greater\ than\ 1\ percent.\ Also,\ for\ RITS\ data,\ report\ postings\ to\ any\ SGL\ account,\ other\ than\ account\ 6400.^

^3.\ Agree\ employee\ salary\ and\ contributions\ to\ the\ SF-50\ ("Notification\ of\ Personnel\ Action"),\ authorized\ withholding/contributions,\ and\ benefit\ program\ elections.\ From\ the\ payroll\ information\ corresponding\ to\ the\ three\ RITS\ submissions\ selected\ for\ testing\ above,\ randomly\ select\ a\ total\ of\ 25\ individuals\ who\ are\ covered\ by\ Retirement,\ Health\ Benefits,\ Basic\ Life\ Insurance,\ and\ at\ least\ one\ Life\ Insurance\ Option\ (A,\ B,\ or\ C).\ Obtain\ the\ Official\ Personnel\ File\ (OPF)\ for\ each\ individual\ selected,\ and\ perform\ the\ following\ procedures:\ ^

^3.a.\ Verify\ that\ the\ base\ salary\ used\ for\ payroll\ purposes\ and\ upon\ which\ withholdings\ and\ contributions\ generally\ are\ based\ agrees\ with\ the\ base\ salary\ reflected\ on\ the\ employees\'\ SF-50.\ ^

^3.b.\ For\ Retirement,\ verify\ that\ amounts\ withheld\ and\ contributed\ for\ participants\ in\ the\ Civil\ Service\ Retirement\ System\ (CSRS)\ and\ the\ Federal\ Employees\ Retirement\ System\ (FERS)\ are\ correct,\ based\ upon\ the\ official\ withholdings\ and\ contribution\ rates\ required\ by\ law^*^.\ \[See\ Payroll\ Office\ Letters\ P-97-10\ and\ P-97-07.\]^*

^3.c.\ For\ Health\ Benefits,\ verify\ that\ employee\ withholdings\ and\ agency\ contributions\ agree\ with\ the\ official\ subscription\ rates\ issued\ by\ OPM\ for\ the\ plan\ and\ option\ elected\ by\ the\ employees,\ as\ documented\ by\ a\ Health\ Benefits\ Registration\ Form\ (SF-2809)\ in\ the\ employees\'\ OPF.\ ^*^See\ Payroll\ Office\ Letter\ P-98-10,\ for\ 1999\ rates^*^.^

*^If\ an\ employee\ elected\ his/her\ current\ health\ plan\ via\ Employee\ Express,\ there\ likely\ will\ not\ be\ documentation\ in\ the\ OPF.\ In\ these\ circumstances,\ the\ auditor\ must\ seek\ to\ obtain\ enrollment\ documentation\ from\ Employee\ Express,\ which\ maintains\ a\ history\ of\ all\ FEHB\ transactions\ entered\ by\ employees.\ Rather\ than\ requesting\ documentation\ directly\ from\ Employee\ Express,\ auditors\ should\ work\ through\ each\ agency^^'^^s\ personnel\ office.\ Employee\ Express\ key\ representatives\ have\ been\ apprized\ of\ this\ potential\ requirement^*^.^

^3.d.\ For\ Life\ Insurance,\ verify\ that\ Basic\ Life\ Insurance\ was\ elected\ by\ the\ employees,\ as\ documented\ by\ a\ Life\ Insurance\ Election\ Form\ (SF\ 2817),\ in\ his/her\ OPF\ and\ that\ withholdings\ and\ contributions\ are\ correct.^

^\ i.\ For\ [employee\ withholdings]{.underline}:\ Round\ the\ employee's\ annual\ base\ salary\ to\ the\ nearest\ thousand\ dollars\ and\ add\ \$2,000.\ For\ pay\ periods\ ending\ before\ 4/24/99,\ divide\ this\ total\ by\ 1,000\ and\ multiply\ by\ \$0.165\ (for\ APOs\ with\ biweekly\ pay\ periods)\ or\ \$0.3575\ (for\ APOs\ with\ monthly\ pay\ periods).\ For\ pay\ periods\ beginning\ on\ or\ after\ 4/24/99,\ divide\ this\ total\ by\ 1,000\ and\ multiply\ by\ \$0.155\ (for\ APOs\ with\ biweekly\ pay\ periods)\ or\ \$0.3358\ (for\ APOs\ with\ monthly\ pay\ periods.\ ^

^\ ii.\ For\ [agency\ contributions]{.underline}:\ Divide\ the\ employee\ withholdings\ derived\ in\ step\ 3.d.i.\ by\ two.^

^3.e.\ Also,\ for\ Life\ Insurance,\ verify\ Optional\ coverage\ was\ elected,\ as\ documented\ by\ an\ SF\ 2817\ in\ the\ employees'\ OPF,\ and\ that\ withholdings\ are\ correct.\ The\ withholding\ rates\ for\ Options\ A,\ B,\ and\ C\ are\ based\ upon\ the\ age\ of\ the\ employee\ and\ the\ amount\ of\ coverage\ elected.\ \[^*^See\ the\ ^^"^^FEGLI\ Description\ and\ Certificate\ Handbook^^"^^\ for\ withholding\ rates\ applicable\ to\ pay\ periods\ ending\ before\ 4/24/99\ and\ the\ appropriate\ ^^"^^FEGLI\ Program\ Booklet^^"^^\ for\ pay\ periods\ beginning\ on\ or\ after\ 4/24/99.\]\ ^*^Report\ any\ differences\ or\ exceptions\ that\ are\ unsupported\ or\ unsubstantiated,\ or\ represent\ an\ error.^

*^Note:\ For\ step\ 3.e.\ only,\ randomly\ select\ additional\ individuals\ as\ necessary\ so\ that\ ten\ individuals\ are\ selected\ for\ each\ Life\ Insurance\ option\ (i.e.,\ Options\ A,\ B,\ and\ C).^*

^4.\ Randomly\ select\ a\ total\ of\ ten\ employees,\ who\ have\ no\ Health\ Benefits\ withholdings,\ from\ the\ payroll\ information\ corresponding\ to\ the\ three\ RITS\ submissions\ selected\ for\ testing\ above.\ Verify\ from\ a\ review\ of\ the\ OPF\ that\ the\ employees\ did\ not\ elect\ Health\ Benefits\ coverage\ \--\ this\ may\ be\ proven\ by\ the\ absence\ of\ an\ election\ form\ SF\ 2809\ in\ the\ OPF,\ if\ the\ employee\ never\ elected\ coverage.\ Alternatively,\ for\ an\ employee\ who\ canceled\ enrollment\ after\ having\ been\ enrolled\ in\ the\ Health\ Benefits\ Program\ look\ for\ a\ SF\ 2809\ with\ Section\ E\ checked,\ indicating\ election\ of\ coverage\ cancellation.\ Report\ any\ exceptions\ that\ are\ unsupported\ or\ unsubstantiated,\ or\ represent\ an\ error.\ ^

*^To\ conclude\ with\ finality\ that\ there\ was\ no\ election\ of\ health\ benefits,\ the\ auditor\ must\ first\ confirm\ with\ Employee\ Express,\ via\ the\ agency^^'^^s\ personnel\ office,\ that\ no\ election\ was\ made\ or\ coverage\ canceled\ by\ this\ means.^*

^5.\ Randomly\ select\ a\ total\ of\ ten\ employees\ who\ have\ no\ Life\ Insurance\ withholdings\ from\ the\ payroll\ information\ corresponding\ to\ the\ three\ RITS\ submissions\ selected\ for\ testing\ above.\ Verify\ that\ the\ employees\ either\ waived\ or\ canceled\ Life\ Insurance\ coverage.\ This\ will\ be\ proven\ by\ the\ presence\ in\ the\ OPF\ of\ an\ SF\ 2817,\ by\ which\ an\ employee\ waives\ or\ cancels\ Basic\ Life\ Insurance\ coverage.\ Report\ any\ exceptions.^

6.  Calculate the headcount reflected on the Semiannual Headcount Report
    selected for testing above, as follows.

^6.a.\ Obtain\ existing\ payroll\ information\ supporting\ the\ selected\ Supplemental\ Semiannual\ Headcount\ report.\ If\ existing\ payroll\ data\ is\ not\ available,\ have\ APO\ personnel\ perform\ a\ payroll\ system\ query\ that\ summarizes\ detailed\ payroll\ data\ supporting\ the\ Supplemental\ Semiannual\ Headcount\ Report,\ as\ follows:^

-   Benefit Category \[see Semiannual Headcount Report\].

-   ^Dollar\ Amount\ of\ withholdings\ and\ contributions.^

-   ^Number\ Enrolled\ (deductions\ made/no\ deductions).^

-   ^Central\ Personnel\ Data\ File\ Code.^

-   ^Aggregate\ Base\ Salary.^

^It\ may\ be\ that\ the\ payroll\ information\ needed\ to\ recalculate\ the\ selected\ Headcount\ Report\ is\ no\ longer\ available\ on\ the\ payroll\ system.\ If\ such\ is\ the\ case,\ query\ the\ payroll\ information\ currently\ residing\ on\ the\ payroll\ system\ and\ compare\ it\ to\ the\ selected\ Headcount\ Report.\ Account\ for\ any\ significant\ personnel\ changes\ that\ may\ affect\ withholdings,\ contributions,\ and\ numbers\ of\ employees\ enrolled.\ ^

6.b. Recalculate the Headcount reflected on the Semiannual Headcount
Report. A suggested method of recalculating the Headcount is as follows:
(1) estimate the number of employees per payroll register page by
counting the employees listed on several pages, (2) count the number of
pages in the payroll register, and (3) multiply the number of employees
per page by the number of pages, or count (using a computer audit
routine) the number of employees on the payroll data file for the
period.

6.c. Compare the results of payroll information from step 6.a with the
calculated headcount from step 6.b to the information shown on the
Semiannual Headcount Report.

^6.d.\ Report\ any\ differences\ (i.e.,\ gross\ rather\ than\ net)\ greater\ than\ 2\ percent\ between\ the\ headcount\ reporting\ on\ the\ agency\'s\ Semiannual\ Headcount\ Report\ and\ payroll\ information\ from\ step\ 6.a\ and\ the\ calculated\ Headcount\ from\ step\ 6.b.\ ^

7\. Calculate employer and employee contributions for Retirement, Health
Benefits, and Life Insurance.

^7.a.\ Calculate\ Retirement\ withholdings\ and\ contributions\ for\ the\ three\ pay\ periods\ selected,\ as\ follows:\ ^

i.  Multiply the CSRS and FERS payroll base by the withholding and
    employer contribution rates required by law.

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i.  ^Compare\ the\ calculated\ totals\ with\ related\ amounts\ shown\ on\ the\ RITS\ submissions.\ Report\ any\ variances\ (i.e.,\ gross\ rather\ than\ net)\ between\ the\ calculated\ amounts\ and\ the\ amounts\ reported\ on\ the\ RITS\ submissions\ greater\ than\ 5\ percent.\ ^

7.b. Calculate employee withholdings and employer contributions for
Health Benefits for the three pay periods selected, as follows:

i.  Multiply the number of employees enrolled in each Health Benefit
    plan and plan option by the employee withholdings and employer
    contributions for the plan and option.

^ii.\ Sum\ the\ totals\ in\ step\ 7.b.i.\ and\ compare\ the\ result\ with\ the\ Health\ Benefit\ withholding\ and\ contribution\ amounts\ shown\ on\ the\ RITS\ submissions.\ Report\ any\ variances\ (i.e.,\ gross\ rather\ than\ net)\ between\ the\ calculated\ amounts\ and\ the\ amounts\ reported\ on\ the\ RITS\ submissions\ greater\ than\ 5\ percent.\ ^

^7.c.\ Calculate\ the\ Basic\ Life\ Insurance\ employee\ withholdings\ and\ employer\ contributions\ for\ the\ three\ pay\ periods\ selected\ as\ follows:^

i.  Have APO personnel perform a payroll system query to determine the
    total number of employees with Basic Life Insurance Program coverage
    and the aggregate annual basic pay for all employees with Basic Life
    Insurance Program coverage. (*See the [CSRS/FERS
    Handbook]{.underline}, Section 30A1.1-2 for definition of basic
    pay.)*

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i.  For [employee withholdings]{.underline}: Add the product of 2,000
    times the number of employees with Basic Life Insurance coverage to
    the aggregate annual basic pay for all employees selected. This
    represents the estimated total Basic Life Insurance coverage. For
    pay periods ending before 4/24/99, divide this total by 1,000 and
    multiply by \$0.165 (for APOs with biweekly pay periods) or \$0.3575
    (for APOs with monthly pay periods). For pay periods beginning on or
    after 4/24/99, divide this total by 1,000 and multiply by \$0.155
    (for APOs with biweekly pay periods) or \$0.3358 (for APOs with
    monthly pay periods).

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i.  Compare the result in step 7.c.ii. to the withholdings for Basic
    Life Insurance coverage reported on the RITS submission. Report any
    difference (i.e., gross rather than net) between the estimate and
    the amount of withholdings reported on the RITS submission greater
    than 5 percent.

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i.  ^For\ [agency\ contributions]{.underline}:\ Divide\ the\ results\ of\ step\ 7.c.ii.\ by\ two\ \--\ this\ approximates\ agency\ contributions,\ which\ are\ one-half\ of\ employee\ withholdings.\ Compare\ this\ result\ to\ the\ amount\ reported\ on\ the\ RITS\ submission.\ and\ report\ any\ differences\ (i.e.,\ gross\ rather\ than\ net)\ between\ the\ estimate\ and\ the\ amount\ reported\ on\ the\ RITS\ submission\ greater\ than\ 5\ percent.^

^7.d.\ Calculate\ the\ Option\ A\ and\ Option\ C\ Life\ Insurance\ coverage\ withholdings\ for\ the\ three\ pay\ periods\ selected\ by\ using\ the\ results\ of\ payroll\ system\ queries\ from\ step\ 6.a\ or\ have\ the\ APO\ personnel\ perform\ a\ payroll\ system\ query\ that\ summarizes\ the\ number\ of\ employees,\ by\ age\ group,\ who\ elected\ Options\ A\ and\ C\ during\ the\ pay\ periods\ selected.^

^\ i.\ Multiply\ the\ number\ of\ employees\ in\ each\ age\ group\ by\ the\ appropriate\ rate\ for\ Option\ A\ or\ Option\ C,\ in\ accordance\ with\ the\ rates\ for\ age\ groups\ provided\ in\ the\ FEGLI\ Description\ and\ Certificate\ Handbook\ for\ pay\ periods\ ending\ before\ 4/24/99\ and\ the\ FEGLI\ Program\ Booklet\ for\ pay\ periods\ beginning\ on\ or\ after\ 4/24/99.\ Report\ any\ differences\ (i.e.,\ gross\ rather\ than\ net)\ greater\ than\ 2\ percent\ for\ Option\ A\ and/or\ Option\ C.\ ^

^ii.\ Contributions\ for\ Option\ B\ cannot\ be\ tested\ for\ reasonableness\ by\ these\ methods\ because\ of\ the\ number\ of\ variables\ involved\ in\ electing\ this\ option.^

***^INQUIRIES^***

^Questions\ on\ the\ application\ of\ the\ AUPs\ should\ be\ directed\ to\ OPM's\ Financial\ Policy\ Staff\ at\ (202)\ 606-0606,\ or\ via\ the\ Internet\ at\ .^

**^APPENDIX\ I-2^**

**^ILLUSTRATIVE\ INDEPENDENT\ ACCOUNTANT\'S\ REPORT\ ON\ THE^**

# ^APPLICATION\ OF\ AGREED‑UPON\ PROCEDURES^

To the Inspector General

U.S. Office of Personnel Management:

We have performed the procedures described below (or in the attachment),
which were agreed to by the Inspector General, Chief Financial Officer,
and the Associate Director for Retirement and Insurance of the U.S.
Office of Personnel Management (OPM), solely to assist with respect to
the employee withholdings and employer contributions reported on the
Report of Withholdings and Contributions for Health Benefits, Life
Insurance, and Retirement for the payroll periods ended \[state dates\]
and Semiannual Headcount Report as of \[state date\]. This engagement to
apply agreed-upon-procedures was performed in accordance with the
standards established by the American Institute of Certified Public
Accountants. The sufficiency of the procedures is solely the
responsibility of the Inspector General, Chief Financial Officer, and
the Associate Director for Retirement and Insurance of OPM.
Consequently, we make no representation regarding the sufficiency of the
procedures described below either for the purpose for which this report
has been requested or for any other purpose.

*Insert the following unless the procedures and findings are in an
attachment.*

The procedures and the associated findings are as follows:

* \[Insert procedures and findings\]*

We were not engaged to, and did not, perform an audit, the objective of
which would be the expression of an opinion on the withholdings and
contributions for Health Benefits, Life Insurance, and Retirement, and
the Headcount Report of the \[name of agency\]. Accordingly, we do not
express such an opinion. Had we performed additional procedures, other
matters might have come to our attention that would have been reported
to you.

This report is intended solely for the use of the Inspector General,
Chief Financial Officer, and the Associate Director for Retirement and
Insurance of OPM and should not be used by those who have not agreed to
the procedures and taken responsibility for the sufficiency of the
procedures for their purposes.

\[*Signature*\]

\[*Date*\]

cc: Chief Financial Officer of OPM

Associate Director of Retirement and Insurance of OPM

[^1]: This list is included in OMB Bulletin 97-01 (OMB\'s Form and
    Content Bulletin), which prescribes the Principal Statements that
    shall be prepared.

[^2]: The following Federal financial management systems requirements do
    not require testing as they do not affect the reporting entity's
    ability to prepare financial statements in accordance with Federal
    accounting standards:

    i.  requirements contained in the [Framework for Federal Financial
        Management Systems]{.underline}; and

    ii. ^requirements\ for\ systems\ that\ produce\ information\ which\ is\ not\ material\ to\ the\ financial\ statements,\ e.g.,\ travel\ systems.\ ^

[^3]: For those requirements which were updated and re-issued during
    FY1999, auditors should test systems for compliance with pre-FY 1999
    requirements and are encouraged to advise entity management of
    potential noncompliance with new requirements that come to the
    auditor's attention. Auditors should test for compliance with FY
    1999 requirements during FY 2000 audits.

[^4]: An illustrative auditor's report on internal control is provided
    in Appendix F. Use of this guidance is optional.

[^5]: An illustrative auditor\'s report on compliance with laws and
    regulations is provided in Appendix G. Use of this guidance is
    optional.

[^6]: The requirement for components to prepare financial statements may
    be satisfied by presenting the components separately in
    consolidating agencywide financial statements and conducting an
    audit, in accordance with this Bulletin, at the consolidating
    financial statement level.

[^7]: The auditor is not expected to test all provisions of each law
    presented. However, the auditor is expected to test, at a minimum,
    the provisions cited above.

[^8]: In very limited circumstances, reportable conditions that
    significantly impair an entity's ability to meet Federal financial
    management systems requirements (such as reportable conditions
    related to computer security over financial information covered by
    OMB Circular A-130, Appendix 3) may represent conditions reportable
    under FFMIA.

[^9]: In very limited circumstances, reportable conditions that
    significantly impair an entity's ability to meet Federal financial
    management systems requirements (such as reportable conditions
    related to computer security over financial information covered by
    OMB Circular A-130, Appendix 3) may represent conditions reportable
    under FFMIA.

[^10]: ^\ \ ^This illustrative management representation letter must be
    customized to the situation of the audited entity. Representations
    number 1-13 relate to the opinion on the financial statements;
    numbers 14-16 relate to management\'s assertion about the
    effectiveness of internal control; numbers 17-19 relate to
    management\'s assertion about the financial management systems\'
    substantial compliance with Federal financial management system
    requirements; and numbers 20-22 relate to compliance with laws and
    regulations. AU Section 333, \"Management Representations,\"
    [Codification of Statements on Auditing Standards]{.underline},
    provides examples of additional representations that may be
    appropriate.

[^11]: If the objective is to express an opinion on the agency's
    internal control over financial reporting, the auditor should
    follow[ Statement on Standards for Attestation Engagements No.
    2]{.underline}, "Reporting on an Entity's Internal Control Over
    Financial Reporting," issued by the American Institute of Certified
    Public Accountants.

[^12]: FFMIA does not impose any compliance requirements; rather, it
    requires reporting on whether an agency\'s financial management
    systems substantially comply with the financial management systems
    requirements contained in governmentwide policies, e.g., OMB
    Circular A-127, \"Financial Management Systems;\" [Statements of
    Federal Financial Accounting Standards]{.underline}; and the United
    States Government Standard General Ledger published by the
    Department of the Treasury. FFMIA imposes additional reporting
    requirements when tests disclose instances in which agency systems
    do not substantially comply with the foregoing requirements.

[^13]: If the objective is to express an opinion on the agency's
    compliance with laws and regulations, the auditor should follow
    [Statement on Standards for Attestation Engagements No.
    3]{.underline}, "Compliance Attestation," issued by the American
    Institute of Certified Public Accountants.

[^14]: Management and the auditor should agree on a materiality level to
    use in the letter of inquiry. A guideline for setting the
    materiality level for the legal letter is 0.5 percent of planning
    materiality, as defined in the PCIE Policy Manual: [Federal
    Financial Statement Audit Manual]{.underline} and GAO's [Financial
    Audit Manual]{.underline}.

[^15]: This illustrative response is based on examples presented in AU
    Section 337C of the [Codification of Statements on Auditing
    Standards]{.underline}.

[^16]: See Paragraph 3 of the American Bar Association (ABA) [Statement
    of Policy]{.underline} and the accompanying [Commentary]{.underline}
    for guidance where the response is limited to material items.

[^17]: As required by paragraph 8.b. of OMB Bulletin No. 99-\_\_, the
    CFO shall prepare and the auditor shall review a summary of the
    information contained in the legal counsel's response using this
    format. An electronic version of this form is available in Mircosoft
    Excel at OMB's website on the Internet at [
    "Bulletins")]{.underline}.