United States General Accounting Office 

President’s Council on Integrity and Efficiency 

GAO/PCIE

Financial 

Audit 

Manual 

Update to Part II - Tools 

Update to Part II

GAO-03-466G 
[This page intentionally left blank] 
 April 2003 

Dear Colleague: 

In July 2001, the U.S. General Accounting Office (GAO) and the President’s Council on 

Integrity and Efficiency (PCIE) issued the GAO/PCIE Financial Audit Manual (FAM). 

The FAM provides guidance for financial audits conducted by the Inspector General 

community, GAO, and their contractors. The FAM is a key part in enhancing 

accountability over taxpayer-provided resources. 

GAO and the PCIE are committed to keeping the FAM current and intend to prepare 

updates as needed. With this goal in mind, a GAO/PCIE task force prepared this update 

to volume II of the FAM, which provides tools to assist the auditor in complying with 

audit standards. The new or updated sections are highlighted in the table of contents for 

volume II. It was issued as an exposure draft on the internet in September 2002, and we 

incorporated changes based on comments received. The original GAO/PCIE FAM, which 

will be updated by having these additional sections incorporated, and this April 2003 

update are available on the internet at 

www.GAO.gov or www.ignet.gov/pande/audit.html

If you have comments or suggestions for additional projects for further FAM updates, 

please e-mail them to 

FAM_Comments@oig.doi.gov

We extend our thanks to the many individuals and organizations that provided comments 

and insights to make the manual stronger. The task force assembled by GAO and the 

PCIE also deserves much credit for its dedication to completing this project. 

 

Jeffrey C. Steinhoff The Honorable Gregory H. Friedman 

Managing Director Chair, President’s Council on Integrity 

U.S. General Accounting Office and Efficiency Audit Committee 
Filing instructions for April 2003 FAM Volume II – Tools update: 

Retain from original 

July 2001 version 

Insert from April 2003 

update 

Delete from original 

July 2001 version 

Cover to volume II 

 Contents – Part II 

(including title page) 

Contents – Part II 

(including title page) 

 Section 600 (including title 

page and sections 601, 

650, 650 A, B, and C, 660, 

660 A, B, C, and D) 

Section 600 title page 

 Section 700 (including title 

page and sections 701 and 

701 A and B) 

Section 700 title page 

 Section 800 (including title 

page and sections 802, 

803, 808, 809, 810, 812, 

813, 814, 816, and 817) 

Section 800 title page 

 Section 900 (including title 

page and sections 902, 902 

A, B, and C, 903, 921, 921 

A, B, C, and D) 

Section 900 title page 

Section 1000 title page 

Sections 1001 and 1001 A 

 Sections 1002 and 1002 A, 

B, C, and D 

Section 1002 title page 

Sections 1003, 1004, and 

1005 

 

 Section 1006 title page Section 1006 

Changes affecting volume I 

Glossary title page Glossary (22 pages) Glossary (17 pages) 

Abbreviations title page Abbreviations (3 pages) Abbreviations (2 pages) 
 CONTENTS - PART II - TOOLS

 
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CONTENTS – PART II – TOOLS

 

April 2003 GAO/PCIE Financial Audit Manual - Part II Contents-1 

 600 PLANNING AND GENERAL

 601 Introduction to Part II – Tools 

 650 

 650 A 

 650 B 

 650 C 

Using the Work of Others 

Summary of Audit Procedures and Documentation for Review of Other 

Auditors' Work 

Example Audit Procedures for Using the Work of Others 

Example Reports When Using the Work of Others 

 660 

 660 A 

 660 B 

 660 C 

 660 D 

Agreed-Upon Procedures 

Example Agreed-Upon Procedures Engagement Letter 

Example Representation Letter from Responsible Entity on Agreed-Upon 

Procedures Engagement 

Agreed-Upon Procedures Completion Checklist 

Example Agreed-Upon Procedures Report 

 

 700 INTERNAL CONTROL (See also section 900) 

 701 

 701 A 

 701 B 

Assessing Compliance of Agency Systems with the Federal Financial 

Management Improvement Act (FFMIA) 

Example Audit Procedures for Testing Compliance with FFMIA 

Summary Schedule of Instances of Noncompliance with FFMIA 

800 COMPLIANCE

 801 Reserved 

 802 General Compliance Checklist 

 803 Antideficiency Act 

 804 Reserved 

 805 Reserved 

 806 Reserved 

 807 Reserved 

 808 Federal Credit Reform Act of 1990 

 809 Provisions Governing Claims of the U.S. Government (31 U.S.C. 3711-

3720E) (Including the Debt Collection Improvement Act of 1996) (DCIA) 

 810 Prompt Payment Act 

 811 Reserved 

 812 Pay and Allowance System for Civilian Employees, as Provided Primarily 

in Chapters 51-59 of Title 31, U.S. Code 
Contents - Part II - Tools

April 2003 GAO/PCIE Financial Audit Manual - Part II Contents-2 

 813 Civil Service Retirement Act 

 814 Federal Employees Health Benefits Act 

 815 Reserved 

 816 Federal Employees' Compensation Act 

 817 Federal Employees' Retirement System Act of 1986 

 

900 SUBSTANTIVE TESTING

 901 Reserved 

 902 

 902 A 

 902 B 

 902 C 

Related Parties, Including Intragovernmental Activity and Balances 

Example Account Risk Analysis for Intragovernmental Activity and 

Balances 

Example Specific Control Evaluation for Intragovernmental Accounts 

Example Audit Procedures for Intragovernmental and Other Related 

Parties' Activity and Balances 

 903 Auditing Cost Information 

 921 

 921 A 

 921 B 

 921 C 

 921 D 

Auditing Fund Balance with Treasury (FBWT) 

Treasury Processes and Reports Related to FBWT Reconciliation 

Example Account Risk Analysis for Fund Balance with Treasury 

Example Specific Control Evaluation for Fund Balance with Treasury 

Example Audit Procedures for Fund Balance with Treasury 

1000 REPORTING

 

1001 Management Representations 

1001 A Example Management Representation Letter 

1002 

1002 A 

1002 B 

1002 C 

1002 D 

Inquiries of Legal Counsel 

Example Audit Procedures for Inquiries of Legal Counsel 

Example Legal Letter Request 

Example Legal Representation Letter 

Example Management Summary Schedule 

1003 Financial Statement Audit Completion Checklist 

1004 Checklist for Reports Prepared Under the CFO Act 

1005 Subsequent Events Review 

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

 

 

 

 
SECTION 600

Planning and General
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Planning and General 

 

 601 - INTRODUCTION TO PART II – TOOLS 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 601-1 

.01 Part II of the GAO/PCIE Financial Audit Manual (FAM) consists of tools to assist 

the auditor1 in performing a financial statement audit. These tools are generally 

organized according to the phases of the audit: tools in section 600 deal with the 

planning phase and general issues; section 700, the internal control phase; section 

800, compliance; section 900, substantive testing; and section 1000, the reporting 

phase. 

.02 Many of the tools in the various sections include activities that would be 

performed during other phases of the audit. Thus, the auditor should refer to the 

sections in part II early in the audit. For example, section 701, Assessing 

Compliance of Agency Systems with the Federal Financial Management 

Improvement Act, includes procedures that would be performed throughout the 

audit, not just during the internal control phase, although many of them would be 

performed then. Also, section 902, Related Parties, Including Intragovernmental 

Activity and Balances, has procedures that the auditor may decide to perform in 

the planning and internal control phases of the audit as well as during the testing 

phase. 

.03 The audit procedures presented in the examples in this and other sections of 

part II (tools) of the GAO/PCIE FAM are examples of some of the audit steps 

typically performed in each area. They should be used in conjunction with the 

appropriate FAM sections. In using these procedures, the auditor should use 

judgment to add additional procedures, delete irrelevant procedures, modify 

procedures, indicate the extent and timing of procedures, and change the 

terminology to that used by the audited entity. The auditor may integrate these 

steps with the audit programs for related line items. For example, tests of 

intragovernmental activity and balances (section 902) may be integrated with 

tests of accounts receivable and payable, and, to improve efficiency, the auditor 

may coordinate those tests with related nonintragovernmental activity and 

balances. 

 1

 The term "auditor," throughout the FAM includes individuals who may be titled 

auditor, analyst, evaluator, or have a similar position description. 
[This page intentionally left blank.]
 Planning and General 

 

 650 - USING THE WORK OF OTHERS 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-1 

.01 In many audits, the auditor uses the work and reports of other auditors and 

specialists. Other auditors include CPA firms, Inspectors General, state auditors, 

and internal auditors. Specialists include actuaries and information systems 

auditors. The audit organization may contract with a CPA firm to perform parts 

of or the entire audit. The audit organization should use FAM 650 to design and 

perform appropriate oversight and other procedures to use the work of other 

auditors and specialists. (The audit organization using the work of other auditors 

and specialists is referred to below as "the auditor.") This section provides 

guidance on using the work of other auditors and specialists and the nature and 

extent of procedures the auditor should perform. 

.02 Various professional standards provide guidance in this area. These standards 

include AU 543, "Part of Audit Performed by Other Independent Auditors"; AU 

322, "The Auditor's Consideration of the Internal Audit Function in an Audit of 

Financial Statements"; AU 336, "Using the Work of a Specialist";1

 and AU 315 (SAS 

No. 84), "Communication Between Predecessor and Successor Auditors." These 

standards have different requirements depending on whether the other 

organization is an independent auditor, an internal auditor, or a specialist. 

.03 The auditor may use the work of other auditors and specialists in various 

situations, for example: 

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

FAM; 

• CPA firms or specialists hired to do parts of an audit (for example, review 

information systems controls, review actuarial calculations, test specific 

accounts); 

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

firms; 

 

• work performed by internal auditors; and 

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

.04 AU 543.13 states: "In some circumstances the principal auditor may consider it 

appropriate to participate in discussions regarding the accounts with 

1

 The AICPA also issued Practice Alert 2002-02, Use of Specialists. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-2 

management personnel of the component whose financial statements are being 

audited by other auditors and/or to make supplemental tests of such accounts. 

The determination of the extent of additional procedures, if any, to be applied 

rests with the principal auditor alone in the exercise of his professional judgment 

and in no way constitutes a reflection on the adequacy of the other auditor's 

work. Because the principal auditor in this case assumes responsibility for his 

opinion on the financial statements on which he is reporting without making 

reference to the audit performed by the other auditor, his judgment must govern 

as to the extent of procedures to be undertaken." 

.05 The above paragraph makes clear that the principal auditor exercises 

considerable judgment in deciding what procedures are necessary to use the 

work of the other auditor. FAM 650 provides guidance in making the judgments 

necessary to use the work of others. These judgments include 

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

• the auditor's evaluation of the other auditors' or specialists' independence and 

objectivity (see paragraphs 650.11-.24), 

• the auditor's evaluation of the other auditors' or specialists' qualifications (see 

paragraphs 650.25-.35), and 

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

.06 The auditor should coordinate with other auditors whose work he or she wishes 

to use. In turn, the other auditor should consider the needs of auditors who plan 

to use the work being performed so that the judgments exercised by both 

auditors could satisfy the needs of both. This is best done before major work is 

started. For example, auditors of a consolidated entity (such as the U.S. 

government or an entire department or agency) are likely to plan to use the work 

of auditors of subsidiary entities (such as individual departments and agencies or 

bureaus and components of a department). This coordination can result in more 

economy, efficiency, and effectiveness of government audits in general and avoid 

duplication of effort. In addition, the coordination needs to be ongoing 

throughout the audit so that the timing needs of both the auditor and the other 

auditors are met. The other auditors should make their audit documentation 

available for review by the auditor on an ongoing basis during the audit. 

.07 In this coordination, the auditor should inform the other auditor how his or her 

work and report will be used. AU 543.07 indicates that if the auditor's report will 

name the other auditor, the auditor should obtain permission to do so and should 

present the other auditor's report together with the principal auditor's report. 

For CPA firms, this permission may be obtained through the contracting process. 

The auditor also should provide the other auditors a draft of the report as a 

courtesy. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-3 

.08 When there is a difference of opinion between the two auditors, the principal 

auditor generally should confer with the other auditor to reach agreement with 

him or her as to the procedures necessary to satisfy both auditors' professional 

judgments. If both auditors are unable to reach agreement, see paragraphs 

650.54 to .56. Section 650 B contains example audit procedures for using the 

work of others, which depend on the judgments made. 

TYPES OF REPORTING

.09 There are various types of reporting when using the work of other auditors and 

specialists. The type of reporting depends on the degree of responsibility the 

auditor accepts and the work performed by the auditor. Factors for the auditor 

to consider in deciding which type of reporting to use include the amount of 

assurance the auditor wishes to provide, legal requirements, and cost-benefit 

considerations. The degree of resources required varies by type of report and 

generally increases in the order presented below. The type of reporting should 

be decided in planning the job and generally should be discussed with the other 

auditors or specialists. In deciding the type of reporting, the auditor should 

consider AU 504.03, which states that an auditor is "associated with financial 

statements when he has consented to the use of his name in a report, document, 

or written communication containing the statements." (Section 650 C contains 

examples of wording for two types of reporting.) The types of reporting are as 

follows. 

a. No association with report—In this situation, the other auditors' or 

specialists' report is provided directly to the auditee and/or to significant 

users. The auditor may use this method when the auditor merely procures the 

audit but is not acting as "the auditor." For example, if there is no legal 

requirement for a separate report by the auditor, the user does not need a 

separate report from the auditor, and a separate report would provide no 

additional information. When the auditor is required by law to perform the 

audit, he or she should not use this option since he or she is associated with 

the report. 

b. Auditor transmittal letter—There are two types of transmittal letters, one 

expressing no assurance and one expressing negative assurance on the other 

auditors' work. For either type, the auditor is associated with the financial 

statements as described in AU 504. The fourth standard of reporting states, (in 

the last sentence) "where an auditor's name is associated with financial 

statements, the report should contain a clear-cut indication of the character of 

the auditor's work, if any, and the degree of responsibility the auditor is 

taking." Because the auditor did not perform an audit, the auditor should 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-4 

disclaim an opinion and should not express concurrence with the other 

auditors' opinion. The auditor may use this approach when there is no legal 

requirement for the auditor to express an opinion or concurrence but the 

auditor is required to or wants to issue a report or letter. The auditor may 

expand the letter to highlight certain findings or information or to indicate that 

certain procedures were performed. See example 1 of section 650 C for 

wording for both types of transmittal letters. 

• Auditor transmittal letter expressing no assurance—For this letter, 

the auditor issues a transmittal letter without reviewing the other auditors' 

documentation. In these situations, the transmittal should be clear as to 

the limitations of the auditor's work. The auditor still has the 

responsibility to monitor any contract and meet the requirements of the IG 

Act, as amended, CFO Act, and Accountability of Tax Dollars Act of 2002, if 

applicable.

• Auditor transmittal letter expressing negative assurance—This 

letter indicates that the auditor reviewed the other auditors' or specialists' 

report and related documentation and inquired of their representatives and 

states that the auditor found no instances where the other auditors did not 

comply, in all material respects, with Government Auditing Standards

(GAGAS). 

c. The auditor issues a report that refers to other auditors' reports and 

indicates a division of responsibilities—To use this approach, the auditor 

has two decisions to make: (1) whether the auditor may serve as the principal 

auditor (AU 543.01-.03) and (2) whether the auditor should refer to the work of 

the other auditors (AU 543.01-.10). The auditor should exercise considerable 

judgment in making these decisions and should document the basis for the 

decisions. One consideration the auditor may use in deciding whether the 

auditor is the principal auditor is whether the auditor has sufficient knowledge 

of the entire entity, including portions audited by other auditors. Another 

consideration is the materiality and importance of the consolidated assets, 

liabilities, expenses, revenues, or net position he or she has not audited. The 

auditor may issue a report that refers to other auditors when (1) the other 

auditors have reported on financial statements for a component entity that is 

part of the entity whose financial statements the auditor is reporting on and 

(2) the auditor does not wish to take responsibility for the other auditors' 

work. (See AU 543.09 for example wording. This approach may be used only 

for CPA firms or for other auditors who are organizationally independent [see 

paragraph 650.14]; it may not be used for internal auditors or specialists.) 

However, if the reader of the report could question the basis for the principal 

auditor issuing the opinion because of the significant materiality and 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-5 

importance of the portion of the financial statements audited by the other 

auditors, the auditor should consider whether there is a need to issue a report 

that does not mention the other auditors' work, which may require additional 

work (see 650.09 e below). 

d. The auditor issues a report that expresses concurrence with the other 

auditors' report and conclusions—The auditor may use this approach when 

other auditors have reported on financial statements and the auditor needs or 

wants to provide more assurance than what is provided by the transmittal 

letter.2

 Expressing concurrence means that the auditor would have reached 

the same opinion or conclusion had he or she done the audit. Therefore, the 

auditor needs to do the same level of work as he or she would have done to 

take responsibility for the other auditor's work.3 The auditor usually 

accomplishes this by (1) reviewing the audit documentation and (2) having 

discussions with entity management and/or performing supplemental tests. 

See example 2 in section 650 C for report wording. This approach may be 

used only for CPA firms or for other auditors who are organizationally 

independent (see paragraph 650.14). This report should not be used for 

specialists, since AU 336.15 prohibits reference to a specialist's report unless 

the auditor issues a qualified or adverse opinion or a disclaimer of opinion 

based on the specialist's work. This approach also should not be used for 

internal auditors. AU 322.19 notes that the responsibility to report on the 

2

 For example, a certain audit may be required by law, in which the auditor, 

although allowed to hire other auditors to do the work, is required to give his or 

her own opinion. In the absence of such a requirement, a report expressing 

concurrence is generally not cost-effective because of the resources required. 

3

 In this instance both the other auditor and the auditor that expresses concurrence 

are principal auditors because both have sufficient knowledge of the overall 

financial statements and the important issues, and the concurring auditor, by 

reason of the level of work done, has also audited the financial statements. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-6 

financial statements rests with the auditor and cannot be shared with internal 

auditors.4

e. The auditor issues a report that does not mention the other auditors' 

or specialists' work—In this situation, the auditor issues the report in 

section 595 A and/or B (as if no other auditors or specialists were involved). 

This means the auditor takes responsibility for the other auditors' or 

specialists' work. (See 650.09 c above for a discussion of principal auditor 

issues.) The auditor may use this approach when the other auditors have done 

part of the audit; the approach also may be used when the other auditors have 

done substantially the entire audit.5

 The auditor usually accomplishes this by 

(1) reviewing the audit documentation and (2) having discussions with entity 

management and/or performing supplemental tests. The auditor also should 

use this approach when using the work of specialists and internal auditors, 

because professional standards do not permit referring to specialists' or 

internal auditors' work (unless, for specialists, the auditor issues a qualified or 

adverse opinion or a disclaimer of opinion based on the specialist's work). 

GAO uses this approach in the audit of the consolidated financial statements 

of the United States Government. 

4

 There may be situations where the auditor is asked to provide a separate opinion 

in addition to presenting the other auditors' report. In these situations, the 

auditor should follow the wording in section 595 A and/or B and should add the 

following in lieu of the introduction to the first paragraph on page 595 A-5: 

"To help fulfill these responsibilities, we contracted with the independent certified 

public accounting firm of [insert firm name] to perform a financial statement audit 

in accordance with U.S. generally accepted government auditing standards, 

OMB's bulletin, Audit Requirements for Federal Financial Statements, and the 

GAO/PCIE Financial Audit Manual. The report of [name of CPA firm] dated [date] 

is attached. We evaluated the nature, timing, and extent of the work, monitored 

progress throughout the audit, reviewed the documentation of [name of CPA 

firm], met with partners and staff members of [name of firm], evaluated the key 

judgments, met with officials of [entity being audited], performed independent 

tests of the accounting records [if applicable], and performed other procedures 

we deemed appropriate in the circumstances. Our opinions expressed above are 

consistent with the opinions of [name of CPA firm]. Thus, in this audit, we:" 

(continue with numbered items). 

5

 For example, a number of other auditors may have audited individual components 

of an entity and the auditor may audit the consolidation process. The auditor may 

choose to use this approach if the auditor has sufficient knowledge of the entire 

entity and does additional work (see paragraph 650.10). 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-7 

.10 The following chart presents an overview of the work the auditor generally 

should perform for each type of report or letter. "Yes" means some of that 

category of work generally should be performed. "No" means that the category is 

generally not required for the report or letter. The extent of work in each 

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

on level of review. 

Type of reporting Evaluate 

the other 

auditors' 

independence and 

objectivity 

(paragraphs 

650.11-.24) 

Evaluate 

the other 

auditors' 

qualifications 

(paragraphs 

650.25-

.35) 

Level of 

Review 

(paragraphs 

650.36-

.42) 

Hold discussions 

and/or perform 

supplemental 

tests (paragraphs 650.43-

.47) 

No association with 

report (paragraph 

650.09 a) 

No6

 No None No 

Auditor transmittal 

letter expressing no 

assurance (paragraph 650.09 b, first 

bullet) 

Yes Yes Low or 

none 

No 

Auditor transmittal 

letter expressing 

negative assurance 

(paragraph 650.09 

b, second bullet) 

Yes Yes Moderate 

or low 

No 

Report refers to the 

other auditors' report and indicates a 

division of responsibilities (paragraph 650.09 c)

Yes Yes Low or 

none 

No 

6

 If the auditor contracts with the other auditors, the contracting process generally 

will require the auditor to evaluate the other auditors' independence, objectivity, 

and qualifications and to monitor performance under the contract. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-8 

Type of reporting Evaluate 

the other 

auditors' 

independence and 

objectivity 

(paragraphs 

650.11-.24) 

Evaluate 

the other 

auditors' 

qualifications 

(paragraphs 

650.25-

.35) 

Level of 

Review 

(paragraphs 

650.36-

.42) 

Hold discussions 

and/or perform 

supplemental 

tests (paragraphs 650.43-

.47) 

Report concurs with 

the other auditors' 

report or does not 

mention the other 

auditors' work 

(paragraph 650.09 d 

and e)

Yes Yes High, 

moderate, 

or low 

Yes for internal 

auditors' work 

(should include 

supplemental 

tests). 

Yes for auditors' 

work for high 

level of review. 

No for auditor's 

work for moderate 

or low level of 

review 

EVALUATING THE OTHER AUDITORS' OR SPECIALISTS' 

INDEPENDENCE AND OBJECTIVITY

.11 Unless the auditor has no association with the report, the auditor should evaluate 

the other auditors' or specialists' independence and objectivity. Where the 

auditor has previously used the work of the same other auditors, the auditor 

generally should update the previous evaluation. GAGAS 3.11 indicates that 

audit organizations and individual auditors should be free from personal and 

external impairments to independence, should be organizationally independent, 

and should maintain an independent attitude and appearance. The auditor 

should first evaluate organizational independence. Different standards apply to 

CPA firms, other organizationally independent auditors, internal auditors, and 

specialists. 

.12 For CPA firms and specialists, the contracting process is designed to select a firm 

that is independent and objective. The statement of work or request for proposal 

should ask the firms to represent that they are independent and objective with 

respect to the auditee and should request the firms to describe in their proposals 

all work, including nonaudit services, they have done for the auditee in the last 

several years (see GAGAS Amendment No. 3, Independence, and Answers to 

Independence Questions). The technical evaluation panel should evaluate 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-9 

whether the nature and extent of this work or other factors cause an 

independence or objectivity issue. In this evaluation, the panel may consider, for 

example, whether (1) the other auditors will need to audit their own work or (2) 

whether the other auditors made management decisions or performed 

management functions. 

.13 If possible,7 the auditor should have a role in contracting for the CPA firm or 

specialist. When the auditor does not participate in contracting for the CPA firm 

or specialist, the auditor generally should obtain an overview of the contracting 

process; this generally should include reading the statement of work or request 

for proposal and the proposal of the firm selected, and understanding the 

evaluations of the panel selecting the firm. The auditor should determine 

whether the firm provided a representation as to independence and objectivity 

(usually in its proposal). If the firm has not provided a representation as to 

independence and objectivity, the auditor should obtain a representation from 

the firm. If the auditor is not familiar with the firm, the auditor should inquire of 

professional organizations (such as the American Institute of Certified Public 

Accountants or the Public Company Accounting Oversight Board established by 

the Sarbanes-Oxley Act of 2002) as to the firm's professional reputation and 

standing. 

.14 For government auditors, the auditor should decide whether the other audit 

organization is organizationally independent to report externally or whether it 

should be considered an internal audit organization. The auditor may refer to the 

work of organizationally independent government auditors but should not refer 

to the work of internal audit organizations in the audit report; generally more 

extensive review and supervision are necessary when dealing with internal 

auditors. The auditor should obtain written representations from the head of the 

government audit organization that to the best of his or her knowledge, the 

organization and the individual auditors doing the work are independent of the 

entity being audited. This means that the individual auditors are free of personal 

impairments to independence and maintain an independent attitude and 

appearance; it also means that the organization is free from external impairments 

and is organizationally independent (see GAGAS 3.11). The representation letter 

may indicate the general criteria for determining independence, such as "under 

the criteria in GAGAS." The representations should be for the period of the 

financial statements to the date of the other auditors' report. Since the decision 

on the independence and objectivity of the other auditors is needed to plan the 

7

 Under the CFO Act and the Government Management Reform Act, if the IG is not 

doing the audit, he or she is required to determine the CPA firm that will do the 

work. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-10 

auditor's work, the auditor generally should obtain oral representations early in 

the audit, with written representations at the end of the audit.8

.15 Government auditors may be presumed to be free from organizational 

impairments to independence when reporting externally to third parties if their 

audit organization is organizationally independent of the audited entity. 

Government audit organizations may meet the requirement for organizational 

independence in a number of ways. There is a presumption that a government 

audit organization is organizationally independent (GAGAS 3.30.1) if the audit 

organization is 

a. "assigned to a level of government other than the one to which the audited 

entity is assigned (federal, state, or local), for example, a federal auditor 

auditing a state government program, or

b. "assigned to a different branch of government within the same level of 

government as the audited entity, for example, a legislative auditor auditing 

an executive branch program." 

.16 There is also a presumption of organizational independence if the head of the 

audit organization (GAGAS 3.30.2) meets one of the following: 

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

b. "is elected or appointed by a legislative body, subject to removal by a 

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

legislative body, 

c. "is appointed by someone other than a legislative body, so long as the 

appointment is confirmed by a legislative body and removal from the position 

is subject to oversight or approval by a legislative body, and reports the 

results of audits to and is accountable to a legislative body, or 

d. "is appointed by, accountable to, reports to, and can only be removed by a 

statutorily created governing body, the majority of whose members are 

independently elected or appointed and come from outside the organization 

being audited." 

.17 If the other audit organization or its head meets one of the above criteria, the 

auditor need not perform any procedures concerning organizational 

8

 Obtaining a representation from the head of the audit organization is similar to 

the procedure for CPA firms under AU 543.10b. 
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April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-11 

independence other than to obtain a representation letter from the head of the 

audit organization as noted in paragraph 650.14 (see paragraph 650.23 for tests of 

personal independence). However, if the auditor encounters evidence that the 

audit organization might not be organizationally independent, the auditor should 

consider the need for inquiries and other procedures; the auditor should then 

evaluate the results of these procedures. 

.18 In addition to the presumptive criteria, GAGAS recognize that there may be other 

organizational structures under which a government audit organization could be 

free from organizational impairments. These other structures should provide 

sufficient safeguards to prevent the audited entity from interfering with the audit 

organization's ability to perform the work and report the results impartially. For 

the audit organization to be considered free from organizational impairments to 

report externally under a structure different from the ones listed above, the audit 

organization (GAGAS 3.30.3) should have all of the following safeguards: 

a. "statutory protections that prevent the abolishment of the audit organization 

by the audited entity, 

b. "statutory protections that require that if the head of the audit organization is 

removed from office, the head of the agency should report this fact and the 

reasons for the removal to the legislative body, 

c. "statutory protections that prevent the audited entity from interfering with the 

initiation, scope, timing, and completion of any audit, 

d. "statutory protections that prevent the audited entity from interfering with the 

reporting on any audit, including the findings, conclusions, and 

recommendations, or the manner, means, or timing of the audit organization's 

reports, 

e. "statutory protections that require the audit organization to report to a 

legislative body or other independent governing body on a recurring basis, 

f. "statutory protections that give the audit organization sole authority over the 

selection, retention, and dismissal of its staff, and 

g. "statutory access to records and documents that relate to the agency, 

program, or function being audited." 

.19 If the head of the audit organization concludes that the organization has all the 

safeguards listed above, the audit organization may be considered free from 

organizational impairments to independence when reporting externally. The 
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April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-12 

audit organization should document the statutory provisions in place that provide 

these safeguards. The external quality assurance reviewer will review these 

provisions to determine whether the necessary safeguards are present. 

.20 The auditor using the work of other auditors who meets these requirements 

should request a representation letter (see paragraph 650.14) from the head of 

the audit organization; the auditor should review the above documentation and 

discuss it with the head of the audit organization. He or she also may discuss the 

matter with the external quality assurance reviewer, legal counsel for the audit 

organization, and his or her own legal counsel. 

.21 If the auditor decides that the government audit organization is not 

organizationally independent to report externally (either because it does not 

meet the criteria in GAGAS or for another reason), the auditor should determine 

whether the other auditors are organizationally independent to report internally. 

These auditors are internal auditors. The Institute of Internal Auditors' (IIA) 

Standards for the Professional Practice of Internal Auditing defines internal 

auditing as "an independent, objective assurance and consulting activity designed 

to add value and improve an organization's operations. It helps an organization 

accomplish its objectives by bringing a systematic, disciplined approach to 

evaluate and improve the effectiveness of risk management, control, and 

governance processes." GAGAS contain guidance on organizational 

independence for government internal auditors. For example, internal auditors 

should be outside the staff or line management function of the unit under audit. 

They should report their results and be accountable to the head or deputy of their 

agency. IIA standards require internal auditors to be objective for the activities 

they audit. These GAGAS and IIA standards of independence for internal 

auditors differ from independence under the AICPA Code of Professional 

Conduct or independence for external auditors under GAGAS. The auditor 

generally should determine whether the internal auditors whose work is to be 

used are independent of the activities they audit. The auditor also should 

consider the organizational status of the head of the audit organization, including 

(GAGAS 3.30.5) whether the head: 

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

• "is required to report the results of the audit organization's work to the head or 

deputy head of the government entity, and 

• "is located organizationally outside the staff or line management function of 

the unit under audit." 
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 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-13 

.22 If the auditor concludes that the internal auditors are not independent under 

GAGAS and IIA standards, the auditor should treat the work as if the auditee 

prepared it. If the auditor concludes that the internal auditors are independent 

under GAGAS and IIA standards, the auditor may use their work to the extent 

permitted by AU 322. In either case, the auditor may not issue a report referring 

to or concurring with the work of internal auditors. 

.23 In addition to evaluating the other auditors' organizational independence, the 

auditor should evaluate whether the audit team has any personal impairments. 

For both internal auditors and organizationally independent government audit 

organizations, the auditor generally should ask how the other auditors monitor 

the personal independence of individual staff members, especially those doing 

the work the auditor would like to use. 

.24 The auditor should document the work performed and the conclusions reached 

as to independence and objectivity. The documentation should indicate the 

auditor's conclusion as to whether the other auditors are independent and 

objective and the basis for that conclusion. The auditor should consult with the 

Reviewer if there are questions about the other auditors' independence or 

objectivity. 

 

EVALUATING THE OTHER AUDITORS' OR SPECIALISTS' 

QUALIFICATIONS

.25 After evaluating the other auditors' or specialists' independence and objectivity, 

the auditor should evaluate the other auditors' or specialists' qualifications to 

perform the specific tasks required. This involves evaluating the qualifications of 

the firm or audit organization and evaluating the qualifications of the specific 

audit team. Where the auditor has previously used the work of the same other 

auditors, the auditor generally should update the previous evaluation. 

.26 For CPA firms and specialists, qualifications are generally evaluated through the 

contracting process. The firm submits resumes for the audit team and 

demonstrates why its team is qualified to do the work. CPA firms should be 

asked to submit their latest peer review report (or inspection report specified by 

the Public Company Accounting Oversight Board), letter of comments, and 

response to the peer review report. The firm generally submits its plan for doing 

the work. The purpose of the technical evaluation panel under the contracting 

process is to select a qualified firm. 

.27 Where the auditor did not participate in the contracting process, the auditor 

should consider how the qualifications of the firm were evaluated. For example, 

did the evaluation panel review resumes of the team; review the audit approach; 
 Planning and General 

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April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-14 

and read the peer review report, the related letter of comments, and the firm's 

response to the peer review report? The auditor should read these documents 

and reach a conclusion as to qualifications. 

.28 For auditors other than CPA firms, the auditor should ask whether the audit 

organization had a peer review and the date of that review. IGs have peer 

reviews performed every 3 years by other IGs. Most state auditors also have peer 

reviews every 3 years. To comply with GAGAS, the audit organization should 

have a peer review every 3 years. The IIA standards indicate that, "[e]xternal 

assessments, such as quality assurance reviews, should be conducted at least 

once every five years by a qualified, independent reviewer or review team from 

outside the organization.". While reviews under the IIA standard are not designed 

to report whether the audit organization's quality control adheres to GAGAS, they 

do provide evidence about whether the work adheres to a recognized set of 

professional standards. The auditor should read the peer review report, the letter 

of comments, and the audit organization's response. Where the audit 

organization has received an unqualified peer review report recently (usually less 

than 1 year ago), further review of the audit organization's qualifications is 

generally not required. 

.29 Where the peer review report is not recent, the auditor also should review the 

results of the audit organization's internal inspection program. If the peer review 

is not recent, the inspection is important in highlighting new quality control 

issues. The inspection generally should include reviews of documentation, 

interviews of staff members, and tests of functional areas. Where the inspection 

is recent (usually within the past year) and the inspection report is unqualified, 

further review of the audit organization's qualifications is generally not required. 

.30 Where the peer review or inspection report is qualified or adverse, the auditor 

should evaluate whether the quality control system has since been strengthened 

to allow the auditor to use the other auditors' work. The auditor may review the 

organization's action plan for improving quality controls. Inspection results are 

helpful in determining whether quality controls have improved since the peer 

review. The auditor should consider the effect of the remaining weaknesses in 

determining the nature and extent of procedures the auditor will perform. 

.31 Where the peer review is not recent and there is no inspection program, the 

auditor generally should obtain an overview of the important policies and 

procedures in the functional areas: 

• independence, integrity, and objectivity (see above); 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-15 

• personnel management (includes recruiting and hiring, advancement, 

professional development and training, and assigning personnel to 

assignments); 

• audit performance (includes supervision and consultation); 

• acceptance and continuance of assignments; and 

• monitoring programs. 

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

organization's management and staff and through reading the audit organization's 

quality control summary document, if one has been written. The auditor also 

may read the organization's manuals and other guidance for conducting audits. 

.33 In addition to evaluating the audit organization's qualifications, the auditor also 

should evaluate the overall qualifications of the other auditors' team assigned to 

do the work. Reviewing resumes of key team members may accomplish this. 

The auditor should consider the specific education, training, certifications, and 

experience of key team members. In evaluating qualifications, the auditor should 

consider the specific role of staff members on the job. When the auditor has 

knowledge of qualifications from prior experience with key team members, the 

auditor should inquire about experience in the time since the last audit. 

.34 Where the auditor is not fully satisfied as to the other auditors' qualifications, the 

auditor generally should perform a more detailed review of the documentation 

and/or perform supplemental tests of key line items (see paragraph 650.36). The 

auditor also may help the other auditors improve future audits. 

.35 If the auditor has significant concerns about the other auditors' independence, 

objectivity, or qualifications, the auditor should revise the audit approach. For 

example, the auditor may: 

• contract with another firm, 

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

members, 

• do the audit without using the other auditors' work, treating any work done by 

the other auditors as prepared by the auditee, 

• divide the work so that the other auditors test the areas where they are 

qualified, and the auditor does the rest of the audit, or 

• issue a disclaimer of opinion. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-16 

PLANNING THE REVIEW AND TESTING OF THE OTHER AUDITORS' 

OR SPECIALISTS' WORK 

.36 After evaluating the other auditors' or specialists' independence, objectivity, and 

qualifications, the auditor should develop a written plan for reviewing and, if 

necessary, testing the work done. This plan documents the level of review the 

auditor believes necessary. The level of review is high,9 moderate, or low.10 The 

plan should be reconsidered as the work progresses. The level of review is a 

judgment the auditor makes; this judgment generally should be made for each 

material line item and should consider the following factors: 

a. The type of report or letter the auditor will issue (less review is needed for a 

transmittal letter than for reports in which the auditor takes responsibility for 

the other auditors' work). (See paragraph 650.10.) 

b. Whether the other auditors issue a disclaimer of opinion because of a scope 

limitation (less work is needed to concur with a scope limitation than to 

concur with an unqualified opinion). (See paragraph 650.37.) 

c. Whether the auditor's report might contain a disclaimer because of a scope 

limitation (less work is needed if the auditor's report will contain a scope 

limitation). (See paragraph 650.39.) 

d. The other auditors' independence, objectivity, and integrity (both for the 

audit team and for the other audit organization) including whether the other 

audit organization is an independent auditor or an internal auditor (the level 

of review increases as independence, objectivity, and integrity decreases). 

e. The other auditors' qualifications to perform the work the auditor wishes to 

use (both for the audit team and for the other audit organization) (the level of 

review increases as the other auditors' qualifications decrease). 

9

 Some situations may require significantly more work than the work shown for the 

high level. In those situations, the auditor generally should perform significant 

supplemental tests; in some cases, the audit may be a joint audit. 

10 In some situations, the auditor may decide less review or no review is necessary. 

These situations typically involve entities or line items that are very small in 

relation to the financial statements taken as a whole. In these situations the 

auditor may decide to read the other auditors' report and the financial statements 

and ask questions if anything seems unusual. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-17 

f. The auditors' prior experience with the other auditors (both for the audit 

team and for the other audit organization) (the level of review decreases as 

the auditor has favorable experience in working with the other auditors). 

g. The materiality of the line item in relation to the financial statements the 

auditor is reporting on, taken as a whole (the level of review increases as the 

line item becomes more material). 

h. The combined risk (combination of inherent risk and control risk) and the 

risk of material fraud for the line item and assertion in the financial 

statements the other auditors are auditing (the level of review increases as 

the combined risk and the risk of material fraud increase). 

.37 If the other auditors' work had a scope limitation, this generally affects the level 

of review (except for transmittal letters with no assurance). If the other auditors 

disclaim an opinion on the financial statements because of a scope limitation, the 

auditor should issue a disclaimer of opinion (unless the financial statements the 

other auditors audited are not material to the financial statements the auditor is 

auditing). It will not take much review to be satisfied that the disclaimer is 

appropriate. Discussions with entity management and/or supplemental tests are 

not required in this situation, and the review of documentation may be limited to 

summary documentation. Thus, the level of review is usually low or no review 

(see footnote 6). However, the auditor may decide to do additional work to learn 

about the entity, to help the other auditor plan future audits, or to help 

management correct the causes of the scope limitation. 

.38 If the other auditors' work had a scope limitation that results in a qualified 

opinion, this generally needs a moderate or high level of review to determine 

whether the other auditors should have disclaimed an opinion and that the only 

issues are those relating to the qualification. 

.39 A scope limitation on the auditor's work that results in a disclaimer also may 

affect the level of review. Since the auditor has already decided that not enough 

work can be done on the overall financial statements, no amount of review of the 

other auditors' work is likely to change that conclusion. Thus, as in the situation 

above, discussions with entity management and/or supplemental tests are not 

required, the review of the other auditors' documentation may be limited to 

summary documentation, and the level of review is usually low or no review (see 

footnote 6). However, the auditor may decide to do additional work to learn 

about the entity, to help the other auditor plan future audits, or to help 

management correct the causes of the scope limitation. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-18 

.40 A scope limitation on the auditor's work that results in a qualified opinion needs a 

similar amount of work as an unqualified opinion. 

.41 Section 650 A illustrates the work that generally should be performed for each 

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

documentation. 

REVIEW OF DOCUMENTATION

.42 The extent of the auditor's review of the other auditors' or specialists' 

documentation depends on the level of review and is a judgment based on the 

factors in paragraph 650.36. For the low level of review, the review of 

documentation may be limited to key summary planning and completion 

documentation. For the moderate level, the auditor generally should review 

more of the other auditors' or specialists' documentation, especially those 

evidencing important decisions. For financial statement audits, these include the 

General Risk Analysis (GRA) or audit plan or equivalent documents; the Account 

Risk Analysis (ARA) (or equivalent documentation) for significant accounts; the 

Specific Control Evaluations (SCE) (or equivalent documentation) for significant 

applications; the documentation for high-risk accounts, estimates, and 

judgments; the analytical procedures; the audit completion checklist (or 

equivalent documentation); the audit summary memorandum; and the summary 

of possible adjustments. For the high level of review, the auditor generally 

should review all of the items for the moderate level of review plus the important 

detailed documentation. 

DISCUSSIONS AND/OR SUPPLEMENTAL TESTS WHERE LEVEL OF 

REVIEW IS HIGH

.43 AU 543.13 states: "In some circumstances the principal auditor may consider it 

appropriate to participate in discussions regarding the accounts with 

management personnel of the component whose financial statements are being 

audited by other auditors and/or to make supplemental tests of such accounts." 

"In some circumstances" is interpreted to mean when the level of review is high. 

Thus, where the level of review is high, the auditor should (1) review audit 

documentation and (2)hold discussions with auditee management and/or 

perform tests of original documents. The objective of these additional 

procedures is for the auditor to obtain additional evidence about whether key 

items are properly handled and well supported. For example, the auditor 

generally should discuss key items with auditee management, especially 

estimates and judgments; this discussion generally should be with the other 

auditors present. The auditor generally should attend the entrance and exit 

conferences and other key meetings held by other auditors or specialists. The 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-19 

auditor should consider that for key items that are high risk, discussions with 

management may not provide sufficient evidence and supplemental tests may 

need to be performed. 

.44 Supplemental tests may be a selection of the other auditors' work, additional 

tests of the accounting records, or both. To perform supplemental tests, the 

auditor should have access to the entity's personnel and their books and records. 

 The auditor may coordinate access to the entity's personnel and records through 

the other auditor. The auditor and the other auditor also may jointly perform 

parts of a test, where the sample is planned jointly and the results are evaluated 

jointly. Although supplemental tests are usually performed only when the level 

of review is high, the auditor may decide to perform supplemental tests in other 

situations to learn about the entity, to help the other auditor plan future audits, or 

to help management correct problems. 

.45 Where the other auditor is an internal auditor, the auditor should perform 

supplemental tests. Accordingly, for internal auditors, supplemental tests 

generally should be of greater scope (see AU 322.26). 

.46 The auditor generally should limit discussions with entity management and/or 

supplemental tests to line items that are both high combined risk and material to 

the financial statements the auditor is reporting on, especially in areas involving 

estimates and judgments or in areas on which users place extensive reliance. 

The auditor's supplemental tests generally should include some items that the 

other auditor tested that appear to be exceptions to determine whether they were 

appropriately considered in formulating an opinion. The auditor should consider 

performing supplemental tests while the other auditors are at the auditee 

location and have access to records; this can minimize the inconvenience to the 

auditee. 

.47 It is not necessary to perform supplemental tests of the work of specialists. As 

indicated in AU 336.12, the auditor should understand the methods and 

assumptions used by the specialists, test the data provided to the specialists 

(extent of testing is based on risk and materiality), and evaluate whether the 

specialists' findings support the financial statement assertions. If the auditor 

believes the findings are unreasonable, the auditor should apply additional 

procedures and/or consider the need to obtain another specialist. 

SUBSEQUENT EVENTS REVIEW AND DATING OF THE AUDITOR'S 

REPORT

.48 The auditor's report should be dated when the auditor completes fieldwork. If 

the other auditors' or specialists' report is dated earlier and the auditor's report 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-20 

does not mention the other auditors' report or concurs with the other auditors' 

report (example 2 of section 650 C), the subsequent events review should be 

updated to the date of the auditor's report. The auditor may ask the other 

auditors to update the subsequent events work to the required date, or the 

auditor may update the subsequent events review. Since this requires additional 

work, the auditor should attempt to complete fieldwork when the other auditors 

complete fieldwork. This issue should be considered in planning. It is not 

necessary to update the subsequent events review when the auditor issues a 

transmittal letter (example 1 of section 650 C). 

STAFFING THE REVIEW OF THE OTHER AUDITORS' OR SPECIALISTS' 

WORK

.49 When staffing the review, the auditor should consider that the other auditors or 

specialists may already have reviewed the work at several levels. The auditor's 

staff reviewing the work generally should have enough experience in financial 

statement auditing to understand the judgments that need to be made and to 

interact with the higher levels of the other audit organization. Most of the review 

generally should be done by or under the direction of an assistant director or a 

manager who has significant experience in performing and reviewing financial 

statement audit work. Supplemental tests may be done by less experienced staff 

members and supervised by an assistant director or an experienced audit 

manager. Primary review of the experienced audit manager's or assistant 

director's documentation should be performed by the audit director or an 

assistant director designated by the audit director. However, the assistant 

director or audit manager should review the documentation of supplemental 

tests performed by the less experienced staff members. Because of the high level 

of financial statement auditing experience of staff members doing and reviewing 

this work, secondary review should be performed only in very high-risk 

situations. 

.50 When the other auditors' work involves the review of computer controls, an 

information systems auditor in a management role generally should do the 

auditor's review. An audit assistant director should review the information 

systems auditor's documentation to determine that related audit objectives were 

achieved. 

EVALUATING THE WORK 

.51 After the auditor has completed the review of the other auditors' work, and, if 

necessary, the supplemental testing, the auditor should determine whether the 

work is sufficient and acceptable for the auditors' use. The auditor should 

summarize the evaluation in the audit summary memorandum. 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-21 

.52 Sometimes, the other auditors use methodologies or audit approaches that are 

different from those the auditor would have used. The auditor should recognize 

that auditing requires a great deal of professional judgment and that there often 

are alternative ways to achieve audit objectives. Thus, the auditor should first 

understand the basis for the nature, timing, and extent of the other auditors' 

procedures. The auditor should evaluate whether sufficient evidence has been 

obtained to meet the auditor's objectives; usually the auditor should consider 

materiality and combined risk for the particular line item in this evaluation. If the 

auditor has concerns about whether the other auditors' work provides sufficient 

evidence, the auditor should discuss the matter with the audit director and the 

Reviewer before formally discussing the issue with the other auditors. 

.53 The auditor should consider the significance of the test results to the audit of the 

financial statements the auditor is reporting on. As an example, the other 

auditors might have selected a nonstatistical sample and/or the sample size might 

be smaller than the sample size the auditor would have selected. The auditor 

might decide that this provides sufficient evidence in an area that is less material 

or is not risky. However, if the area is material or risk is high, the auditor might 

conclude that sufficient evidence has not been obtained and that additional work 

is needed. In this case, after consulting with the audit director and the Reviewer, 

the auditor generally should either ask the other auditors to perform additional 

tests or perform the additional tests; if the additional testing is not done, the 

auditor should consider the effect of this scope limitation on the auditor's report. 

 Since reaching this conclusion after the work is performed is inefficient, when 

the level of review is high, the auditor generally should coordinate or concur with 

major planning decisions before audit work is started. 

.54 Sometimes, the auditor may disagree with the conclusions or judgments of the 

other auditors. In this case, the auditor should consider the other auditors' work 

as well as any other evidence necessary to determine the appropriate conclusion. 

.55 The auditor should then discuss the issue with the other auditors to attempt to 

resolve the disagreement. It is important to attempt to resolve disagreements to 

reduce confusion that may arise from differing auditor views. In planning the 

audit, the auditor should try to identify potential disagreements early. Once 

identified, the auditor should discuss the issues with the other auditors as early 

as possible so that they can be resolved timely. 

.56 If the auditor does not reach agreement with the other auditors, the auditor 

should consider how to report. For very material disagreements, the auditor may 

decide not to transmit the other auditors' report, instead issuing a disclaimer of 

opinion due to a scope limitation or doing additional work, if necessary, to issue 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-22 

an appropriate opinion. In less material disagreements, the auditor may transmit 

the other auditors' report, issue the transmittal letter or report, and describe the 

disagreement and the basis for the auditor's conclusions. 

DOCUMENTING THE REVIEW OF OTHER AUDITORS' OR SPECIALISTS' 

WORK

.57 Regardless of the type of reporting or the level of review, the auditor's 

documentation should contain the items listed in section 650 A under 

"documentation." 

.58 In addition, where the auditor performs supplemental tests of the accounting 

records, the auditor's documentation should contain a description of the work 

(this may be a list of the documents the auditor examined or tick marks on a 

copy of the other auditors' documentation if that is the basis for the selection) 

and the auditor's conclusion. It is not necessary to retain copies of the 

documents examined. 

.59 It is important to distinguish between the auditor's responsibilities to review the 

documentation of other auditors versus what the auditor might copy and retain 

from that documentation. The auditor should use judgment in deciding which of 

the other auditors' or specialists' documents to copy and retain. Copies of 

documents readily available from the other auditors or the auditee (such as 

invoices and contracts) need not be retained. Section 650 A indicates what 

documentation the auditor generally should retain. 

.60 The auditor may decide to retain other documentation if it might be useful in 

understanding the entity, training staff members, planning future audits, 

reviewing the documentation, or writing the report. Documentation in this 

category includes the entity profile (or equivalent), the general risk analysis or 

audit plan, the audit programs, the ARA and SCE forms (or equivalent), the trial 

balance or lead schedules, the management representation letter, and the 

attorney representation letter. Auditors often find it helpful to keep copies of 

documents in case questions are raised in review but not to include those copies 

in the documentation unless they are needed to document the work performed. 

Documents should not be retained if they are no longer needed. The audit plan 

or audit program may indicate which documents to retain. 

USING INTERNAL AUDIT STAFF TO PROVIDE DIRECT ASSISTANCE 

TO THE AUDITOR

.61 Sometimes the auditor or the auditee requests that internal auditors provide 

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

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-23 

satisfied with the independence, objectivity, and qualifications of the staff 

assigned to do the work requested. AU 322.27 indicates that in these situations 

"the auditor should inform the internal auditors of their responsibilities, the 

objectives of the procedures they are to perform, and matters that may affect the 

nature, timing, and extent of procedures.... The auditor should also inform the 

internal auditors that all significant accounting and auditing issues identified 

during the audit should be brought to the auditor's attention." The auditor should 

direct, review, test, and evaluate the work done by internal auditors to the extent 

appropriate based on the auditor's evaluation of risk, materiality, objectivity, and 

qualifications. 

USING AGENCY SPECIALISTS

.62 Many agencies have actuaries, security specialists, statistical specialists, and 

other specialists whose work the auditor would like to use. Unless these 

specialists are part of an organization that is organizationally independent or 

under contract to such an organization, the auditor should evaluate their work as 

the work of any auditee employee. The auditor generally should use specialists 

in the audit organization or contract for outside specialists to develop and 

implement appropriate tests. 

MULTIPLE LEVELS OF OTHER AUDITORS

.63 Sometimes there are several levels of other auditors. For example, the IG might 

hire a CPA firm to do an audit. The IG may issue a report concurring with the 

CPA's report or a letter transmitting the CPA's report; GAO may then use the 

work of the IG. 

.64 In these situations, each audit organization should follow the guidance in section 

650. The IG should evaluate the independence (see paragraphs 650.11-. 24) and 

qualifications of the other auditors (see paragraphs 650.25-. 35), should review 

the audit documentation (see paragraph 650.42), and may need to have 

discussions with entity management and/or perform supplemental tests of key 

accounts (see paragraphs 650.43-. 47) (depending on the level of review deemed 

appropriate). GAO should evaluate the qualifications of the IG organization (by 

reading the peer review report, the letter of comments, and the audit 

organization's response as described in paragraph 650.25) and the team doing the 

monitoring, should review the IG's documentation, and may perform 

supplemental tests. When GAO finds that the IG has done and documented 

adequate work including discussions with management and/or supplemental 

tests, GAO's discussions and/or supplemental tests would be quite limited—

perhaps a walk-through of work done in high-risk and material areas. Often, 

GAO may attend fewer meetings than the IG staff attends and would concentrate 
 Planning and General 

 650 - Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650-24 

the review on the IG's documentation. GAO may then issue a report on the 

financial statements. 

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

between the various auditors. The IG and GAO may perform the review jointly. 

Sometimes, a memorandum of understanding might be useful in documenting 

responsibilities. A chart that describes the review to be done by each 

organization may be useful. The following is a useful format for this chart (with 

more detail added as necessary under each phase): 

Procedures 

Phase Other auditor IG review GAO review 

Planning 

Internal control 

Testing 

Reporting 

REPORTS ON OTHER AUDITORS' WORK 

.66 The auditor may be asked to issue a report evaluating work done by other 

auditors in a situation where the auditor is not using the work of the other 

auditors. For example, the auditor might be asked to evaluate an audit done by a 

CPA firm. While AU 543, 322, and 336 are not directed towards these situations, 

the guidance in FAM 650 is helpful in planning and reporting on these 

assignments. 
 Planning and General 

 

 650 A - SUMMARY OF AUDIT PROCEDURES AND 

DOCUMENTATION FOR REVIEW OF OTHER 

AUDITORS' WORK 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 A-1 

.01 The table in this section indicates the work that generally should be performed 

for each level of review, as well as what generally should be retained in the 

documentation. The table does not include work on other auditor's 

independence, objectivity, and qualifications. (See paragraphs 650.11-.35 for a 

discussion of that work.) Where the other auditor uses equivalent documents, 

review those documents. 

.02 In the table, steps to be performed and documents to be retained at the low level 

of review are indicated by regular font. The moderate level of review includes 

the low level plus those in bold letters. The high level of review includes the 

moderate level plus those in BOLD CAPITALS.

 
 Planning and General 

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

Other Auditors' Work 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 A-2 

AUDIT PROCEDURES

At entity level For significant line items, accounts, or 

applications 

- Communicate with the other auditors: 

 - as to the objectives of the work 

 - discuss their procedures and 

results 

- Attend key entrance and exit 

meetings

- COORDINATE OR CONCUR IN 

SIGNIFICANT PLANNING 

DECISIONS BEFORE MAJOR 

WORK IS STARTED 

- Review: 

 - general risk analysis 

 - audit plan 

 - scope of work 

 - audit summary memorandum 

 - summary of unadjusted 

misstatements 

 - analytical procedures 

 - completion checklist 

 - determination of planning and 

design materiality 

 - information systems 

background 

- general and application 

controls documentation (done 

by information systems 

auditor)

 - representation letters 

 - key documentation

- Read: 

 - other auditor's report 

 - financial statements and notes 

 - stewardship report and required 

supplementary information 

 - other accompanying information 

 - management's response 

- Review: 

 - audit program 

 - conclusions about significant 

issues and their resolution (often 

in audit summary) 

 - account risk analysis (ARA)

 - specific control evaluations 

(SCE)

 - cycle memo

 - flowcharts

- determination of test 

materiality 

- sampling plan

 - other auditors' key 

documentation

 - documentation for high-risk 

accounts, estimates, and 

judgments

- analytical procedures 

- evaluation of sample results

 - summary of possible 

adjustments 

- PARTICIPATE IN DISCUSSIONS 

WITH MANAGEMENT 

PERSONNEL AND/OR PERFORM 

SUPPLEMENTAL TESTS OF THE 

LINE ITEMS (ESPECIALLY KEY 

ITEMS, ESTIMATES AND 

JUDGMENTS); COMPARE 

CONCLUSIONS 
 Planning and General 

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

Other Auditors' Work 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 A-3 

DOCUMENTATION

Retain Optional 

Auditor prepared: 

- audit plan 

- audit program 

- memo documenting entrance and 

exit conference

- MEMOS DOCUMENTING KEY 

MEETINGS ATTENDED AND 

DISCUSSIONS WITH AUDITEE 

MANAGEMENT 

- results of review of 

documentation

- SUPPLEMENTAL TEST 

DOCUMENTATION

- summary memo 

Other auditor prepared: 

At entity level: 

- other auditor's report 

- final financial statements and notes 

- stewardship report 

- management letter 

- other auditor's unadjusted 

misstatements, estimate of the 

imprecision of audit procedures, and 

comparison with materiality 

- audit completion checklist 

- other auditor's audit summary memo 

At line item level: 

- documentation that supports 

exceptions 

- other auditor's documentation 

evidencing significant judgments 

and conclusions

- entity profile 

- general risk analysis 

- other auditor's audit plan 

- other auditor's audit program 

- account risk analyses 

- specific control evaluations 

- sampling plan

- trial balance 

- lead schedules 

- evaluation of sample results

- management representation 

letter 

- legal representation letter 
[This page intentionally left blank.] 
 Planning and General 

 

 650 B - EXAMPLE AUDIT PROCEDURES FOR USING 

THE WORK OF OTHERS 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-1 

This program is appropriate when using the work of other auditors or the work of 

specialists to perform a full or partial audit of financial statements. The steps 

should be tailored to the circumstances and the planned level of review by 

deleting inapplicable steps, modifying the steps, and adding additional steps. 

When the other auditors or specialists have done only part of an audit, many of 

the steps below may be deleted. Many of the steps also may be deleted for the 

low level of review or when the auditor plans to issue a transmittal letter. The 

program consists of three sections: evaluating independence, objectivity, and 

qualifications for CPA firms and specialists; evaluating independence, objectivity, 

and qualifications for government auditors; and monitoring the work (for all 

types of other auditors and for specialists). The auditor generally should use one 

of the first two sections and the third section. A separate form generally should 

be used for each other auditor or specialist. 

Entity:________________________________________________________________ 

Job code:_____________________________________________________________ 

Period of audit:________________________________________________________ 

Step Done 

by/date 

W/P 

ref 

EVALUATING INDEPENDENCE, OBJECTIVITY, 

AND QUALIFICATIONS FOR CPA FIRMS AND 

SPECIALISTS

1. Read the statement of work or request for proposal 

to determine whether this contracting document 

provides sufficient background on the auditee and 

indicates the objectives of the work, what the 

contractor should include in its proposal, how 

proposals will be evaluated, and how the report will 

be used. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-2 

Step Done 

by/date 

W/P 

ref 

Independence and objectivity: 

2. Determine whether proposal of selected firm 

includes a representation as to the firm's 

independence and objectivity. 

3. If proposal does not include a representation as to 

independence and objectivity, obtain written 

representation from firm. 

Qualifications: 

4. Read proposal of selected firm. In reviewing 

proposal, evaluate the overall qualifications of the 

team performing the work. Review resumes and 

consider for key team members their educational 

level, professional certifications, and professional 

experience (including whether key team members 

have current knowledge and experience in the type 

of work done). 

5. If the auditor does not know the qualifications of 

the selected firm, review peer review report, letter 

of comments, and response letter. 

6. Communicate orally or in writing with the other 

auditors to be satisfied that they understand the 

requirements, the timetable, and the report or letter 

the auditor expects to issue. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-3 

Step Done 

by/date 

W/P 

ref 

EVALUATING INDEPENDENCE, OBJECTIVITY, 

AND QUALIFICATIONS FOR GOVERNMENT 

AUDITORS

Independence and objectivity: 

1. For all government audit organizations, obtain 

written representation from the head of the audit 

organization that the audit organization and the 

individual auditors are independent of the entity 

being audited. 

2. Determine whether the audit organization meets 

ONE of the criteria in paragraph 650.15, or the head 

meets ONE of the criteria in paragraph 650.16. 

If the organization (or its head) meets one of these 

criteria, no further work is needed unless the 

auditor finds contrary evidence as to independence 

and objectivity in other parts of the audit. Indicate 

which criterion is met; document the evaluation of 

any other evidence obtained. (Go to step 6.) 

3. If the audit organization (or its head) does not meet 

any of the criteria in step 2, determine whether it 

meets ALL of the criteria in paragraph 650.18. 

4. Review the audit organization's documentation of 

how it meets the requirements of step 3. Discuss 

with head of audit organization (consider 

discussing with external quality control reviewer, 

legal counsel for audit organization, and auditor's 

legal counsel). (Go to step 6.) 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-4 

Step Done 

by/date 

W/P 

ref 

5. If the audit organization does not meet the criteria 

for organizational independence to report 

externally, determine whether the organization is 

an independent internal audit organization under 

GAGAS and IIA standards. Determine whether the 

internal auditors are objective for the activities they 

audit. Consider the organizational status of the 

head of the audit organization, including whether 

the head 

• is accountable to the head or deputy head of the 

government entity, 

• is required to report the results of the audit 

organization's work to the head or deputy head 

of the government entity, and 

• is located organizationally outside the staff or 

line management function of the unit under 

audit. 

6. For all government audit organizations, obtain an 

understanding of organization's policies to enhance 

the objectivity of individual auditors, including 

• policies to prohibit auditors from auditing areas 

where relatives are employed, 

• policies to prohibit auditors from auditing areas 

where they were recently assigned or are 

scheduled to be assigned after they complete 

their tour of duty in auditing, and 

• policies to require representations as to 

objectivity and lack of conflicts of interest from 

each auditor. 

7. Prepare memorandum documenting work 

performed and conclusions as to independence and 

objectivity. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-5 

Step Done 

by/date 

W/P 

ref 

Qualifications: 

8. Read the latest peer review report, letter of 

comments, and the audit organization's response. 

Note date of report and whether it is unqualified. If 

report is recent (usually within the past year) and 

unqualified, go to step 12. 

9. If the peer review is not recent, review the latest 

inspection report, if any, and the organization's 

response. Note date of report and whether it is 

unqualified. If the inspection is recent (usually 

within the past year) and unqualified, go to step 12. 

10. If the organization has not had a recent peer review 

or inspection, obtain an overview of the important 

policies and procedures in the functional areas 

(through interviews of management and staff and 

through reading the summary quality control 

document, if any). Consult with Reviewer before 

performing this step. 

11. If the peer review or inspection report was qualified 

or adverse, determine whether the quality control 

system has since been strengthened. Review the 

organization's action plan for strengthening its 

quality control system. Consider the effect of 

remaining weaknesses in determining the level of 

review. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-6 

Step Done 

by/date 

W/P 

ref 

12. Inquire how the audit organization determined the 

staffing for the audit. Evaluate the overall 

qualifications of the team performing the work. 

Review resumes and consider for key team 

members: 

• educational level, professional certifications, 

and professional experience; 

• continuing professional education, especially 

whether key team members have received 

training and have current knowledge in the type 

of work done; 

• supervision and review of work; 

• whether the audit team has adequate sources for 

consultation and use of specialists, especially 

for audit sampling, audit methodology, and 

review of computer controls; and 

• quality of documentation, reports, and 

recommendations. 

13. If the auditor has significant concerns about the 

audit organization's or team's objectivity or 

qualifications, the auditor, in developing the audit 

plan, may either 

• ask the audit organization to substitute more 

objective or highly qualified staff members; 

• do the work, treating any work done by the 

other auditors as prepared by the auditee; 

• divide the work so that the other auditors test 

the areas where they are qualified and the 

auditor does the rest of the audit; or 

• issue a disclaimer of opinion. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-7 

Step Done 

by/date 

W/P 

ref 

MONITORING THE WORK (FOR ALL TYPES OF 

OTHER AUDITORS AND FOR SPECIALISTS)

1. Develop a plan for reviewing the other auditors' or 

specialists' work and, if necessary, performing 

supplemental tests of the accounting records. 

Determine the level of review for each line item. 

2. Monitor the planning of the audit (FOR MODERATE 

AND HIGH LEVEL OF REVIEW). 

• Attend entrance meeting and key planning 

meetings. 

• Review the entity profile. 

• Review the General Risk Analysis or equivalent 

document (and audit plan if prepared as a 

separate document) (FOR ALL LEVELS OF 

REVIEW). 

• Review the determination of planning 

materiality and design materiality. 

• Have an information systems auditor review the 

information resource management background 

information and the documentation for review 

of general and application controls. 

• Document line items and applications to be 

reviewed. 

• For each such line item, review the Account 

Risk Analyses, the Specific Control Analyses, 

the cycle flowcharts, the cycle memoranda, the 

determination of test materiality, and the audit 

program or equivalent documents. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-8 

Step Done 

by/date 

W/P 

ref 

3. Monitor the execution of the audit (for reports 

following example 2 of section 650 C or section 595 

A and/or B WHERE LEVEL OF REVIEW IS HIGH). 

• Attend key meetings, especially those discussing 

high-risk areas, significant estimates and 

judgments, and the other auditors' conclusions. 

• Discuss key items with auditee management, 

especially significant estimates and judgments. 

• Perform supplemental tests of the accounting 

records. 

•• Generally do for high risk and material line 

items, especially in areas involving 

estimates and judgments or ones that users 

rely on extensively. 

•• Generally do while the other auditors are at 

the auditee location and have access to the 

records. 

•• Examine some of the same documents the 

other auditors examined or make own 

selection or both. 

•• Compare results of other auditors' work to 

results of supplemental tests. 

•• Document scope of supplemental testing 

and conclusions reached. 
 Planning and General 

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

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 B-9 

Step Done 

by/date 

W/P 

ref 

4. Monitor the completion of the audit (items with * 

are usually not necessary for LOW level of review) 

• Review the overall analytical procedures. 

• *Review the key documentation for the line item 

and for completing the audit; consider 

evaluations of sample results. (For example, 

were projections appropriate? Was appropriate 

action taken based on sample results?) 

• *Determine whether the subsequent events 

review was updated to the date of the auditor's 

report. 

• Review the audit summary memorandum, 

conclusions about line items, and summary of 

possible adjustments. 

• Review the audit completion checklist (or 

equivalent document). 

• Review the management representation letter 

and the legal representation letter. 

• *Attend key exit conference(s). 

• Read the other auditors' report, the financial 

statements, the notes, the other accompanying 

information, and management's response. 

5. Prepare summary memorandum. 

6. Write the auditor's report or transmittal letter. 
[This page intentionally left blank.] 
 Planning and General 

 

 650 C - EXAMPLE REPORTS WHEN USING THE 

WORK OF OTHERS 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 C-1 

EXAMPLE 1 – TRANSMITTAL LETTER

We contracted with the independent certified public accounting firm of [name of 

firm] to audit the financial statements of [name of entity] as of [date] and for the 

year then ended. The contract required that the audit be done in accordance with 

U.S. generally accepted government auditing standards; OMB's bulletin, Audit 

Requirements for Federal Financial Statements; and the GAO/PCIE Financial 

Audit Manual. 

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

• the financial statements were fairly presented, in all material respects, in 

conformity with U.S. generally accepted accounting principles, 

• [entity] had effective1 internal control over financial reporting (including 

safeguarding assets) and compliance with laws and regulations, 

• [entity's] financial management systems substantially complied2 with the 

requirements of the Federal Financial Management Improvement Act of 1996 

(FFMIA), and 

• no reportable noncompliance with laws and regulations it tested. 

 

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

[Discuss significant matters]. 

1

 If the other auditors did not provide an opinion on internal control, change this to 

"there were no material weaknesses in internal control" (and include a definition 

of material weakness in a footnote). 

2

 If the other auditors did not provide an opinion (i.e., did not give positive 

assurance) on whether the entity's systems complied with FFMIA, change this to 

"no instances in which entity's financial management systems did not 

substantially comply" (i.e., negative assurance). 
 Planning and General 

 650 C - Example Reports When Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 C-2 

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

[Name of CPA firm] is responsible for the attached auditor's report dated [date] 

and the conclusions expressed in the report. We do not express opinions on 

[name of entity]'s financial statements or internal control or on whether [entity]'s 

financial management systems substantially complied with FFMIA; or 

conclusions on compliance with laws and regulations. 

[For transmittal letters expressing negative assurance, use the following 

paragraph:] 

In connection with the contract, we reviewed [name of CPA firm]'s report and 

related documentation and inquired of its representatives. Our review, as 

differentiated from an audit in accordance with U.S. generally accepted 

government auditing standards, was not intended to enable us to express, and we 

do not express, opinions on [name of entity]'s financial statements or internal 

control3

 or on whether [entity]'s financial management systems substantially 

complied with FFMIA;4

 or conclusions on compliance with laws and regulations. 

[Name of CPA firm] is responsible for the attached auditor's report dated [date] 

and the conclusions expressed in the report. However, our review disclosed no 

instances where [name of CPA firm] did not comply, in all material respects, with 

U.S. generally accepted government auditing standards. 5

3

 If the other auditors did not provide an opinion on internal control, change this to 

read "conclusions about the effectiveness of internal control." 

4

 If the other auditors did not provide an opinion on FFMIA, change "opinion" to 

"conclusions." 

5

 If the auditor found that the other auditors did not comply with GAGAS, or if the 

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

 650 C - Example Reports When Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 C-3 

EXAMPLE 2 – REPORT CONCURRING WITH OTHER AUDITORS' 

OPINION (PRESENTING REPORT OF OTHER AUDITORS AFTER THE 

AUDITOR'S REPORT)6

Under [citation of statute], we are responsible for auditing [name of entity]. To 

help fulfill these responsibilities, we contracted with [name of firm], an 

independent certified public accounting firm. [Name of firm]'s report dated 

[date] is attached. 

We concur7 with [name of firm]'s report that indicated: 

• the financial statements were fairly presented, in all material respects, in 

conformity with U.S. generally accepted accounting principles, 

• [entity] had effective internal control over financial reporting (including 

safeguarding assets) and compliance with laws and regulations, 

• [entity's] financial management systems substantially complied with the 

requirements of the Federal Financial Management Improvement Act of 1996 

(FFMIA), and 

• no reportable noncompliance with laws and regulations it tested. 

 Details of their conclusions are in their report. 

OBJECTIVES, SCOPE, AND METHODOLOGY

Management is responsible for (1) preparing the financial statements in 

conformity with U.S. generally accepted accounting principles, (2) establishing, 

maintaining, and assessing internal control to provide reasonable assurance that 

the broad control objectives of 31 U.S.C. 3512 (c), (d) (Federal Managers' 

Financial Integrity Act) are met, (3) ensuring that [entity]'s financial management 

systems substantially comply with FFMIA requirements, and (4) complying with 

applicable laws and regulations. 

6

 This example assumes the other auditors opined on internal control and on 

whether the financial management systems substantially complied with FFMIA. If 

the other auditors provided negative assurance, appropriate changes should be 

made. 

7

 If the auditor does not concur with the other auditors' report, see paragraphs 

650.54-.56. 
 Planning and General 

 650 C - Example Reports When Using the Work of Others 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 650 C-4 

We are responsible for obtaining reasonable assurance about whether (1) the 

financial statements are presented fairly, in all material respects, in conformity 

with U.S. generally accepted accounting principles, and (2) management 

maintained effective internal control, the objectives of which are the following: 

• Financial reporting: Transactions are properly recorded, processed, and 

summarized to permit the preparation of financial statements and stewardship 

information in conformity with U.S. generally accepted accounting principles, 

and assets are safeguarded against loss from unauthorized acquisition, use, or 

disposition. 

• Compliance with laws and regulations: Transactions are executed in 

accordance with laws governing the use of budget authority and with other 

laws and regulations that could have a direct and material effect on the 

financial statements and any other laws, regulations, and governmentwide 

policies identified by OMB audit guidance. 

We are also responsible for (1) testing whether [entity's] financial management 

systems substantially comply with the three FFMIA requirements, (2) testing 

compliance with selected provisions of laws and regulations that have a direct 

and material effect on the financial statements and laws for which OMB audit 

guidance requires testing, and (3) performing limited procedures with respect to 

certain other information appearing in the Accountability Report. 

To help fulfill these responsibilities, we contracted with the independent certified 

public accounting (CPA) firm of [name of firm] to perform a financial statement 

audit in accordance with U.S. generally accepted government auditing standards; 

OMB's bulletin, Audit Requirements for Federal Financial Statements; and the 

GAO/PCIE Financial Audit Manual. We evaluated the nature, timing, and extent 

of the work, monitored progress throughout the audit, reviewed the 

documentation of the CPA firm, met with partners and staff members, evaluated 

the key judgments, met with officials of [entity being audited], performed 

independent tests of the accounting records, and performed other procedures we 

deemed appropriate in the circumstances. We conducted our work in 

accordance with U.S. generally accepted government auditing standards. 
 Planning and General 

 

 660 – AGREED-UPON PROCEDURES 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660-1 

.01 In an engagement to apply agreed-upon procedures, a client engages an auditor to 

perform specific procedures on subject matter and report on the results to assist 

users in evaluating subject matter or an assertion. Agreed-upon procedures 

should be performed in accordance with the Statements on Standards for 

Attestation Engagements (SSAE). The auditor should read appropriate sections 

(e.g., AT 101, Attest Engagements, and AT 201, Agreed-Upon Procedures 

Engagements) and thoroughly understand them before performing agreed-upon 

procedures. 

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

matter. The engagement will vary depending on the needs of the user. The 

engagement may assist entity management by providing information for making 

decisions and give report users information on important areas. Examples of 

agreed-upon procedures are: 

• compare payroll information reported to the Office of Personnel Management 

with the entity's payroll records and general ledger; 

• compare entity reconciliations of intragovernmental activity and balances with 

supporting documentation and compare amounts with the financial statements 

and with reports to the Department of the Treasury (Treasury); 

• trace tax collections from the master file to deposit confirmations, determine 

whether they were recorded in the appropriate period and in the correct tax 

class; 

• trace amounts on the entity's financial statements to an "account grouping 

worksheet," foot the worksheet, read the CFO's explanation for any 

differences, and compare the explanation with supporting documentation; and 

• examine official receipt documents to determine whether they were included 

in the weekly deposit; compare deposit amounts to amounts reported on the 

statement of funding. 

.03 In agreed-upon procedures engagements, all parties involved, which include the 

report users, the entity responsible for the subject matter (which may or may not 

be the same as the user), and the auditor, should clearly understand the 

procedures to be applied. Since users may have different needs, the nature, 

timing, and extent of the agreed-upon procedures also may differ. Therefore, the 

users, and not the auditor, assume the responsibility for the sufficiency of the 
 Planning and General 

 660 – Agreed-Upon Procedures 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660-2 

design and extent of the procedures since they best understand their own needs, 

although the auditor may assist the user in designing the procedures. 

.04 The auditor should establish and document an understanding with the users 

regarding the nature, timing, and extent of the agreed-upon procedures to be 

performed. The auditor may document this understanding using an engagement 

letter to the users. (See example in section 660 A.) 

.05 The subject matter should be capable of evaluation against criteria that are 

suitable and available to users. Suitable criteria should have objectivity, 

measurability, completeness, and relevance. The procedures should be subject 

to reasonably consistent measurement and the criteria should be agreed upon. 

The auditor should not perform overly subjective procedures or use terms with 

uncertain meaning unless they are defined within the agreed-upon procedures. 

.06 The auditor need not perform additional procedures beyond the agreed-upon 

procedures. If matters come to the auditor's attention by other means that 

significantly contradict the subject matter (or assertion), the auditor should 

include these matters in the report. For example, if during the course of applying 

agreed-upon procedures regarding an entity's operation, the auditor becomes 

aware of a material weakness related to the assertion by means other than the 

agreed-upon procedures, the auditor should include this matter in the report. 

This may be done by mentioning the material weakness with a footnote reference 

to another report where it is described in detail. 

.07 Where circumstances impose restrictions on the performance of the agreed-upon 

procedures, the auditor should attempt to obtain agreement from the users of the 

report to modify the agreed-upon procedures. When agreement cannot be 

obtained (for example, when the agreed-upon procedures are published by a 

regulatory agency that will not modify the procedures), the auditor should 

describe restrictions in the report or withdraw from the engagement. 

WRITTEN REPRESENTATIONS 

.08 The auditor should determine if a representation letter is necessary. The auditor 

may determine that a representation letter is necessary, for example, if (1) the 

responsible entity is so large there is a risk as to whether one person knows 

whether pertinent information has been made available to the auditor, (2) the 

subject matter depends on estimates, judgments, or future events (i.e., whether 

the subject matter is less objective and fact-based and more subjective), or 

(3) the user of the report believes written representations should be obtained. 

Although generally not required (unless specifically required by another 

attestation standard, such as in a compliance engagement) a representation letter 
 Planning and General 

 660 – Agreed-Upon Procedures 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660-3 

may nonetheless be a useful means of documenting the responsible entity's 

representations. (See FAM section 660 B for an example representation letter for 

an agreed-upon procedures engagement.) 

.09 The responsible entity's refusal to furnish written representations determined by 

the auditor to be necessary constitutes a scope limitation. In such 

circumstances, the auditor should do one of the following: 

• disclose in the report the inability to obtain representations from the 

responsible entity, 

• withdraw from the engagement, or 

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

audit). 

DOCUMENTATION 

.10 In accordance with GAGAS, the auditor should prepare and maintain 

documentation in connection with an agreed-upon procedures engagement that 

is appropriate for the engagement. They should contain sufficient information to 

enable an experienced auditor having no previous connection with the 

engagement to ascertain from them the evidence that supports the auditors' 

agreed-upon procedures report. 

.11 Although the quantity, type, and content of documentation varies with the 

circumstances, ordinarily it should be sufficient to demonstrate that the work 

was adequately planned and supervised and sufficient evidential matter was 

obtained to provide a reasonable basis for the report. 

.12 The auditor generally should prepare a summary memorandum that recaps the 

work performed and refers to the detailed documentation. This memorandum 

generally should include the auditor's conclusion on whether the work was 

performed in accordance with GAGAS, including the attestation standards, and 

the GAO/PCIE FAM and whether the report is appropriate. (See FAM section 

660 C for an agreed-upon procedures completion checklist.) 

 REPORTING 

.13 An auditor should report on the agreed-upon procedures in the form of results. 

The auditor should not provide any opinion or negative assurance about whether 

the subject matter or the assertion is fairly stated based on the criteria. The 

report should include information such as the identification of the entities that 
 Planning and General 

 660 – Agreed-Upon Procedures 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660-4 

agreed to the procedures and took responsibility for the sufficiency of the design 

and extent of the procedures for their purposes, as shown in the example report 

in FAM section 660 D. 

.14 The auditor should report all results arising from application of the agreed-upon 

procedures. The concept of materiality does not apply to results to be reported 

in an agreed-upon procedures engagement unless the users of the report agree to 

the definition of materiality. This could be included in the engagement letter. 

Any agreed-upon materiality limits should be described in the report. 

.15 The auditor should include a statement indicating that the report is intended for 

the specified users who have agreed upon the procedures performed and taken 

responsibility for the sufficiency of the design and extent of the procedures for 

their needs. However, since governmental reports are generally a matter of 

public record, the distribution of the report is not limited. 

.16 The auditor may have performed agreed-upon procedures on an element, 

account, or item of financial statements and also audited the same financial 

statements. If the audit report on the financial statements includes a departure 

from a standard report, the auditor generally should include a reference to the 

audit report and the departure from the standard report in the agreed-upon 

procedures report. 

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

following: 

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

• description of the condition of records, controls, or data to which the 

procedures were applied; 

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

• explanation of sampling risk. 

.18 The auditor should state the results in definitive, rather than qualified, language 

and avoid vague or ambiguous language. The following table provides examples 

of appropriate and inappropriate descriptions of findings. 
 Planning and General 

 660 – Agreed-Upon Procedures 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660-5 

Examples of appropriate/inappropriate description of findings 

 Description of findings 

Procedures agreed-upon Appropriate Inappropriate 

Based on the total tax 

liability, select and 

recompute the 50 largest 

excise tax returns from the 

quarter ended September 30 

and compare these amounts 

with the certified audit file. 

Recomputed amounts for 

the selected excise tax 

returns agreed with the 

amounts in the certified 

audit file. 

Nothing came to 

our attention as a 

result of applying 

this procedure. 

Select a random sample of 

45 Treasury SF-224 

reconciliations; determine if 

XYZ reported revenue 

receipts were properly 

classified and reconciled to 

Treasury FMS records. 

Revenue receipts selected 

randomly from the 

monthly Treasury SF-224 

reconciliation process 

were properly classified 

and agreed with Treasury 

FMS records. 

The revenue 

receipts 

approximated the 

amount shown in 

the Treasury FMS 

records. 

Examine personnel files of 

40 individuals randomly 

selected from the 

timekeeping records for the 

year; determine if all the 

selected files contain a 

current and approved 

Notification of Personnel 

Action. 

Thirty of the selected files 

contained a current and 

approved Notification of 

Personnel Action. Ten 

files did not contain a 

current and approved 

Notification of Personnel 

Action (list and identify 

exceptions). 

Some of the 

personnel files did 

not contain a 

current and 

approved 

Notification of 

Personnel Action. 

 Other Report Issues 

.19 The report should be addressed to the users who have agreed upon the 

procedures to be performed (see paragraph 660.03). The date of completion of 

the agreed-upon procedures should be used as the date of the agreed-upon 

procedures report. If the audit organization's procedure is to date reports with 

the issue date, the date of completion of fieldwork may be stated in the report 

(e.g., "We completed the agreed-upon procedures on [date]."). 

.20 Agency comments should be obtained from the entity responsible for the subject 

matter. If time constraints present problems, oral comments may be obtained. 
[This page intentionally left blank.] 
 Planning and General 

 

 660 A - EXAMPLE AGREED-UPON PROCEDURES 

ENGAGEMENT LETTER 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 A-1 

[Date]

Management of ABC Agency 

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

Dear Management Official: 

Based on our discussions, we agree to perform agreed-upon procedures to assist 

ABC Agency in determining the completeness and accuracy of receipts 

transferred to the tax trust fund. XYZ Agency is responsible for the information 

to which these procedures will be applied. 

This letter documents our agreement to perform these agreed-upon procedures 

related to fiscal year 20X1. We will perform these procedures in accordance with 

U.S. generally accepted government auditing standards, which incorporate the 

financial audit and attestation standards established by the American Institute of 

Certified Public Accountants (AICPA). The procedures are included in the 

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

We are not engaged to perform, and will not perform, an examination, the 

objective of which would be to express an opinion on the amount of receipts 

transferred to the tax trust fund. Accordingly, we will not express such an 

opinion. Were we to perform additional procedures, other matters might come 

to our attention that we would report to you. 

Our report will be intended solely for your information and use and should not 

be used by those who have not agreed to the procedures or taken responsibility 

for the sufficiency of the procedures for their purposes. However, the report will 

be a matter of public record and its distribution will not be limited. 
 Planning and General 

 660 A - Example Agreed-Upon Procedures Engagement Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 A-2 

Unless we hear from you, we will assume your concurrence with these 

procedures and their sufficiency for your purposes.1

 Please contact me at 

[telephone number] if you or your staff have any questions. 

Sincerely yours, 

[Name of Director] 

Director 

Enclosure 

cc: XYZ Agency 

 1

 The auditor may request the users to document their agreement with the 

procedures and their sufficiency for their purposes by signing the engagement 

letter and returning it to the auditor. 
 Planning and General 

 660 A - Example Agreed-Upon Procedures Engagement Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 A-3 

Agreed-Upon Procedures for Tax Receipts and Refunds 

General 

• Compare fiscal year 20X1 tax collections for the ABC tax trust fund per XYZ's 

Statement of Custodial Activity with 

•• the trust fund's accounting records and 

•• ABC's consolidated financial statements. 

• Obtain explanations and examine supporting documentation for differences. 

Sampling 

A. Use dollar unit sampling (DUS) and an 80-percent confidence level to select a 

sample of ABC tax trust fund tax revenue receipts and refunds for fiscal year 

20X1. Use $300 million as the test materiality, which is 1 percent of the total 

revenue collected. Use an expected aggregate misstatement of $100 million, 

or one-third of test materiality. The projected sample size for this population 

is expected to be 40 transactions. 

For the sample items selected: 

• Receipts testing — Compare tax receipts transactions (for example cash 

receipts, federal tax deposit (FTD) receipts, reversals, and adjustments) with 

source documents to determine whether the amounts agree, the transactions 

are recorded in the appropriate period based on the transaction date, and they 

are properly categorized as ABC tax trust fund receipts. 

• Refunds testing — Compare refund transactions with the source documents 

(for example, payment vouchers, FTD coupons, tax returns) to determine 

whether the amounts agree, the transactions are recorded in the appropriate 

period based on the transaction date, and they are properly categorized as 

ABC tax trust fund refunds. 

B. Use DUS and the same sampling parameters as above to extract statistical 

samples of total XYZ revenue receipts and refunds for fiscal year 20X1. 

For the sample items selected: 

• Test whether the tax receipt or refund amounts and tax category from source 

documentation agrees with amounts recorded for each of the revenue receipts 

or refunds sample items.
[This page intentionally left blank.] 
 Planning and General 

 

 660 B - EXAMPLE REPRESENTATION LETTER FROM 

RESPONSIBLE ENTITY ON AGREED-UPON 

PROCEDURES ENGAGEMENT 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 B-1 

[XYZ Agency letterhead] 

[Date] 

Dear Auditor: 

In connection with the agreed-upon procedures engagement for XYZ's budget 

execution process for the period from October 1, 20X0 through September 30, 

20X1, we confirm to the best of our knowledge and belief, the following 

representations made to you in performing these agreed-upon procedures. 

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

• We acknowledge responsibility for selecting the criteria [state criteria] and 

for determining the appropriateness of the criteria for our purposes. 

• Our budget execution process is [state assertion about budget execution 

process based on the criteria selected]. 

• We know of no matters that would contradict our assertion about our budget 

execution process. 

• There have been no communications from regulatory or oversight agencies 

concerning our budget execution process or noncompliance with budgetary 

laws or the Antideficiency Act. 

• We have made available to you all records and related data pertaining to our 

budget execution process during the period from October 1, 20X0 through 

September 30, 20X1. 

• XYZ's budget execution process is designed to meet the requirements of the 

Antideficiency Act. 

• The accounting records and fund status reports are checked quarterly to 

determine whether all source documents that affect the appropriation and 

fund balance have been recorded properly, accurately, and on a timely basis. 
 Planning and General 

 660 B – Example Representation Letter from Responsible Entity on 

Agreed-Upon Procedures Engagement 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 B-2 

• The agency's accounting system provides timely disclosure of total valid 

obligations incurred to date and total budgetary resources available for 

obligations within each apportionment. 

• The system also provides timely disclosure of the authorization or creation of 

commitments, obligations, or expenditures that exceed apportionments and 

allotments. 

• We are not aware of instances of noncompliance with the above-stated 

procedures. 

• There has been no fraud involving management, employees, or contractor 

staff who have significant roles in the operation of our budget execution 

process. 

• We have no plans or intentions that would materially affect our budgetary 

process or operations. 

Sincerely yours, 

Management, XYZ Agency 
 Planning and General 

 

 660 C - AGREED-UPON PROCEDURES COMPLETION 

CHECKLIST 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 C-1 

Entity:_________________________________________________________________ 

Job code:______________________________________________________________ 

Principal report:________________________________________________________ 

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

checklist in the planning phase. 

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

including the GAO workpaper set, second partner review, and review by the 

Technical Accounting and Auditing Expert (Chief Accountant at GAO) when that 

person is not the second partner. GAO auditors should complete these questions 

and forms. IG auditors and other auditors may use these questions and forms or 

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

control. 

Step N/A Yes No W/P 

ref 

1. Has the audit team documented an 

understanding with the users? 

 

2. Does the documentation cover the following? 

• The nature of the engagement. 

• Identification of the subject matter, the 

responsible entity, and the criteria. 

• Identification of the users of the report. 

• Auditor's responsibilities. 

• Reference to GAGAS and the attestation 

standards. 

• Agreement on procedures. 

• Disclaimers expected. 

• Any involvement of a specialist. 

• Materiality limits. 

 
 Planning and General 

 660 C – Agreed-Upon Procedures Completion Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 C-2 

Step N/A Yes No W/P 

ref 

3. Was an entrance conference held with the 

responsible entity? 

 

4. Has the auditor determined whether a letter of 

representation from the responsible entity is 

necessary? (Note: This is not a requirement.) 

 

5. Were applicable laws and regulations 

documented if part of the procedures? 

 

6. Were review responsibilities communicated to 

individuals on the assignment? 

 

7. Does the documentation contain the following? 

a. The scope and methodology, including any 

sampling criteria used. 

b. Documentation of the work performed to 

support reported results. 

c. Descriptions of transactions and records 

examined. 

d. Evidence of supervisory review. 

 

8. Does the documentation record that the 

applicable standards were followed (AT 201 

and AT 101)? 

 

9. Does the documentation record a reasonable 

basis for the results of the agreed-upon 

procedures? 

 

10. Does the summary memorandum summarize 

the results of the procedures and refer to the 

documentation? 

 
 Planning and General 

 660 C – Agreed-Upon Procedures Completion Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 C-3 

Step N/A Yes No W/P 

ref 

11. Were any deviations from the standard 

reporting elements documented and the basis 

approved by the assistant director with copies 

of the documentation sent to the audit director 

and Reviewer (AT 201.31)? 

 

12. Was the report referenced? 

13. Did the assistant director review the 

following? 

a. Understanding with the client. 

b. Memorandum of entrance conference with 

the responsible entity. 

c. Completed work programs. 

d. Memorandums on key engagement issues. 

e. Summary of the results of the procedures. 

f. Memorandum of exit conference with the 

responsible entity. 

g. Deviations from standard reporting 

language. 

h. Financial schedules/statements. 

i. Agreed-upon procedures report. 

j. GAO workpaper set (or equivalent). 

 

14. Did the audit director review the following? 

a. Understanding with the client. 

b. Summary of results of the procedures. 

c. Memorandum of exit conference with 

responsible entity. 

d. Deviations from standard reporting 

language. 

e. Agreed-upon procedures report. 

f. GAO workpaper set (or equivalent). 

 

15. Did the assistant director or the auditor in 

charge determine that all significant review 

notes were resolved appropriately? 

 
 Planning and General 

 660 C – Agreed-Upon Procedures Completion Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 C-4 

Step N/A Yes No W/P 

ref 

16. Did the assistant director initial all 

documentation bundle covers to indicate that 

all documentation was sufficiently reviewed? 

 

17. Is the report appropriate as to the following? 

a. Wording. 

b. Scope of work. 

c. GAGAS. 

d. Explanatory paragraphs. 

 

18. Was the report reviewed by the following? 

a. Office of the General Counsel. 

b. Technical Accounting and Auditing Expert. 

c. Second partner (or equivalent), if not 

Technical Accounting and Auditing Expert. 

 

19. Is the agreed-upon procedures report dated 

appropriately or does the report indicate when 

the auditor completed fieldwork? (AT 201) 

 
 Planning and General 

 660 C – Agreed-Upon Procedures Completion Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 C-5 

SECOND PARTNER'S (OR EQUIVALENT) CONCURRENCE ON 

AGREED-UPON PROCEDURES WORK 

Objective of second partner (or equivalent) review: To objectively 

review significant engagement matters to conclude, based on all facts the 

second partner (or equivalent) has knowledge of, that no matters were found 

that caused the second partner (or equivalent) to believe that (1) the 

procedures were not performed in accordance with GAGAS, which 

incorporate financial audit and attestation standards established by the 

American Institute of Certified Public Accountants and (2) the report does not 

meet professional standards and audit organization policies. 

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

procedures: 

• as necessary, discussed significant engagement issues with the audit 

director; 

• read documentation of key decisions and consultations; 

• read the agreed-upon procedures report; and 

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

Conclusions: Based on all the relevant facts of which I have knowledge, I 

found no matters that caused me to believe that (1) the agreed-upon 

procedures were not performed in accordance with GAGAS and the AICPA's 

attestation standards related to agreed-upon procedures engagements and 

(2) the report is not in accordance with professional standards and audit 

organization policies. 

____________________________________________________________________

Title Signature Date 
 Planning and General 

 660 C – Agreed-Upon Procedures Completion Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 C-6 

TECHNICAL ACCOUNTING AND AUDITING EXPERT'S 

CONCURRENCE ON AGREED-UPON PROCEDURES WORK 

Objective of review: When the Technical Accounting and Auditing Expert is 

not the second partner (or equivalent), the Technical Accounting and Auditing 

Expert should read the report. The Technical Accounting and Auditing Expert 

should then sign the conclusions below. 

Conclusions: Based on my reading of the report, I found no matters that 

caused me to believe that (1) the agreed-upon procedures were not performed 

in accordance with GAGAS and the AICPA's attestation standards related to 

agreed-upon procedures engagements and (2) the report is not in accordance 

with professional standards and audit organization policies. 

____________________________________________________________________ 

Title Signature Date 
 Planning and General 

 

 660 D - EXAMPLE AGREED-UPON PROCEDURES 

REPORT 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 D-1 

[Date] 

Management of ABC Agency 

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

Dear Management Official: 

We have performed the procedures contained in the enclosure to this letter, 

which we agreed to perform and with which you concurred, solely to meet your 

needs for an independent count of cash and cash-related items as of 

September 30, 20X1. 

We conducted our work in accordance with U.S generally accepted government 

auditing standards, which incorporate financial audit and attestation standards 

established by the American Institute of Certified Public Accountants. These 

standards also provide guidance when performing and reporting the results of 

agreed-upon procedures. 

You are responsible for the adequacy of the procedures to meet your objectives 

and we make no representation in that respect. The procedures we agreed to 

perform consist of counting amounts for cash and related receipts and comparing 

combined totals to the authorized amounts. The enclosure contains the agreedupon procedures and our results. 

We were not engaged to perform, and did not perform, an examination, the 

objective of which would have been to express an opinion on the amount of cash 

on hand. Accordingly, we do not express such an opinion. Had we performed 

additional procedures, other matters might have come to our attention that we 

would have reported to you. We completed our agreed-upon procedures on [date 

of completion]. 

We provided a draft of this letter, along with the enclosure, to your 

representatives for review and comment. They agreed with the results presented 

in this letter and its enclosure. 
 Planning and General 

 660 D - Example Agreed-Upon Procedures Report 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 D-2 

This letter is intended solely for the use of the management of ABC Agency and 

should not be used by those who have not agreed to the procedures or have not 

taken responsibility for the sufficiency of the procedures for their purposes. 

However, the report is a matter of public record and its distribution is not limited. 

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

Sincerely yours, 

[Name of Director] 

Director 

Enclosure 
 Planning and General 

 660 D – Example Agreed-Upon Procedures Report 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 660 D-3 

RESULTS OF CASH COUNTS 

Procedures

We counted and totaled cash on hand for the petty cash fund as of [date]. We 

also listed and totaled the receipts on hand evidencing disbursements from the 

fund. Finally, we compared the combined total of cash and receipts available to 

the amount authorized for the fund ($500). 

Results

We counted cash totaling $258.96 and scheduled 14 receipts totaling $174.85. 

The combined total of cash and receipts on hand accounted for $433.81 of the 

$500 in authorized petty cash funds. In addition, the custodian provided us two 

separate Expense Summary Report and Petty Cash Itemization Sheets and 

related receipts for an additional $65.09, which had been submitted for 

reimbursement to the fund. Thus, the unexplained difference between the 

authorized amount and the total cash and receipts evidencing petty cash fund 

disbursements was $1.10. 
[This page intentionally left blank.]
SECTION 700

Internal Control
[This page intentionally left blank.]
 Internal Control 

 

 701 – ASSESSING COMPLIANCE OF AGENCY 

SYSTEMS WITH THE FEDERAL FINANCIAL 

MANAGEMENT IMPROVEMENT ACT (FFMIA) 

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

.01 FFMIA emphasizes the need for agencies to have systems that can generate 

timely, reliable, and useful information with which to make informed decisions 

and to ensure ongoing accountability. FFMIA requires the 24 CFO Act 

departments and agencies1

 to implement and maintain financial management 

systems that comply substantially with (1) federal financial management systems 

requirements, (2) applicable federal accounting standards, and (3) the U.S. 

Government Standard General Ledger (SGL) at the transaction level. The law 

also requires auditors to report whether agency financial management systems 

comply with the FFMIA requirements. OMB has provided FFMIA implementation 

guidance to help agencies and their auditors determine compliance. This section 

also provides guidance for assessing agency systems' compliance with FFMIA. It 

explains FFMIA's requirements and discusses audit issues related to testing for 

compliance with the act. An example audit program is included as section 701 A. 

FFMIA REQUIREMENTS 

.02 OMB Circular A-127, Federal Financial Systems,

2

 also addresses the three FFMIA 

requirements. OMB Circular A-127 prescribes policies and standards for 

executive branch departments and agencies to follow in developing, operating, 

evaluating, and reporting on financial management systems (see 

www.whitehouse.gov/omb/financial). In its FFMIA implementation guidance, 

OMB identifies the applicable requirements from Circular A-127 that should be 

assessed when making an FFMIA compliance determination.3

 OMB, in Circular 

A-127, refers to the federal financial management systems requirements, a series 

of publications issued by the Joint Financial Management Improvement Program 

(JFMIP), as the source of governmentwide requirements for financial 

management systems software functionality. JFMIP has developed a framework 

to describe the basic elements of an integrated financial management system, 

 1

 OMB also requires certain designated entities to determine FFMIA compliance. 

2

 OMB is considering revising this guidance. 

3

 OMB did not include certain elements of Circular A-127, section 7, in its FFMIA 

implementation guidance because some of the elements are not essential to 

satisfying the requirements of FFMIA and to the ability of an agency's systems to 

provide reliable, timely, and useful information necessary for federal managers' 

responsibilities. Accordingly, those elements are not included in this section. 
 Internal Control 

 701 – Assessing Compliance of Agency Systems with the Federal Financial 

Management Improvement Act (FFMIA) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701-2 

including the core financial system. Agency financial management systems fall 

into four categories: core financial systems, other financial and mixed systems4

(such as procurement, property, budget, payroll, and travel systems), shared 

systems,5

 and departmental executive information systems (systems to provide 

information to all levels of management.) 

.03 JFMIP has developed publications of systems requirements for the core financial 

system and for some of the mixed or feeder systems (see www.jfmip.gov). The 

systems requirements in the publications are stated as either mandatory 

(required) or value-added (optional). Agencies should use the mandatory 

functional and technical requirements in planning system improvement projects, 

whereas value-added requirements should be used as needed. The core financial 

management system affects all financial event transaction processing because it 

maintains reference tables used for editing and classifying data, controls 

transactions, and maintains security. The core financial management system 

consists of six functional areas: general ledger management, funds management, 

payment management, receivable management, cost management, and reporting. 

OMB Circular A-127 requires agencies to use for agency core financial 

management systems commercial-off-the-shelf (COTS) software that has been 

tested and certified through the JFMIP software certification process. According 

to JFMIP, core financial management system certification does not mean that 

agencies that install qualified software packages will have financial systems that 

are in compliance with FFMIA. Many other factors can affect the capability of 

the systems to comply with FFMIA, including modifications made to the JFMIPcertified core financial management system software, and the validity and 

completeness of data from feeder systems. JFMIP's certification process does 

not eliminate or significantly reduce the need for agencies to develop and 

conduct a comprehensive testing effort to ensure that the software product meets 

their requirements 

.04 The federal accounting standards, the second requirement of FFMIA, are 

promulgated by the Federal Accounting Standards Advisory Board (FASAB). 

FASAB develops accounting standards after considering the financial and 

budgetary information needs of Congress, executive agencies, and other users of 

federal financial information as well as comments from the public (see 

www.fasab.gov). FAM section 560 describes the relationship of the FASAB 

standards to the hierarchy of accounting principles. 

 4

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

systems. 

5

 Shared systems are governmentwide systems used by agencies with 

information and data definitions common to all users. 
 Internal Control 

 701 – Assessing Compliance of Agency Systems with the Federal Financial 

Management Improvement Act (FFMIA) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701-3 

.05 Implementing the SGL at the transaction level is also a requirement of FFMIA. 

The SGL provides a uniform chart of accounts and guidance for use in 

standardizing federal agency accounting and supports the preparation of 

standard external reports required by OMB and Treasury (see 

www.fms.treas.gov/ussgl). The SGL is defined in the latest supplement, which is 

released annually, to the Department of the Treasury's Treasury Financial Manual 

(TFM). The supplement is composed of five major sections (1) chart of accounts, 

(2) account descriptions, (3) accounting transactions, (4) SGL attributes, and (5) 

report crosswalks. Each agency should implement a chart of accounts that is 

consistent with the SGL and meets the agency's information needs. OMB 

Circular A-127 states that application of the SGL at the transaction level means 

that financial management systems will process transactions following the 

definitions and defined uses of the general ledger accounts as described in the 

SGL. Transaction detail supporting SGL accounts are required to be available in 

the financial management systems and directly traceable to specific SGL account 

codes. In addition, the criteria for recording financial events in all financial 

management systems should be consistent with accounting transaction 

definitions and processing rules defined in the SGL. 

.06 OMB's FFMIA implementation guidance requires the CFO act agency auditors to 

perform tests of the compliance of the entity's systems with FFMIA. Auditors 

who are reporting that agency financial management systems do not substantially 

comply with FFMIA requirements are to include in their reports (1) the entity or 

organization responsible for the financial management systems that have been 

found not to be substantially compliant and all pertinent facts relating to the 

noncompliance, (2) the nature and extent of the noncompliance including areas 

in which there is substantial but not full compliance, (3) the primary reason or 

cause of the noncompliance, (4) the entity or organization responsible for the 

noncompliance, (5) any relevant comments from any responsible officer or 

employee, and (6) a statement with respect to the recommended remedial actions 

for each instance of noncompliance and the time frames for implementing these 

actions. FFMIA as well as OMB's FFMIA implementation guidance require 

agencies to report whether the agencies' financial management systems comply 

with FFMIA's requirements and prepare remediation plans that include 

resources, remedies, and intermediate target dates necessary to bring the 

agency's financial management systems into substantial compliance. 

.07 According to OMB's FFMIA implementation guidance, auditors are to plan and 

perform their audit work in sufficient detail to enable them to determine the 

degree of compliance and report on instances of noncompliance for all of the 

applicable FFMIA requirements. The guidance describes specific minimum 

requirements from Circular A-127 that agency systems should meet to achieve 

compliance and provides indicators of compliance. The indicators included in 
 Internal Control 

 701 – Assessing Compliance of Agency Systems with the Federal Financial 

Management Improvement Act (FFMIA) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701-4 

OMB's implementation guidance are characterized as examples and are not allinclusive. The four primary factors OMB identifies as critical to assessing 

compliance with FFMIA are determining whether agencies can:6

• Prepare financial statements and other required financial and budget reports 

using information generated by the financial management system(s); 

• Provide reliable and timely financial information for managing current 

operations; 

• Account for their assets reliably, so that they can be properly protected from 

loss, misappropriation, or destruction; and, 

• Do all of the above in a way that is consistent with federal accounting 

standards and the Standard General Ledger. 

AUDIT ISSUES 

.08 While financial statement audits will offer some assurances regarding FFMIA 

compliance, auditors should design and implement additional testing to satisfy 

the criteria in FFMIA. For example, in performing financial statement audits, 

auditors generally focus on the capability of the financial management systems to 

process and summarize financial information that flows into agency financial 

statements. In contrast, FFMIA requires auditors to assess whether an agency's 

financial management systems comply with systems requirements. To do this, 

auditors need to consider whether agency systems provide complete, accurate, 

and timely information for managing day-to-day operations. This is based on 

Congress' expectation, in enacting FFMIA, that agency managers would have any 

necessary information to measure performance on an ongoing basis rather than 

just at year-end. Financial statement auditors generally review performance 

measure information for consistency with the financial statements, but do not 

assess whether managers have the performance-related information to manage 

during the fiscal year. 

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

financial statements audits, the auditor should use, where appropriate, the audit 

work performed as part of the financial statement audit. In the example audit 

program (FAM 701 A) for testing compliance with FFMIA, several procedures 

indicate that the auditor may have performed the procedure as part of the 

financial statement audit; whereas, other procedures needed to assess FFMIA 

compliance require additional work not normally contemplated by financial 

statement auditors. The determination of FFMIA compliance need not be 

performed simultaneously with the financial statement audit. The determination 

of FFMIA compliance may be performed by different staff or staggered 

 6

 OMB is considering revising this guidance. 
 Internal Control 

 701 – Assessing Compliance of Agency Systems with the Federal Financial 

Management Improvement Act (FFMIA) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701-5 

throughout the assessment time frame. While the example audit program 

provides steps the auditor should perform, the auditor may tailor the steps to 

satisfy the objectives or intent of the step if the step cannot be completed as 

described. Because of the broad scope of federal operations and the many 

variations that can and do flow from such a broad scope, the degree of specificity 

in the example audit program varies. For example, each agency will likely need 

and use a variety of internal reports for managing current operations. These 

reports may be on line or in hard copy. Auditors will need to use their skills and 

professional judgment to assess the adequacy of these reports that are essential 

to having FFMIA compliance. Auditors may also rely on other work products 

that address the objectives of the example audit procedures. 

.10 As discussed in FAM section 350, the auditor need not perform specific tests of 

the systems compliance with FFMIA requirements for agencies with 

longstanding, well-documented financial management systems weaknesses that 

severely affect the systems' ability to comply with FFMIA requirements. The 

auditor should understand management's process for determining whether its 

systems comply with FFMIA requirements and report any deficiencies in 

management's process along with previously identified problems. 

.11 FAM paragraphs 580.62 through .66 and FAM section 595 A provide FFMIA 

reporting guidance. When reporting a lack of substantial compliance, the auditor 

should refer to FAM 595 B for suggested modifications to the report. FAM Part 

III, section 1603, provides guidance that GAO will use to provide an affirmative 

statement when reporting on compliance with FFMIA. 
[This page intentionally left blank.] 
 Internal Control 

 

 701 A – EXAMPLE AUDIT PROCEDURES FOR TESTING 

COMPLIANCE WITH FFMIA 

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

Entity __________________________________________________________________ 

Date of review __________________________________________________________ 

Job code _______________________________________________________________ 

Objective: FFMIA requires the 24 major departments and agencies covered by the 

CFO Act to implement and maintain financial management systems that comply 

substantially with (1) federal financial management systems requirements, 

(2) applicable federal accounting standards, and (3) the U.S. Government 

Standard General Ledger (SGL) at the transaction level. OMB also requires 

certain designated entities to determine FFMIA compliance. The objective of this 

audit program is to assess whether agencies' systems' comply with FFMIA. 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

I. Planning (May be combined with the work to plan the 

financial statement audit) 

A. To understand the FFMIA requirements, read: 

• Federal Financial Management Improvement Act, 

P.L. 104-208. 

• Audit Requirements for Federal Financial 

Statements (OMB Bulletin).

• OMB Memorandum, January 4, 2001, Revised 

Implementation Guidance for the Federal Financial 

Management Improvement Act.

• JFMIP Publications of Federal Financial 

Management System Requirements including the 

Framework and Core Financial System 

Requirements. 

• Form and Content of Agency Financial Statements

(OMB Bulletin) 

• FASAB Standards. 

• Treasury Financial Manual (TFM) sections related 

to the SGL (see transmittal letter S2-01-02 and TFM 

Part 2, Chapter 4000). 

 
Internal Control 

701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-2 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

• OMB Circular No. A-123, Management 

Accountability and Control. 

• OMB Circular No. A-127, Financial Management 

Systems. 

• OMB Circular No. A-130, Management of Federal 

Information Resources. 

• Government Information Security Reform (GISR) 

legislation, Floyd D. Spence National Defense 

Authorization Act for Fiscal Year 2001, Pub. L. 106-

398.

B. Read the prior year's workpapers and audit report to 

identify (1) the auditors' FFMIA determinations, 

(2) reported instances of noncompliance with FFMIA, 

and (3) material weaknesses and reportable conditions 

related to the agency's financial management systems. 

• Prepare a schedule of the previously identified 

problems to follow up on the status of these 

specific problems. See section 701 B for an 

example of the schedule. 

 

C. Read the most recent FMFIA report, IG reports, GAO 

reports, internal control workpapers from the financial 

statement audit or other reports related to financial 

systems and consider the impact of any reported 

weaknesses on the FFMIA assessment. 

• Obtain an update on the status of the issues and 

document problems identified in the schedule in 

section 701 B. 

 

D. Read the cycle memoranda for each of the audit cycles 

completed for the current year audit. Document issues 

related to FFMIA compliance in the schedule in section 

701 B. 

 
 Internal Control 

 701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-3 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

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

whether it is necessary to perform the remaining test 

steps. If the information gathered indicates 

"longstanding, well-documented financial management 

systems weaknesses" that preclude compliance with 

FFMIA requirements, then: 

1. Document recognition of longstanding, welldocumented financial management systems 

weaknesses and identify the source for this 

conclusion. 

2. Obtain and document an understanding of 

management's process for determining whether its 

systems comply with FFMIA requirements. Report 

any deficiencies identified in management's 

process. 

3. Complete step V (summary), except for completion 

of the schedule in FAM section 701 B. 

 

II. Testing for Compliance with Federal Financial 

Management Systems Requirements 

A. Ask whether the agency has an agencywide inventory 

of its systems. If so, obtain the inventory and any 

supporting documentation. 

 

B. From the agency's inventory of systems, identify the 

core financial management systems and the feeder 

systems. 

1. Document the key internal controls and the 

information flows between the core financial 

systems and the feeder systems in a flowchart or 

narrative. (This step may be performed as part of 

the internal control phase). 

a. Determine whether the feeder systems are 

integrated or interfaced with the core financial 

system. Note: Feeder systems that are 

integrated with the core financial system share 

data tables. Therefore, reconciliations should 

not be necessary. 

 
Internal Control 

701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-4 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

b. If the feeder systems interface with the core 

systems, determine whether reconciliations are 

performed between the systems. If 

reconciliations are performed, determine how 

often and by whom; assess the adequacy of the 

reconciliation, including follow-up activities and 

supervisory review. 

c. Through interviews with agency management 

and reading of systems documentation, 

determine if the agency's systems have detective 

controls (i.e., batch control or hash totals or 

supervisory reviews) and preventive controls 

(i.e. segregated duties, appropriate 

authorizations, or access controls) to process 

transactions properly and timely. (May be 

performed as part of the internal control phase). 

2. Using the documentation prepared in step II.B.1 

above, identify those JFMIP financial management 

systems requirements that are applicable to the 

agency's operations. For example, for those 

agencies that do not have grant or loan programs, 

the auditor would not need to assess whether 

JFMIP requirements related to grants or loans are 

applicable. Document the results. 

 

C. Determine whether the agency's core financial 

management system and the financial portions of its 

applicable feeder systems, as identified in step II.B.2 

above, conform to JFMIP's federal financial 

management systems requirements. 

• Ask whether the agency's core financial 

management system is a JFMIP-certified COTS 

system. If so, ask which version of the software is 

being used and obtain the agency's JFMIP 

certification for that software version. [Agencies 

replacing software to meet core financial system 

requirements must use JFMIP-certified core 

financial management systems as required by OMB 

Circular A-127, but it is not a noncompliance issue 

for FFMIA purposes.] 

 
 Internal Control 

 701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-5 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

1. Ask whether there have been significant changes in 

the agency's automated business processes since 

compliance testing with JFMIP requirements was 

last performed. If so, ask whether the agency has 

performed an assessment of any new functionality 

using the JFMIP system requirements documents, 

GAO checklists, or similar tools. Document the 

results. 

 

2. For those agencies with a core financial 

management system that is not a JFMIP- certified 

COTS and for any feeder systems, obtain any 

analyses performed by agency management to 

support its FFMIA and FMFIA assessments that 

document how the agency's systems conform to the 

applicable JFMIP systems requirements. If 

management has not performed an analysis of 

systems functionality, go to step C.5. 

 

3. Select several important functions that 

management has reported as complying with the 

systems requirements and determine if 

management's assessment can be relied upon. 

 

4. If management's results cannot be relied upon for 

each system, perform an assessment of the 

functionality of the applicable systems using JFMIP 

system requirement documents, GAO checklists or 

other similar tools. 

 

5. Document in section 701 B, the instances and 

related impact in which the agency's systems did 

not comply with JFMIP requirements. 

 
Internal Control 

701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-6 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

D. Ask if management receives appropriate reports that 

are significant to performing day-to-day management 

operations. 

1. Determine the adequacy of reports used to manage 

day-to-day operations. 

a. For reports that are produced by the agency's 

financial management systems, ask 

knowledgeable users, read the agency's 

financial management systems documentation, 

and from other audit work, use professional 

judgment to determine if the reports produced 

by the systems are timely, useful, reliable, 

complete, and appropriately summarized for the 

management level receiving the report. Use 

professional judgment, agency policy, and/or 

criteria evident from each report to determine 

its timeliness and accuracy; i.e., if a report is 

due by the 10th of each month, verify it was 

provided by the 10th of each month. If only online access is provided for important internal 

reports, through observation, documentation, 

and inquiry—such as obtaining systems logs and 

asking key managers about their work habits—

assess whether the reports were available and 

accessed. Through inquiry and observation, 

assess if management uses the reports to 

manage operations. Ask management what 

improvements are needed in the current 

reporting methods. Document the results. 

b. If the reports were not produced by the agency's 

financial management systems, ask how the 

reports were prepared and perform a similar 

assessment as described in step D.1.a. 

 
 Internal Control 

 701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-7 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

2. Determine whether appropriate levels of 

management are receiving adequate and timely 

management information. See FAM paragraph 

903.12 for questions related to determining FFMIA 

compliance with SFFAS No. 4. 

a. Using professional judgment and industry best 

practices, identify internal management 

performance-related information that should be 

available for managing day-to-day operations. 

b. Determine whether appropriate levels of 

management are receiving the information 

identified in step D.2.a. 

c. If full costing is not used in these management 

reports, assess whether the lack of full cost 

information affects the usefulness of the 

information. Review management's justification 

that full costing would not be beneficial for the 

internal reports. This may need to be assessed 

on a case-by-case basis. 

 

3. Include any deficiencies identified and related 

impact in the schedule shown in section 701 B. 

 

E. Identify the agency's external reports that are related 

to financial management such as those used for budget 

formulation and execution, fiscal management of 

agency programs, funds management, payments and 

receipts management, and to support the legal, 

regulatory, and other special requirements of the 

agency. 

1. Through interviews with knowledgeable users and 

reading of the agency's financial management 

system documentation, determine if the reports are 

produced by the systems. 

a. For external reports that are tested as part of 

the financial statement audit, include any 

deficiencies identified and the related impact in 

section 701 B. 

b. For external reports that are not tested as part 

of the financial statement audit, using 

professional judgment select several reports and 

assess whether the reports are reliable, timely,

 
Internal Control 

701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-8 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

and complete. Include any deficiencies 

identified and the related impact in section 

701 B. 

2. As an indicator of systems deficiencies, determine 

the magnitude and type of adjustments made by 

both management and the auditors to derive 

financial statements after the end of the accounting 

period. 

 

F. Determine if the agency's financial management 

systems track financial events and summarize 

information to facilitate the preparation of auditable 

financial statements. This determination can result 

from work performed as part of the financial statement 

audit. Document the deficiencies and the related 

impact in the schedule shown in section 701 B. 

 

G. Determine if the financial management systems enable 

the agency to prepare, execute, and report on the 

agency's budget in accordance with the requirements 

of OMB Circular No. A-11. This determination can 

result from work performed as part of the financial 

statement audit. Document the deficiencies and the 

related impact in the schedule shown in section 701 B. 

 

H. Determine if the agency's financial management 

systems capture and produce the financial information 

required to measure program performance. 

1. Identify the agency's performance measures from 

its most recent accountability report that include 

data from the agency's financial management 

systems. 

 

2. Ask agency management whether an assessment 

was performed of the validity of the financial data 

used to derive the performance measures. If so, 

obtain and review the assessment and any 

supporting documentation. 

 

3. If agency management has not assessed the validity 

of the financial data used to derive the agency's 

performance measures, include this deficiency in 

section 701 B. 

 
 Internal Control 

 701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-9 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

4. Determine if recent GAO or IG reports have 

addressed the validity of financial data used to 

derive performance measures. 

 

5. If any deficiencies were identified, include them 

along with the related impact in the schedule 

shown in FAM section 701 B. 

 

I. Coordinate with the Information Security (IS) auditors 

to determine if the agency has implemented and 

maintains a program to provide adequate security for 

all agency information that is collected, processed, 

transmitted, stored, or disseminated in financial 

management systems. 

1. Have the IS auditors review the annual 

management evaluation and the annual 

independent evaluation conducted in accordance 

with the Government Information Security Reform 

(GISR) legislation. 

 

2. Document the deficiencies and related impact 

identified by the IS auditors in the schedule shown 

in section 701 B. 

 

J. Determine if the financial management systems include 

internal control to safeguard resources against waste, 

loss, and misuse, and whether reliable data are 

obtained, maintained, and disclosed in system 

generated reports. Some of the information needed to 

make this determination may be obtained from the 

work performed in the internal control phase of the 

financial statement audit, and other systems internal 

control weaknesses may be identified from other audit 

reports reviewed and steps performed in this program. 

Document the results in section 701 B. 

 
Internal Control 

701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-10 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

III. Testing for Compliance with the Federal 

Accounting Standards 

A. Determine if the agency's financial statements are 

compiled in accordance with applicable accounting 

standards. 

1. Ask agency management and review financial 

statement audit results to determine whether any 

FASAB standards are not applicable. Document the 

results. Analyze the resultant list of applicable/ 

inapplicable FASAB standards for reasonableness 

and use the list as a reference in performing these 

steps. 

 

2. Determine if any issues reported as part of the 

financial statement audit were related to the lack 

of the agency's implementation of the accounting 

standards in their systems or the standards were 

not properly applied because of inadequate or 

improperly implemented manual procedures. 

Document the results in the schedule shown in 

section 701 B. 

 

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

accounting systems 

• use the agency's accounting classification elements 

to identify and establish unique cost objects to 

capture, accumulate, and report costs and 

revenues; 

• allocate and distribute the full cost and revenue of 

cost objects as defined by OMB including services 

provided by one federal entity to another for 

external reporting; and 

• transfer cost data directly to and from other cost 

systems/applications that produce or allocate cost 

information. 

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

 
 Internal Control 

 701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-11 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

C. From the deficiencies identified in performing steps in 

part II (testing for compliance with federal financial 

management systems requirements) and from tests 

conducted as part of the financial statement audit, 

determine if the financial systems record and 

summarize transactions in accordance with applicable 

accounting standards. Note that the systems 

functionality assessments performed in step II. B. 

should have determined any compliance issues related 

to accounting standards since the accounting 

standards are used as a source for systems 

functionality requirements. Document the results and 

the related impact in the schedule shown in section 

701 B. 

 

IV. Testing for Compliance with the SGL 

A. Determine whether the agency financial management 

systems use financial data that can be traced directly 

to SGL accounts to produce reports providing financial 

information for both internal and external reporting. 

1. Ask agency management and from the 

documentation prepared in step II.B.1 above, 

determine how financial transaction data are 

summarized from the financial systems to the core 

financial system. 

 

2. Compare the agency's chart of accounts to the SGL 

accounts and identify any deviations. 

 

3. Review all of the standard entries allowed by the 

core financial system to determine if these entries 

conform to the SGL posting rules. 

 

4. Document any deficiencies and the related impact 

in the schedule shown in section 701 B. 

 

B. Ask whether the agency uses a crosswalk from its 

chart of accounts for its core financial management 

system to the SGL. If so, perform tests to determine 

the accuracy of the crosswalk. 

1. Trace all SGL accounts to the crosswalk. 

 
Internal Control 

701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-12 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

2. Identify any SGL accounts that are not included in 

the crosswalk. Identify any agency accounts not 

associated with an SGL account in the crosswalk. 

 

3. Compare the posting rules used by the system to 

those included in the SGL to determine whether the 

posting rules used by the system conform to the 

SGL. 

 

4. Document deficiencies and the related impact in 

the schedule shown in section 701 B. 

 

V. Summary 

A. Summarize the results of the work performed above 

and assess the agency's compliance with the federal 

financial management systems requirement of FFMIA. 

1. Finalize the schedule of the FFMIA 

noncompliances identified in the schedule prepared 

in FAM section 701 B. 

 

2. Read the agency's management representation 

letter covering the fiscal year under audit to obtain 

the agency management's FFMIA determination. 

a. Document the entity or organization responsible 

for the financial management systems that have 

been found not to comply. 

b. Document all facts pertaining to the: 

i. nature and extent of the noncompliance and 

areas where there is substantial but not full 

compliance; 

ii. primary reason or cause of the 

noncompliance; 

iii. impact of the noncompliance; 

iv. entity or organization responsible for the 

noncompliance; and 

v. relevant comments from any responsible 

officer or employee. 

c. Assess the recommended remedial actions for 

each instance of noncompliance and the time 

frames for implementing these actions. Include 

this assessment in the schedule in section 701 B. 

 
 Internal Control 

 701 A – Example Audit Procedures for Testing Compliance with FFMIA 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 701 A-13 

FFMIA example audit procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref. 

3. After reviewing the nature and extent of 

deficiencies identified, conclude whether the 

systems deficiencies identified constitute lack of 

substantial compliance with FFMIA. Consider the 

four factors in paragraph 701.07 from OMB's FFMIA 

implementation guidance when drawing this 

conclusion. 

 

4. Prepare the FFMIA section of the report. See FAM 

paragraphs 580.62 through .66 and sections 595 A, 

595 B, and 1603, as appropriate. 

 
[This page intentionally left blank.] 
Internal Control 

701 B – SUMMARY SCHEDULE OF INSTANCES OF NONCOMPLIANCE WApril 2003 GAO/PCIE Financial Audit Manual - Part II 

Source of 

information used 

in identifying 

deficiencies in 

agency systems 

Nature 

and 

extent of 

noncompliance 

Substantial but not 

full compliance? 

(Y or N) 

Applicable 

criteria 

(JFMIP, 

FASAB 

citation) 

Responsible 

entity

Primary 

reason or 

cause of 

noncompliance 

Impact 

of 

noncom

pliance 

Agency 

comments 

on 

noncompliance 

Corrective 

action in 

remediation 

plan? 

(Y or N) 

Asof 

ac

tim

Prior year's reported instances of noncompliance (Step I.B.) Prior year's material weaknesses and reportable conditions that affect FFMIA determination (Step I.B.) 
Internal Control 

701 B – Summary Schedule of Instances of Noncompliance with FFMIA April 2003 GAO/PCIE Financial Audit Manual - Part II 

Source of 

information used 

in identifying 

deficiencies in 

agency systems 

Nature 

and 

extent of 

noncompliance 

Substantial but not 

full compliance? 

(Y or N) 

Applicable 

criteria 

(JFMIP, 

FASAB 

citation) 

Responsible 

entity

Primary 

reason or 

cause of 

noncompliance 

Impact 

of 

noncom

pliance 

Agency 

comments 

on 

noncompliance 

Corrective 

action in 

remediation 

plan? 

(Y or N) 

Asof 

ac

tim

Weaknesses in the agency's most recent FMFIA report that affect FFMIA determination (Step I.C.) Weaknesses in Recent IG and GAO reports that affect FFMIA determination (Step I.C.) Cycle memoranda for the current year's audit (Step I.D.) 
Internal Control 

701 B – Summary Schedule of Instances of Noncompliance with FFMIA April 2003 GAO/PCIE Financial Audit Manual - Part II 

Source of 

information used 

in identifying 

deficiencies in 

agency systems 

Nature 

and 

extent of 

noncompliance 

Substantial but not 

full compliance? 

(Y or N) 

Applicable 

criteria 

(JFMIP, 

FASAB 

citation) 

Responsible 

entity

Primary 

reason or 

cause of 

noncompliance 

Impact 

of 

noncom

pliance 

Agency 

comments 

on 

noncompliance 

Corrective 

action in 

remediation 

plan? 

(Y or N) 

Asof 

ac

tim

Instances in which the agency's systems did not comply with JFMIP's functional requirements (Step II.C.) Preparation of internal management reports (Step II.D.) Preparation of external agency reports (Step II.E.) 
Internal Control 

701 B – Summary Schedule of Instances of Noncompliance with FFMIA April 2003 GAO/PCIE Financial Audit Manual - Part II 

Source of 

information used 

in identifying 

deficiencies in 

agency systems 

Nature 

and 

extent of 

noncompliance 

Substantial but not 

full compliance? 

(Y or N) 

Applicable 

criteria 

(JFMIP, 

FASAB 

citation) 

Responsible 

entity

Primary 

reason or 

cause of 

noncompliance 

Impact 

of 

noncom

pliance 

Agency 

comments 

on 

noncompliance 

Corrective 

action in 

remediation 

plan? 

(Y or N) 

Asof 

ac

tim

Preparation of auditable financial statements (Step II.F.) Preparation, execution, and reporting on agency budget in accordance with OMB requirements (Step II.G.) Management's assessment of the validity of information used to derive performance measures (Step II.H.) 
Internal Control 

701 B – Summary Schedule of Instances of Noncompliance with FFMIA April 2003 GAO/PCIE Financial Audit Manual - Part II 

Source of 

information used 

in identifying 

deficiencies in 

agency systems 

Nature 

and 

extent of 

noncompliance 

Substantial but not 

full compliance? 

(Y or N) 

Applicable 

criteria 

(JFMIP, 

FASAB 

citation) 

Responsible 

entity

Primary 

reason or 

cause of 

noncompliance 

Impact 

of 

noncom

pliance 

Agency 

comments 

on 

noncompliance 

Corrective 

action in 

remediation 

plan? 

(Y or N) 

Asof 

ac

tim

Implementation and maintenance of an information security program (Step II.I.) Internal controls as part of financial management (Step II.J.) Preparation of agency financial statements in accordance with applicable accounting standards (Step III.A.) 
Internal Control 

701 B – Summary Schedule of Instances of Noncompliance with FFMIA April 2003 GAO/PCIE Financial Audit Manual - Part II 

Source of 

information used 

in identifying 

deficiencies in 

agency systems 

Nature 

and 

extent of 

noncompliance 

Substantial but not 

full compliance? 

(Y or N) 

Applicable 

criteria 

(JFMIP, 

FASAB 

citation) 

Responsible 

entity

Primary 

reason or 

cause of 

noncompliance 

Impact 

of 

noncom

pliance 

Agency 

comments 

on 

noncompliance 

Corrective 

action in 

remediation 

plan? 

(Y or N) 

Asof 

ac

tim

Compliance issues related to the implementation of applicable accounting standards (Step III.C.) Agency financial systems' implementation of the SGL accounts (Step IV. A.) Agency use of a crosswalk from its core financial management system to the SGL (Step IV. B.) 
SECTION 800

Compliance
[This page intentionally left blank.]
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-1 

.01 The compliance testing section consists of a General Compliance Checklist 

(questionnaire) for identifying laws and regulations for compliance testing and 

supplements for the laws OMB requires auditors of CFO Act agencies to test for 

(see section 295 H) and other laws of general applicability auditors may consider 

during federal financial audits. The compliance supplements provide detailed 

guidance for assessing the effectiveness of compliance controls and testing 

compliance with the significant provisions of each law. 

.02 The General Compliance Checklist (Form 802), or equivalent, generally should be 

completed for federal financial audits. If an individual law is considered to be 

significant for purposes of compliance testing, the related supplement should be 

completed. Supplements should be completed only for laws required to be tested 

for CFO Act agencies and for other laws identified for compliance testing on the 

General Compliance Checklist. Use of these documents is described below. 

.03 To understand and evaluate compliance controls, the auditor also should follow 

the guidance in FAM 260 on identifying risk factors and in FAM 320 on 

understanding information systems. The FAM also provides additional guidance 

on compliance considerations for all audit phases. 

INSTRUCTIONS FOR GENERAL COMPLIANCE CHECKLIST

.04 The checklist contains a summary of each law. The auditor generally should use 

this checklist or equivalent to determine which of these laws are considered to be 

significant for purposes of testing compliance, as discussed in FAM 245. The 

auditor should indicate whether each law meets the criteria for significance by 

placing a check mark in the appropriate column (yes or no). OMB audit guidance 

requires auditors of CFO Act agencies to test for five of the laws, as noted in 

section 295 H. Auditors also may test for the other four laws if they have 

determined they are material to the financial statements being audited. 

.05 The auditor may need to use estimates or interim information in the preliminary 

column. The final amounts (based on the audited amounts or the final amounts 

of available budget authority) are used to determine whether all laws that would 

be significant in quantitative terms have been identified for control and 

compliance testing. The sources of all amounts included in this checklist should 

be documented. If the law is considered to be significant from a qualitative 

standpoint, the reasons for this conclusion should be documented. 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-2 

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

 Law _

Supplement 

number

Antideficiency Act (required for CFO Act agencies) 803 

Federal Credit Reform Act of 1990 (required for CFO 

Act agencies) 

808 

Provisions Governing Claims of the U.S. Government 

as provided primarily in 31 U.S.C. 3711-3720E 

(Including the Debt Collection Improvement Act 

of 1996 (DCIA)) (required for CFO Act agencies) 

809 

Prompt Payment Act (required for CFO Act agencies) 810 

Pay and Allowance System for Civilian Employees as 

Provided Primarily in Chapters 51-59 of Title 5, 

U.S. Code (required for CFO Act agencies) 

812 

Civil Service Retirement Act 813 

Federal Employees Health Benefits Act 814 

Federal Employees' Compensation Act 816 

Federal Employees' Retirement System Act of 1986 817 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-3 

Entity _________________________________________________________________ 

Period of financial statements ____________________________________________

Job code _______________________________________________________________

Description of Law Yes No 

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

This law imposes restrictions on the amounts of budgetary 

authority that may be obligated or expended. As discussed in 

FAM 250, the auditor should obtain information on the entity's 

budget authority, from sources such as appropriation 

legislation, and identify all legally binding restrictions on 

budget execution. 

Do the amounts of any legally binding budget execution 

restrictions on budget authority in effect during the audit period 

exceed planning materiality or are provisions of the 

Antideficiency Act otherwise considered to be significant? 

(OMB audit guidance requires auditors of CFO Act agencies to 

test for compliance with this law.) 

 Preliminary Final

Individual appropriations 

budget authority 

Planning materiality 

If yes, complete compliance supplement 803. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-4 

Description of Law Yes No 

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

661f

This law contains numerous provisions relating to the recording 

of activity related to direct loans, loan guarantees, and related 

modifications for budget accounting purposes. The law 

provides that after October 1, 1991, an agency may incur new 

direct loan obligations or make new loan guarantee 

commitments only to the extent that Congress has provided 

budget authority to cover the costs of the loan or loan 

guarantee. 

Does the entity's budget authority available during the audit 

period for direct loan obligations, loan guarantee commitments, 

or any related modifications exceed planning materiality or are 

provisions of the FCRA of 1990 otherwise considered to be 

significant? 

(OMB audit guidance requires auditors of CFO Act agencies to 

test for compliance with this law.) 

 Preliminary Final

Total appropriations or other 

budget authority available during 

the fiscal year for costs of FCRA 

activities (direct loans, loan 

guarantees, and related 

modifications) 

Planning materiality 

If yes, complete compliance supplement 808. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-5 

Description of Law Yes No 

Provisions Governing Claims of the U.S. Government, 

Including the Debt Collection Improvement Act of 1996 

(DCIA)

These provisions address the collection of amounts owed to the 

federal government. Interest generally accrues from the date 

that a notice stating the amount due and the interest policies is 

first mailed to the debtor. Interest generally accrues at a rate 

established by the Secretary of the Treasury. Administrative 

costs and penalties shall also be charged. 

The provisions also require the entity to take all appropriate 

steps to collect the debt before discharging it and to notify 

Treasury about delinquent debt for administrative offset, 

collection by a debt collection center, or tax refund offset. 

Entities shall also participate in a computer match of delinquent 

debt with federal employees, and when collection actions are 

terminated, the entity holding delinquent debt shall sell it. 

Provisions also require the entity (or entities making loans the 

government guarantees) to notify credit-reporting agencies 

about delinquent debt and not make or guarantee loans to 

persons who owe delinquent debt. 

Does the cumulative amount of receivables created during the 

audit period that are subject to provisions governing claims of 

the U.S. government, including DCIA, exceed planning 

materiality; does the amount of receivables at the end of the 

audit period that are subject to provisions governing claims of 

the U.S. government, including DCIA, exceed planning 

materiality; or are provisions governing claims of the U.S. 

government, including the DCIA, otherwise considered to be 

significant? 

(OMB audit guidance requires auditors of CFO Act agencies to 

test for compliance with this law.) 

(continued on next page) 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-6 

Description of Law Yes No 

Provisions Governing Claims of the U.S. Government, 

Including the Debt Collection Improvement Act of 1996 

(DCIA)

(continued) 

 Preliminary Final

Cumulative amount of 

receivables created during the 

audit period that are subject to 

provisions governing claims of 

the U.S. government, including 

DCIA 

or: 

Amount of receivables at the 

end of the audit period that are 

subject to provisions governing 

claims of the U.S. government, 

including DCIA 

Planning materiality 

If yes, complete compliance supplement 809. 

Note: These provisions of the law generally do not apply to 

amounts payable to the entity under the Internal Revenue Code, 

the Social Security Act, or tariff laws. Those laws contain 

specific provisions for these amounts. 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-7 

Description of Law Yes No 

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

The Prompt Payment Act requires federal entities to make 

payments for property or services by the due date specified in 

the related contract or, if a payment date is not specified in the 

contract, generally 30 days after the invoice for the amount due 

is received. If payments are not made within the appropriate 

period, the entity shall pay an interest penalty. Also, discounts 

offered by vendors may be taken only during the specified 

period. If they are taken after the time period has expired, an 

interest penalty shall be paid. 

Do the entity's payments for property or services subject to the 

Prompt Payment Act for the audit period exceed planning 

materiality or are provisions of the Prompt Payment Act 

otherwise considered to be significant? 

(OMB audit guidance requires auditors of CFO Act agencies to 

test for compliance with this law.) 

Preliminary Final

Amount of payments made for 

property and services subject 

to the Prompt Payment Act 

Planning materiality 

If yes, complete compliance supplement 810. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-8 

Description of Law Yes No 

Pay and Allowance System for Civilian Employees as 

Provided Primarily in Chapters 51-59 of Title 5, U.S. Code

These laws require that employees be paid at the appropriate 

rates established by law, including general pay increases, and 

that employees be paid at least minimum wage. 

Does the entity's payroll expense for the audit period exceed 

planning materiality or are related provisions of the Pay and 

Allowance System for Civilian Employees (as provided 

primarily in Chapters 51-59 of Title 5, U.S. Code) otherwise 

considered to be significant? 

(OMB audit guidance requires auditors of CFO Act agencies to 

test for compliance with this law.) 

 Preliminary Final

Payroll expense 

Planning materiality 

If yes, complete compliance supplement 812. 

It is not expected that the entity's expense for performance 

awards, cash awards, overtime, travel, transportation, 

subsistence, or allowances for the audit period would exceed 

planning materiality. However, if these items or related 

provisions of the Pay and Allowance System for Civilian 

Employees are otherwise considered to be significant, the 

auditor should consult with the Office of General Counsel 

(OGC) for specific provisions to be considered for compliance 

testing. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-9 

Description of Law Yes No 

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

This law provides retirement benefits to employees who were 

hired prior to January 1, 1984. For each employee, the entity 

withholds a percentage of basic pay from the employee's 

compensation and contributes an equal amount for retirement. 

The employee and entity amounts are remitted to Treasury. 

Does the entity's expense for retirement costs under the Civil 

Service Retirement Act for the audit period exceed planning 

materiality or are provisions of the Civil Service Retirement Act 

otherwise considered to be significant? 

Preliminary Final

Expense for retirement 

contributions 

Planning materiality 

If yes, complete compliance supplement 813. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-10 

Description of Law Yes No 

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

seq.

This law provides health insurance coverage to employees who 

elect health insurance benefits. For each employee who elects 

coverage, the entity pays an amount set by OPM for insurance 

costs. The entity portion cannot exceed 75 percent of the 

insurance cost. The employee pays the remainder of the total 

cost. Information on the employee and entity cost of the 

insurance is published by OPM. The entity withholds the 

amount of the employee's portion of the cost from the 

employee's pay and remits this amount, along with its own 

contribution, to Treasury. 

Does the entity's expense for health insurance costs for the 

audit period exceed planning materiality or are provisions of 

the Federal Employees Health Benefits Act otherwise 

considered to be significant? 

 Preliminary Final

Expense for health insurance 

Planning materiality 

If yes, complete compliance supplement 814. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-11 

Description of Law Yes No 

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

seq.

This law provides for the compensation of employees injured or 

disabled while performing their duties. Claims are paid out of 

the Federal Employees' Compensation Fund. Federal entities 

are billed annually by the fund for claims paid on their behalf. 

Does the entity's expense for the audit period for benefits paid 

by the Federal Employees' Compensation Fund on the entity's 

behalf exceed planning materiality or are provisions of the 

Federal Employees' Compensation Act otherwise considered to 

be significant? 

 Preliminary Final

Expense for Compensation 

 Fund claims 

Planning materiality 

If yes, complete compliance supplement 816. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-12 

Description of Law Yes No 

Federal Employees' Retirement System Act of 1986, 

5 U.S.C. 8401 et seq.

This law provides retirement benefits for employees who were 

hired after December 31, 1983. For each employee, the entity 

withholds a percentage of basic pay from the employee's 

compensation and contributes an amount equal to the 

employing agency's applicable normal cost percentage less the 

employee deduction rate for retirement. The employee and 

entity amounts are remitted to Treasury. 

Does the entity's expense for retirement costs under the 

Federal Employees' Retirement System Act for the audit period 

exceed planning materiality or are provisions of the Federal 

Employees' Retirement System Act of 1986 otherwise 

considered to be significant? 

 Preliminary Final

Expense for retirement 

 contributions 

Planning materiality 

If yes, complete compliance supplement 817. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-13 

Description of Law Yes No 

Other laws 

Perform the following procedures and include references to 

supporting documentation: 

1. As described in FAM 245.02, read the list of laws and 

regulations identified by the entity as significant to others. 

(See .) 

2. With OGC assistance, identify any other laws or regulations 

that have a direct effect on determining financial statement 

amounts. Determine whether any such laws or regulations 

are material to the financial statements. (See .) 

3. Consider whether to test compliance with any indirect laws 

or regulations and make inquiries of management as 

discussed in FAM 245.04-.06. (See .) 

4. For all laws or regulations identified for testing above, 

identify significant provisions using the criteria in FAM 

245.02. Test compliance controls and compliance as 

described in FAM 300 and 460. 

Are any other laws or regulations identified for compliance 

testing? 

If yes, attach a list of the laws or regulations identified to 

this form and reference it to control and compliance work 

performed. 

____ ____ 
Compliance 

802 - General Compliance Checklist 

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

INSTRUCTIONS FOR COMPLIANCE SUPPLEMENTS

.07 Each compliance supplement consists of (1) a compliance summary, (2) a 

compliance audit program, and (3) notes. 

Compliance Summary 

.08 For each law identified for compliance testing on the General Compliance 

Checklist, the auditor generally should complete the related compliance 

summary or equivalent. The compliance summary is designed to assist the 

auditor in planning compliance control tests and summarizing the results of 

compliance control tests and compliance tests for reporting the results of the 

work performed. 

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

have been identified for compliance testing, the type of provision, and the 

reference to the law. 

.10 The second column contains the objective related to the specific provision to be 

used for both compliance control and compliance testing. 

.11 The auditor should identify the control activities that the entity has in place to 

achieve each objective and document the control activity in the third column. If 

the entity does not have a control activity that achieves the objective, the auditor 

should document this condition in the third column. 

.12 The fourth column is used to indicate whether the control activity is information 

system (IS)-related as described in FAM 270.04. IS controls are those the 

effectiveness of which depends on computer processing. They can generally be 

classified into general, application, and user controls. Testing of IS controls 

generally should be performed by an IS auditor, although the audit team may 

assist the IS auditor. 

.13 The auditor should design control tests to determine whether the control 

activities that have been identified in the third column are in place and operating 

effectively. A control activity is considered to be effective if it achieves the 

control objective. The control testing program and the control tests should be 

recorded in the documentation. The results of these tests and the auditor's 

conclusions on the effectiveness of the compliance controls should be 

documented in the fifth column of the Compliance Summary. A reference to 

supporting documentation should be included in this column. 
Compliance 

802 - General Compliance Checklist 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 802-15 

.14 Compliance tests should be performed using the related Compliance Audit 

Program as described below. The results of the compliance tests should be 

indicated in the last column of the Compliance Summary along with a reference 

to the supporting documentation. 

Compliance Audit Program 

.15 A compliance audit program has been developed for the provisions identified on 

the related compliance summary for each law. For each law identified for 

compliance testing on the General Compliance Checklist, the auditor generally 

should perform each step of the related compliance audit program. Because the 

subject matter of some laws is closely related to matters the auditor will be 

planning to test for other parts of the audit, the auditor should consider 

coordinating with that other testing and designing multipurpose tests. For 

example, payroll compliance testing could be performed using multipurpose tests 

of payroll controls and/or substantive payroll testing. The auditor generally 

should initial in the "performed by" column of the compliance audit program 

when he or she performs the procedure. A reference to the documentation 

recording the work performed for each step generally should be included in the 

last column of the compliance audit program. 
[This page intentionally left blank.]
Compliance 

803 - ANTIDEFICIENCY ACT April 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Antideficiency Act are as indicated on Form 802 - General Compliance Checklist. OMB guidance on budget execution, including the Antideficiency Act, is included in OMB Circular A-11, Part 4. 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

1. The entity shall not make expenditures or 

obligations that exceed the amount available for expenditure or obligation in an appropriation or fund. 

Type: Quantitative-based Ref: 31 U.S.C. 1341(a)(1)(A) and (C) 

1. Expenditures or 

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

[Document the control activities used by the entity to achieve the objective.] 

(See note 2.) 

[Is control dependent on computer processing?] 

[Indicyes or includreferesuppodocumtion.] 
Compliance 

803 - Antideficiency Act April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

2. The entity shall not make expenditures or 

obligations that exceed 

(1) the amount of an apportionment; or (2) a lesser amount, if any, established by 

agency regulations (such as the allotment level). See note 1. 

Type: Quantitative-based Ref: 31 U.S.C. 1517(a) 

2. Expenditures or 

obligations do not exceed the legally binding limit on the entity's budget authority. (The amount of the apportionment or a lesser amount, if any, established by the entity's regulations.) See note 1. 

(See note 2.) 
Compliance 

 803 - Antideficiency Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 803-3 

Note: Complete this program or prepare equivalent documentation only if provisions 

of the Antideficiency Act are considered to be significant as indicated on Form 802 - 

General Compliance Checklist. The procedures in this program are designed to test 

compliance with the provisions listed on the Compliance Summary for this law. 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

1. List the appropriations or other budget authority and 

the related budget accounts that were identified for 

compliance testing on Form 802 - General Compliance 

Checklist. Per page 802-3, the auditor should identify 

all legally binding restrictions on budget execution, 

from sources such as appropriation legislation. 

 (The following tests for compliance with the 

Antideficiency Act should be coordinated with tests of 

the Statement of Budgetary Resources and with tests of 

expenses.) 
Compliance 

 803 - Antideficiency Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 803-4 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

2. As discussed in FAM 460.03, the auditor needs 

assurance that the summarized budget information 

(obligations and expenditures) used for compliance 

tests is reasonably accurate and complete. This 

assurance may be provided through effective controls 

(usually the budget controls) or, if the controls are not 

effective, through substantive testing of budget 

amounts for validity, completeness, cutoff, recording, 

classification, and summarization as described in FAM 

495 B. 

For the accounts listed in step 1, document if this 

assurance is provided through effective controls (as 

indicated on Form 803 - Compliance Summary) or if 

substantive tests of the budget information are 

necessary. 

If the controls are not considered to be effective in 

meeting some or all of the budget control objectives 

listed in FAM 395 F, perform substantive tests of the 

budget amounts (obligations and expenditures) as 

discussed in FAM 495 B. These substantive tests 

should be performed only for those potential 

misstatements for which the entity does not have 

effective budget controls. 

After the auditor is satisfied as to the reasonableness of 

the budget amounts to be used for the compliance 

tests, perform the compliance tests in steps 3 and 4. 

 

3. Compare the actual amounts of budget obligations and 

expenditures with the related appropriation or other 

budget authority listed in step 1. If the entity does not 

appear to have complied with the provision, perform 

step 5. (31 U.S.C. 1341(a)(1)(A) and (C)) 
Compliance 

 803 - Antideficiency Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 803-5 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

4. Determine the entity's legally binding level of budget 

authority (below the appropriation level) that was 

identified during the planning phase. This level is 

usually the apportionment level unless the entity has 

elected a lower level, such as allotments. 

Compare the amount of actual obligations and 

expenditures to the legally binding level of restrictions 

on budget authority identified for compliance testing 

(the apportionment or allotment level). If the entity 

does not appear to have complied with the provision, 

perform step 5. (31 U.S.C. 1517(a)) 

5. If the entity does not appear to be in compliance based 

on the results of tests performed, discuss these matters 

with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance actually 

has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in controls that allowed the 

noncompliance to occur, if not previously 

identified during control testing; 

• report the nature of any weakness in controls and 

consider modification of the opinion on internal 

control as appropriate (see FAM 580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75.). 
Compliance 

 803 - Antideficiency Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 803-6 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

6. Document conclusions on compliance with each 

provision on Form 803 - Compliance Summary. 
Compliance 

 803 - Antideficiency Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 803-7 

Note 1: Entities are required to establish regulations that provide for a system of 

administrative controls over their execution of budget authority (31 U.S.C. 

1514(a)). As discussed in FAM 250.03, the entity may elect to lower the level 

at which budget limitations are legally binding in these regulations. For 

example, the entity may elect to reduce the legally binding limit on the 

obligation and expenditure of budget funds from the apportionment to the 

allotment level. The auditor should determine the level at which the entity's 

legally binding limit has been established. 

Note 2: The auditor should consider the results of the evaluation and testing of 

budget controls. These controls relate to the execution of budget authority 

and usually are the same controls that are used to comply with the 

Antideficiency Act. Accordingly, additional consideration of controls that 

achieve the compliance objective generally is not necessary if the auditor 

has assessed whether the entity achieves all of the budget control objectives 

listed in FAM 395 F. The auditor should reference this compliance summary 

to the budget control evaluation and testing and perform any additional 

procedures considered necessary to conclude if compliance controls are 

effective. 
[This page intentionally left blank.]
Compliance 

808 - FEDERAL CREDIT REFORM ACT OF 1990 April 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Federal Credit Reform considered to be significant as indicated on Form 802 - General Compliance Checklist. OMB guidance on FCRA is included in OMB Circular A-11, part 5, Federal Credit Programs. 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Eff

com

con

1. Direct loan obligations may be incurred on 

or after October 1, 1991, only to the extent that an appropriation or other budget authority is available to cover these costs. (See notes 1, 2, and 5-7.) 

Type: Quantitative-based Ref: 2 U.S.C. 661c(b) 

1. Direct loan obligations 

made on or after October 1, 1991, do not exceed the available appropriation or other budget authority. (See notes 1, 2, and 5-7.) 

[Document the control activities used by the entity to achieve the objective.] 

(See note 10.) 

[Is control dependent on computer processing?] 

[Indior noinclurefersuppdocution.
Compliance 

808 - Federal Credit Reform Act of 1990 April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Eff

com

con

2. A direct loan obligation or outstanding 

direct loan shall not be modified in a manner that increases its cost unless budget authority for the additional cost is available. (See notes 5 and 8.) (See note 9 for matters to discuss with OGC prior to testing.) 

Type: Quantitative-based Ref: 2 U.S.C. 661c(e) 

2. Modifications made to 

direct loan obligations or outstanding direct loans do not exceed the available budget authority. (See notes 5, 8, and 9.) 

(See note 10.) 

3. Loan guarantee commitments may be 

made on or after October 1, 1991, only to the extent that an appropriation or other budget authority is available to cover these costs. (See notes 3 to 7.) 

Type: Quantitative-based Ref: 2 U.S.C. 661c(b) 

3. Obligations for new loan 

guarantee commitments made on or after October 1, 1991, do not exceed the available appropriation or other budget authority. (See notes 3 to 7.) 

(See note 10.) 
Compliance 

808 - Federal Credit Reform Act of 1990 April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Eff

com

con

4. A loan guarantee commitment or 

outstanding loan guarantee shall not be modified in a manner that increases its cost unless budget authority for the additional cost is available. (See notes 5 and 8.) (See note 9 for matters to discuss with OGC prior to testing.) 

Type: Quantitative-based Ref: 2 U.S.C. 661c(e) 

4. Modifications made to loan 

guarantee commitments or outstanding loan guarantees do not exceed the available budget authority. (See notes 5, 8, and 9.) 

 (See note 10.) 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-4 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Federal Credit Reform Act (FCRA) are considered to be 

significant as indicated on Form 802 - General Compliance Checklist. The 

procedures in this program are designed to test compliance with the provisions 

listed on the Compliance Summary. 

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

Programs. 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

1. List the appropriations or other budget authority and 

the related budget accounts that were identified for 

compliance testing on Form 802 - General 

Compliance Checklist. 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-5 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

2. As discussed in FAM 460.03, the auditor needs 

assurance that the summarized budget information 

(obligations and expenditures) used for compliance 

tests is reasonably accurate and complete. This 

assurance may be provided through effective 

controls (usually the budget controls) or, if the 

controls are not effective, through substantive testing 

of budget amounts for validity, completeness, cutoff, 

recording, classification, and summarization as 

described in FAM 495 B. 

For the accounts listed in step 1, document whether 

this assurance is provided through effective controls 

(as indicated on Form 808 - Compliance Summary) or 

whether substantive tests of the budget information 

are necessary. 

If the controls are not considered to be effective in 

meeting some or all of the budget control objectives 

listed in FAM 395 F, plus the supplemental objectives 

for FCRA listed in FAM 395 F Sup, perform 

substantive tests of the budget amounts (obligations 

and expenditures) as discussed in FAM 495 B. These 

substantive tests should be performed only for those 

potential misstatements for which the entity does not 

have effective budget controls. 

After the auditor is satisfied as to the reasonableness 

of the budget amounts to be used for the compliance 

tests, perform the compliance tests in steps 3 and 4. 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-6 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

3. For each appropriation account or other budget 

authority listed in step 1, perform the following 

procedures that are applicable for direct and 

guaranteed loan programs that have a positive 

subsidy (i.e., cash outflows exceed cash inflows); (for 

direct and guaranteed loan programs that have a 

negative subsidy (i.e., cash inflows exceed cash 

outflows), perform step 4): 

(a) Compare the amount of obligations for direct 

loans to the amount of the available 

appropriation or other budget authority. (Note: 

This budget restriction is applicable only to 

obligations for direct loans made on or after 

October 1, 1991.) 

3. (b) Compare the amount of obligations for 

modifications of direct loan obligations or 

outstanding direct loans to the amount of 

available budget authority. (Note: The sale of a 

direct loan is considered a modification. Discuss 

applicability of this budget restriction to direct 

loans and direct loan obligations that were 

outstanding prior to October 1, 1991, with OGC 

prior to performing compliance test.) 

 

3. (c) Compare the amount of obligations for loan 

guarantee commitments to the amount of the 

available appropriation or other budget 

authority. (Note: This budget restriction is only 

applicable to obligations for loan guarantee 

commitments made on or after October 1, 1991.) 

 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-7 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

3. (d) Compare the amount of obligations for 

modifications of loan guarantee commitments or 

outstanding loan guarantees to the amount of 

available budget authority. (Note: Discuss 

applicability of this budget restriction to loan 

guarantees and loan guarantee commitments 

that were outstanding prior to October 1, 1991, 

with OGC prior to performing compliance test.) 

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

If the amounts of obligations in any of these 

comparisons exceed the available budget authority, 

the entity may not be in compliance. Perform step 5. 

4. Direct and guaranteed loan programs that have a 

negative subsidy (cash inflows exceed cash outflows) 

do not receive an appropriation. However, such 

programs have a loan limit that cannot be exceeded, 

i.e., a maximum number of loans that can be made or 

guaranteed. For these programs, compare the total 

number and dollar volume of loans made to the loan 

limit in the applicable Presidents' Budget. Perform 

step 5. 

 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-8 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

5. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in controls that allowed the 

noncompliance to occur, if not previously 

identified during control testing; 

• report the nature of any weakness in controls and 

consider modification of the report on internal 

control as appropriate (see FAM 580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75). 

6. Document conclusions on compliance with each 

provision on Form 808 - Compliance Summary. 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-9 

Note 1: A direct loan is a disbursement of funds by the government to a nonfederal borrower under a contract that requires the repayment of such 

funds with or without interest. The term also includes the purchase of, 

or participation in, a loan made by another lender. The term does not 

include the acquisition of a federally guaranteed loan in satisfaction of 

default claims or the price support loans of the Commodity Credit 

Corporation. (2 U.S.C. 661a(1)) 

Note 2: A direct loan obligation is a binding agreement by a federal agency to 

make a direct loan when specified conditions are fulfilled by the 

borrower. (2 U.S.C. 661a(2)) 

Note 3: A loan guarantee is any guarantee, insurance, or other pledge with 

respect to the payment of all or a part of the principal or interest on any 

debt obligation of a nonfederal borrower to a nonfederal lender, but 

does not include the insurance of deposits, shares, or other 

withdrawable accounts in financial institutions. (2 U.S.C. 661a(3)) 

Note 4: A loan guarantee commitment is a binding agreement by a federal 

agency to make a loan guarantee when specified conditions are fulfilled 

by the borrower, the lender, or any other party to the guarantee 

agreement. (2 U.S.C. 661a(4)) 

Note 5: Appropriations or other budget authority to cover the cost of budget 

obligations for direct loan obligations and loan guarantee commitments 

must be made in advance by Congress. For revolving or other funds that 

otherwise would be available for these budget obligations, Congress 

must enact a limit on the use of such funds for these purposes to make 

them available for use. (2 U.S.C. 661c(b)) 

Note 6: Costs are defined as the estimated long-term cost to the government of a 

direct loan or loan guarantee, calculated on a net present value basis, 

excluding administrative costs and any incidental effects on 

governmental receipts or outlays. These calculations are described in 

further detail under the valuation control objective for obligations in 

FAM 395 F. (2 U.S.C. 661a(5)) 

Note 7: There is an exemption from this requirement for entitlements 

(mandatory programs such as the guaranteed student loan program and 

the VA home loan guaranty program) and credit programs of the 

Commodity Credit Corporation existing on the date of enactment of the 

act (November 5, 1990). (2 U.S.C. 661c(c)) 
Compliance 

808 - Federal Credit Reform Act of 1990 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 808-10 

Note 8: Modifications are government actions that alter the estimated net 

present value of a direct loan or loan guarantee for which an obligation 

has been recorded, for example, the sale of a direct loan, per SFFAS No. 

2, paragraph 53, or a policy change affecting the repayment period or 

interest rate for a group of existing loans. (Changes within the terms of 

existing contracts or through other existing authorities are not 

considered to be modifications. Also, "work outs" of individual loans, 

such as a change in the amount or timing of payments to be made, are 

not considered modifications.) The effects of these changes should be 

included in the annual reestimates of the estimated net present value of 

the obligations. Permanent indefinite authority is provided by FCRA for 

these reestimates. 

Note 9: Discuss applicability of this budget restriction to direct loans, direct loan 

obligations, loan guarantees, or loan guarantee commitments that were 

outstanding prior to October 1, 1991, with OGC prior to performing 

control or compliance tests. 

Note 10: The auditor should consider the results of the evaluation and testing of 

budget controls and testing of the Statement of Budgetary Resources. 

These controls relate to the execution of budget authority and usually 

are the same controls that are used to comply with the Antideficiency 

Act and the Federal Credit Reform Act. Accordingly, additional 

consideration of controls that achieve the compliance objective 

generally is not necessary if the auditor has assessed whether the entity 

achieves all of the budget control objectives listed in FAM 395 F, 

including the supplemental control objectives for the Federal Credit 

Reform Act. The auditor should reference to the budget control 

evaluation and testing and perform any additional procedures 

considered necessary to conclude if compliance controls are effective. 
Compliance 

809 - PROVISIONS GOVERNING CLAIMS OF THE U.S. GOVERNMENT (

3720E) (INCLUDING THE DEBT COLLECTION IMPROVEMENT A(DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions governing claims of the U.S. gprimarily in sections 3711-3720E of Title 31, U.S. Code (including provisions of the Debt Collection Improvement Act of 1996), aindicated on Form 802 - General Compliance Checklist. 

Name of entity: Compliance Summary Prepared b

Audit period: Reviewed  Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

con

1. Interest shall be charged on an 

outstanding debt (or claim) owed to the entity. Interest accrues from the date the notice of the amount due and interest policies is first mailed to the debtor. Interest is charged at the rate established by the Secretary of the Treasury that is in effect on that date. The rate remains fixed at that rate for the duration of the indebtedness. 

(See notes 1, 2, and 3.) Type: Transaction-based Ref: 31 U.S.C. 3717(a), (b), and (c) 

1. Interest is properly 

calculated and charged on past due amounts owed to the entity at the correct rates. (See notes 1, 2, and 3.) 

[Document the control activities used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicyes oincludreferesuppodocumtion.] 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 3711-3720E) (Including th

Improvement Act of 1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Prepared bAudit period: Reviewed  Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

con

2. The entity shall assess, on a claim owed to 

it, a charge to cover the cost of processing and handling a delinquent claim plus a penalty charge (of not more than 6 percent a year) for failure to pay a part of a claim more than 90 days past due. These additional charges do not accrue interest. (See note 3.) 

Type: Transaction-based Ref: 31 U.S.C. 3717(e) and (f) 

2. Administrative charges and 

late payment penalties are properly calculated and charged on past due amounts. (See note 3.) 

3. The entity may compromise, terminate, or 

suspend claims that are not more than $100,000. Claims of more than $100,000 (excluding interest, penalties, and administrative costs) shall be referred to the Justice Department for compromise, termination, or suspension. (See note 4.) 

Type: Procedural-based Ref: 31 U.S.C. 3711(a) 

3. Claims of more than 

$100,000 (excluding interest, penalties, and administrative costs) are referred to the Justice Department for compromise, termination, or suspension. 

(See note 4.) 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 3711-3720E) (Including th

Improvement Act of 1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Prepared bAudit period: Reviewed  Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

con

4. If the entity is owed a valid and legally 

enforceable, nontax debt delinquent over 180 days, and there are no bars to collection, it shall notify Treasury about the debt for administrative offset and refer the debt to Treasury or a Treasurydesignated debt collection center for collection action. (See notes 5, 6, and 7.) 

Type: Procedural-based Ref: 31 U.S.C. 3711(g)(1) and (9), 31 U.S.C. 3716(c)(6), 31 U.S.C. 3719 (a), 31 U.S.C. 3720A(a), and 5 U.S.C. 5514(a)(1). 

4. When nontax debt becomes 

delinquent over 180 days, it is referred to Treasury for administrative offset and collection. (See notes 5, 6, and 7.) 

5. Unless waived by the entity, a person may 

not obtain any loan (other than a disaster loan) or loan insurance or guarantee administered by the entity if the person has outstanding nontax delinquent federal debt. (Delinquency is determined by Treasury regulations.) 

Type: Transaction-based Ref: 31 U.S.C. 3720B 

5. Loans and loan insurance or 

guarantees are not granted to persons with delinquent nontax debt. 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-4 

Note: Complete this program or prepare equivalent documentation only if 

provisions governing claims of the United States government as provided 

primarily in sections 3711-3720E of Title 31, U.S. Code (including provisions of the 

Debt Collection Act of 1996) are considered significant, as indicated on Form 802 - 

General Compliance Checklist. The procedures in this program are designed to 

test compliance with the provisions listed on the Compliance Summary. 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

1. Based on the preliminary assessment of compliance 

control effectiveness (as documented on Form 809 - 

Compliance Summary), select a sample of amounts 

owed to the entity during or at the end of the audit 

period. (The sample size will vary based on the 

expected effectiveness of compliance controls, as 

discussed in FAM 460.02). Document the sampling 

approach using the documentation in FAM section 

495 E. See note 8 regarding sampling efficiencies and 

completeness of the sample population. 

Sample size 

Sample selection method 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-5 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

2. For each item selected in step 1 obtain the loan file or 

other supporting documentation and note the 

following information as of the date selected for 

testing: 

• due date of debt; 

• amount owed; 

• date the notice of the amount due and the interest 

policies is first mailed to the debtor; 

• amount of interest accrued and other 

administrative charges and penalties charged, if 

any; and 

• number of days the debt is past due, if any. 

Perform step 3 if the debt is past due. 

Perform step 4 if the debt is not past due. 

3. If the amount selected is past due: 

(a) Calculate the number of days that interest 

should be accrued on the debt as of the date 

selected for testing. Interest generally accrues 

from the date that the notice of the amount due 

is first mailed to the debtor. (See note 1.) 

Compare the auditor's calculation with the 

calculation performed by the entity and obtain 

explanation and examine support for any 

differences. (31 U.S.C. 3717(b)) 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-6 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

3. (b) Determine the interest rate that should be used 

to accrue interest on the debt. The rate is 

published in the Federal Register and should be 

the rate that was in effect on the date that the 

notice of the amount due is first mailed to the 

debtor. (The web site for the Federal Register

is: 

http://www.access.gpo.gov/su_docs/aces/aces14

0.html.) Compare the auditor's determination of 

the rate to the rate used by the entity and obtain 

explanation and examine support for any 

differences. (31 U.S.C. 3717(a) and (c)) 

3. (c) Calculate the amount of interest that should be 

owed as of the date selected for testing using the 

number of days tested in (a) and the interest 

rate tested in (b). Compare the auditor's 

calculation to the amount calculated by the 

entity and obtain explanation and examine 

support for any differences. See notes 2 and 3 

regarding the waiver of interest. 

3. (d) Obtain the entity's schedule of administrative 

charges and late payment penalties and 

determine if the appropriate amounts were 

charged to the debtor. See note 3 regarding the 

waiver of these charges. (31 U.S.C. 3717(e) and 

(f)) 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-7 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

4. If the debt is not past due, determine through 

examination of the entity's records whether 

(a) interest, administrative charges, or penalties are 

not being charged; and 

(b) the debtor had no outstanding nontax delinquent 

federal debt at the time the loan was obtained. 

(31 U.S.C. 3720 B) 

5. The objectives listed below relate to procedural-based 

provisions. As discussed in FAM 460.06, sufficient 

procedures usually are performed in conjunction with 

tests of compliance controls for these proceduralbased provisions to conclude on the entity's 

compliance without performing additional 

procedures. Additional procedures should not be 

performed to obtain evidence regarding compliance 

with the provisions related to the following objectives 

unless sufficient evidence regarding compliance was 

not obtained during compliance control tests 

documented on Form 809 - Compliance Summary. 

(a) Claims of more than $100,000 (excluding 

interest, penalties, and administrative costs) are 

referred to the Justice Department for 

compromise, termination, or suspension. See 

note 4. (31 U.S.C. 3711 ) 

(b) Claims delinquent for a period of 180 days have 

been referred to Treasury for collection. See 

notes 5, 6, and 7. (31 U.S.C. 3711 (g)) 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-8 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

6. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the 

conclusion on internal control as appropriate (see 

FAM 580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as 

appropriate (see FAM 580.67-.75). 

7. Document conclusions on compliance with each 

provision on Form 809 - Compliance Summary. 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-9 

Note 1: Claims are amounts owed to the government, including amounts owed 

for loans insured or guaranteed by the government. The term "claim" is 

used interchangeably with the term "debt" in this law. (31 U.S.C. 

3701(b)) 

Interest normally accrues from the date that notice of the debt and the 

agency's interest policies is first mailed to the debtor. If the agency 

sends a bill to the debtor in advance of the due date and that bill states 

the interest policies, interest would accrue from the due date specified in 

the bill. 

The provisions regarding accrual of interest and other charges do not 

apply to the extent that a statute, related regulation, loan agreement, or 

contract provides otherwise, or if a claim is under a contract executed 

before October 25, 1982, that is in effect on October 25, 1982. (31 U.S.C. 

3717(g)) Accrual of interest and penalties under this law does not apply 

to amounts owed by other agencies of the federal government, a state 

government or a unit of general local government or to amounts payable 

to the entity under the Internal Revenue Code, the Social Security Act, or 

tariff laws. (31 U.S.C. 3701 (c) and (d)) This law, however, does not 

preclude the charging of interest to state and local governments under 

authority provided under other laws. 

Note 2: The entity shall waive the collection of interest on a claim (or any 

portion of the claim) that is paid within 30 days after the date on which 

interest began to accrue. The agency may extend this 30-day period. (31 

U.S.C. 3717(d)) Interest that is either accrued or collected on claims that 

are paid within the 30-day period would usually not be material or 

otherwise significant for purposes of compliance testing. If the auditor 

considers this provision to be significant for compliance testing, this 

form should be tailored to include the appropriate testing procedures. 

Note 3: The entity has the authority to waive the collection of interest, penalties, 

and administrative charges. The entity should follow its own regulations 

when determining whether a waiver is appropriate. Such regulations 

should be in conformity with the standards set jointly by the Comptroller 

General, the Attorney General, and the Secretary of the Treasury 

described in 31 CFR 901.9. (31 U.S.C. 3717(h)) 

The entity may increase an administrative claim (debt not based on an 

extension of government credit through direct loans, guarantees, or 

insurance, including fines, penalties, and overpayments) annually by the 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-10 

cost of living adjustment in lieu of charging interest and penalties. (31 

U.S.C. 3717(i)) 

Note 4: Compromise is the term used when an amount less than the total amount 

of the claim is accepted by the entity as payment in full. Suspension 

refers to the temporary deferral of collection activities until collection 

activity is expected to be more successful. Termination refers to 

stopping of collection activities. 

Only the Justice Department has the authority to compromise, terminate, 

or suspend collection on claims that are greater than $100,000 (excluding 

interest, penalties, and administrative charges). Pursuant to 31 CFR 

Parts 902.1 and 903.1, entities generally should use a Claims Collection 

Litigation Report (CCLR) to refer such matters to the Justice 

Department. 

Note 5: Exceptions to the requirement to transfer nontax debt delinquent for a 

period of 180 days to Treasury for collection are 

(a) a debt or claim that 

(1) is in litigation or foreclosure; 

(2) will be disposed of under an asset sales program within 1 year 

after becoming eligible for sale, or later than 1 year if 

consistent with an asset sales program and a schedule 

established by the entity and approved by OMB; 

(3) has been referred to a private collection contractor for 

collection for a period determined by Treasury; 

(4) has been referred by, or with the consent of, Treasury to a debt 

collection center for a period determined by Treasury; or 

(5) will be collected under internal offset, if such offset is 

sufficient to collect the claim within 3 years after the date the 

debt or claim is first delinquent; and 

(b) to any other specific class of debt or claim, as determined by 

Treasury at the request of an entity. (31 U.S.C. 3711(g)(2)) 

Examples include 

(1) debts in bankruptcy meeting the criteria for an automatic stay 

(11 U.S.C. 362), 

(2) foreign debt considered uncollectable by Treasury due to 

foreign diplomacy considerations and affairs of state, 

(3) debts in forbearance or appeals. 

Note 6: Exceptions to the requirement to notify Treasury of nontax debt 

delinquent over 180 days for administrative offset are a claim that has 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-11 

been outstanding for more than 10 years or when a statute explicitly 

prohibits using administrative offset or setoff to collect the type of claim 

involved. (31 U.S.C. 3716(e)) Also, this section does not prohibit the use 

of any other administrative offset authority existing. (31 U.S.C. 3716 (d)) 

Prior to referring debts to Treasury, an agency shall inform the debtor of 

the amount and nature of the debt (such as overpayment, etc.), and 

actions which may be taken to enforce recovery of a delinquent debt. 

These include 

(a) offset of any payments which the debtor is due, including tax 

refunds, and salary; 

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

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

for litigation; 

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

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

income. 

In the future, the agency also will need to inform the debtor that the debt 

may be subject to administrative wage garnishment, his/her identity may 

be published or publicly disseminated, and/or the debt may be sold. 

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

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

(b) for a review by the agency; and 

(c) to enter into a written repayment agreement. 

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

refund, it must 

(a) notify the person incurring such debt that the entity proposes to 

refer to Treasury for tax refund offset, 

(b) give such person at least 60 days to present evidence that all or 

part of the debt is not past due or not legally enforceable, 

(c) consider any evidence presented by such person and determine 

that an amount of such debt is past due and legally enforceable, 

(d) satisfy such other conditions Treasury may prescribe to ensure the 

above determination is valid and that the entity has made 

reasonable efforts to obtain payment, and 
Compliance 

809 - Provisions Governing Claims of the U.S. Government (31 U.S.C. 

3711-3720E) (Including the Debt Collection Improvement Act of 

1996 (DCIA)) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 809-12 

(e) certify that reasonable efforts have been made by the entity to 

obtain payment. (31 U.S.C. 3720A (b)) 

Treasury issues regulations prescribing the times at which entities shall 

submit notices of past-due legally enforceable debts, the manner of 

submitting them, and the information to be contained in them. The 

regulations also specify the minimum amount of debt that may be 

referred for tax refund offset and the fee the entity shall pay to 

reimburse Treasury for its costs. 

Note 8: If multipurpose testing is used for the compliance test and/or 

compliance control test and/or a substantive test of accounts or loans 

receivable details, the sample items for the compliance test and/or 

compliance control test should be selected using the sampling method 

used for the substantive test as described in FAM 430. Otherwise, the 

items should be selected using attribute sampling as discussed in FAM 

460.02. 

As with all sampling applications, the auditor should consider the 

completeness of the test population. For efficiency, the auditor should 

consider using records that were tested for validity, accuracy, and 

completeness (as well as the other financial statement assertions) in 

conjunction with substantive tests of the population. 
Compliance 

810 - PROMPT PAYMENT ACTApril 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Prompt Payment Act aras indicated on Form 802 - General Compliance Checklist. OMB guidance on the Prompt Payment Act is included in 5 CFR Part 1315. 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

1. If payment for property or services from a 

business concern is not made by the required due date, an interest penalty shall be paid to the concern on the amount of the payment due. The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made. (See notes 1, 2, 3, 4, and 5.) 

Type: Transaction-based Ref: 31 U.S.C. 3902(a) and (b) 

1a. All payments for property 

or services that are not made by the payment due date are identified. (See note 1.) 

1b. Interest penalties are 

calculated and paid on the past due amount using the appropriate interest rate and period. (See notes 2, 3, 4, and 5.) 

[Document the control activities used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicyes or includreferesuppodocumtion.] 
Compliance 

810 - Prompt Payment Act April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

2. Penalties shall be paid out of amounts 

made available to carry out the program for which the penalty is incurred. 

Type: Transaction-based Ref: 31 U.S.C. 3902(f) 

2. Interest penalties are paid 

out of the appropriation used to pay related program expenditures. 

3. Discounts offered by a business concern 

may be taken only if payment is made within the specified time as determined from the date of the invoice. An interest penalty shall be paid on improperly taken discounts. 

Type: Transaction-based Ref: 31 U.S.C. 3904 

3a. Discounts taken after the 

specified time period are identified. 

3b. Interest penalties are 

properly calculated and paid on the amount of any improperly taken discounts using the appropriate interest rate and period. 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-3 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Prompt Payment Act are considered to be significant as 

indicated on Form 802 - General Compliance Checklist. The procedures in this 

program are designed to test compliance with the provisions listed on the 

Compliance Summary. 

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

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

1. Based on the preliminary assessment of compliance 

control effectiveness (as documented on Form 810 - 

Compliance Summary), select a sample of payments 

from throughout the audit period. (The sample size 

will vary based on the expected effectiveness of 

compliance controls as discussed in FAM 460.02.) 

Document the sampling approach using the 

documentation in FAM section 495 E. See note 6 

regarding sampling efficiencies and completeness of 

the population. 

Sample size 

Sample selection method 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-4 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

2. For each item selected in step 1, obtain the 

supporting documentation for the payment such as 

the invoice voucher package. 

(a) Document the following items in the 

documentation: 

• invoice number; 

• payee; 

• invoice amount; 

• invoice date; 

• invoice receipt date (or other date used for 

determining compliance with this law - see 

step 2 (b)); 

• payment date; 

• amount of interest penalty paid, if any; 

• amount of discount taken, if any; and 

• appropriation account(s) charged for the 

expenditure and interest penalty, if any. 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-5 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

2. (b) For each item selected, note whether the 

payment was made by the required due date. 

The required due date may be the date specified 

in the contract or, if a date is not specified, 30 

days after receipt of the invoice (31 U.S.C. 

3903(a)(1)(A) and (B)). If payment is for meat or 

meat food products, perishable agricultural 

products, dairy products or construction 

contracts, consult with OGC to determine 

payment due date. Specific payment due dates 

to avoid interest penalties are established by law 

for these items. (31 U.S.C. 3903(a)(2), (3), (4), 

and (6)) 

The invoice receipt date is the later of (1) the 

date the entity's designated representative or 

office actually receives a proper invoice or 

(2) the 7th day after the date on which, in 

accordance with the terms and conditions of the 

contract, the property is actually delivered or 

performance of the services is actually 

completed (unless the entity accepted the 

property or services before the 7th day or a 

longer acceptance period is specified in the 

contract). If the date of actual invoice receipt is 

not indicated, the entity must use the invoice 

date. (31 U.S.C. 3901(a)(4)(A) and (B)) 

If the payment was made prior to the payment 

due date, perform step 3. 

If the payment was made after the payment due 

date, perform step 4. 

If a discount was taken, perform step 5. 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-6 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

3. If the payment was made prior to the payment due 

date, and no discount was taken, determine that no 

interest penalty was paid. 

(Note: If the entity did not take advantage of a 

discount for which it was eligible or if an interest 

penalty was paid when it was not owed, the auditor 

generally should determine the cause of these items 

for purposes of reporting findings.) 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-7 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

4. If the payment was made after the payment due date, 

determine whether 

(a) an interest penalty was paid; 

(b) the amount of the interest penalty was properly 

calculated; and 

(c) the interest penalty was paid out of the 

appropriation used to pay the related 

expenditures. 

Review the accounting codes indicated on the 

expense voucher. Determine whether the 

accounting codes used to record the interest 

penalty are the same as those used for the 

related expenditure and whether the codes and 

amounts agree with those recorded in the 

budgetary accounting records. (See step 6 

regarding proper summarization of amounts.) 

(31 U.S.C. 3902 (a), (b), and (f)) 

Investigate any differences between the amount of 

interest penalty calculated by the auditor and the 

amount paid by the entity, including any instances 

when an interest penalty was owed but not paid. See 

note 5. Investigate any instances when the proper 

appropriation account was not charged. 

See note 2 regarding the interest rate to be used. See 

notes 3 and 4 regarding the period the penalty should 

cover. 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-8 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

5. If a discount was taken, determine whether it was 

taken during the specified period the discount was 

available. If the discount was taken during the 

specified period, further consideration is not 

necessary. 

If any discounts are taken after the appropriate time 

period, determine whether 

(a) an interest penalty was paid, 

(b) the amount of the interest penalty was properly 

calculated, and 

(c) the interest penalty was charged against the 

appropriation used for the related expenditures. 

Review the budget accounting codes indicated 

on the expense voucher. Determine whether the 

budget accounting codes indicated on the 

voucher for the interest penalty are the same as 

those used for the related expenditure. 

Determine whether the codes and amounts on 

the voucher agree with those recorded in the 

budgetary accounting records. (See step 6 

regarding proper summarization of the 

budgetary amounts.) (31 U.S.C. 3902 (a), (b), 

and (f), and 31 U.S.C. 3904) 

Interest penalties should be calculated on the amount 

of the discount. The penalty accrues on the amount 

of the discount from the last date specified that the 

discounted amount may be paid (31 U.S.C. 3904). See 

note 2 regarding the interest rate to be used to 

calculate the interest penalty. 

 (continued) 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-9 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

5. (continued) 

Investigate any differences between the amount of 

interest penalty calculated by the auditor and the 

amount paid by the entity, including any instances 

when an interest penalty was owed but not paid. 

Investigate any instances when the proper 

appropriation account was not charged. 

6. Consider the procedures performed on the entity's 

budget controls over summarization of expenditure 

balances as discussed in FAM 395 F. 

If the auditor has assessed the entity's controls as 

effective in achieving the control objective of 

summarization of expenditure balances, further 

procedures are not necessary to obtain assurance as 

to whether interest penalties are paid out of the 

proper appropriation account. 

If the auditor has assessed the controls as ineffective, 

the auditor should perform procedures to determine 

if the entity has properly summarized the expenditure 

balances as described in FAM 495 B. 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-10 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

7. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the opinion 

on internal control as appropriate (see FAM 

580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75). 

8. Document conclusions on compliance with each 

provision on Form 810 - Compliance Summary. 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-11 

Note 1: The required due date is generally the date specified in the contract or, if 

a date is not specified, 30 days after receipt of the invoice (31 U.S.C. 

3903(a)(1)(A) and (B)) If payment is for meat or meat food products, 

perishable agricultural products, dairy products or construction 

contracts, consult with OGC to determine payment due date. Specific 

payment due dates to avoid interest penalties are established by law for 

these items. (31 U.S.C. 3903(a)(2), (3), (4), and (6)) 

The invoice receipt date is established as the later of (1) the date the 

entity's designated representative or office actually receives a proper 

invoice or (2) the 7th day after the date on which, in accordance with the 

terms and conditions of the contract, the property is actually delivered 

or performance of the services is actually completed, unless the entity 

accepted the property or services before the 7th day or a longer 

acceptance date is specified in the contract. If the date of actual invoice 

receipt is not indicated, the entity must use the invoice date. (31 U.S.C. 

3901(a)(4)(A) and (B)) 

Note 2: Interest shall be calculated at the rate set by the Secretary of the 

Treasury under section 12 of the Contract Disputes Act of 1978 (41 

U.S.C. 611) that is in effect at the time the entity accrues the obligation 

to pay a late payment interest penalty. The rates are published in the 

Federal Register. (31 U.S.C. 3902(a)) 

Note 3: The interest penalty shall be paid for the period beginning on the day 

after the required payment date and ending on the date on which 

payment is made. (31 U.S.C. 3902(b)) 

An interest penalty not paid after any 30-day period shall be added to the 

principal amount of the debt, and a penalty accrues thereafter on the 

combined amount of principal and interest. (31 U.S.C. 3902(e)) 

Note 4: A payment is deemed to be made on the date a check for payment is 

dated or an electronic transfer is made. (31 U.S.C. 3901 (a)(5)) 

Note 5: The temporary unavailability of funds to make a timely payment due for 

property or services does not relieve the entity head of the obligation to 

pay interest penalties under this law. (31 U.S.C. 3902 (d)) 

Note 6: If multipurpose testing is used for the compliance test and/or 

compliance control test and/or a substantive test of payments details, 

the sample items for the compliance test and/or compliance control test 

should be selected using the sampling method used for the substantive 
Compliance 

810 - Prompt Payment Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 810-12 

test as described in FAM 430. Otherwise, the items should be selected 

using attribute sampling as discussed in FAM 460.02. 

As with all sampling applications, the auditor should consider the 

completeness of the test population. For efficiency, the auditor should 

consider using records that were tested for validity, accuracy, and 

completeness (as well as the other financial statement assertions) in 

conjunction with substantive tests of the population. 
Compliance 

812 - PAY AND ALLOWANCE SYSTEM FOR CIVILIAN EMPLOYEES, A

PRIMARILY IN CHAPTERS 51-59 OF TITLE 5, U.S. CODE

April 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Pay and Allowance Sysprovided primarily in Chapters 51-59 of Title 5, U.S. Code, are considered to be significant as indicated on Form 802 - General Co

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

1. Pay for a specific position should be based 

on the appropriate pay schedule or pay rate. 

Type: Transaction-based Ref: 5 U.S.C. 5332, 5343, and 5383 

1. Employees are paid at 

appropriate rates. 

[Document the control activities used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicyes or includreferesuppodocumtion.] 

2. Employer shall pay employees at least 

minimum wage. (See note 1.) 

Type: Transaction-based Ref: 29 U.S.C. 206 

2. Employees are paid at least 

minimum wage. (See note 1.) 
Compliance 

812 - Pay and Allowance System for Civilian Employees, as Provided 

Primarily in Chapters 51-59 of Title 5, U.S. Code 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 812-2 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Pay and Allowance System for Civilian Employees, as provided 

primarily in Chapters 51-59 of Title 5, U.S. Code, are considered to be significant 

as indicated on Form 802 - General Compliance Checklist. The procedures in this 

program are designed to test compliance with the provisions listed on the 

Compliance Summary. 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

Note: These tests are closely related to procedures 

performed for substantive tests of payroll expense 

details. Use of multipurpose testing in this 

situation is strongly encouraged. 

1. Based on the preliminary assessment of compliance 

control effectiveness (as documented on Form 812 - 

Compliance Summary), select an appropriate sample 

of disbursements from the payroll records 

throughout the audit period. (The sample size will 

vary based on the expected effectiveness of 

compliance controls as discussed in FAM 460.02). 

Document the sampling approach using the 

documentation in FAM section 495 E. See note 2 

regarding sampling efficiencies and completeness of 

the population. 

Sample size 

Sample selection method 
Compliance 

812 - Pay and Allowance System for Civilian Employees, as Provided 

Primarily in Chapters 51-59 of Title 5, U.S. Code 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 812-3 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

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

information: 

• employee name; 

• pay period (number and dates); 

• amount of gross pay for the period; 

• pay rate; 

• total hours worked; and 

• number of hours worked at regular pay and other 

pay (i.e., overtime, premium pay, etc.). 

3. For each item selected in 1, obtain the employee's 

personnel file and note the following in effect for the 

pay period selected: 

• the employee's grade and step and 

• the employee's pay rate. 

4. For each item selected in 1, 

(a) Calculate the amount of gross pay using the 

hours worked and the employee's pay rate 

indicated on the payroll records. Compare the 

amount of gross pay calculated by the auditor to 

the amount shown on the payroll records for the 

selected pay period and obtain explanation and 

examine support for any differences. 

Note: To convert basic annual amount to a 

daily, weekly or biweekly amount, divide 

the annual rate by 2,087 for an hourly 

rate. Multiply the hourly rate by number 

of either daily hours, 40 for weekly, or 80 

for biweekly amounts. (5 U.S.C. 5504) 
Compliance 

812 - Pay and Allowance System for Civilian Employees, as Provided 

Primarily in Chapters 51-59 of Title 5, U.S. Code 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 812-4 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

4. (b) Compare the employee's pay rate in the payroll 

records to the appropriate pay rate for the 

employee's approved grade and step on the pay 

schedules established by executive order. (Use 

the approved grade and step indicated in the 

employee's personnel records for this test.) 

Obtain explanation and examine support for any 

differences between the actual pay rate for the 

period selected and the authorized amounts. (5 

U.S.C. 5332, 5343, and 5383) 

If the employee's pay is not set by these pay 

schedules, determine whether the amount paid 

is properly authorized and whether the pay rate 

is at least minimum wage. (29 U.S.C. 206) 
Compliance 

812 - Pay and Allowance System for Civilian Employees, as Provided 

Primarily in Chapters 51-59 of Title 5, U.S. Code 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 812-5 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

5. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the opinion 

on internal control as appropriate (see FAM 

580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75). 

6. Document conclusions on compliance with each 

provision on Form 812 - Compliance Summary. 
Compliance 

812 - Pay and Allowance System for Civilian Employees, as Provided 

Primarily in Chapters 51-59 of Title 5, U.S. Code 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 812-6 

Note 1: To convert basic annual amount to a daily, weekly, or biweekly amount, 

divide the annual rate by 2,087 for an hourly rate. Multiply the hourly 

rate by number of either daily hours, 40 for weekly, or 80 for biweekly 

amounts. (5 U.S.C. 5504) 

Note 2: If multipurpose testing is used for the compliance test and/or 

compliance control test and a substantive test of payroll expense details, 

the sample items for the compliance test and/or compliance control test 

should be selected using the sampling method used for the substantive 

test. Otherwise, the items should be selected using attribute sampling, 

as discussed in FAM 460.02. 

As with all sampling applications, the auditor should consider the 

completeness of the population. For efficiency, the auditor should 

consider using records that were tested for validity and completeness 

(as well as the other financial statement assertions) in conjunction with 

substantive tests of payroll or other payroll related compliance tests. 

Note 3: If the entity outsources payroll processing, the entity remains 

responsible for compliance. Dividing responsibility for payroll 

processing activities between the entity and the service organization 

could make payroll testing more complicated, although the same testing 

should be performed. The auditor may accomplish that testing with the 

assistance of the service organization's auditor, who may issue an 

internal control report on the service organization under AU 324 

(SAS 70). Or the service organization's auditor may assist the entity 

auditor by performing agreed-upon procedures at the service 

organization (e.g., substantive testing) under AT 201 (see FAM 660). 
Compliance 

813 - CIVIL SERVICE RETIREMENT ACTApril 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Civil Service Retiremensignificant as indicated on Form 802 - General Compliance Checklist. 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

1. For each employee employed prior to 

January 1, 1984, the entity shall withhold a percent of the basic pay of the employee. (See notes 1 and 2.) 

Type: Transaction-based Ref: 5 U.S.C. 8334(a)(1) 

1. The appropriate amount is 

withheld from employee's pay. (See notes 1 and 2.) 

[Document the control activities used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicyes or includreferesuppodocumtion.] 
Compliance 

813 - Civil Service Retirement Act April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

2. An amount equal to the amount withheld 

from the employee's pay shall be contributed by the entity from the appropriation or fund used to pay the employee. 

Type: Transaction-based and 

Quantitative-based 

Ref: U.S.C. 5 U.S.C. 8334(a)(1) 

2. The entity contribution for 

employee retirement is calculated properly, summarized properly, and charged to the proper appropriation account or fund. 

3. Amounts withheld from employees and the 

sum contributed by the entity for retirement benefits shall be deposited in the Treasury to the credit of the Civil Service Retirement and Disability Fund. 

Type: Procedural-based and Quantitative 

based 

Ref: 5 U.S.C. 8334(a)(2) 

3. Withholdings from 

employees and entity contributions for retirement benefits are properly summarized and deposited in the Treasury to the credit of the Civil Service Retirement and Disability Fund. 
Compliance 

813 - Civil Service Retirement Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 813-3 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Civil Service Retirement Act are considered to be significant as 

indicated on Form 802 - General Compliance Checklist. The procedures in this 

program are designed to test compliance with the provisions listed on the 

Compliance Summary. 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

1. Based on the preliminary assessment of compliance 

control effectiveness (as documented on Form 813 - 

Compliance Summary), select a sample of expense 

amounts for individuals' gross pay from the payroll 

disbursement records for the audit period for 

employees covered by the Civil Service Retirement 

Act system (CSRS). (See note 1.) 

(The sample size will vary based on the expected 

effectiveness of compliance controls, as discussed in 

FAM 460.02). Document the sampling approach using 

the documentation in FAM section 495 E. See note 3 

regarding sampling efficiencies and completeness of 

the population. 

These tests should be coordinated with other tests of 

payroll-related expenses and with the agreed-upon 

procedures agency auditors perform for the Office of 

Personnel Management (OPM), per OMB audit 

guidance, if performed. 

Sample size 

Sample selection method 
Compliance 

813 - Civil Service Retirement Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 813-4 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

2. For each selection made in 1, document the following 

for the pay period selected: 

• the amount withheld for the cost of retirement 

benefits; 

• the amount of basic pay; and 

• if indicated in the payroll disbursement records, 

document the retirement plan under which the 

withholdings were made (CSRS or FERS). (Only 

employees covered by CSRS should be included in 

this compliance test. See FAM 817 for the FERS 

compliance test.) 

3. For each item selected in 1, obtain the employee's 

personnel file and note the following: 

• employee hire date, 

• amount of basic pay, and 

• the retirement plan under which the employee is 

covered. 

4. For each selection made in 1, 

(a) Compare the amount of basic pay indicated in 

the employee's personnel file with the amount 

indicated in the payroll records and obtain an 

explanation and examine support for any 

differences. (This procedure would be 

performed only if not already performed as part 

of other testing.) 
Compliance 

813 - Civil Service Retirement Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 813-5 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

4. (b) Calculate the amount of the withholdings for 

retirement costs based on 7 percent of basic pay 

for executive branch employees (see note 2 for 

percentages for other employees) for the 

selected pay period and document the amount in 

the documentation. Compare to the actual 

amount withheld for the selected pay period and 

obtain an explanation and examine support for any 

differences. (5 U.S.C. 8334(a)(1)) 

4. (c) Determine whether the entity contributed an 

equal amount for the employee's retirement for 

the selected pay period. Obtain explanation and 

examine support for any differences between the 

employee and entity contributions. (5 U.S.C. 

8334(a)(1)) 

5. Determine whether amounts contributed by the entity 

are charged to the appropriation or fund used to pay 

the employee for the selected pay period by 

performing the following procedures: 

(a) Review the accounting codes indicated on the 

supporting documentation. 

(b) Determine whether the accounting codes used to 

record the entity contribution are the same as 

those used for the related payroll expenditure 

and whether the codes and amounts agree with 

those recorded in the budgetary accounting 

records. (This step assumes other payroll testing 

would have included checking that the codes 

represent the proper appropriation.) 
Compliance 

813 - Civil Service Retirement Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 813-6 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

5. (c) Consider the procedures performed on the 

entity's budget controls over summarization of 

expenditure balances as discussed in FAM 395 F. 

If the auditor has assessed the entity's controls 

as effective in achieving the control objective of 

summarization of expenditure balances, further 

procedures are not necessary to obtain 

assurance as to whether the entity's 

contributions are paid out of the proper 

appropriation account. 

If the auditor has assessed the controls as 

ineffective, the auditor should perform 

procedures to determine whether the entity has 

properly summarized the expenditure balances 

as described in FAM 495 B. (5 U.S.C. 8334 

(a)(1)) 

 

6. Determine whether the entity has effective controls 

over the proper summarization of (a) the amounts 

withheld from employees for retirement costs under 

this law and (b) the entity contributions for 

remittance to Treasury. If the entity does not have 

effective controls for summarization, test the 

summarization of the totals that include the items 

selected for testing in step 1. 

7. Compare the combined totals of employee 

withholdings and entity contributions that include 

each selection made in step 1 to the deposit made to 

Treasury and the remittance sent to OPM and obtain 

an explanation and examine support for any 

differences. The funds should be deposited in the 

Treasury to the credit of the Civil Service Retirement 

and Disability Fund. (5 U.S.C. 8334(a)(2)) 
Compliance 

813 - Civil Service Retirement Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 813-7 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

8. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the opinion 

on internal control as appropriate (see FAM 

580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75). 

9. Document conclusions on compliance with each 

provision on Form 813 - Compliance Summary. 
Compliance 

813 - Civil Service Retirement Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 813-8 

Note 1: Employees may be covered by the Civil Service Retirement Act (CSRS) 

or the Federal Employees' Retirement System Act (FERS), generally 

depending on their employment date. 

Note 2: The percentage to be withheld for the service period after December 31, 

2000, for (1) executive branch employees is 7 percent and 

(2) Congressional employees is 7.5 percent. The percentage to be 

withheld for the service period between January 1, 2001 and 

December 31, 2002, for Members of Congress is 8.5 percent. The 

percentage withheld for service after December 31, 2002, for Members of 

Congress is 8 percent. (5 U.S.C. 8334(a)(1)) 

Note 3: If multipurpose testing is used for the compliance test and/or 

compliance control test and a substantive test of payroll expense details, 

the sample items for the compliance test and/or compliance control test 

should be selected using the sampling method used for the substantive 

test. Otherwise, the items should be selected using attribute sampling, 

as discussed in FAM 460.02. 

As with all sampling applications, the auditor should consider the 

completeness of the population. For efficiency, the auditor should 

consider using records that were tested for validity and completeness 

(as well as the other financial statement assertions) in conjunction with 

substantive tests of payroll or other payroll related compliance tests. 

Note 4: If the entity outsources payroll processing, the entity remains 

responsible for compliance. Dividing responsibility for payroll 

processing activities between the entity and the service organization 

could make payroll testing more complicated, although the same testing 

should be performed. The auditor may accomplish that testing with the 

assistance of the service organization's auditor, who may issue an 

internal control report on the service organization under AU 324 

(SAS 70). Or the service organization's auditor may assist the entity 

auditor by performing agreed-upon procedures at the service 

organization (e.g., substantive testing) under AT 201 (see FAM 660). 
Compliance 

814 - FEDERAL EMPLOYEES HEALTH BENEFITS ACT

April 2003 GAO/PCIE Financial Audit Manual - Part II 

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

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

1. For each full-time employee enrolled in a 

health benefits plan, a biweekly contribution shall be made by the entity in an amount determined by OPM for each type of insurance plan. (See note 1 for part-time career employees.) 

Type: Transaction-based Ref: 5 U.S.C. 8906(b)(1) 

1. The amount of the entity 

contribution for health insurance benefits is calculated properly for employees who elect to enroll in a health benefits plan. 

[Document the control activities used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicyes or includreferesuppodocumtion.] 

2. For employees generally, the entity 

contribution for the cost of health insurance shall be paid from the appropriation or fund that is used to pay the employee. 

Type: Transaction-based and 

 Quantitative-based 

Ref: 5 U.S.C. 8906(f) 

2. Entity contributions for the 

cost of employee health insurance are summarized properly and charged to the proper appropriation account or fund. 
Compliance 

814 - Federal Employees Health Benefits Act April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

3. An amount shall be withheld from the 

employee's pay to cover the total cost of enrollment in the health benefit plan selected by the employee after the amount of the entity contribution is subtracted. 

Type: Transaction-based Ref: 5 U.S.C. 8906(d) 

3. Withholdings are made for 

the employee's share of the cost of health insurance and are calculated properly. 

4. Amounts withheld from employees and the 

sum contributed by the entity for health insurance costs shall be deposited in the Treasury to the credit of the Employees Health Benefits Fund. 

Type: Procedural-based and 

 Quantitative-based 

Ref: 5 U.S.C. 8909 

4. Withholdings from 

employees and entity contributions for health insurance costs are properly summarized and deposited in the Treasury to the credit of the Employees Health Benefits Fund. 
Compliance 

814 - Federal Employees Health Benefits Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 814-3 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Federal Employees Health Benefits Act are considered to be 

significant as indicated on Form 802 - General Compliance Checklist. The 

procedures in this program are designed to test compliance with the provisions 

listed on the Compliance Summary. 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

1. Based on the preliminary assessment of compliance 

control effectiveness (as documented on Form 814 - 

Compliance Summary), select a sample of expense 

amounts for individuals' gross pay from the payroll 

disbursement records for the audit period. 

(The sample size will vary based on the expected 

effectiveness of compliance controls, as discussed in 

FAM 460.02). Document the sampling approach using 

the documentation in FAM section 495 E. See note 2 

regarding sampling efficiencies and completeness of 

the population. 

These tests should be coordinated with other tests of 

payroll-related expenses and with the agreed-upon 

procedures agency auditors perform for OPM, per 

OMB audit guidance, if performed. 

Sample size 

Sample selection method 

2. For each selection made in step 1, document the 

employee, the pay period selected, and the amount 

withheld for the pay period selected, if any, for the 

cost of health insurance. If available, document the 

health plan enrollment code. 
Compliance 

814 - Federal Employees Health Benefits Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 814-4 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

3. For each selection made in step 1, obtain the 

employee's personnel file and note whether the 

employee elected health insurance coverage for the 

period to which payroll disbursement relates. Such 

coverage should be indicated on OPM form SF 2809. 

If the employee did not elect health insurance 

coverage, ask why amounts are being withheld for the 

cost of insurance and determine whether any entity 

contributions are being made inappropriately as well. 

4. If the employee identified in step 3 elected coverage, 

perform the following steps: 

(a) Obtain the schedule of health insurance costs 

for all plans published by OPM. Using the 

enrollment code for the plan selected by the 

employee on OPM form SF 2809, calculate the 

employee's portion of the health insurance cost 

and record it in the documentation. Compare it 

to the amount actually withheld for the selected 

pay period and obtain an explanation and 

examine support for any differences. (5 U.S.C. 

8906(d)) 

4. (b) For each employee in (a), determine the 

appropriate amount of the entity's contribution 

for its share of health insurance costs by using 

the OPM schedule of costs. Compare it to the 

amount actually contributed by the entity for 

the employee's health insurance for the selected 

pay period and obtain an explanation and 

examine support for any differences. (See note 

1 for part-time career employees.) (5 U.S.C. 

8906(b)(1)) 
Compliance 

814 - Federal Employees Health Benefits Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 814-5 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

4. (c) For each employee in (b), determine if amounts 

contributed by the entity are charged to the 

appropriation or fund that is used to pay the 

employee for the selected pay period by 

performing the following procedures: 

(1) Review the accounting codes indicated on 

the supporting documentation. 

(2) Determine whether the accounting codes 

used to record the entity contribution are 

the same as those used for the related 

payroll expenditure and whether the codes 

and amounts agree with those recorded in 

the budgetary accounting records. (This 

step assumes other payroll testing would 

have included checking that the codes 

represent the proper appropriation.) 
Compliance 

814 - Federal Employees Health Benefits Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 814-6 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

4. (c) (3) Consider the procedures performed on the 

entity's budget controls over summarization 

of expenditure balances as discussed in 

FAM 395 F. 

If the auditor has assessed the entity's 

controls as effective in achieving the 

control objective of summarization of 

expenditure balances, further procedures 

are not necessary to obtain assurance as to 

whether the entity's contributions are paid 

out of the proper appropriation account. 

If the auditor has assessed the controls as 

ineffective, the auditor should perform

procedures to determine whether the entity 

has properly summarized the expenditure 

balances as described in FAM 495 B. (5 

U.S.C. 8906(f)) 

 

5. Determine whether the entity has effective controls 

over the proper summarization of the amounts 

withheld from employees for health insurance costs 

under this law and the entity contributions for 

remittance to Treasury. If the entity does not have 

effective controls for summarization, test the 

summarization of the totals that include the items 

selected for testing in step 1. 

6. Compare the total cost of health insurance on the 

entity's records (employee and employer portions) 

for the selected pay period to the deposit made to 

Treasury and the documentation sent to OPM and 

obtain an explanation and examine support for any 

differences. The funds should be deposited in the 

Treasury to the credit of the Employees Health 

Benefits Fund. (5 U.S.C. 8909) 
Compliance 

814 - Federal Employees Health Benefits Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 814-7 

Name of entity: 

Audit period: Reviewed by: 

Audit Procedures 

Done 

by/date 

W/P ref 

7. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the opinion 

on internal control as appropriate (see FAM 

580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as 

appropriate (see FAM 580.67-.75). 

8. Document conclusions on compliance with each 

provision on Form 814 - Compliance Summary. 
Compliance 

814 - Federal Employees Health Benefits Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 814-8 

Note 1: For part-time career employees, the biweekly entity contribution shall be 

calculated on a prorata basis based on the ratio of number of scheduled 

part-time hours to the number of scheduled regular hours for an 

employee serving in a comparable position on a full-time basis. (5 U.S.C. 

8906(b)(3)) 

Note 2: If multipurpose testing is used for the compliance test and/or 

compliance control test and a substantive test of payroll expense details, 

the sample items for the compliance test and/or compliance control test 

should be selected using the sampling method used for the substantive 

test. Otherwise, the items should be selected using attribute sampling, 

as discussed in FAM 460.02. 

As with all sampling applications, the auditor should consider the 

completeness of the test population. For efficiency, the auditor should 

consider using records that were tested for validity and completeness 

(as well as the other financial statement assertions) in conjunction with 

substantive tests of payroll or other payroll related compliance tests. 

Note 3: If the entity outsources payroll processing, the entity remains 

responsible for compliance. Dividing responsibility for payroll 

processing activities between the entity and the service organization 

could make payroll testing more complicated, although the same testing 

should be performed. The auditor may accomplish that testing with the 

assistance of the service organization's auditor, who may issue an 

internal control report on the service organization under AU 324 

(SAS 70). Or the service organization's auditor may assist the entity 

auditor by performing agreed-upon procedures at the service 

organization (e.g., substantive testing) under AT 201 (see FAM 660). 
Compliance 

816 - FEDERAL EMPLOYEES' COMPENSATION ACTApril 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Federal Employees' Coto be significant as indicated on Form 802 - General Compliance Checklist. 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

1. If the agency receives a statement showing 

the costs of amounts paid from the Employees' Compensation Fund (the Fund), the agency shall include a request for an appropriation to cover such amounts during the next fiscal year when submitting its budget request. (See note 1.) 

Type: Procedural-based Ref: 5 U.S.C. 8147 

1. The entity's budget request 

includes a request for an appropriation for any amounts paid by the Fund on the entity's behalf for the prior fiscal year. 

[Document the control activities used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicyes or includreferesuppodocumtion.] 
Compliance 

816 - Federal Employees' Compensation Act April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Pre

Audit period: Re

 Provision description Objective Control activities 

IS 

(Y/N) 

Effe

comp

cont

2. Amounts appropriated pursuant to the 

request (described in 1 above) shall be credited to the Fund within 30 days after they are available. (See note 2 for entities that are not dependent on annual appropriations.) 

Type: Procedural-based Ref: 5 U.S.C. 8147 

2. Appropriations received for 

the costs of amounts paid out of the Fund on behalf of the entity are credited to the Fund within 30 days after they are available. 
Compliance 

816 - Federal Employees' Compensation Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 816-3 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Federal Employees' Compensation Act are considered to be 

significant as indicated on Form 802 - General Compliance Checklist. The 

procedures in this program are designed to test compliance with the provisions 

listed on the Compliance Summary for this law. 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

Note: The provisions identified for testing are 

procedural-based provisions. As discussed in FAM 

460.06, sufficient procedures usually are 

performed in conjunction with tests of compliance 

controls for these procedural-based provisions to 

conclude on the entity's compliance without 

performing additional procedures. Additional 

procedures should not be performed to obtain 

evidence regarding compliance with the provisions 

related to the following objectives unless sufficient 

evidence regarding compliance was not obtained 

during compliance control tests documented on 

Form 816 - Compliance Summary. 

1. Reference to conclusions on compliance controls on 

Form 816 - Compliance Summary and indicate 

whether any additional procedures are necessary. 
Compliance 

816 - Federal Employees' Compensation Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 816-4 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

2. If the entity does not appear to be in compliance 

based on the results of tests performed, discuss these 

matters with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance 

actually has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the opinion 

on internal control as appropriate (see FAM 

580.32-.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75). 

3. Document conclusions on compliance with each 

provision on Form 816 - Compliance Summary. 
Compliance 

816 - Federal Employees' Compensation Act 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 816-5 

Note 1: A statement showing the total cost of benefits and other payments made 

from the Employees' Compensation Fund during the preceding July 1 

through June 30 expense period on account of the injury or death of 

employees or individuals under the jurisdiction of the entity is required 

to be provided by the Secretary of Labor to the entity by August 15 of 

each year. (5 U.S.C. 8147) 

Note 2: Entities not dependent on an annual appropriation shall make the 

required deposit to Treasury from funds under its control during the first 

15 days of October after receipt of the statement showing the costs paid 

on the entity's behalf. (5 U.S.C. 8147) 
[This page intentionally left blank.]
Compliance 

817 – FEDERAL EMPLOYEES' RETIREMENT SYSTEM ACT OF 1986 April 2003 GAO/PCIE Financial Audit Manual - Part II Note: Complete this compliance summary or prepare equivalent documentation only if provisions of the Federal Employees' Reconsidered significant as indicated on Form 802 - General Compliance Checklist. 

Name of entity: Compliance Summary Prepared by

Audit period: Reviewed b

Provision description Objective Control activities 

IS 

(Y/N) 

Eff

com

con

1. For each employee employed after 

December 31, 1983, the entity shall withhold 0.8% of the basic pay of the employee. (See notes 1 and 2.) 

 Type: Transaction-based  Ref: 5 U.S.C. 8401(11), 5U.S.C. 8422(a)(1) 

1. The appropriate amount is 

withheld from employee's pay. (See notes 1 and 2.) 

[Document the control techniques used by the entity to achieve the objective.] 

[Is control dependent on computer processing?] 

[Indicor norefersuppdocution.] 
Compliance 

817 – Federal Employees' Retirement System Act of 1986April 2003 GAO/PCIE Financial Audit Manual - Part II 

Name of entity: Compliance Summary Prepared by

Audit period: Reviewed b

Provision description Objective Control activities 

IS 

(Y/N) 

Eff

com

con

2. An amount equal to the employing agency's 

applicable normal cost percentage less the employee deduction rate shall be contributed by the entity from the appropriation or fund used to pay the employee. (See note 3.) 

 Type: Transaction-based and  Quantitative-based  Ref: 5 U.S.C. 8423(a)(1) and 5 U.S.C. 

8401(23) 

2. The entity contribution for 

employee retirement is calculated properly, summarized properly, and charged to proper appropriation account or fund. (See note 3.) 

3. Amounts withheld from employees and the 

sum contributed by the entity for retirement benefits shall be deposited in the Treasury to the credit of the Civil Service Retirement and Disability Fund. 

 Type: Procedural-based and  Quantitative based  Ref: 5 U.S.C. 8422(c) 

3. Withholdings from 

employees and entity contributions for retirement benefits are properly summarized and deposited in the Treasury to the credit of the Civil Service Retirement and Disability Fund. 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-3 

Note: Complete this program or prepare equivalent documentation only if 

provisions of the Federal Employees' Retirement System Act of 1986 are 

considered significant as indicated on Form 802 - General Compliance 

Checklist. The procedures in this program are designed to test compliance 

with the provisions listed on the Compliance Summary. 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

1. Based on the preliminary assessment of compliance 

control effectiveness (as documented on form 817 - 

Compliance Summary), select a sample of expense 

amounts for individuals' gross pay from the payroll 

disbursement records for the audit period for 

employees covered by the Federal Employees' 

Retirement System (FERS). (See note 1.) 

(The sample size will vary based on the expected 

effectiveness of compliance controls as discussed in 

FAM 460.02). Document the sampling approach using 

the documentation in FAM section 495 E. See note 4 

regarding sampling efficiencies and completeness of 

the sample population. 

These tests should be coordinated with other tests of 

payroll-related expenses and with the agreed-upon 

procedures agency auditors perform for OPM, per OMB 

audit guidance, if performed. 

Sample size 

Sample selection method 

 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-4

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

2. For each selection made in 1, document the following 

for the pay period selected: 

• the amount withheld for the cost of retirement 

benefits, 

• the amount of basic pay, and 

• if indicated in the payroll disbursement records, 

document the retirement plan under which the 

withholdings were made (CSRS or FERS). (Only 

employees covered by FERS should be included in 

this compliance test. See FAM 813 for the CSRS 

compliance test.) 

 

3. For each item selected in 1, obtain the employee's 

personnel file and note the following: 

• employee hire date, 

• amount of basic pay, and 

• the retirement plan under which the employee is 

covered. 

 

4. For each selection made in 1, 

(a) Compare the amount of basic pay indicated in the 

employee's personnel file with the amount 

indicated in the payroll records and obtain an 

explanation and examine support for any 

differences. (This procedure would be performed 

only if not already performed as part of other 

testing.) 

 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-5 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

4. (b) Calculate the amount of the withholdings for 

retirement costs based on 0.8% of basic pay for 

most employees (see note 2 for percentages for 

certain employees) for the selected pay period and 

record the amount in the documentation. 

Compare to the actual amount withheld for the 

selected pay period and obtain an explanation and 

examine support for any differences. (5 U.S.C. 

8422(a)(1)) 

 

4. (c) Determine whether the entity contributed the 

correct amount for the employee's retirement for 

the selected pay period. Obtain an explanation 

and examine support for any differences between 

the entity contributions and the amount calculated 

using OPM's normal cost percentage. (5 U.S.C. 

8423(a)(1) and 5 U.S.C. 8401(23)) 

 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-6

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

5. Determine if amounts contributed by the entity are 

charged to the appropriation or fund used to pay the 

employee for the selected pay period by performing the 

following procedures: 

 (a) Review the accounting codes indicated on the 

supporting documentation. 

 (b) Determine whether the accounting codes used to 

record the entity contribution are the same as 

those used for the related payroll expenditure and 

whether the codes and amounts agree to those 

recorded in the budgetary accounting records. 

(This step assumes other payroll testing would 

have included checking that the codes represent 

the proper appropriation.) 

 (c) Consider the procedures performed on the entity's 

budget controls over summarization of 

expenditure balances as discussed in FAM 395 F. 

If the auditor has assessed the entity's controls as 

effective in achieving the control objective of 

summarization of expenditure balances, further 

procedures are not necessary to obtain assurance 

as to whether the entity's contributions are paid 

out of the proper appropriation account. 

If the auditor has assessed the controls as 

ineffective, the auditor should perform procedures 

to determine whether the entity has properly 

summarized the expenditure balances as described 

in FAM 495 B. (5 U.S.C. 8423(a)(1)) 

 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-7 

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

6. Determine whether the entity has effective controls 

over the proper summarization of the amounts withheld 

from employees for retirement costs under this law and 

the entity contributions for remittance to Treasury. If 

the entity does not have effective controls for 

summarization, test the summarization of the totals that 

include the items selected for testing in step 1. 

 

7. Compare the combined totals of employee withholdings 

and entity contributions that include each selection 

made in step 1 to the deposit made to Treasury and the 

remittance sent to OPM and obtain explanation and 

examine support for any differences. The funds should 

be deposited in the Treasury to the credit of the Civil 

Service Retirement and Disability Fund. (5 U.S.C. 

8422(c) and 5 U.S.C. 8401(6)) 

 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-8

Name of entity: 

Audit period: Reviewed by: 

 Audit Procedures 

Done 

by/date 

W/P ref 

8. If the entity does not appear to be in compliance based 

on the results of tests performed, discuss these matters 

with OGC and, when appropriate, the Special 

Investigator Unit to conclude if noncompliance actually 

has occurred and the implications of such 

noncompliance. 

For any noncompliance noted, the auditor should 

• identify the weakness in compliance controls that 

allowed the noncompliance to occur, if not 

previously identified during compliance control 

testing; 

• report the nature of any weakness in compliance 

controls and consider modification of the conclusion 

on internal control as appropriate (see FAM 580.32-

.61); 

• consider the implications of any instances of 

noncompliance on the financial statements; and 

• report instances of noncompliance, as appropriate 

(see FAM 580.67-.75). 

 

9. Document conclusions on compliance with each 

provision on Form 813 - Compliance Summary. 

 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-9 

Note 1: Employees may be covered by the Civil Service Retirement Act 

(CSRS) or the Federal Employees' Retirement System Act (FERS), 

generally depending on their employment dates. 

Note 2: For most employees, the percentage to be withheld is 0.8 percent (7 

percent less the Social Security tax rate). For congressional 

employees, Members of Congress, and law enforcement officers, 

firefighters, air traffic controllers, and nuclear materials couriers, the 

withholding rates are higher. (See 5 U.S.C. 8422(a)(1).). 

Note 3: The Office of Personnel Management (OPM) computes the normal 

cost percentage. For FY 2002, it is 11.5 percent for regular 

employees. For congressional employees, Members of Congress, and 

law enforcement officers, firefighters, air traffic controllers, and 

nuclear materials couriers, the normal cost percentages are higher. 

OPM lists the percentages in its Benefits Administration Letters, 

accessible on its Internet site, http://www.opm.gov/asd/htm/bal01.htm

(where the 2 digits after "bal" represent the calendar year of the 

letters). (5 U.S.C. 8401(23)) 

Note 4: If multipurpose testing is used for the compliance test and/or 

compliance control test and a substantive test of payroll expense 

details, the sample items for the compliance test and/or compliance 

control test should be selected using the sampling method used for 

the substantive test. Otherwise, the items should be selected using 

attribute sampling, as discussed in FAM 460.02. 

 As with all sampling applications, the auditor should consider the 

completeness of the test population. For efficiency, the auditor 

should consider using records that were tested for validity and 

completeness (as well as the other financial statement assertions) in 

conjunction with substantive tests of payroll or other payroll related 

compliance tests. 

Note 5: If the entity outsources payroll processing, the entity remains 

responsible for compliance. Dividing responsibility for payroll 

processing activities between the entity and the service organization 

could make payroll testing more complicated, although the same 

testing should be performed. The auditor may accomplish that 

testing with the assistance of the service organization's auditor, who 

may issue an internal control report on the service organization 

under AU 324 (SAS 70). Or the service organization's auditor may 

assist the entity auditor by performing agreed-upon procedures at the 
Compliance 

817 - Federal Employees' Retirement System Act of 1986

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 817-10

service organization (e.g., substantive testing) under AT 201 (see 

FAM 660). 
SECTION 900

Substantive Testing
[This page intentionally left blank.]
 Substantive Testing 

 

 902 - RELATED PARTIES, INCLUDING 

INTRAGOVERNMENTAL ACTIVITY AND 

BALANCES 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-1 

.01 This section provides detailed guidance on the procedures that the auditor should 

perform with respect to related parties, as described in FAM sections 280 and 550. 

AU 334 (SAS No. 45) provides general guidance on the procedures that should be 

performed to identify related party relationships and transactions so that the 

auditor may satisfy him or herself that they are appropriately accounted for and 

disclosed. In addition, the American Institute of Certified Public Accountants 

(AICPA) has issued a toolkit for accountants and auditors titled, Accounting and 

Auditing for Related Parties and Related Party Transactions1

. This toolkit 

includes selected authoritative accounting and auditing literature, an illustrative 

audit program, disclosure checklist, confirmation letter, and letter to other 

auditors and is available at the AICPA's website: 

http://www.aicpa.org/news/relpty1.htm. 

.02 The federal government in its entirety is an economic entity. Federal entities are 

components of the U.S. government; therefore, transactions between federal 

entities are considered intragovernmental. Within the federal government, many 

reporting entities rely on other federal entities to help them achieve their missions 

and fulfill their operating objectives. These arrangements may be voluntary, 

stipulated by law, or established by mutual agreement of the entities involved and 

may not be carried out on an arm's-length basis. In many cases, the entity 

receiving goods or services will reimburse the providing entity in accordance with 

some agreed-upon price, which may or may not represent market value. Often, 

however, one entity provides goods or services to another entity free of charge 

(without reimbursement). For example, the General Services Administration, in 

some cases, provides property management services and contract award and 

administration to other entities without charge. 

.03 In addition, certain federal entities can significantly influence the operating 

policies of the transacting entities. For example, the Office of Management and 

Budget (OMB) provides policy and/or general management guidance to other 

federal entities, and the Office of Personnel Management (OPM) helps federal 

entities recruit nationwide and sets human resources management rules with the 

1 These tools are based on the best practices guidance received from the 

participating accounting and auditing firms and the AICPA publication, Practice 

Alert No. 95-3, Auditing Related Parties and Related Party Transactions, which is 

available at http://www.aicpa.org/members/div/secps/lit/practice/953.htm.
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-2 

federal entities' involvement; administers the systems for setting federal 

compensation and benefits; manages federal employee health and life insurance 

programs; and operates the retirement program for federal employees. 

.04 Thus, in the federal government, the most significant related parties are other 

federal government entities. Other possible related parties outside of the federal 

government include states, members of the entity's management, and individuals 

and firms with which members of management may be related. 

.05 The auditor should consider the possible existence of related parties with material 

activity and balances that could affect the financial statements, including 

intragovernmental activity and balances. The identification of related parties and 

activity and balances is important because of (1) the requirement under U.S. 

generally accepted accounting principles to disclose material related-party 

transactions and certain control relationships, (2) the instances of fraudulent 

financial reporting and misappropriation of assets that have been facilitated by 

the use of an undisclosed related party, and (3) the potential for distorted or 

misleading financial statements in the absence of adequate disclosure. 

.06 The reason for disclosing related party information is that financial statement 

users may need that information to make informed judgments. As stated above, if 

parties are related, the transactions between them may not be based on an arm'slength relationship. For example, certain goods or services may be donated or be 

at an amount that does not represent market value, thus affecting the cost of the 

receiving entity's operations. In addition, if the entity has transactions with 

another entity based on a common control situation, such as when the entity 

controls or can significantly influence the management or operating policies of 

the transacting entity, the users of financial statements should know the nature of 

the relationship since this control relationship could result in operating results or 

financial positions significantly different from those that would have been 

achieved in the absence of such relationship. 

.07 Disclosures generally should include the nature of the relationship between the 

entity and its related parties, a description of the transactions, including 

donations, dollar amounts of transactions that occurred during the period, and 

amounts due to or from related parties as of the end of the period. Disclosures 

could include aggregation of similar transactions by type. In cases of common 

control relationships, the nature of the control relationship generally should be 

disclosed even if there are no transactions between the entities. Disclosure of 

related party transactions is not required for transactions between components of 

the audited entity that are eliminated in consolidation. However, if separate 

statements of the components are issued, the disclosures should be presented in 

the separate component statements. 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-3 

.08 The following paragraphs discuss intragovernmental activity and balances, then 

other related parties. 

INTRAGOVERNMENTAL ACTIVITY AND BALANCES 

.09 Intragovernmental amounts represent activity and balances within or between 

federal entities. Intradepartmental amounts are activity and balances within the 

same department (a department here means any department, agency, 

administration or other entity designated by OMB as a financial reporting entity 

that is not part of a larger financial reporting entity other than the government as 

a whole). Interdepartmental amounts are activity and balances between two 

different departments. The intradepartmental and interdepartmental amounts are 

subsets of intragovernmental activity and balances. 

.10 Intragovernmental activity includes: 

• Intragovernmental fiduciary transactions such as 

•• Transactions with the Department of Labor (Labor) relating to the Federal 

Employee's Compensation Act, including routine payments to Labor; 

•• Transactions with the OPM relating to employee benefit programs (the 

Federal Employees' Retirement System, the Civil Service Retirement 

System, and federal employees' life insurance and health benefits 

programs) including routine payments, imputed financing, and accruals; 

•• Investments in federal securities issued by Treasury's Bureau of the Public 

Debt, including interest accruals, interest income and expense, and 

amortization of premiums and discounts; and 

•• Borrowings from the Treasury and the Federal Financing Bank, including 

interest accruals, interest income, and expenses; 

• Goods and services provided from one federal entity to another (trade 

transactions) including any related revenues earned, costs incurred, and 

reimbursable costs (including both interdepartmental and intradepartmental 

activity); 

• Transfers between entities based on agreements or legislative authority, 

expended appropriations, taxes and fees collected, collections for others, 

accounts receivable from appropriations, transfers payable, and custodial 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-4 

revenue (including both interdepartmental and intradepartmental activity); 

and 

• Imputed costs such as fiduciary transactions with OPM and Labor mentioned 

above and costs of litigation paid by the judgment fund (including both 

interdepartmental and intradepartmental activity). 

.11 Activity and balances between federal entities (interdepartmental transactions) 

should be eliminated at the U.S. Government's Consolidated Financial Statements 

level, while the activity and balances within the same department 

(intradepartmental) should be eliminated at the department's consolidated 

financial statements level. 

Accounting and Reporting Guidance 

.12 In accounting for and reporting of related parties, including intragovernmental 

activity and balances, the entity should refer to Statements of Federal Financial 

Accounting Standards (SFFAS), Statements of Financial Accounting Standards, 

OMB guidance, and Treasury guidance. The following paragraphs illustrate these 

relevant documents. 

.13 SFFAS No. 4, Managerial Cost Accounting Concepts and Standards, and related 

interpretations address the accounting standards for interentity cost activities. 

SFFAS No. 5, Accounting for Liabilities of the Federal Government, addresses 

interentity liabilities, including federal debt, pensions and retirement benefits. 

Also, SFFAS No. 7, Accounting for Revenue and Other Financing Sources and 

Concepts for Reconciling Budgetary and Financial Accounting, addresses 

interentity revenue and requires disclosure of the nature of intragovernmental 

exchange transactions in which an entity provides goods or services at a price 

less than full cost or does not charge a price at all. The reporting entities should 

also consult with the funding and administering agencies, such as OPM, for 

information needed to properly record interentity costs. Note that SFFAS No. 4 

directs OMB to designate the costs of goods and services received from other 

departments that should be recognized, which it has done in the guidance 

mentioned below. 

.14 Statement of Financial Accounting Standards No. 57, Related Party Disclosures,

defines related parties and provides examples of related party transactions and 

general guidance on disclosures of transactions between related parties. Footnote 

disclosures generally should include disclosure of the nature of the relationship 

between the entity and its related parties, a description of the transactions, 

including donations, dollar amounts of transactions that occurred during the 

period, and amounts due to or from related parties as of the end of the period. 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-5 

.15 The OMB bulletin titled Form and Content of Agency Financial Statements

indicates that federal entities should: 

• Present intragovernmental amounts by trading partner (reciprocal federal 

entity) as required supplementary information (RSI). Intragovernmental asset 

and liability categories reported as RSI should agree with the 

intragovernmental asset and liability line items reported on the balance sheet. 

The intragovernmental RSI may be limited to the consolidated 

departmentwide financial statements of the Chief Financial Officers (CFO) Act 

departments and agencies covered by the form and content bulletin. The 

intragovernmental RSI reporting requirement does not extend to federal 

components that are required to prepare financial statements. All amounts 

should be net of intraentity transactions. 

• Reconcile intragovernmental asset, liability, and revenue amounts reported as 

RSI with their trading partners; and 

• Report intragovernmental gross cost to generate earned revenue from trade 

transactions, as well as total entity gross cost and earned revenue, by budget 

functional classification. 

OMB also has issued a memorandum titled Business Rules for Intragovernmental 

Transactions that requires agencies to use the same methodology in accounting 

for certain intragovernmental transactions, which should help in reconciliation. 

.16 To emphasize the agency management's responsibility for identifying 

intragovernmental activity and balances and reconciling data with relevant 

trading partners, the entity should include specific representations in the 

management representation letter that intragovernmental, including 

intradepartmental, transactions have been properly accounted for, reconciled 

with trading partners, and disclosed (see FAM section 1001). If such disclosure is 

included in the financial statements and the auditor believes that the disclosure is 

not supported by management, or if management refuses to disclose related party 

transactions, the auditor generally should give a qualified or adverse opinion 

because of the inadequate disclosure, depending on materiality, and include the 

necessary disclosures in a separate paragraph in the audit report. 

.17 Treasury Financial Manual (TFM) section "Federal Intragovernmental 

Transactions Process" and the Federal Intragovernmental Transactions 

Accounting Policies Guide (Guide) provide governmentwide procedures for 

federal entities to account for and reconcile transactions occurring within and 

between each other. The procedures in these guides do not apply to transactions 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-6 

between federal entities and nonfederal entities. The TFM and the Guide are 

available at the Treasury/Financial Management Service's (FMS) websites 

(http://fms.treas.gov/tfm/vol1/v1p2c400.html and 

http://www.fms.treas.gov/cfs/dev/index.html). 

.18 The TFM includes procedures for CFO Act departments to reconcile and confirm 

with their trading partners intragovernmental activity and balances as of and for 

the fiscal year ended September 30. Each department's CFO is to provide the 

department Inspector General (IG) with representations indicating whether the 

department completed the reconciliation. In addition, the department is to 

describe noncompliance with the reconciliation requirements. (See TFM.) These 

CFO representations should be included in the management representation letter 

(see above). 

.19 The Guide provides detailed guidance on accounting and reconciling 

intragovernmental balances. According to the Guide, federal entities should 

identify trading partners2

 for all intragovernmental transactions and accumulate 

detail and summary information for each activity by trading partner from their 

accounting records. The trading partner code may be incorporated (1) as part of 

account coding classification or (2) in the customer/vendor identification code in 

accounts receivable and payable systems. These codes are the same as the 

Treasury index agency code used by the Treasury to prepare the governmentwide 

consolidated financial statements. If the two-digit Treasury index agency code is 

not adequate to identify the trading partner, entities may expand the partner code 

to components below the department level and communicate these codes to their 

trading partners. 

.20 Federal entities also should use Standard General Ledger (SGL) account attributes 

to indicate the nature of account balances and to identify intragovernmental 

transactions. For example, the federal "F" and nonfederal "N" attributes used in 

conjunction with an SGL account in the Federal Agencies' Centralized Trial 

Balance System (FACTS) I submissions enable Treasury/FMS to prepare 

elimination entries for the governmentwide financial statements. When the 

federal attribute "F" is used with an SGL account, a trading partner should be 

designated for each transaction posted to the account. 

Audit History 

.21 Prior years' audits of several federal entities' financial statements have identified 

instances where entities did not identify, summarize, or reconcile 

2

Trading partners are agencies, bureaus, programs or other entities (within or 

between entities) participating in transactions with each other. 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-7 

intragovernmental activity and balances by trading partner. Controls over the 

intragovernmental transactions were not adequate. For example, one department 

instructed its components to make buyer's intragovernmental transaction 

amounts agree with seller's information without requiring an adequate 

reconciliation or verification if goods or services were provided. Similar issues 

were also identified concerning activity and balances within the same entity 

(intradepartmental). Accordingly, there was no assurance that the entity records 

contained fairly stated balances. 

Intragovernmental Payment and Collection (IPAC) System3

.22 IPAC is the primary method used by most federal entities to electronically bill 

and/or pay for services and supplies within the government, and to communicate 

to the Treasury and the trading partner agency that the online billing and/or 

payment for services and supplies has occurred. IPAC, however, is not intended 

to be a control over the intragovernmental transactions (reciprocal accounts). 

The auditor should understand that IPAC was not designed as an accounting 

system and does not require trading partners to record transactions at the same 

time or in the same amounts. In addition, unreconciled IPAC differences could 

affect the existence and completeness of intragovernmental activity and balances. 

.23 The IPAC billing entity initiates an IPAC transaction either as a collection or a 

payment. The IPAC customer entity receives an IPAC transaction either as a 

payment or a collection. Monthly, the Treasury compares the customer and 

billing entities' Statement of Transactions with the IPAC data. If there is a 

difference, a Statement of Differences, including a detailed list of all transactions 

charged or credited to a particular agency location code, is generated monthly. 

Entities should investigate the differences and make any necessary corrections on 

their next Statement of Transactions. 

.24 The auditor should examine the entity's IPAC reconciliation procedures to 

determine if the entity performs the reconciliation and researches and resolves 

differences reflected on the statement of differences properly and timely. The 

auditor may coordinate with the Fund Balance with Treasury (FBWT) procedures 

to assess the effectiveness of the entity's IPAC reconciliation. 

.25 The auditor should also design procedures to understand whether the entity uses 

other systems (standard forms used to transfer funds between appropriations, 

credit cards, and others) in addition to the IPAC system to process 

intragovernmental activity and balances. The auditor should determine whether 

3 The Intragovernmental Payment and Collection (IPAC) system replaced the 

Online Payment and Collection (OPAC) system in December 2001. 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-8 

these systems affect the fairness of intragovernmental activity and balances. (See 

audit procedures below and FAM section 902 C.) 

Audit Procedures 

.26 The auditor should consider audit risk and materiality in determining the nature, 

timing, and extent of procedures for auditing intragovernmental activity and 

balances and in evaluating the results of these procedures. Throughout the audit, 

the auditor should consider the possible existence of material intragovernmental 

activity and balances that could affect the financial statements. The auditor 

should evaluate all the information available concerning material 

intragovernmental activity and balances and determine that the financial 

statement disclosures are adequate and appropriate. 

.27 During the planning phase, the auditor should assess inherent, fraud, and control 

risk. In assessing the inherent risk related to intragovernmental activity and 

balances, there are several conditions that the auditor should consider. For 

example, inherent risk may exist because of the nature of the intragovernmental 

activity, such as a significant volume of transactions and number of trading 

partners or complex transactions. The auditor should assess the impact of 

inherent and control risk on control testing and substantive testing. The auditor 

should determine whether similar conditions continue to exist and understand 

management's response to such conditions. 

.28 In assessing inherent and control risk, the auditor should obtain an understanding 

of management responsibilities and the relationship of each component to the 

total department and of each department to other departments. The auditor 

should obtain an understanding of the entity's operations to identify, respond to, 

and resolve accounting and auditing problems early in the audit. For example, 

the auditor should know what trading partners the entity has, the nature of 

intragovernmental transactions that occur, the volume and dollar amount of 

transactions, and management's attitude and awareness with respect to 

reconciliations of intragovernmental activity and balances. 

.29 The auditor should assess the effectiveness of the entity's internal control over 

intragovernmental activity and balances. The auditor should identify the policies 

and procedures that pertain to the entity's ability to record, process, summarize, 

and report intragovernmental activity and balances by trading partner. The 

agency should emphasize the importance of identifying and classifying 

intragovernmental transactions by trading partner when they are initiated and on 

all documentation thereafter; without this initial identification, the system will not 

be able to keep track of them. 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-9 

.30 Without proper and timely reconciliation of intragovernmental activity and 

balances, misstatements in these account balances at the component and/or 

department level could materially affect the balances at the governmentwide level 

(as well as at the department or component level). In addition, when preparing 

consolidated financial statements, the preparer must eliminate intragovernmental 

activity and balances within and between departments or components. Because 

the amounts reported for entity trading partners for certain intragovernmental 

accounts could be significantly out of balance, the preparer would not be able to 

eliminate these accounts in the consolidated financial statements. The auditor 

may advise the entity about the need for monthly confirmation and reconciliation 

of these transactions with trading partners. Annual or quarterly reconciliations 

are generally not sufficient to detect and resolve misstatements promptly. 

.31 If the auditor determines that the entity's reconciliation control for 

intragovernmental transactions is not effectively designed and placed in 

operation, the auditor should consider the effect on the financial statements. 

Where intragovernmental transactions are or could be material, significant 

additional work is usually necessary to express an unqualified opinion. In some 

cases where the auditor finds material weaknesses in the intragovernmental 

reconciliation control and no other mitigating controls exist, the auditor may 

decide to modify the audit opinion (see FAM section 580). 

.32 The TFM contains agreed-upon procedures for the department inspectors general 

to perform for federal intragovernmental activity and balances. These procedures 

are intended to assist with accounting for and eliminating intragovernmental 

activity and balances in the preparation of department and governmentwide 

financial statements and reports. The IG should perform these procedures 

regardless of the opinion on the department consolidated financial statements. 

.33 To avoid duplicate procedures, the auditor should consider the agreed-upon 

procedures contained in the TFM when designing the tests for intragovernmental 

activity and balances. Examples of the account risk analysis (ARA), specific 

control evaluation (SCE), and audit procedures for the audit of intragovernmental 

activity and balances are in sections 902 A, 902 B, and 902 C. The ARA, SCE(s), 

and audit procedures generally should be customized for the particular entity. 

For example, if the auditor determines that the intragovernmental accounts 

receivable line item is significant, the auditor generally should prepare a separate 

ARA, SCE(s), and audit procedures for the intragovernmental accounts receivable 

account and its related accounting applications. (Note that a single SCE for a 

line-item/account-related accounting application is presented. There are likely 

transaction-related accounting applications listed on the ARA that also would 

have SCEs.) In addition, to improve efficiency, the auditor may coordinate tests 
 Substantive Testing 

 902 - Related Parties, Including Intragovernmental Activity and Balances 

 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902-10 

of intragovernmental activity and balances with tests of nonfederal activity and 

balances. 

OTHER RELATED PARTIES 

.34 To effectively plan and perform an audit, the auditor should understand the 

entity's organization and its characteristics. The auditor should consider the 

possible existence of other related parties and other related party transactions 

throughout the audit to satisfy him or herself that they are properly accounted for 

and disclosed (see paragraph 902.07). Other related parties may include states 

that federal entities made payments to in carrying out or executing their federal 

programs. Examples of these programs are Department of Health and Human 

Services grants to states for Medicaid,4 Department of Transportation Federal 

Highway Administration programs such as federal aid for highways and highway 

safety construction programs, and Department of Labor State Unemployment 

Insurance and Employment Service Operations. 

.35 The auditor may attempt to detect these relationships by inquiry of management, 

reviewing major contracts/agreements, and reading financial disclosure 

statements. The documentation generally should include the names of related 

parties so all audit staff may become aware of transactions with them. Work done 

to test transactions with such parties may be coordinated with sensitive payments 

work, as discussed in paragraph 280.05. 

 

.36 In addition to the procedures on related parties, the auditor also generally should 

inquire about other parties that may not be related parties, but that the agency 

may wish to disclose because of a public perception that they might be related, 

although professional standards do not require disclosure if the parties are not 

related (as defined in AU 334). Section 902 C shows examples of audit 

procedures for other related parties as well as for intragovernmental activity and 

balances. The steps should be customized for the particular audited entity. 

PRACTICE AIDS 

.37 The following practice aids are appended: 

• Section 902 A – Example Account Risk Analysis (ARA), 

• Section 902 B – Example Specific Control Evaluation (SCE), and 

• Section 902 C – Example Audit Procedures 

4 Medicaid assists states in providing medical care to their low-income populations 

by granting federal matching payments under the Social Security Act to states 

with approved plans. 
Substantive Testing 

902 A - EXAMPLE ACCOUNT RISK ANALYSIS FOR INTRAGOVERNMENTAL 

BALANCES

Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 ACCOUNT RISK ANALYSIS FORM 

File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance Intragovernmental assets, liabilities, revenues, expenses 

Existence or occurrence Recorded intragovernmental balances do not exist. 

Inherent risk arises from (1) the nature of intragovernmental transactions, which is susceptible to errors because of the significant high volume of transactions (and dollar amounts) and number of multiple reporting entities/ trading partners, and (2) prior years' significant 

Cycles

Revenues, Expenses, various Accounting 

applications

Receipts, Disbursements, Accounts Receivable, 
Substantive Testing 

902 A - Example Account Risk Analysis for Intragovernmental Activity and Balances Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 

ACCOUNT RISK ANALYSIS FORM 

 File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance 

audit adjustments relating to intragovernmental transactions. Control risk arises from (1) prior years' material weaknesses in accounting and reporting where the agency was not able to identify, classify, and summarize intragovernmental transactions by trading partners, and (2) management's attitude in not enforcing the reconciliation procedures. 

Accounts Payable, various 
Substantive Testing 

902 A - Example Account Risk Analysis for Intragovernmental Activity and Balances Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 

ACCOUNT RISK ANALYSIS FORM 

 File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance 

Completeness Same as existence above, 

and control risk also arises from the lack of management's oversight relating to the intragovernmental transactions and balances adjustments made to the financial statements and required supplementary information. 

Same as existence above 
Substantive Testing 

902 A - Example Account Risk Analysis for Intragovernmental Activity and Balances Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 

ACCOUNT RISK ANALYSIS FORM 

 File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance 
Substantive Testing 

902 A - Example Account Risk Analysis for Intragovernmental Activity and Balances Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 

ACCOUNT RISK ANALYSIS FORM 

 File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance 

Valuation or allocation Intragovernmental balances are not valued accurately or on an appropriate basis in the financial statements. 

Same as existence above Same as 

existence above 
Substantive Testing 

902 A - Example Account Risk Analysis for Intragovernmental Activity and Balances Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 

ACCOUNT RISK ANALYSIS FORM 

 File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance 

Rights and obligations The agency does not have rights to recorded intragovernmental balances. 

Same as existence above Same as 

existence above 
Substantive Testing 

902 A - Example Account Risk Analysis for Intragovernmental Activity and Balances Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Intragovernmental balances 

 

ACCOUNT RISK ANALYSIS FORM 

 File: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

 PLANNING PHASE INTERNAL CONTROL PHASE  Account Financial statement 

assertions / risks 

Inherent, fraud, and control 

risk factors 

Cycle/ 

accounting 

application 

Effectiveness of 

control 

activities 

Control 

risk 

Combined 

risk 

 Name Balance 

Presentation and disclosure Intragovernmental balances are not properly classified or disclosed in the financial statements, or based on a consistent application of accounting guidance. 

Same as existence and completeness above 

Same as existence above 
[This page intentionally left blank.]
Substantive Testing 

902 B - EXAMPLE SPECIFIC CONTROL EVALUATION FOR INTRAGOVERNM

ACCOUNTS

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various Existence or occurrence 

various various Substantiation

1. Recorded 

intragovernmental assets and liabilities do not exist at a given date. 

1a. Recorded 

intragovernmental assets and liabilities should exist at a given date. 

1. Quarterly, intragovernmental 

balances recorded in the agency's general ledgers are confirmed and reconciled with trading partners. 

2. The agency and trading partners 

work together to exchange data/ correct errors promptly concerning the intragovernmentabalances. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various  3. Reconciliation adjustments and 

supporting documents are reviewed and approved by authorized personnel before being entered in the general ledgers. 

4. Reconciliation between 

intragovernmental general ledger balances and subsidiary ledger balances are performed quarterly and reviewed by supervisory personnel. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various  1b. Recorded 

intragovernmental assets and liabilities of the entity, at a given date, should be supported by appropriate detailed records that are accurately summarized and reconciled to the account balance. 

1. Same as 1a. above. 2. The agency maintains the 

transaction logs and detailed records of transactions to facilitate the reconciliation process and to provide sufficient information for the location of the supporting documents. 

 1c. Access to 

intragovernmental assets, critical forms, records, and processing and storage areas should be permitted only in accordance with laws, regulations, and management's policy. 

1. The agency's critical forms and 

records are protected by safes and locks, guards, cameras, alarm systems, and backup of electronidata. 

2. Changes made to the trading 

partner codes file are restricted to authorized accounting personnel. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various Completeness various various Account Completeness 2. Intragovernmental 

assets and liabilities of the entity exist but are omitted from the financial statements. 

2. All intragovernmental 

accounts that belong in the financial statements should be so included. There should be no undisclosed assets or liabilities. 

Same as existence above. 1. The agency reviews all transactions to identify and properly 

code intragovernmental transactions. 

2. The agency reconciles and 

resolves IPAC differences (and differences from other systems/ methods, if any, used to process intragovernmental transactions) promptly and records adjustments properly. 

3. Supervisory personnel review and 

approve monthly account analyses of intragovernmental accounts and examine budget-toactual and trend analyses. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various 

 4. Elimination journal entries and 

supporting documentation are reviewed and approved by authorized personnel. 

5. Elimination entries are supported 

by schedules summarizing the SGL accounts that are combined to total the amounts eliminated. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various Valuation or allocation 

Valuation or allocation 

Valuation or allocation 

Valuation3. Intragovernmental 

assets and liabilities included in the financial statements are valued on an inappropriate basis. 

3. Intragovernmental 

assets and liabilities included in the financial statements should be valued on appropriate valuation bases. 

Same as existence and completeness above. 1. The agency periodically evaluates 

the condition and marketability ointragovernmental assets, for example receivables are evaluated for collectibility. 

2. The agency accounting records 

are compared with the assessed values such as independent appraisals or assets. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various 

Measurement4. Intragovernmental 

revenues and expenses included in the financial statements are measured improperly. 

4. Intragovernmental 

revenues and expenses included in the financial statements should be properly measured. 

Same as existence and completeness above. 

Rights and obligations 

Rights and obligations 

Rights and obligations 

Ownership5. Recorded 

intragovernmental assets are owned by others because of sale, or other contractual arrangements. 

5. Recorded 

intragovernmental assets should be owned by the entity. 

Same as existence and completeness above. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various 

Rights6. The entity does not 

have certain rights to recorded intragovernmental assets because of certain restrictions. 

6. Intragovernmental 

assets should be the entity's rights at a given date. 

Same as existence and completeness above. 

Obligations 7. The entity does not 

have an obligation for recorded intragovernmental liabilities at a given date. 

7. Intragovernmental 

liabilities should be the entity's obligations at a given date. 

Same as existence and completeness above. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various Presentation and disclosure 

Presentation and disclosure 

Presentation and disclosure 

Account classification8. Intragovernmental 

accounts are not properly classified and described in the financial statements. 

8. Intragovernmental 

accounts should be properly classified and described in the financial statements. 

1. The agency uses trading partner 

codes to identify and track trading partners when the intragovernmental transactions are initiated and on all documentation thereafter. 

2. The agency uses SGL account 

attributes to identify the nature of account balances and to identify intragovernmental transactions by trading partner. 

3. The agency classifies, 

summarizes, and reports intragovernmental accounts by trading partner and presents them as required supplementary information (RSI). 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various 

 4. The CFO staff checks that the 

intragovernmental asset and liability categories reported as RSI agree with the intragovernmental asset and liability line items reported on the balance sheet. 

5. The agency discloses intragovern

mental gross cost and earned revenue by budget functional classification as required by OMB 

Consistency9. The financial statement components are 

based on accounting principles different from those used in prior periods. 

9. The financial statement 

components should be based on accounting principles that are applied consistently from period to period. 

See # 8 above. 
Substantive Testing 

902 B - Example Specific Control Evaluation for Intragovernmental Accounts 

Entity: Agency Date of Financial Statements: 

September 30, 20xx 

Accounting application: 

Intragovernmental accounts 

SPECIFIC CONTROL EVALUATION Prep

 (Line Item/Account-Related) Regi

 File: Date

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Accounting 

application 

assertions 

Relevant 

assertions in line 

items 

Potential misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

 various various 

Disclosure10. Required information 

is not disclosed in the financial statements or in the notes thereto. 

10. The financial 

statements or notes should contain all information required to be disclosed. 

See # 8 above. 
[This page intentionally left blank.]
 Substantive Testing 

 

 902 C - EXAMPLE AUDIT PROCEDURES FOR INTRAGOVERNMENTAL AND OTHER RELATED 

PARTIES' ACTIVITY AND BALANCES

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-1 

 Entity __________________________________________________________________

 Period of financial statements ____________________________________________

 Job code _______________________________________________________________

Audit Procedures1

 Done 

by/date 

W/P 

ref. 

I. Planning Phase 

Obtain an understanding of the entity's operations that are 

significant to the audit of intragovernmental and other 

related party activity and balances (see FAM section 220). 

1. To obtain an understanding of significant accounting 

and auditing issues, read the entity's prior year's 

accountability and auditors' reports. 

 

2. To identify the entity's accounting and reporting 

requirements and applicable auditing standards for 

intragovernmental and other related party activity and 

balances, read the following: 

a. SFFAS No. 4, Managerial Cost Accounting Concepts 

and Standards; SFFAS No. 5, Accounting for 

Liabilities of the Federal Government; SFFAS No. 7, 

Accounting for Revenue and Other Financing 

Sources and Concepts for Reconciling Budgetary 

and Financial Accounting; Statement of Financial 

Accounting Standards No. 57, Related Party 

Disclosures; AU Section 334, Related Parties; AU 

Section 558, Required Supplementary Information; 

OMB bulletin on Form and Content of Agency 

Financial Statements; Treasury/ Financial 

Management Service's (FMS) Federal Intragovernmental Transactions Accounting Policies Guide; and

Treasury Financial Manual section "Federal 

Intragovernmental Transactions Process." 

 

 

1

 These procedures are applicable for intragovernmental (including interdepartmental and intradepartmental) and other related parties' activity and balances. 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-2 

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b. The entity's internal procedures for identifying, 

accounting, reconciling and reporting 

intragovernmental and other related party activity 

and balances. 

 

c. The entity's process for identifying, classifying, and 

reporting intragovernmental activity and balances 

requiring elimination at the consolidated 

departmentwide or governmentwide level. 

 

3. To identify the impact of systems/methods for 

processing, accounting and financial reporting of 

intragovernmental and other related party activity and 

balances, 

a. Interview the entity's key management about, for 

example, the systems/methods that are used to 

process intragovernmental and other related party 

activity and balances (e.g., IPAC, credit cards, 

standard forms used to transfer funds between 

appropriations, and others). 

 

b. Obtain estimates of the approximate number and 

dollar amount of intragovernmental and other 

related party activity and balances (this could be 

based on the prior year) that are processed by each 

significant system/method (see FAM section 270). 

 

c. Consider coordinating this work with the audit of 

like nonfederal activity and balances (i.e., similar 

transactions by the entity with parties other than 

other federal entities). 

 

4. To identify the intragovernmental and other related 

party activity and balances 

a. Ask the entity management: 

i. Names of all related parties (intragovernmental 

and others) and whether there were transactions 

with them during the period. Other possible 

related parties outside of government might be 

states, management, and individuals and firms 

with which members of management may be 

related or otherwise be able to significantly 

influence the management or operating policies. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-3 

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ii. The nature and terms of all significant activities 

and balances. For example, 

• for a seller entity, 

 •• Obtain information on the types of 

significant revenues, any markup 

percentage(s) over full cost, and the 

settlement/payment due date. 

 •• Inquire as to how the full cost of products 

and services sold is determined. 

 

• for a buyer entity, 

 •• Inquire about the minimum requirements 

(business rules) that must be met before

an intragovernmental trading partner may 

provide goods or services. 

 

• Inquire as to amounts, if any, that are in 

dispute at year-end. 

 

iii. Whether the audited entity receives services 

without reimbursement or for less than full 

reimbursement, for example, donated services, 

such as space or detailed employees. If so, ask if 

the entity is complying with GAAP and/or OMB 

requirements with respect to accounting and 

reporting treatment of these transactions. Also, 

if applicable, ask about the approximate fair 

value and/or financial statement disclosure for 

such goods and/or services.

 

iv. Whether the entity centrally maintains contracts, 

agreements, and support for the terms of all 

significant transactions with related parties. 

 

b. Review, if any: 

i. The entity policy for advance approval of related 

party transactions by senior management. 

 

ii. The entity policy for requiring disclosure by 

employees to appropriate officials of potential 

conflicts of interest, such as related party 

transactions by employees of the entity. Also 

determine if summaries of such transactions are 

communicated to financial management for its 

consideration. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-4 

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iii. Vendor and customer master file listings, major 

contracts, and IPAC activity for 

intragovernmental or other related parties. 

 

c. Ask Treasury/FMS regarding entities historically 

reporting intragovernmental transactions with the 

audited entity. 

 

5. Provide audit staff with the names of known 

intragovernmental and other related party trading 

partners, a description of the nature of significant 

transactions with each, and such other information as 

considered necessary to assist them in planning and 

performing other sections of the audit. 

 

6. Summarize the results. 

7. Document the auditor's preliminary assessment of risks 

related to the intragovernmental and other related party 

activity and balances in the ARA form or equivalent. 

 

II. Internal Control Phase 

Understand the internal control the entity has in place for 

identifying, accounting for, eliminating, and reporting 

intragovernmental and other related party activity and 

balances (existence, completeness, valuation, rights and 

obligations, presentation and disclosure) (see FAM section 

320). 

1. Determine through inquiry of management, 

walkthroughs, review of prior years' documentation and 

other means, how and when the entity identifies 

intragovernmental and other related party transactions. 

a. Whether the entity identifies the transactions by 

trading partner when they are initiated and on all 

documentation thereafter. 

 

b. If the entity uses trading partner codes, the 

relationship of such codes to other document 

identifiers such as vendor codes. For example, 

trading partner codes may be integral to each 

vendor code, or it may be necessary to crosswalk 

vendor codes to a file of trading partner codes. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-5 

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c. If the entity does not use trading partner codes, 

determine how the entity identifies, analyzes, and 

accumulates intragovernmental activity and 

balances. For example, the entity may derive such 

amounts through off-line manual processes after the 

fact. 

 

d. When the entity recognizes each significant category 

of intragovernmental and other related party 

transactions. For example, when an invoice is 

received, when processed through IPAC,2 when 

goods or services are received, when notified by the 

seller that an agreed-upon stage of completion has 

been achieved. Consider whether the entity's policy 

in recording intragovernmental and other related 

party transactions is appropriate. 

 

e. Whether the entity and its trading partners use 

consistent reciprocal ledger accounts3 and 

categories of activity and balances for recording and 

reconciling such amounts. If so, ask what processes 

are in place to provide management with reasonable 

assurance that trading partners are recognizing 

reciprocal transactions in the same period, for the 

same amount, and by consistent or compatible 

accounting methods. 

 

 

2

 Intragovernmental Payment and Collection (IPAC) system replaced the Online 

Payment and Collection (OPAC) system in December 2001. 

3

 Reciprocal accounts are corresponding SGL accounts that should be used by seller 

and buyer entities to record like intragovernmental transactions. For example, the 

seller entity's accounts receivable would normally be reconciled to the reciprocal 

account, accounts payable, on the buyer entity's records. Examples of these 

accounts are in FMS' Federal Intragovernmental Transactions Accounting Policies 

Guide. 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-6 

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f. If the entity complies substantially with the SGL at 

the transaction level as it applies to 

intragovernmental activity and balances. (Note: 

The SGL accounts used should include attributes for 

intragovernmental activity and balances that identify 

(a) that these accounts contain intragovernmental 

transactions (e.g., attribute "F") and (b) the trading 

partner (e.g., Treasury trading partner code "20").) 

 

g. Policies and procedures for confirming 

intragovernmental and other related party activity 

and balances with trading partners. 

 

h. How often the entity reconciles its related party 

activity and balances with its trading partners. Also 

inquire as to whether adjustments identified as 

necessary through the reconciliation process have 

been properly recognized in the financial records. If 

not, ask why. If the entity did not perform 

reconciliations, ask why not. 

 

i. Whether the selling and buying entities have 

established processes to facilitate the timely 

reconciliation of activity and balances. (Note: The 

selling entity is typically responsible for furnishing 

detailed transaction information to facilitate 

reconciliation.) 

 

j. What the entity's year-end cut-off procedures related 

to the intragovernmental and other related party 

activity are. Determine if procedures provide 

assurance that intragovernmental activities 

occurring in the current period are recorded in the 

current period. (Since the reconciliation process 

should detect cutoff errors, see above for 

reconciliation procedures with trading partners.) 

 

k. What the entity's policies and procedures are for 

intraentity elimination. 

 

l. Whether the entity maintains transaction logs or 

detailed records of transactions to identify the 

postings to SGL accounts and to facilitate the 

reconciliation process. The logs should include 

sufficient information to enable identification and 

location of the supporting documents. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-7 

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m. Whether the entity reviews and approves monthly 

account analyses of intragovernmental accounts and 

examines budget-to-actual and trend analyses. 

 

2. Coordinate with the results of audit procedures for 

other cycles to determine if the entity has internal 

control issues related to intragovernmental and other 

related party activity and balances. For example, to 

determine if the entity has control issues related to 

intragovernmental activity and balances, coordinate 

with the results of FBWT audit procedures to determine 

if the entity has issues on its FBWT/IPAC reconciliation 

such as material unreconciled amounts and aged 

unreconciled IPAC differences. 

 

3. Perform walk-throughs of processes for identifying, 

accounting, reconciling, confirming, eliminating, and 

reporting intragovernmental and other related party 

activity and balances to obtain or update the auditor's 

understanding of these procedures and preliminarily 

assess the effectiveness of these controls. 

a. Walkthrough the process from initiation to 

recording in the general ledger and inclusion in the 

financial statements or elimination for each 

significant type of intragovernmental and other 

related party activity and balances. 

 

b. Walk through the management/entity approval 

process of payments to trading partners. (Note: 

Prior audits have identified instances where 

payment controls for intragovernmental 

transactions were not sufficient, for example, the 

seller entity made payments to trading partners 

without verifying whether goods or services were 

provided.) 

 

c. Identify and document differences in process for 

nonfederal and intragovernmental and other related 

party activities and balances. 

 

d. If the entity performs reconciliations of 

intragovernmental activity and balances with trading 

partners during the year, the auditor should walk 

through both interim and year-end reconciliation 

processes. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-8 

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4. Prepare or update the cycle memorandum, flowchart, 

and ARA and SCE forms (See FAM sections 390, 395 H 

and I, and 902 A and B) or equivalents. 

 

III. Testing Phase 

A. For intragovernmental accounts, if the auditor preliminarily 

determines that the entity's reconciliation and confirmation 

controls with trading partners are effectively designed and 

placed in operation, test the entity's policies and 

procedures to determine if the reconciliation and 

confirmation controls are effective and if 

intragovernmental balances appear reasonable. 

1. Obtain final yearend reconciliations/confirmations of 

intragovernmental activity and balances for each 

trading partner and supporting documentation; or 

obtain the entity CFO responses for intragovernmental 

activity and balances and the supporting documentation 

for the final reconciliation/confirmations. (See the 

Treasury Financial Manual (TFM) sections on CFO 

procedures/representations and on IG Agreed-Upon 

Procedures for Federal Intragovernmental Activity and 

Balances) 

 

2. Compare the amounts in the reconciliations to 

supporting documentation. 

 

3. Trace the adjustments, if any, identified in the 

reconciliation process to the entity's financial records. 

 

4. Compare the amounts, excluding intra-departmental 

activity and balances, in the audited department 

consolidated financial statements to such amounts in 

the department's final FACTS I or FACTS Notes reports 

to FMS. 

 

5. Prepare an agreed-upon procedures report. (Note: The 

procedures in steps 1 to 4 above are agreed-upon 

procedures for intragovernmental activity and balances. 

See the TFM, volume 1, section on IG Agreed-Upon 

Procedures for Federal Intragovernmental Activity and 

Balances. Also see FAM section 660.) 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-9 

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6. Consider whether these agreed-upon procedures are 

sufficient to achieve financial statement audit 

objectives. For example, whether the agreed upon 

procedures are applied to all significant assertions for 

all significant intragovernmental activity and balances. 

Typically these procedures alone will not be sufficient 

for financial statement audit purposes. 

 

7. If the agreed-upon procedures are not sufficient, then 

design additional procedures that in combination with 

the agreed-upon procedures will be sufficient. For 

example: 

Reconciliation/confirmation (existence, completeness, 

valuations, rights and obligations, and classification)

• OMB's bulletin on Form and Content of Agency 

Financial Statements requires an entity to 

reconcile and confirm intragovernmental activity 

and balances with trading partners semiannually, 

beginning with the six-month period ending 

March 31, 2002 and quarterly, beginning with the 

three-month period ending December 31, 2002. If 

the entity performed monthly, quarterly, or 

semiannual reconciliations, test reconciliations 

to determine if the entity's reconciliation control 

is effective throughout the year. 

• There should be a separate reconciliation/ 

confirmation for each trading partner. 

• This reconciliation/confirmation also may be 

used for within entity 

reconciliation/confirmation (intraentity). 

a. Determine the completeness of population: 

Determine if the entity performed reconciliations 

and confirmations for all trading partners by 

comparing the trading partners on the 

reconciliations and confirmation forms to subsidiary 

records or the entity's trading partner list obtained 

during the planning phase. 

 

b. For each reconciliation/confirmation: 

i. Determine if the reconciliation/confirmation was 

reviewed and approved by the appropriate 

personnel. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-10 

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ii. Compare the total amounts and SGL accounts of 

the activity and balances reported on the 

reconciliation/confirmation form with the 

general and subsidiary ledger accounts, and the 

total amounts to audited financial statements 

and footnote disclosures. If differences are 

found, document each such difference. Consider 

potential impact on financial statements and post 

the differences identified to summary of 

unadjusted misstatements. 

 

iii. Test whether the entity used appropriate SGL 

accounts and whether these SGL accounts 

include the proper attribute(s) to indicate that 

they result from intragovernmental transactions. 

(Note: For example, when the federal attribute 

"F" is used with an SGL account, a trading 

partner should be designated for each 

transaction posted to the account.) Entities can 

modify SGL accounts listed on the form to be 

more specific. 

 

iv. Consider whether the entity is using the 

reciprocal accounts delineated in the FMS Guide. 

Entities should use these accounts to account for 

intragovernmental activity and balances in the 

specified categories. Use of these reciprocal 

accounts will facilitate the reconciliation and 

confirmation process. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-11 

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v. For fiduciary activity and balances, compare 

amounts on the reconciliation forms to amounts 

on the Intragovernmental Fiduciary 

Confirmation System. (Note: Fiduciary activity 

and balances include loans from the Federal 

Financing Bank and Bureau of Public Debt, 

investments with Bureau of Public Debt, Federal 

Employees Compensation Act transactions with 

Labor, and employee benefit transactions with 

OPM. The seller entity—Bureau of Public Debt, 

Treasury, Federal Financing Bank, Labor, and 

OPM—will make balances information and other 

details available through the Intragovernmental 

Fiduciary Confirmation System for the buyer 

entities' use in reconciling amounts to their 

records. The Intragovernmental Fiduciary 

Confirmation System is the official confirmation 

system for federal entities that engage in 

fiduciary intragovernmental transactions with 

Bureau of Public Debt, Federal Financing Bank, 

OPM, and Labor.) 

 

vi. For transfers, test whether 

• the classification of transfers as expenditure 

or nonexpenditure is proper, and 

• the accounting and reporting are appropriate. 

 

vii. For trust fund transfers such as highway and 

airport trust funds, also test whether the trust 

fund amounts are properly accounted for and 

maintained in accordance with laws that 

established these funds. (Note: Test either by 

the trust fund auditor or as agreed-upon 

procedures by the auditor who audits the entity 

that collects the revenue for it.) 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-12 

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Reconciliation adjustments and differences (all 

intragovernmental categories)

(Note: Exhibit I to FAM 902 C provides an 

illustration of a reconciliation tool that may be used 

to summarize reconciling items and prove amounts 

between a buyer and a seller entity.) 

c. Determine whether adjustments, if any, are 

supported and timely: 

i. Trace the adjustments and reconciling items 

identified in the reconciliation process to the 

entity general and subsidiary ledgers. 

 

ii. Examine the adjustments and supporting 

documents to determine if 

• The entity timely and properly performed the 

research and identified causes for 

differences. 

• The adjustments are agreed upon by both 

entities and made to proper SGL accounts. 

(Note: Examples of adjustments and 

reconciling items are: 

•• Adjustments in estimated accruals: For 

example, the seller entity has recorded 

unbilled revenue and the buyer entity was 

not timely advised of the estimated 

accrual. 

•• Adjustments due to timing differences: 

For example, timing differences caused by 

a buyer entity's delay in recording IPAC 

transactions into proper SGL accounts. 

•• Reconciling item for capitalization of 

assets: For example, the buyer entity 

purchased property and equipment or 

inventory and recorded them as assets.) 

 

iii. Obtain or prepare aging of outstanding 

unadjusted reconciling amounts for all 

significant intragovernmental balance sheet 

accounts. Identify old and/or unusual 

reconciling items and obtain explanations from 

the entity. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-13 

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iv. Review final yearend reconciliation for any 

accounting policy differences and determine if 

the entity explains the causes of these 

differences on the final reconciliation. The 

causes of these differences might be differences 

in accounting standard requirements, for 

example, amortization methods for discounts 

and premiums. For example, one trading partner 

uses the interest method and the other trading 

partner uses the straight-line method to amortize 

discounts/premiums. (Note: There should be no 

material unresolved differences on the final yearend reconciliation forms. The entity should 

resolve all differences with trading partners.) 

 

v. Determine the extent of unadjusted differences 

at year-end. Assess their materiality on the 

financial statement line item and the overall 

financial statements. 

 

vi. If adjustments are made subsequent to the 

completion of the confirmations (during the 

audit period), determine if the entity revised the 

reconciliation and confirmation and submitted 

the updated data to FMS. 

 

8. Summarize the results of testing: (1) conclude on the 

effectiveness of the entity's reconciliation and 

confirmation controls and (2) propose adjustments, if 

necessary. 

 

9. Determine whether the results of testing and the nature 

of misstatements indicate that combined risk should be 

assessed differently and whether the audit procedures 

should be revised. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-14 

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B. For intragovernmental activity and balances, if the auditor 

preliminarily determines that the entity's reconciliation/ 

confirmation control with trading partners is not effective, 

or if the reconciliations and/or confirmations are not 

performed by the entity, the auditor should consider the 

effect on substantive tests and on the audit report. In some 

cases, the auditor may decide to modify the audit opinion 

when no reconciliation and other mitigating controls 

existed. However, when intragovernmental activity and 

balances are material, significant additional work may be 

necessary to express an unqualified opinion such as: 

1. Coordinate work with other related line items to test 

existence, completeness, valuation, rights and 

obligations, and classification of intragovernmental 

activity and balances. For example, 

a. In conjunction with cash receipts, revenues, and 

accounts receivable testing, determine if 

intragovernmental accounts receivable were 

collected subsequent to test date. Examine 

supporting documentation for the posting of 

collections to the cash records; determine if 

intragovernmental revenues and receivables are 

included in nonfederal balances. 

 

b. Test completeness of intragovernmental activity and 

balances by reviewing vendor and customer master 

files to determine if intragovernmental vendors and 

customers are properly included in 

intragovernmental accounts. 

 

c. Consider sending confirmation requests to trading 

partners for both balance sheet and net cost activity 

and balances. Especially if combined risk is 

assessed as high, consider applying similar 

confirmation procedures as to the nonfederal 

accounts. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-15 

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Cut off test (existence and completeness)

d. Determine if there are unrecorded transactions and 

if the transactions are recorded in the correct 

period. 

i. Coordinate with the FBWT audit team to review 

results of the FBWT reconciliation tests. For 

example, review IPAC transactions 

reconciliations and the recording of IPAC 

transactions in accounting systems; consider 

how timely and whether appropriate; review 

IPAC transactions after 9/30–subsequent billing 

and collecting transactions–to determine 

unrecorded transactions as of 9/30. 

 

ii. Search for unrecorded sales revenue, accounts 

receivable, purchases, and accounts payable 

(completeness). For example, 

• To search for unrecorded sales revenue and 

accounts receivable, select sales invoices for 

trading partners recorded in the xx-day 

period subsequent to year-end. Trace the 

selected invoices to shipping records or 

evidence of service performance. Determine 

whether the sales revenue and accounts 

receivable were recorded in the correct 

period. Alternatively, select from shipping 

records to trading partners prior to year-end 

and trace to sales invoices. 

 

• To test the completeness of amounts 

recorded as accounts payable at the balancesheet date, select disbursements after the end 

of the audit period and test if the amounts 

were recorded in accounts payable. 

 

2. Review the test results of other related line items to 

determine if there are issues related to existence, 

completeness, valuation, rights and obligations, and 

classification in the tested accounts and transactions 

and the impact on the intragovernmental activity and 

balances. In testing these other accounts, consider 

whether items tested were from trading partners. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-16 

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3. Summarize the results and propose adjustments, if 

necessary. 

 

4. Determine if the results of testing and the nature of 

misstatements indicate that combined risk should be 

assessed differently and whether the audit procedures 

should be revised. 

 

Control and substantive tests of details—other related parties

C. Attain satisfaction about the purpose, nature, and extent of 

material other related party transactions and their effect on 

the financial statements. Coordinate with sensitive 

payments work, including the review of executive 

compensation, travel, official entertainment funds, 

unvouchered expenses, and consulting services (see FAM 

section 280.05). 

1. Based on the work performed during the planning and 

internal control phases, determine and document the 

methodology used to select the transactions for testing. 

• Examine all transactions, 

• Dollar unit sampling (DUS), 

• Classical variables estimation sampling, or 

• Other (describe). 

 

2. For the selected transactions, 

a. examine documentation such as invoices, contracts, 

agreements, and receiving and shipping reports; 

 

b. determine whether the transactions have been 

properly approved; 

 

c. confirm transaction terms and amounts with the 

other party to the transaction; and 

 

d. test the compilation of amounts that may be 

disclosed in the financial statements for 

reasonableness. 

 

3. Summarize the results. 

4. Determine if the results of testing and the nature of 

misstatements indicate that combined risk should be 

assessed differently and if the audit procedures should 

be revised. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-17 

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Substantive analytical procedures (FAM 475)

D. Substantive analytical procedures: Perform analytical 

procedures to assess whether balances are reasonable and 

reflect appropriate activities (existence and completeness). 

If the entity performs reconciliation and confirmation of 

intragovernmental activity and balances and the auditor 

places reliance on those tests of details, less rigorous, 

supplemental analytical procedures may be used to 

increase the auditor's understanding of intragovernmental 

activity and balances after performing tests of details in 

Testing, step III.A, above. However, in the absence of 

adequate reconciliation and confirmation controls, some or 

all of these procedures may be necessary to obtain 

sufficient evidence, if possible. For example, 

1. Develop expectations of the accounts payable and 

receivable balances overall or for all significant trading 

partners in light of the payment cycle during the year. 

Then, compare the recorded balance overall or by 

trading partner to the expected amount and investigate 

differences in the recorded balance if differences 

exceed ______ (insert an amount such that the total 

uninvestigated difference for all trading partners, 

including those not selected, does not exceed the limit). 

 

2. Develop expectations of recorded intragovernmental 

sales overall or for all significant trading partners based 

on independent data; for example, consider using 

trading partners' orders. Then compare the 

expectations to the recorded sales amounts and 

investigate differences in the recorded balance if 

differences exceed ______ (insert an amount such that 

the total uninvestigated difference for all trading 

partners, including those not selected, does not exceed 

the limit). 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-18 

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3. Examine accounting records, for example, accounts 

receivable and payable, for large, unusual, or 

nonrecurring activity or balances. For example, 

consider expectations as to the types of 

intragovernmental activity and balances and trading 

partners based on the planning work. Then, examine 

significant unexpected/unusual intragovernmental 

activity and balances and intragovernmental activity or 

balances with unexpected trading partners. Document 

the definition of significant. 

 

4. Summarize the results of testing and determine if 

adjustments are necessary. 

 

Elimination (existence, completeness, and valuation)

E. Test consolidation/elimination for transactions occurring 

within the entity (intraentity) to determine whether the 

elimination is appropriate and supportable. 

1. Obtain a list of each component entity's intraentity 

transactions identified for elimination and each 

component entity's reconciliation of its intraentity 

activity and balances with its respective trading 

partners. This step may be done in conjunction with the 

test of reconciliation (see step III.A above). 

 

2. Review the entity's eliminating journal entries and 

supporting documentation for elimination entries of the 

entitywide consolidated financial statements. 

Determine whether elimination journal entries are 

a. approved by management and 

 

b. supported by schedules summarizing the SGL 

accounts that are combined to total the amounts 

eliminated. 

 

3. Summarize the results. 

4. Determine if the results of testing and the nature of 

misstatements indicate that combined risk should be 

assessed differently and if the audit procedures should 

be revised. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-19 

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IV. Reporting Phase 

To determine if the presentation and disclosures of 

intragovernmental and other related party balances comply 

with GAAP and OMB requirements: 

1. Determine whether financial reports are prepared in 

accordance with the OMB bulletin on Form and Content 

of Agency Financial Statements. For example, 

a. Review the balance sheet and determine whether it 

is properly classified and line items are correctly 

reported as intragovernmental or nonfederal. 

 

b. Read the required supplementary information (RSI) 

to determine if intragovernmental amounts and the 

related federal trading partners for assets, liabilities, 

earned revenue from trade (buy/sell) transactions 

and nonexchange revenue are presented as RSI. The 

gross cost to generate earned revenue from trade 

transactions should be presented by budget 

functional classification in the notes to the financial 

statements. 

 

c. Read disclosures for the Statement of Net Cost in 

the notes to the departmentwide financial 

statements and determine if the department includes 

a separate disclosure of intragovernmental gross 

cost and earned revenue by budget functional 

classification as required by OMB's form and 

content bulletin. Gross cost and earned revenue 

should be net of intradepartment transactions 

(consolidated). 

 

2. Read the entitywide financial statements, notes, and 

RSI; compare the reported intragovernmental and other 

related party (if any) activity and balances with the test 

results. 

 

3. Request that the entity's management include, in the 

representation letter, representations related to 

intragovernmental and other related party activity and 

balances. (See FAM section 1001 for guidance.) 

 

4. Communicate with trading partner entities' auditors 

(with auditee's permission) to consider whether issues 

identified by the other auditors affect the auditor' s 

conclusions on intragovernmental transactions. 

 
Substantive Testing 

 902 C – Example Audit Procedures for Intragovernmental and Other 

Related Parties' Activity and Balances 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-20 

Audit Procedures1 Done 

by/date

W/P 

ref. 

5. Read the various current period Agreed-Upon 

Procedures (AUP) reports to consider whether the 

findings will affect the auditor's conclusion and/or if 

additional procedures need to be performed. For 

example, 

a. The AUP report on employee withholdings and 

employer contributions that are reported on the 

Report of Withholdings and Contributions for Heath 

Benefits, Life Insurance and Retirements. This AUP 

report is to assist OPM in assessing the 

reasonableness of the Retirement, Health Benefits, 

and Life Insurance Withholdings/Contributions and 

Supplemental Semiannual Headcount report 

submitted to OPM (see OMB audit guidance). 

 

b. The AUP report on FACTS I verification. This AUP 

report is to evaluate the department's management 

assertion that it compared the department's 

summarized FACTS I data to its consolidated 

financial statements and to determine whether such 

data is in agreement. 

 

6. Summarize the results and determine if adjustments are 

necessary. 

 

7. Conclude whether intragovernmental and other related 

party activity and balances have been adequately 

accounted for and properly disclosed in the financial 

statements. 

 
Substantive Testing

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

Exhibit I

Seller Entity - Trading Partner 1

200,000

Less adjustment for timing difference -

Cash received but revenue unearned at end of the current year (20,000)

Add adjustment for timing difference -

Earned revenue recognized on unbilled work at the end of the current year 50,000

230,000

Buyer Entity - Trading Partner 2

190,000

Add:

10,000

Adjustment for completed but unbilled work at the end of the current year 50,000

Less: 

Cash paid in the current year, but amount prepaid at end of current year (20,000)

General ledger after adjustment for Trading Partner 1 230,000

Less: 

Reconciling item for purchases inventoried at end of the current year (50,000)

180,000

Reconciliation of Seller Entity Intragovernmental 

Earned Revenue with Buyer Entity Cost

Adjustment for cutoff error identified during reconciliation process 

[Cash sent to Trading Partner 1, but not recorded]

Intragovernmental purchases included in cost - accrual basis, FY 200X, 

from Trading Partner 1

Intragovernmental earned revenue - accrual basis, FY 200X, from 

Trading Partner 2 (General ledger after adjustment)

Intragovernmental cash received for earned revenue, FY 200X, from 

Trading Partner 2 (General ledger before adjustment)

Intragovernmental purchases - cash basis, FY 200X, from Trading 

Partner 1 (General ledger before adjustment)

When reconciled, Seller Revenue and Buyer 

Cost must agree after adjustments are recorded 

to correct for errors.

When reconciled and adjusted, Seller 

Revenue and Buyer Cost may not 

agree because of timing differences. 

Here, the Buyer has inventoried a 

portion of the purchases for the year. 

The contra 

accounts for timing 

items should also 

reconcile. 

The Seller's 

unearned revenue 

account (liability) 

should reconcile 

with the Buyer's 

prepaid (asset) 

account. 

Seller's earned but 

unbilled receivable 

(asset) should 

reconcile with the 

Buyer's accounts 

payable for 

unbilled work 

(liability) account. 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 902 C-21
[This page intentionally left blank.]
Substantive Testing 

 903 - AUDITING COST INFORMATION 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 903-1 

.01 This section provides general guidance for considering cost information and 

planning audit procedures. The auditor should coordinate these procedures with 

procedures on auditing various line items and accounts. The auditor is 

concerned about cost information for a number of reasons. First, the auditor 

should obtain sufficient evidence to determine whether the costs are fairly stated 

in the financial statements and appropriately classified. Proper classification at 

the agency level also contributes to proper classification of costs in the 

consolidated financial statements of the U.S. government. Second, for CFO Act 

agencies and components designated by OMB, the auditor is concerned about the 

entity's financial management systems' substantial compliance with the three 

requirements of FFMIA. Third, cost information is important to the MD&A, 

although the auditor does not opine on the MD&A. The most relevant accounting 

standard for cost information is Statement of Federal Financial Accounting 

Standards (SFFAS) No. 4, Managerial Cost Accounting. This standard has 

relevance both to external financial reporting and to cost information for internal 

management reporting. 

STATEMENT OF FEDERAL FINANCIAL ACCOUNTING STANDARDS 

NO. 4, MANAGERIAL COST ACCOUNTING

.02 SFFAS No. 4 establishes the concepts and standards for providing reliable and 

timely information on the full cost of federal programs, their activities, and 

outputs. The objectives of managerial cost information specified in SFFAS No. 4 

are: 

• To provide program managers with relevant and reliable information relating 

costs to outputs and activities. With this information, program managers 

should understand the costs of the activities they manage. The cost 

information should assist them in improving operational efficiency. 

• To provide relevant and reliable cost information to assist Congress and 

executives in making decisions about allocating federal resources, 

authorizing and modifying programs, and evaluating program performance. 

• To provide consistency between costs reported in general purpose financial 

reports and costs reported to program managers. This includes standardizing 

terminology to improve communication among federal organizations and 

users of cost information. 

.03 The first two objectives primarily address the managerial use of cost information 

in improving operating efficiency and cost effectiveness, making planning and 
Substantive Testing 

 903 - Auditing Cost Information 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 903-2 

budgeting decisions, and measuring performance. The third objective primarily 

addresses external financial reporting. That objective can be achieved by 

reporting cost information in financial statements that is consistent with costs 

generated by the cost accounting process. Because of the differences in the 

three objectives, some requirements in SFFAS No. 4 are relevant to managerial 

decision making and operations improvement, while some requirements are 

relevant to external financial reporting. 

.04 The cost accounting concepts section of SFFAS No. 4 (paragraphs 41-66) 

establishes the overall goals of cost accounting for federal agencies. Managerial 

cost accounting should be a fundamental part of the financial management 

system and, to the extent practicable, be integrated with the other parts of the 

system. Managerial costing should use a basis of accounting, recognition, and 

measurement that is appropriate for the intended purpose. Cost information 

developed for various purposes should be drawn from a common data source, 

and output reports should be reconcilable to each other. 

.05 The five fundamental standards for managerial cost accounting set forth in 

SFFAS No. 4 (paragraphs 67-162) are important for the auditor. These standards 

will lead to the development of accurate and consistent cost information for 

internal and external reporting by federal agencies. The five standards are: 

• Requirement for cost accounting: Each reporting entity should accumulate 

and regularly report the cost of its activities for management information. 

• Responsibility segments: Management of each reporting entity should define 

and establish responsibility segments and report the costs of each segment's 

outputs. 

• Full costs: Reporting entities should report the full costs of outputs, which is 

the total amount of resources used to produce the output, including direct 

and indirect costs. 

• Interentity costs: Each entity's costs should incorporate the full cost of 

goods and services received from other entities. As directed by SFFAS No. 4, 

paragraph 110, OMB has designated, in its bulletin, Form and Content of 

Agency Financial Statements, the costs of goods and services received from 

other entities that should be recognized. 

• Costing methodology: The costs of resources that directly or indirectly 

contribute to the production of outputs should be accumulated and assigned 

to outputs using appropriate methodologies. (See paragraph 903.07.) 
Substantive Testing 

 903 - Auditing Cost Information 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 903-3 

AUDIT PROCEDURES FOR FINANCIAL STATEMENT OPINION 

.06 As part of understanding the entity's operations, the auditor should obtain an 

overview of how the entity meets these standards. This may be done by inquiry, 

observation, and walkthrough procedures. Substantive tests of the cost 

accounting system are usually necessary. The auditor should consider 

coordinating tests with other control and substantive tests. Based on the 

auditor's understanding of the agency's operations, the auditor should determine 

whether the statement of net costs is designed to include all the costs of the 

agency's programs. Also, in testing the statement of net costs, the auditor should 

test the financial statement assertions related to costs including whether 

expenses are properly classified in the statement of net costs, and in the notes by 

budget functional classification, as required by OMB's form and content 

guidance. The following (see FAM section 395 B) are examples of subassertions 

related to costs: 

• Existence or occurrence: 

•• Validity—(1) Recorded costs, underlying goods and services used, and 

related processing procedures are authorized by federal laws, regulations, 

and management policy. (2) Recorded costs are approved by appropriate 

individuals in accordance with management's general or specific criteria. 

(3) Recorded costs represent goods and services that were actually used 

and are properly classified. 

•• Cutoff—Costs recorded in the current period represent goods and 

services used during the current period. 

•• Summarization—(1) The summarization of recorded costs is not 

overstated. (2) Costs are assigned to appropriate classifications in the 

financial statements. 

• Completeness: 

•• Transaction completeness—All valid costs are recorded and properly 

classified. 

•• Cutoff—All goods and services used in the current period should be 

recorded in the current period. 

•• Summarization—The summarization of recorded costs is not understated. 

• Valuation or allocation: 

•• Accuracy—(1) Costs are recorded at correct amounts. (2) Costs are 

recorded using appropriate assignment methodologies. 

•• Measurement—Costs included in the financial statements are properly 

measured. 
Substantive Testing 

 903 - Auditing Cost Information 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 903-4 

• Presentation and disclosure: 

•• Account classification—Cost accounts are properly classified and 

described in the financial statements. 

•• Consistency—The financial statement costs are based on accounting 

principles that are applied consistently from period to period. 

•• Disclosure—The financial statements and footnotes contain all 

information required to be disclosed. 

.07 SFFAS No. 4 discusses three methods of assigning costs: directly tracing costs, 

assigning costs on a cause-and-effect basis, and allocating costs on a reasonable 

and consistent basis. Although the standard discusses these three methods in 

relation to assigning costs to responsibility segments and outputs, the methods 

are also applicable to assigning costs to financial statement line items in the 

statement of net costs, generally by program, and in the notes by budget 

functional classification. The different methods of assigning costs may require 

different auditing procedures for determining whether costs are properly 

classified in the statement of net costs by program and in the notes by budget 

functional classification. 

.08 For example, for directly traced costs (such as materials used in production or 

employees who worked on an output), the auditor generally should test whether 

costs were assigned to the appropriate program and/or budget functional 

classification. 

.09 Costs may be assigned on a cause-and-effect basis, by grouping costs into cost 

pools where an intermediate activity may be a link between the cause and the 

effect. For example, an information technology department may provide support 

to other departments. The information technology department may assign costs 

to other departments on a cause-and-effect basis by first assigning costs to an 

intermediate activity, such as hardware installation or software design. Then the 

costs in these pools may be further assigned to other departments based on their 

use of these technical services. In auditing these types of costs, the auditor 

should test whether costs are assigned to the appropriate cost pool (hardware 

installation, software design), but also whether the costs are appropriately 

summarized in the pool. Then, when costs are assigned to other departments, 

the auditor should test whether costs assigned are based on appropriate usage 

information, whether the cost assignments are reasonable and consistent, and 

whether they are mathematically accurate. 

.10 Costs may be allocated if it is not economically feasible to directly trace or assign 

costs on a cause-and-effect basis. This is commonly done with costs such as 

general management, depreciation, rent, maintenance, security, and utilities used 

in common by various segments. These costs are generally accumulated in cost 
Substantive Testing 

 903 - Auditing Cost Information 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 903-5 

pools and allocated to segments or outputs (or programs or budget functional 

classifications) based on a relevant common denominator such as number of 

employees, square footage of office space, or amount of direct costs incurred in 

segments. In auditing these allocated costs, the auditor should test whether the 

costs are assigned to the appropriate cost pool and summarized appropriately. 

The auditor also should determine whether the allocation basis is reasonable and 

consistent and test the mathematical allocation. In addition, the auditor should 

determine whether an allocation rather that directly tracing costs or assigning 

them on a cause-and-effect basis is appropriate in the circumstances. 

.11 The entity exercises judgment in determining the line item/programs included in 

its statement of net costs. The auditor should consider whether classifications 

are reasonable in the circumstances. 

FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT OF 1996 

(FFMIA) 

.12 For audits of the CFO Act agencies and components identified by OMB audit 

guidance, the auditor should determine whether the agency's financial 

management systems comply substantially with the three requirements of FFMIA 

(see paragraph 100.02 and FAM section 701). To determine compliance with 

SFFAS No. 4 for the purposes of FFMIA, the auditor should ask these questions, 

which relate to the standards discussed in paragraph 903.05: 

• Does the agency regularly accumulate and report the costs of its activities to 

management? 

• Has the agency defined its major programs and responsibility segments for 

the purpose of delineating costs? 

• Does the agency properly accumulate costs by those programs and 

segments? 

• Has the agency accounted for the full costs (including interentity costs) of 

products, services, or outputs to be externally reported at the entitywide 

level? 

• Has the agency accounted for the costs of resources that contribute to the 

production of outputs by individual responsibility segment using appropriate 

costing methodologies? 

• Has the agency reported those costs in the year-end financial statements on 

the accrual basis of accounting? 
Substantive Testing 

 903 - Auditing Cost Information 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 903-6 

• Are the costs reported for external financial reporting and those reported for 

internal management reporting consistent and reconcilable? 

• Is the reported management cost information consistent, timely, and 

comprehensive? 

• Is the cost information reported in such a manner that management can 

determine answers to appropriate questions about costs of outputs? 

• How does management determine whether costs are appropriate? 

• How does management determine the entity's compliance with FFMIA? 

This inquiry is frequently combined with the procedures in paragraph 903.06, the 

outcome of which should be considered in concluding about the entity's 

compliance with the cost accounting requirements under FFMIA. Also, the 

auditor should review evidence supporting management's assertions in response 

to these questions, as further discussed in section 701, Assessing Compliance of 

Agency Systems with the Federal Financial Management Improvement Act 

(FFMIA). 

MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) 

.13 The auditor does not provide an opinion on the MD&A. Thus, the main concern 

is consistency of information, rather than testing the reliability of the cost data in 

the MD&A. The auditor should read the MD&A for consistency with the financial 

statements and with the auditor's knowledge of the entity. Testing generally 

should be limited to data in the financial statements, as discussed in paragraph 

903.06, not the MD&A. Analytical procedures may be used to consider the 

reasonableness of cost data in the MD&A. Based on this comparison, the auditor 

should consider whether additional testing is needed. 

.14 Although costs reported in internal and external reports should be consistent, 

they may differ in the degree of detail and reporting frequency. Cost information 

for management may require more frequent and timely reporting. It also may 

require more specific and detailed information regarding the costs of specific 

activities or outputs. By comparison, external reports could be less frequent, and 

the cost information more aggregated, such as on a suborganization or program 

basis. 
 Substantive Testing 

 

 921 - AUDITING FUND BALANCE WITH TREASURY 

(FBWT)

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921-1 

.01 This section provides guidance in auditing the Fund Balance with Treasury 

(FBWT) account. It explains key agency and Treasury processes and procedures 

related to FBWT accounts and discusses audit issues. Practice aids, including 

example Account Risk Analysis (ARA) and Specific Control Evaluation (SCE) 

forms and suggested audit procedures for the FBWT line item, are included in 

appendices.

.02 The FBWT account (SGL account 1010) is an asset account representing the 

unexpended spending authority in agencies' appropriations. Federal agencies 

record their budget spending authority in FBWT accounts and increase or 

decrease these accounts as they collect or disburse funds. Most agencies 

maintain several fund balance accounts funded by different types of 

appropriations, such as annual 1-year appropriations and/or multiyear 

appropriations that are included in the financial statement FBWT line item. The 

FBWT account also serves as one of several mechanisms to prevent agencies' 

disbursements from exceeding appropriated amounts. 

.03 In the federal government, Treasury serves as the central banker. Most agencies 

use the banking services provided by Treasury's Financial Management Service 

(FMS) and do not keep cash in separate bank accounts. Some agencies have 

authority to disburse funds on their own behalf. These agencies still maintain 

FBWT accounts and follow Treasury's reporting and reconciliation 

requirements. 

.04 Unlike commercial banking institutions, Treasury does not keep independent 

accounting records of each agency's FBWT accounts. Instead, Treasury uses 

monthly data reported by the agencies to calculate agencies' FBWT balances and 

requires agencies to perform detailed reconciliations of FBWT accounts to 

maintain the accuracy and reliability of agencies' fund balance records. 

Effective reconciliations also serve as a detection control for identifying 

unauthorized and unrecorded transactions at the agencies and Treasury. 

.05 Treasury requires agencies to maintain FBWT accounts and to perform a twopart reconciliation process each month. 

• First, agencies should reconcile differences identified by Treasury between 

cash receipts and disbursements transactions reported by agencies to those 

reported by other sources of financial data, such as the Federal Reserve, 
 Substantive Testing 

 921 – Auditing Fund Balance with Treasury (FBWT) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921-2 

commercial banks, other federal agencies, and the FMS regional financial 

centers. Treasury reports differences identified to agencies each month on 

"Statements of Differences."1

• Second, agencies should reconcile differences between their records and 

Treasury records of the monthly activity recorded in the FBWT accounts. 

Each month Treasury provides appropriation, fund, and receipt account 

ledgers, which include a rollforward of the previous month's balance, the 

current month's cash activity reported by the agency and other account 

activity (supplemental appropriations, recissions, nonexpenditure transfers, 

entries reported by other agencies) to compare to their records. 

Differences remain until reconciled by the agencies and represent potential 

misstatements in agencies' financial statements and budget execution reports. 

AUDIT ISSUES 

.06 Many agencies have problems in reconciling the transaction activity in their 

FBWT accounts. Ineffective FBWT reconciliations contribute to agencies' 

inability to prepare auditable financial statements. Without effective agency 

reconciliations of receipt and disbursement activity, the agency FBWT balance –

the amount of funds available to it for expenditure in each appropriation – may 

contain material misstatements, and auditors generally would be unable to 

determine whether FBWT is fairly stated. 

.07 Prior audits of agencies' financial statements identified instances in which 

agencies were not timely reconciling their FBWT accounts. Instead, some 

agencies adjusted their accounts to show the amounts reported by Treasury 

and/or recorded differences in suspense accounts without adequately 

researching the causes of the differences. Unreconciled differences recorded in 

suspense accounts could represent transactions that have not been recorded by 

the agency to the appropriate accounts. Only after researching its accounting 

records and reports can an agency determine the cause of the problem and make 

the proper adjustments to its FBWT accounts (and related asset, liability, 

expense, or revenue accounts) or advise Treasury to correct its records. 

.08 There were instances in which agencies did not receive Statements of 

Differences from Treasury, even though unreconciled differences existed. Some 

1

 The banking system data is reported via CASHLINK, other federal agencies via 

IPAC (which replaced OPAC in December 2001), and FMS regional financial 

centers via GOALS. See FAM section 921 A for more detail on the Treasury 

processes and reports related to FBWT reconciliation. 
 Substantive Testing 

 921 – Auditing Fund Balance with Treasury (FBWT) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921-3 

agencies did not use their accounting records to prepare monthly reports to 

Treasury. Instead, they reported the same amounts recorded in OPAC and 

CASHLINK to avoid Statements of Differences; generally these agencies tracked 

differences in suspense accounts. Because Treasury uses these sources to 

compare with the amounts reported by the agency, Treasury did not identify 

differences; thus, no Statements of Differences were issued. Also, some agencies 

cleared Statements of Differences by reporting adjustments to Treasury before 

researching and resolving differences. Therefore, amounts reported on 

Statements of Differences might not always be an adequate indicator of 

reconciliation problems or an adequate measure of the extent of outstanding 

unreconciled differences. Auditors should design tests to obtain an 

understanding of the agency's reconciliation procedures in order to assess the 

effect of its reconciliation process on the financial statements and to determine 

the level of audit procedures required after considering the materiality of 

unreconciled differences. 

.09 Because Treasury's record of an agency's FBWT is the result of the activity 

reported to Treasury by the agency itself, and is not obtained from another 

source, the reconciliation process is a key control over FBWT accounts. 

.10 One year's successful audit of the reconciliation of FBWT activity will generally 

not result in an auditable balance because the auditor faces the issue of auditing 

the beginning balance. Except for the first year of an appropriation, the 

balances in most FBWT accounts are included in the FBWT line item rollforward 

from year to year until the account is closed, which can be 5 years or more, 

depending on the type of appropriation. 

.11 In an initial audit, the auditor should design tests to obtain assurance on the 

FBWT beginning balance. This may require testing of FBWT reconciliations 

performed in prior years or other audit procedures that provide assurance on the 

FBWT line item. For example, in some instances detailed audit procedures over 

beginning balances related to other financial statement accounts that affect 

FBWT could provide assurance. In tests of other account balances, the auditor 

may be able to determine that old errors were written off or other appropriate 

adjustments were made to FBWT and that the fund balances from prior years 

and remaining unadjusted reconciling differences are immaterial. 

AUDIT APPROACH 

.12 Because Treasury relies on the monthly data reported by the agencies to 

calculate agencies' FBWT balances, confirmation of FBWT account balances 

with Treasury does not provide competent evidence. Therefore, the auditor 
 Substantive Testing 

 921 – Auditing Fund Balance with Treasury (FBWT) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921-4 

needs to obtain competent evidence through tests of the agency's FBWT 

reconciliation process. 

.13 Since most assets, liabilities, revenues, and expenses stem from or result in cash 

transactions, misstatements in the receipt or disbursement activity recorded in 

the FBWT accounts affect the balances of various financial statement accounts. 

Even though net FBWT account balances may be immaterial as of the date of the 

financial statements, the gross receipt and disbursement transactions flowing 

through the FBWT account during the fiscal year are usually material. 

Therefore, the auditor should test the reconciliation of the transaction activity 

flowing through the account. In addition, the auditor should assess the impact 

of gross unreconciled differences on the FBWT and other financial statement 

line items. 

.14 The auditor should design an audit program that includes steps to determine 

whether the agency 

• prepares monthly reports to Treasury using the same detailed accounting 

records of collection and disbursement transactions that are used to prepare 

the agency's financial statements; 

• researches and resolves the underlying causes of differences between 

amounts reported by Treasury and agency records each month and makes the 

proper adjustments; and 

• monitors suspense account activity – including maintaining detailed records 

of unreconciled differences charged to the account and maintaining records 

that age the differences – and performs procedures to timely and properly 

clear the account. 

.15 The auditor also should design procedures to determine the magnitude of the 

agency's gross unreconciled differences at year-end by analyzing the Treasury 

Statements of Differences reports and agency suspense account items in terms 

of their aggregate absolute values and resulting impact on the financial 

statements. (Since each difference represents a potential misstatement, the rollup and netting of charges and credits can significantly understate the total 

outstanding differences.) 
 Substantive Testing 

 921 – Auditing Fund Balance with Treasury (FBWT) 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921-5 

PRACTICE AIDS 

.16 The following practice aids are appended to this section: 

• Section 921 A – Treasury Processes and Reports Related to FBWT 

Reconciliation. 

• Section 921 B – Example Account Risk Analysis (ARA). 

• Section 921 C - Example Specific Control Evaluation (SCE). (Note that a 

single SCE of the line item/account-related accounting application for FBWT 

is presented. There are transaction-related accounting applications listed on 

the ARA that affect FBWT, such as cash receipts and cash disbursements, that 

would require transaction related SCEs.) 

• Section 921 D - Example Audit Procedures. 

.17 These aids are not all inclusive. They do not include tests of other accounts, 

such as Other Cash on Deposit bank accounts and Imprest Funds. Also, for 

agencies that write their own checks, the aids do not discuss or include tests of 

controls over check stock. If material, the auditor should apply appropriate 

additional tests. The aids provide the auditor with a framework for designing 

tests of FBWT accounts. Auditors should use professional judgment in designing 

audit programs for their particular agency after considering materiality, audit 

risks, and internal control. 

.18 The auditor should use judgment in determining the most effective and efficient 

method to achieve the audit objectives. When possible, the FBWT audit 

procedures should be coordinated with other tests. For example, many 

procedures may be performed in conjunction with tests of agency cash receipts 

and cash disbursements. Others may be included as part of compliance testing. 
[This page intentionally left blank.]
 Substantive Testing 

 

 921 A - TREASURY PROCESSES AND REPORTS 

RELATED TO FBWT RECONCILIATION

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 A-1 

A. Verification of Collections and EFT Disbursements 

Reports 

submitted by 

agencies 

Reports/data 

submitted by 

other sources 

Treasury FMS 

action 

Resulting 

Treasury reports 

to agencies 

Agencies report 

collections 

monthly on 

Statements of 

Transactions (SF 

224) or 

Statements of 

Accountability/ 

Transactions (SF 

1218/1221 or 

1219/1220) by 

ALC. 

Note: For 

agencies which 

report on SF 1218 

or 1219, 

electronic 

disbursements are 

netted against 

collections. 

CASHLINK 

system data 

(CASHLINK is 

used by the 

banking system to 

report collections 

and EFTs 

received from and 

on behalf of 

government 

agencies). 

Note: In 

CASHLINK, 

electronic 

disbursements 

are reported as 

"negative 

collections," or 

debit vouchers. 

FMS compares 

monthly 

collection totals 

reported on 

agency SF 224s, 

SF 1218/1221s, 

or SF 1219/1220s 

to transaction 

data available in 

CASHLINK. 

Month-end 

Statements of 

Differences (FMS 

6652) via GOALS 

for each month 

until the difference 

is cleared. 

Monthly detailed 

support list of 

transactions 

reported in 

CASHLINK. 

Reporting of FBWT accounts activity and balances 

 FMS reports 

agency FBWT 

accounts activity 

and balances 

based on data 

reported by 

agencies. 

Monthly 

appropriation and 

receipt account 

ledgers (FMS 6653 

and 6655) showing 

account activity 

and net balances 

for each 

appropriation, 

fund, and receipt 

account. 

Monthly 

appropriation and 

receipt account 

trial balances (FMS 

6654/ 6655) by 

department. 
 Substantive Testing 

 921 A – Treasury Processes and Reports Related to FBWT Reconciliation 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 A-2 

B. Verification of Disbursement Data 

Reports 

submitted by 

agencies 

Reports/data 

submitted by 

other sources 

Treasury FMS 

action 

Resulting 

Treasury reports 

to agencies 

1. Verification of Treasury Disbursement Office agency disbursements 

Agencies for 

which FMS 

regional financial 

centers disburse 

money submit 

monthly 

Statements of 

Transactions (SF 

224) by ALC. 

Agencies for 

which FMS 

regional finance 

centers disburse 

money report net 

interagency 

transactions on 

SF 224. 

FMS regional 

finance center 

Agency 

Confirmation 

Reports (include 

checks issued 

and electronic 

disbursements 

accomplished on 

behalf of the 

agency). 

The Interagency 

Payment and 

Collection 

system (IPAC) 

data are used by 

agencies and 

FMS to 

accomplish 

interagency 

transactions). 

FMS compares 

monthly 

disbursement 

totals reported 

on agency SF 

224s to 

disbursement 

data on regional 

finance center 

reports or IPAC. 

Monthly Statements 

of Differences 

(FMS 6652) for 

each month until 

the difference is 

cleared. 

Monthly detailed 

support listings of 

transactions 

reported by 

regional finance 

centers, and IPAC. 

Reporting of FBWT accounts activity and balances 

 FMS reports 

agency FBWT 

accounts activity 

and balances 

based on 

monthly data 

reported by 

agencies. 

Monthly 

appropriation 

account ledgers 

(FMS 6653) 

showing account 

activity and net 

balances for each 

appropriation and 

fund account. 

Monthly 

appropriation 

account trial 

balances (FMS 

6654) by 

department. 
 Substantive Testing 

 921 A – Treasury Processes and Reports Related to FBWT Reconciliation 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 A-3 

B. Verification of Disbursement Data 

Reports 

submitted by 

agencies 

Reports/data 

submitted by 

other sources 

Treasury FMS 

action 

Resulting 

Treasury reports 

to agencies 

2. Verification of Non-Treasury Disbursing Office (NTDO) agency 

disbursements 

Verification of interagency transactions: 

NTDO agencies 

report net 

interagency 

transactions on 

SF 1218/1221 or 

SF 1219/1220 by 

ALC. 

Interagency 

payment and 

collection system 

data. 

FMS compares 

monthly net 

disbursement 

totals reported on 

agency SF 

1218/1221s or SF 

1219/1220s to 

disbursement 

data in IPAC. 

Monthly 

Statements of 

Differences (FMS 

6652) for each 

month until the 

difference is 

cleared. 

Monthly detailed 

support lists of 

transactions 

reported by IPAC. 

Verification of checks paid 

NTDOs submit 

tapes detailing 

checks issued 

and Month-end 

Checks Issued 

Summary reports 

(SF 1179). 

Federal Reserve 

Banks submit 

tapes detailing 

checks paid. 

FMS performs a 

check by check 

comparison of 

checks issued to 

checks paid by 

the banking 

system (dollar 

amount). 

Advice of Check 

Issue Discrepancies 

(FMS 5206). 

Verification of checks issued: 

NTDOs submit 

monthly 

Statements of 

Accountability/ 

Transactions (SF 

1218/1221 or SF 

1219/1220). 

SF 1179, MonthEnd Checks 

Issued Summary 

report submitted 

by NTDO 

agencies and 

checks paid by 

the banking 

system. 

FMS compares SF 

1179 data 

(adjusted for FMS 

5206 dollar 

differences) to 

the agency 

disbursements 

reported on SF 

1218/1221 or SF 

1219/1220 (total 

checks issued to 

total checks 

paid). 

Two-, 4-, 6-, & 8-

month letters 

notifying agencies 

of any outstanding 

discrepancies over 

$50. 
 Substantive Testing 

 921 A – Treasury Processes and Reports Related to FBWT Reconciliation 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 A-4 

B. Verification of Disbursement Data 

Reports 

submitted by 

agencies 

Reports/data 

submitted by 

other sources 

Treasury FMS 

action 

Resulting 

Treasury reports 

to agencies 

2. Verification of Non-Treasury Disbursing Office (NTDO) agency 

disbursements 

Reporting of FBWT accounts activity and balances 

 FMS reports 

agency FBWT 

accounts activity 

and balances 

based on monthly 

data reported by 

agencies. 

Monthly 

appropriation 

account ledger 

(FMS 6653) 

showing account 

activity and net 

balances for each 

appropriation and 

fund account. 

Monthly 

appropriation trial 

balance (FMS 6654) 

by department. 
Substantive Testing 

921 B - EXAMPLE ACCOUNT RISK ANALYSIS FOR FUND BALANCE WITH 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Fund Balance with Treasury 

 

 ACCOUNT RISK ANALYSIS FORM 

 File: 

PLANNING PHASE INTERNAL CONTROL PHASE 

Account 

 Name Balance 

Financial statement 

assertions / risks 

Inherent, fraud, and 

control risk factors 

Cycle/ 

accounting 

application 

Effectiveness 

of control activities1

Control 

risk 

Combined 

risk 

Fund Balance with Treasury 

$xx,xxx m Existence or occurrence 

Recorded Fund Balance with Treasury (FBWT) does not exist. 

Control risk arises from the (1) highly decentralized structure of the agency, which reduces management's knowledge of and control over operations, (2) significant weaknesses in general controls over the automated systems the agency relies extensively upon to process transactions and (3) lack of adequate management oversight of the reconciliation process. Inherent risk arises from the high volume of transactions flowing through the account. 

Cycles: 

Revenue Payroll Budget Treasury Applications:

FBWT Cash receipts Cash disbursements 

1 Omitted from this example. 
Substantive Testing 

921 B - Example Account Risk Analysis for Fund Balance with TreasuryApril 2003 GAO/PCIE Financial Audit Manual - Part II 

Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Fund Balance with Treasury 

 

 ACCOUNT RISK ANALYSIS FORM 

 File: 

PLANNING PHASE INTERNAL CONTROL PHASE 

Account 

 Name Balance 

Financial statement 

assertions / risks 

Inherent, fraud, and 

control risk factors 

Cycle/ 

accounting 

application 

Effectiveness 

of control activities1

Control 

risk 

Combined 

risk 

Completeness

FBWT is omitted from the financial statements or is incomplete. 

Control risk arises from the (1) highly decentralized structure of the agency, which reduces management's knowledge of and control over operations, (2) significant weaknesses in general controls over the automated systems the agency relies extensively upon to process transactions and (3) lack of adequate management oversight of the reconciliation process. Inherent risk arises from the high volume of transactions flowing through the account. 

Cycles: 

Revenue Payroll Budget Treasury Applications:

FBWT Cash receipts Cash disbursements 
Substantive Testing 

921 B - Example Account Risk Analysis for Fund Balance with TreasuryApril 2003 GAO/PCIE Financial Audit Manual - Part II 

Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Fund Balance with Treasury 

 

 ACCOUNT RISK ANALYSIS FORM 

 File: 

PLANNING PHASE INTERNAL CONTROL PHASE 

Account 

 Name Balance 

Financial statement 

assertions / risks 

Inherent, fraud, and 

control risk factors 

Cycle/ 

accounting 

application 

Effectiveness 

of control activities1

Control 

risk 

Combined 

risk 

Valuation/Accuracy Fund Balance with Treasury is not recorded accurately. 

No significant inherent, fraud or control risk factors identified. 

Cycles: 

Revenue Payroll Budget Treasury Applications:

FBWT Cash receipts Cash disbursements 
Substantive Testing 

921 B - Example Account Risk Analysis for Fund Balance with TreasuryApril 2003 GAO/PCIE Financial Audit Manual - Part II 

Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Fund Balance with Treasury 

 

 ACCOUNT RISK ANALYSIS FORM 

 File: 

PLANNING PHASE INTERNAL CONTROL PHASE 

Account 

 Name Balance 

Financial statement 

assertions / risks 

Inherent, fraud, and 

control risk factors 

Cycle/ 

accounting 

application 

Effectiveness 

of control activities1

Control 

risk 

Combined 

risk 

RightsAgency does not have certain rights to Fund Balance with Treasury because of transfers, rescissions, and restrictions. 

Inherent risk arises from the high number of appropriation, fund and receipt accounts, including certain special funds and trust funds that do not belong to the agency. Because these nonentity accounts are maintained within the same system used to maintain entity accounts and financial activity, there is a risk that these accounts will be inappropriately charged and be included in the FBWT line item. Same control risks as for existence and completeness. 

Treasury 
Substantive Testing 

921 B - Example Account Risk Analysis for Fund Balance with TreasuryApril 2003 GAO/PCIE Financial Audit Manual - Part II 

Entity: Agency Date of Financial Statements: September 30, 20xx Line Item: Fund Balance with Treasury 

 

 ACCOUNT RISK ANALYSIS FORM 

 File: 

PLANNING PHASE INTERNAL CONTROL PHASE 

Account 

 Name Balance 

Financial statement 

assertions / risks 

Inherent, fraud, and 

control risk factors 

Cycle/ 

accounting 

application 

Effectiveness 

of control activities1

Control 

risk 

Combined 

risk 

Presentation and disclosureFund Balance with Treasury is not properly classified and disclosed in the financial statements. 

No significant inherent or fraud risk factors identified. Same control risks as for existence and completeness. 

Treasury 
[This page intentionally left blank.]
Substantive Testing 

921 C - EXAMPLE SPECIFIC CONTROL EVALUATION FOR FUND BALANCE 

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

Existence or Occurrence 

Existence Existence Substantiation

1. Recorded FBWT 

does not exist as of a given date. 

1a. Recorded FBWT 

amounts should exist as of a given date. 

(See note 1.) 

1. Agency staff performs 

monthly reconciliation between agency general ledger (G/L) and Treasury records (appropriation and receipt account ledgers, FMS 6653 and FMS 6655). 

2. Agency staff resolves receipt 

and disbursement differences reported by Treasury via the FMS 6652, Statements of Differences for collections and disbursements. 
Substantive Testing 

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

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

3. Agency staff resolves 

disbursement differences reported by Treasury via the Advice of Check Issued Discrepancy Report (FMS 5206) and Difference Notification to the Disbursing Office (NTDO agencies). 

 1b. Recorded FBWT, 

at a given date, should be supported by appropriate detailed records that are accurately summarized and reconciled to the account balance. 

1. Agency staff reconciles the 

monthly Statement of Transactions (SF 224) submitted to Treasury, to the applicable G/L accounts. 

2. Agency staff reconciles the 

monthly Statement of Accountability/transactions (SF1219/1220 or SF1218/ 1221) submitted to Treasury, to the applicable G/L accounts (NTDO agencies). 

3. Same as 1.1a.1 
Substantive Testing 

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

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

1c. Access to FBWT, 

critical forms, records, and processing and storage areas should be permitted only in accordance with laws, regulations, and management policy. 

1. Not covered in this example. Note: For agencies that disburse funds on their own behalf (NTDOs), and maintain cash and/or check stock on hand, auditors will need to document and test the effectiveness of the control activities in place. 

Completeness Completeness Complete- ness Account completeness

2. FBWT balance 

exists but is omitted from the financial statements. 

2a. FBWT balance 

should be included in the financial statements. 

1. Same as 1.1a.1, 1.1a.2, 1.1a.3. 2. Agency staff reconciles the 

FBWT line item crosswalk that includes all G/L FBWT accounts to the Treasury Appropriation and Receipt Trial Balances. 
Substantive Testing 

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

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

Valuation or allocation 

Valuation Valuation Accuracy

3. FBWT receipt and 

disbursement transactions are recorded incorrectly. 

3a. FBWT 

transactions should be recorded accurately. 

1. Same as 1.1a.1. 2. Same as 1.1a.2. 3. Same as 1.1a.3. 

Rights and obligations: 

Rights Rights Ownership 

4. Recorded FBWT is 

owned by others. 

4a. Agency should 

own recorded FBWT. 

1. Agency staff reconciles 

Treasury appropriation warrants, appropriation recissions, and nonexpenditure transfers to FBWT accounts. 

2. Agency staff reconciles 

expenditure (cash receipts and disbursements) activity to the FBWT accounts. 
Substantive Testing 

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

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

Rights 5. Agency does not 

have certain rights to recorded FBWT because of appropriation restrictions. 

5a. Recorded FBWT 

should be agencies' rights at a given date. 

1. Same as 4.4a.1. 
Substantive Testing 

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

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

Presentation and disclosure 

Disclosure Disclosure Account classification 

6. FBWT is not 

properly classified and described in the financial statements. 

6a. FBWT should be 

properly classified and described in the financial statements. 

1. Agency staff reconciles 

Treasury Undisbursed Appropriation Account and Receipt Account trial balances to the G/L accounts. 

2. The Chief Accountant 

reviews the FBWT account analysis and crosswalk to the FS against the Treasury Financial Management Supplement–U.S. 

Government Standard 

General Ledger (section V). 
Substantive Testing 

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

Entity: Agency Date of Financial Statements: 

 September 30, 20xx 

Accounting application: Fund 

Balance with Treasury 

SPECIFIC CONTROL EVALUATION Preparer: 

 (Line Item/Account-Related) Region: 

 File: Date: 

April 2003 GAO/PCIE Financial Audit Manual - Part II 

Relevant assertions in line 

Accounting items 

application 

assertions FBWT Various 

Potential 

misstatements in 

accounting application 

assertions 

Control objectives Internal control activities 

(

 Presentation Presentation Consistency 

7. The financial statements components 

of FBWT are based on accounting principles different from those used in prior periods. 

7a. FBWT should be 

based on accounting principles that are applied consistently from period to period. 

1. The CFO, Reports and 

Analysis Branch Chief, and the Chief Accountant review the financial statements for consistently applied accounting principles. 

 Disclosure Disclosure Disclosure 

8. Required 

information is not disclosed in the financial statements or in the footnotes thereto. 

8a. The financial 

statements or footnotes thereto should contain all information required to be disclosed. 

1. The CFO, Reports and 

Analysis Branch Chief, and the Chief Accountant review the financial statements for consistently applied accounting principles and required disclosure. 

Note 1: The internal control activities 1.1a.1 and 1.1b.1 generally rely on system outputs that are dependent on IS general controls, which 

agencies. (Tests of controls over agencies' general ledger systems should be included as part of computer control tests.) The control activdisbursement balances with Treasury records that are obtained from third parties (banks, Treasury regional finance centers, other agencies
[This page intentionally left blank.]
Substantive Testing 

 

 921 D - EXAMPLE AUDIT PROCEDURES FOR FUND 

BALANCE WITH TREASURY

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-1 

 Entity _______________________________________________________________ 

 Period of financial statements ____________________________________________ 

 Job code _____________________________________________________________ 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

I. Planning Phase 

FB-1 

A. To obtain an understanding of the agency's accounting 

and reporting requirements for Fund Balance with 

Treasury (FBWT) accounts, read the following 

documents: 

• Treasury Financial Manual, Volume I, part 2, chapter 

5100 - Reconciling Fund Balance with Treasury 

accounts, http://fms.treas.gov/fundbalance. 

• Current OMB bulletin, Form and Content of Agency 

Financial Statements.

• Statements of Federal Financial Accounting 

Standards (SFFAS No. 1). 

• Agency accounting policies and procedures for the 

Fund Balance with Treasury Accounts. 

 

B. Read prior year documentation, financial statements, 

and related auditor's reports to determine if there were 

any audit issues/reportable conditions related to FBWT. 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-2 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

II. Internal Control Phase 

FB-2

A. To obtain an understanding of the agency's internal 

controls over FBWT accounts, perform the following: 

1. Interview key agency staff about the FBWT 

procedures and controls in place at the agency. 

a. Determine what method the agency uses to 

disburse funds (FMS regional finance centers, 

on its own behalf, and/or both methods). 

b. Obtain an understanding of the significant 

accounting systems and controls used in 

reporting and accounting for FBWT 

transactions. 

c. Identify FBWT line item general ledger accounts.

d. Obtain an understanding of the agency's FBWT 

reconciliation procedures. Ask 

• if and how the agency tracks differences 

between the agency's and Treasury FBWT 

records; 

• what suspense accounts, if any, are used by 

the agency to track unreconciled differences; 

• if the agency has a process/system for aging 

unreconciled differences; and 

• how the agency reports and handles 

differences. 

 

B. Walk through the FBWT reconciliation process and 

determine whether reconciliation controls have been 

placed in operation. 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-3 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

III. Testing Phase 

FB-3 

A. To determine whether the agency's reconciliation of the 

monthly SF 224, 1219/1220 or 1218/1221 Statement of 

Transactions/Accountability report submitted to 

Treasury, to the applicable general ledger (G/L) 

accounts is effective (existence): 

1. Obtain a list of the agency's Agency Location Codes 

(ALCs). Agency ALCs can be obtained through the 

GOALS. ALCs indicate the agency’s method of 

disbursement. Four digit ALCs indicate a nonTreasury disbursing agency. Eight digit ALCs 

indicate a Treasury disbursing agency. 

2. Obtain the monthly Statements of Transactions (SF 

224) or Statements of Accountability/Transactions 

(SF 1219/1220 or 1218/1221) for each ALC for the 

fiscal year, or for the period being audited if testing 

at an interim date. 

3. Select the individual Statements of Transactions (SF 

224) or Statements of Accountability/Transactions 

(SF 1219/1220 or 1218/1221) to be tested (use 

separate forms to document the sampling plan). 

Indicate selection method. 

• Dollar unit sampling (DUS), 

• Classical Variables Estimation Sampling, or 

• Other (describe) 

___________________________ 

 For each statement selected: 

a. Compare the ALC on the SF 224 or SF 1219/1220 

or 1218/1221 to the agency's list of ALCs. 

b. Trace monthly collection and disbursement 

amounts reported on the SF 224, SF 1219/1220 or 

SF 1218/1221 to amounts recorded in the 

agency's official accounting records (G/L). 

c. Trace any prior period adjustment amounts 

reported on the SF 224, SF 1219/1220 or SF 

1218/1221 to supporting documentation and the 

agency's G/L. 

d. Examine supporting documentation for any 

differences. 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-4 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

B. Summarize the results of testing. 

C. Determine whether the results of testing indicate that 

combined risk should be assessed differently and 

whether the audit procedures should be revised. 

 

FB-4 

A. To determine whether the agency is properly 

reconciling collection and disbursement differences 

identified by Treasury (existence and completeness): 

1. Obtain the following Treasury reports for each ALC 

for each month of the fiscal year, or for the period 

being audited if testing at an interim date. 

• Final month-end Statements of Differences (FMS 

6652). Note: To obtain the population of 

Statements of Differences, obtain the initial

month-end Statements of Differences issued by 

Treasury. Treasury issues month-end 

Statements of Differences for each accounting 

month (when differences are identified) and 

continues to send statements for that month 

until the difference is cleared. To obtain the 

initial differences reports for the period being 

audited, obtain the reports that show the same 

accounting date and audit date on the statement, 

indicating that this is the initial statement of 

differences issued for that month. 

• Advice of Check Issued Discrepancy reports 

(FMS 5206). (Note: This step applies only for 

agencies that disburse their own funds – NonTreasury Disbursing Offices (NTDO) agencies.) 

• Treasury letters notifying the agency of 

outstanding differences between amounts 

reported on the SF 1219/1220 or SF 1218/1221 

and its check issued summary reports. (Note: 

This step applies only for NTDO agencies.) 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-5 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

Select the individual statements/letters to be tested 

(use separate forms to document the sampling 

plan). Indicate selection method: 

• Dollar unit sampling (DUS), 

• Classical variables estimation sampling, or 

• Other (describe). 

_____________________________ 

 

 For each statement/letter selected: 

a. Compare the ALC number on the 

statement/report to the agency's list of ALCs. 

 

b. Examine the agency's reconciliation 

files/documentation supporting the 

reconciliation of the difference, and determine if 

differences were adequately researched and 

resolved. 

 

c. Trace resulting adjustments, if any, to 

subsequent month Treasury reporting (SF 224, 

1219/1220, or 1218/1221) and/or the agency 

general ledger accounts to determine if 

adjustments were properly recorded. (Note: 

reconciling items do not always result in 

adjustments to the G/L and/or Treasury records. 

The resulting adjustment, if any, depends on the 

cause of the difference. For example, an 

adjustment to the agency's G/L is not necessary 

when a bank error caused the difference. The 

bank is responsible for reporting the adjustment 

to Treasury.) 

 

B. Summarize the results of testing and conclude on the 

effectiveness of the agency's reconciliation controls. 

 

C. Determine if the results of testing indicate that 

combined risk should be assessed differently and if the 

audit procedures should be revised. 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-6 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

FB-5 

A. To determine if the agency's monthly reconciliation of 

its G/L to Treasury records is effective (existence and 

completeness): 

1. For the months that correspond to the Statements 

of Differences selected above, obtain the 

Undisbursed Appropriation Account ledgers (FMS 

6653) and Receipt Account ledgers (FMS 6655) sent 

by Treasury and the agency's reconciliation. 

• Trace the FMS 6653/6655 balance per the agency 

reconciliation to the FMS 6653/6655 reports sent 

by Treasury. 

• Trace the G/L account balances per the 

reconciliation to the appropriate G/L accounts. 

• Trace account activity per the FMS 6653/6655 to 

the agency G/L. (Note: Typical activity, other 

than agency disbursements and receipts, may 

include supplemental appropriations, nonexpenditure transfers, and entries reported by 

other agencies.) 

• Examine supporting documentation for 

reconciling items. 

• Determine if the appropriate adjustments were 

made to the general ledger or that Treasury had 

been notified of needed corrections. 

 

B. Summarize the results of testing and conclude on the 

effectiveness of the agency's reconciliation controls. 

 

C. Determine if the results of testing indicate that 

combined risk should be assessed differently and if the 

audit procedures should be revised. 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-7 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

FB-6 

A. To determine whether the agency's year-end 

(September) reconciliation of FBWT accounts is 

effective (existence and completeness): 

1. Obtain the Agency's year-end (September) FBWT 

reconciliation and Treasury's September 

Undistributed Appropriation Account Ledger (FMS 

6653) and Receipt Account Ledger (FMS 6655). 

• Trace appropriation, fund, and receipt account 

balances reported on the Treasury account 

ledgers to the agency's reconciliation. 

• Trace the appropriation, fund, and receipt 

account balances reported on the Treasury 

account ledgers to the agency general ledger. 

• Examine supporting documentation for 

reconciling items. 

• Determine if appropriate adjustments were made 

to the G/L and/or reported to Treasury. 

 

2. Obtain the year-end (September) Statements of 

Differences reports issued by Treasury (FMS 6652, 

and/or FMS 5206 and Treasury notification letters). 

• Trace reported differences to the agency's 

reconciliation to determine if all differences 

were included in the FBWT reconciliation. 

• Examine supporting documentation and 

determine if differences were adequately 

resolved. 

• Trace resulting adjustments to supplemental 

Statements of Transactions/Accountability or 

subsequent month Treasury reporting (SF 224, 

1219/1220, or 1218/1221) and/or the agency 

general ledger. 

 

3. Summarize the results of testing. 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-8 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

FB-7 

A. To determine the extent of unreconciled differences at 

year-end and the potential impact on the agency FBWT 

account balance: 

1. Determine if unresolved differences reported by 

Treasury on Statements of Differences as of 

September 30 for the fiscal year being audited were 

subsequently resolved and properly accounted for. 

• Obtain the Statements of Differences for the 

months subsequent to year-end (October 

through end of fieldwork). 

• Identify unreconciled differences outstanding at 

9/30 that were subsequently resolved. 

• Determine if the differences were adequately 

researched and resolved. 

• Determine if the appropriate adjustments were 

made to the agency FBWT accounts or that 

Treasury had been notified of needed 

corrections. 

 

2. Determine the extent of unreconciled differences 

included in suspense accounts that are not included 

on Statements of Differences. 

• Obtain suspense account transaction detail 

report as of 9/30 for the year being audited. 

• Obtain suspense account transaction detail 

report for months subsequent to year-end 

(October through end of fieldwork). 

• Identify unreconciled differences outstanding at 

9/30 that were subsequently resolved. 

• Determine if the differences were adequately 

researched and resolved. 

• Determine if the appropriate adjustments were 

made to the agency FBWT accounts or that 

Treasury had been notified of needed 

corrections. 

 

3. Assess the materiality of all unreconciled 

differences outstanding (at absolute value). 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-9 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

4. Summarize test results. 

5. Document the potential effect of material 

unreconciled differences on the FBWT line item and 

other financial statement accounts. 

 

FB-8 

A. To determine if the agency recorded warrants, 

appropriation transfers, and rescissions properly, 

perform the following (rights and obligations): 

1. For first year appropriations, obtain copies of the 

appropriation legislation and U.S. Treasury 

Appropriation Warrants (FMS 6200) for the fiscal 

year. 

• Compare the warrants to the appropriation 

legislation. 

• Trace amounts reported on the appropriation 

warrants to beginning appropriation balances 

recorded in the general ledger FBWT accounts. 

• Examine supporting documentation for any 

differences/reconciling items. 

 

2. For other than first year appropriations, trace the 

beginning balances recorded in the general ledger to 

audited ending balances of the prior fiscal year 

financial statements. (Note: If this is a first year 

audit, additional work may be necessary to 

substantiate the beginning FBWT account balance. 

For example, the auditor may need to consider if 

the reconciliation process has been effective over 

the life of the appropriations. This may require 

review of prior year reconciliations.) 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-10 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

3. For appropriation activity occurring during the 

fiscal year being audited (supplemental 

appropriations, rescissions, and nonexpenditure 

transfers), obtain copies of related legislation for 

supplemental appropriation and rescission warrants 

and U.S. Treasury Non-Expenditure Transfer 

Authorizations form (FMS 1151) for the fiscal year. 

• Compare supplemental appropriations and 

rescissions recorded in the agencies' FBWT 

account to appropriation legislation and to U.S. 

Treasury warrants. 

• Compare non-expenditure transfer amounts 

recorded in the agencies' FBWT account to 

approved Non-Expenditure Transfer 

Authorizations form (FMS 1151). 

 

4. Examine supporting documentation for any 

differences/reconciling items. 

 

FB-9 

A. To determine the existence and completeness of the 

appropriation, fund, and receipt accounts included in 

the FBWT financial statement balance (existence, 

completeness, presentation and disclosure): 

1. Obtain the agency "crosswalk" of G/L accounts 

included in the FBWT line item and the September 

Treasury Undisbursed Appropriation Account Trial 

Balance and Receipt Account Trial Balance. 

• Trace account balances listed on the Treasury 

trial balances to the agency crosswalk of G/L 

accounts included in the FBWT line item. 

• Determine the status of accounts (i.e., open, 

expired, canceled) and assess whether the 

account is appropriately included in the FBWT 

line item. 

• Obtain an explanation and determine the 

appropriateness of accounts omitted from or 

included in the crosswalk that were not included 

in the Treasury trial balance. 

 
Substantive Testing 

921 D – Example Audit Procedures for Fund Balance with Treasury 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 921 D-11 

FBWT Example Audit Procedures: 

Description of Procedure 

Done 

by/date 

W/P 

ref 

IV. Reporting Phase 

FB-10 

A. To determine if the FBWT balance appears reasonable 

(analytical procedure): 

1. Compare the G/L accounts that constitute the FBWT 

with expectations and obtain explanation for any 

unexpected changes (e.g., credit balances, new 

accounts, closed accounts) or the absence of 

expected changes. 

 

2. Determine if additional testing is necessary. 

B. To assess whether the presentation of the financial 

statements and footnote disclosures for the FBWT line 

item are in accordance with U.S. generally accepted 

accounting principles (SFFAS No. 1) (presentation and 

disclosure) (see GAO/PCIE FAM, Part II, section 1004-

Financial Reporting: Checklist for Reports Prepared 

under the CFO Act): 

1. Determine if the agency has presented and disclosed 

FBWT in the notes to the financial statements in 

accordance with U.S. generally accepted accounting 

principles. 

 

2. Determine if material unreconciled differences are 

disclosed and explained in the notes to the financial 

statements. 

 

3. Determine if material unreconciled differences that 

were written off by the agency during the fiscal year 

being audited are disclosed in the notes to the 

financial statements. 

 

4. Determine if material restrictions, if any, have been 

properly disclosed. 

 

FB-11 

A. Prepare proposed audit adjustments, if any.

 

B. Conclude if the FBWT line item is fairly stated and if 

the controls over FBWT are effective. 

 
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 Reporting 

 

 1002 – INQUIRIES OF LEGAL COUNSEL 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-1 

.01 This section provides guidance on procedures for the auditor to perform to 

obtain evidence that the financial accounting and reporting of contingencies1

regarding litigation, claims, and assessments conform with U.S. generally 

accepted accounting principles (GAAP), as described in FAM sections 280 and 

550. This section discusses the accounting and reporting guidance and audit 

procedures for inquiries of legal counsel concerning litigation, claims, and 

assessments, and includes examples of a legal representation letter request, a 

legal representation letter response, including the Department of Justice's 

standard forms for legal contingencies, and management's schedule for 

summarizing the information contained in the legal response. 

ACCOUNTING AND REPORTING GUIDANCE 

.02 Entity management is responsible for implementing policies and procedures to 

identify, evaluate, account for, and disclose litigation, claims, and assessments as 

a basis for the preparation of financial statements in conformity with GAAP. 

.03 Statement of Federal Financial Accounting Standards (SFFAS) No. 5, Accounting 

for Liabilities of the Federal Government, as amended by SFFAS No. 12, 

Recognition of Contingent Liabilities Arising from Litigation: An Amendment of 

SFFAS No. 5, Accounting for Liabilities of the Federal Government, contains 

accounting and reporting standards for loss contingencies, including those 

arising from litigation, claims, and assessments.2

 The Federal Accounting 

Standards Advisory Board (FASAB) Interpretation No. 2, Accounting for 

Treasury Judgment Fund Transactions, clarifies GAAP related to claims to be 

1 Environmental and disposal liabilities are a type of contingency that is often a 

significant issue. 

2 SFFAS No. 7 has guidance for reporting claims for tax refunds. Rather than 

recognizing probable claims and disclosing other claims in the notes to the 

financial statements, SFFAS No. 7 indicates that other claims for refunds that are 

probable should be included as supplementary information. 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-2 

paid through the Treasury Judgment Fund.3 Statement of Financial Accounting 

Standards No. 5, Accounting for Contingencies, also provides guidance for 

financial accounting and reporting for loss and gain contingencies for those 

entities following GAAP for nongovernmental entities. The definition of probable 

for legal contingencies is now essentially the same in Statement of Financial 

Accounting Standard No. 5 and SFFAS No. 5, since SFFAS No. 12 has amended 

the latter. 

.04 A contingency is an existing condition, situation, or set of circumstances 

involving uncertainty as to possible gain or loss to an entity. The uncertainty will 

ultimately be resolved when one or more future events occur or fail to occur. 

When a loss contingency exists, the likelihood that the future event or events will 

confirm the loss or impairment of an asset or the incurrence of a liability can 

range from probable to remote. SFFAS Nos. 5 and 12 use the terms probable, 

reasonably possible, and remote to identify three areas within the range of 

potential loss, as follows: 

• Probable—For pending or threatened litigation and unasserted claims, the 

future confirming event or events are likely to occur. (For other 

contingencies, the future event or events are more likely than not to occur.) 

• Reasonably possible—The chance of the future event or events occurring is 

more than remote but less than probable. 

• Remote—The chance of the future event or events occurring is slight. 

 

3

 A permanent, indefinite appropriation, commonly known as the Judgment Fund, 

is available to pay final judgments, settlement agreements, and certain types of 

administrative awards against the United States when payment is not otherwise 

provided for. The Secretary of the Treasury certifies all payments from the fund. 

 (See 31 U.S.C. 1304, Judgments, awards, and compromise settlements.) FASAB 

Interpretation No. 2 clarifies how federal entities should report the costs and 

liabilities arising from claims to be paid by the Judgment Fund and how the 

Judgment Fund should account for the amounts that it is required to pay on 

behalf of federal entities. 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-3 

.05 A liability and the related cost for an estimated loss from a loss contingency 

should be recognized (accrued by a charge to income) when4

a. a past event or exchange transaction has occurred, 

b. a future outflow or other sacrifice of resources is probable, and 

c. the future outflow or sacrifice of resources is measurable. 

.06 Disclosure of the nature of an accrued liability for loss contingencies, including 

the amount accrued, may be necessary for the financial statements not to be 

misleading. For example, if the amount recognized is large or unusual, 

disclosure should be considered. However, if no accrual is made for a loss 

contingency because one or more of the conditions in paragraph 1002.05 are not 

met, disclosure of the contingency should be made when there is at least a 

reasonable possibility that a loss has been incurred. The disclosure should 

include the nature of the contingency, and an estimate of the possible liability or 

range of possible liability, if estimable, or a statement that such an estimate 

cannot be made. In addition, if the Judgment Fund might be involved in the 

payment of the possible loss, the federal entity involved in the litigation should 

discuss the Judgment Fund's role in a note to the financial statements. 

.07 Although management often relies on advice of legal counsel about the 

(a) likelihood of an unfavorable outcome and (b) estimates of the amount or 

range of potential loss for litigation, claims, and assessments, management is 

ultimately responsible for determining whether these contingencies are probable, 

reasonably possible, or remote. Management does this to decide whether they 

should be recognized as liabilities and/or disclosed in the notes to the financial 

statements. Thus, the Office of Management and Budget's (OMB) audit guidance 

requires CFO Act agency management to prepare a schedule summarizing legal 

contingencies including whether they are probable, reasonably possible, or 

remote, and whether (and in what amounts) they have been accrued or disclosed 

in the financial statements (see example summary schedule in FAM section 

1002 D). 

4

 If the Judgment Fund will pay the claim, the entity should still recognize the 

liability and cost at this time. Once the claim is settled or a court judgment is 

assessed and the Judgment Fund is determined to be the appropriate source for 

payment, the entity should reduce the liability by recognizing an (imputed) 

financing source. Note that for Judgment Fund payments made under the 

Contract Disputes Act and in employment discrimination cases, the entity should 

instead establish a payable to reimburse the Judgment Fund. 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-4 

AUDIT PROCEDURES 

.08 The auditor should design procedures to test the entity's accounting for and 

disclosure of litigation, claims, and assessments. AU 337 (SAS 12) provides 

guidance on the procedures to identify litigation, claims, and assessments so that 

the auditor may obtain evidence that they are appropriately accounted for and 

disclosed. AU 9337 provides auditing interpretations of AU 337. OMB guidance 

for audits of federal financial statements also contains procedures for inquiries of 

legal counsel. (See FAM section 1002 A for example audit procedures.) 

.09 The auditor should obtain evidence relevant to the following factors with respect 

to litigation, claims, and assessments: 

a. The existence of a condition, situation, or set of circumstances indicating 

uncertainty as to the possible loss to an entity arising from litigation, claims, 

and assessments. 

b. The period in which the underlying causes for legal action occurred. 

c. The likelihood of an unfavorable outcome (probable, reasonably possible, or 

remote). 

d. The amount or range of potential loss, if estimable. 

.10 The auditor should discuss with management the events or conditions that should 

be considered in the accounting for and reporting of litigation, claims, and 

assessments. The auditor should perform audit procedures to corroborate the 

information provided by management, including requesting that management 

send a legal letter request to the entity's legal counsel. An example audit 

program is in FAM section 1002 A. The audit procedures should be modified, as 

appropriate, for the particular entity. 

.11 A letter from legal counsel to the auditor, in response to a legal letter request 

from management to legal counsel, is the auditor's primary means of 

corroborating the information furnished by management concerning the 

accuracy and completeness of litigation, claims, and assessments. The legal 

letter request may include a list of pending or threatened litigation, claims, and 

assessments or a request by management that legal counsel prepare the list. The 

legal letter request also may include a list of unasserted claims and assessments 

considered probable of assertion, and that, if asserted, would have at least a 

reasonable possibility of an unfavorable outcome, to which legal counsel has 

devoted substantive attention on the entity's behalf in the form of legal 

consultation or representation (or a statement that management is not aware of 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-5 

any matters meeting the criteria). Legal counsel then would supplement 

management's information about those unasserted claims and assessments, 

including an explanation of matters where his or her views differ from those 

expressed by management in the legal letter request. In the federal government, 

where the general counsel may be part of management, the general counsel may 

instead provide the list of unasserted claims or assessments meeting the above 

criteria. The legal letter request should also include a request for legal counsel to 

make a statement that he or she will advise management about unasserted claims 

and assessments that should be considered for disclosure. (See the example 

request and response in FAM sections 1002 B and 1002 C.) 

Timing of Legal Letter Request and Responses 

.12 The audit procedures for inquiries of legal counsel concerning litigation, claims, 

and assessments should be performed on a timely basis to give priority to the 

resolution of potential problem areas and to complete other procedures. To 

meet deadlines, the auditor, entity management, and legal counsel should 

coordinate the timing of legal letter requests, responses (including interim 

responses), and related management schedules. The auditor and the entity 

management should consider the due dates for providing legal letter responses 

for the entity financial statements as well as for the U. S. Government's 

Consolidated Financial Statements. (OMB sometimes provides these dates for 

the governmentwide audit.) The due dates should enable the auditors to timely 

complete their work, including the potential need for management to inquire of 

Department of Justice legal counsels on a case-specific basis. 

.13 In addition, when an entitywide audit team uses the work of entity component 

audit teams, the entitywide and component audit teams should coordinate the 

timing of legal letter requests, responses, and management schedules and 

consider the due dates for the component financial statements as well as the 

entitywide financial statements. The entitywide team generally should receive 

copies of the component letters. 

.14 The legal counsel's response should include matters that existed at the balance 

sheet date and through the end of fieldwork. The effective date (the latest date 

covered by the legal counsel's review) should be as close as feasible to the 

completion of fieldwork. If the effective date is substantially in advance of the 

end of fieldwork (for example, earlier than 2 weeks before end of fieldwork), the 

auditor should contact the legal counsel for an updated response. To avoid this 

situation, the legal letter request should clearly specify the period the legal 

counsel's response should cover and the date the auditor should receive the 

response. 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-6 

.15 To assist the auditor in completing the review of legal matters in a timely manner 

(and to assist management in preparing the financial statements), the auditor 

may ask management to request legal counsel to submit a preliminary or interim 

response covering matters that existed at the balance sheet date and through a 

point in time reasonably before the end of fieldwork so that a preliminary 

evaluation of the significance of material legal matters can be made. Then, the 

legal counsel should submit a final or updated response covering matters through 

the end of fieldwork. The updated response generally should contain only 

changes or a statement indicating there are no changes from the interim 

response. (See FAM section 1002 B for an example legal letter request that 

includes requests for interim and updated responses from legal counsel.) 

Determining a Materiality Level 

.16 The auditor may limit the inquiry to matters that are considered individually or 

collectively material to the financial statements, provided the entity and the 

auditor have reached an understanding and agreement on the materiality level. 

The materiality level, if used, should be documented in the legal letter request 

and in the response. 

.17 In determining a materiality level for the legal letter, the auditor should set the 

level sufficiently low that the cases not included in the legal letter would not be 

material to the financial statements taken as a whole when aggregated with 

(1) other cases not included in the letter, (2) all other types of contingencies, 

(3) all other items that would not be adjusted because they are judged immaterial 

(unadjusted misstatements), (4) all other amounts in the financial statements that 

would not be tested directly because they were judged to be immaterial, and 

(5) all other items resolved on the basis of materiality considerations. For 

example, 2.5 percent of design materiality is used for individual cases in the U.S 

Government's Consolidated Financial Statements and 5 percent of design 

materiality is used for the aggregate of all cases. 

.18 In aggregating cases, the auditor and the entity may use two levels of aggregation. 

First, similar cases (such as employment discrimination cases, harbor 

maintenance fee cases, spent nuclear fuel cases, or military promotion board 

challenges) should be aggregated and treated as a group and compared with the 

individual materiality level. The aggregation generally should include a list of the 

individual cases that are aggregated and a discussion of the items of information 

requested to be included in the legal letter for the aggregated cases (see FAM 

sections 1002 B and 1002 C). Second, all cases not included in the legal letter 

individually or as part of a group of similar cases should be aggregated. A higher 

materiality level may be used for such an aggregation; however, this higher 

materiality level should be set sufficiently low that the cases not included in the 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-7 

legal letter would not be material to the financial statements taken as a whole 

when aggregated with the other items listed in the previous paragraph. 

.19 Where the entity engages more than one legal counsel, the auditor should 

exercise caution so that matters considered not material individually would not, 

when aggregated, exceed the materiality limit. In addition, when separate legal 

representation letters are issued on individual components/bureaus of a 

consolidated entity because of individual component audits, the auditor may 

determine materiality levels for each component/bureau. 

Legal Counsels from Whom Information Should Be Requested 

.20 Most federal agencies have a general counsel who has primary responsibility for 

and knowledge about the entity's litigation, claims, and assessments. The auditor 

should request entity management to send a legal letter request to the general 

counsel. In addition, the auditor should ask the management and/or general 

counsel whether the entity used outside legal counsel whose engagement may be 

limited to particular matters (e.g., specific litigation). 

.21 In the federal government, the main legal counsel outside of the entity is the 

Department of Justice.5

 The entity's management, its legal counsel, or the auditor 

may consult with Justice as well as other outside legal counsel to assure 

completeness and accuracy of the presentation of matters related to litigation, 

claims, and assessments. Such consultation may include requesting a list of 

pending litigation, claims, and assessments from Justice or other outside legal 

counsel, or discussion of specific cases. 

.22 The legal response should cover all litigation, claims, and assessments pertaining 

to the federal reporting entity, including matters handled by Justice and other 

outside legal counsel on behalf of the entity. If the general counsel has overall 

responsibility for handling and evaluating litigation, claims, and assessments, his 

or her evaluation and responses ordinarily would be considered adequate. 

5

 The Accounting and Auditing Policy Committee (AAPC) guidance (Technical 

Release No. 1) clarifies FASAB Interpretation No. 2, with respect to the 

Department of Justice's role related to legal letters in cases in which Justice's 

legal counsels are handling legal matters on behalf of other federal reporting 

entities. The letter from the entity's general counsel may provide sufficient 

evidence for the auditor. If the auditor determines that additional evidence is 

needed about a specific case, the auditor may request entity management and 

legal counsel to send a legal letter request to Justice, directed to the lead Justice 

legal counsel handling the case, asking that person to provide a description and 

evaluation directly to the auditor. 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-8 

However, evidential matter obtained from inside legal counsel is not a substitute 

for information that outside legal counsel refuses to furnish to the auditor. 

.23 Where there is no general counsel and management has not consulted legal 

counsel, the auditor should obtain a written representation from management 

that legal counsel has not been consulted. Such representation may be 

incorporated as an item in the management representation letter. (See FAM 

sections 550 and 1001.) (An example item is: "We are not aware of any pending 

or threatened litigation, claims, or assessments or unasserted claims or 

assessments that are required to be accrued or disclosed in the financial 

statements in accordance with SFFAS No. 5. We have not consulted legal 

counsel concerning litigation, claims, or assessments.") 

Evaluation of Responses 

.24 Written responses from legal counsel will vary considerably in the scope of 

information provided and in the opinion expressed. In preparing the responses, 

legal counsels should consider the guidance contained in the American Bar 

Association's Statement of Policy Regarding Lawyers' Responses to Auditors' 

Requests for Information (ABA Policy Statement) (included in its entirety in AU 

337 C). If legal counsel does not follow the ABA Policy Statement in responding 

to the auditor, the legal counsel's response nevertheless should meet the 

requirements of AU 337. 

.25 The response should cover all components included in the financial statements 

being audited. Legal counsel generally should indicate the disposition of cases 

included in the prior year's letter that are no longer contingencies. 

.26 The auditor should evaluate each response in terms of sufficiency as evidence 

and consider (a) the possible limitations on the scope of legal counsel's 

responses and (b) the lack of sufficient opinion on the resolution of a case. AU 

9337 provides guidance in evaluating legal counsel's responses. The auditor also 

should consider the legal counsel's response in light of any other information that 

comes to the auditor's attention. 

Possible Limitations on the Scope of Legal Counsel's Responses

.27 When legal counsel limits his/her responses, the auditor should determine 

whether the limitation affects the auditor's report. A legal counsel may 

appropriately limit responses to certain matters; for example, to matters that 

(a) the legal counsel has given substantive attention to in the form of legal 

consultation or representation and (b) are considered individually or collectively 

material to the financial statements, provided the entity and the auditor have 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-9 

reached an understanding on materiality levels. These limitations are acceptable 

and not limitations on the scope of the audit. 

.28 The following are examples of limitations on legal counsel's responses that are 

not acceptable to the auditor and that would ordinarily result in a scope 

limitation: 

a. Legal counsel refuses to furnish the requested information. When legal 

counsel refuses to furnish the information requested in the legal letter request, 

the auditor should consider this matter as a scope limitation sufficient to 

preclude an unqualified opinion. 

b. Legal counsel excludes matters requested. The legal counsel's responses may 

not address all information requested. The auditor should compare legal 

counsel's response with the legal letter request and determine whether legal 

counsel has addressed all the information requested. If legal counsel excluded 

any of the requested matters, the auditor should obtain responses for those 

matters from legal counsel. If the auditor is unable to obtain all the 

information needed, the auditor should consider this a scope limitation that 

could be sufficient to preclude an unqualified opinion. 

c. Legal counsel indicates that certain information is being withheld due to 

attorney-client privilege. Under the American Bar Association (ABA) Code of 

Professional Responsibility, legal counsel is required to preserve the 

confidences and secrets of the client. Legal counsel may disclose confidences 

to the auditor only with the consent of the client. If the legal letter request is 

prepared in accordance with AU 337, the auditor should expect that legal 

counsel would be responsive; otherwise the scope of the audit would be 

restricted. (On the other hand, explanatory language in the legal letter request 

or in legal counsel's response emphasizing that management or legal counsel 

does not intend to waive attorney-client privilege or attorney work-product 

privilege does not result in a scope limitation.) 

Lack of Sufficient Opinion on the Resolution of a Case

.29 The following are examples of the legal counsel's responses that lack sufficient 

opinion on the resolution of a case. 

a. Uncertainties. A legal counsel may be unable to respond concerning the 

likelihood of an unfavorable outcome of litigation, claims, and assessments or 

the amount or range of potential loss, because of inherent uncertainties. In 

these circumstances, the auditor ordinarily will conclude that the financial 

statements are affected by an uncertainty concerning the outcome of a future 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-10 

event, which is not susceptible to reasonable estimation. The auditor should 

follow the guidance in FAM section 580 for reporting on uncertainties. 

b. Unclear responses. Legal counsels sometimes use general terms to indicate 

their evaluation of the outcome of a case. The ABA Policy Statement states 

that legal counsel may, in the appropriate circumstances, communicate to the 

auditor his/her view that an unfavorable outcome is "probable" or "remote." 

The legal letter responses may include phrases that mean remote or probable. 

The phrases below are examples of opinions that provide sufficient clarity that 

the likelihood of an unfavorable outcome is remote: 

• "We are of the opinion that this action will not result in any liability to the 

entity." 

• "We believe that the plaintiff's case against the entity is without merit." 

The following are examples of opinions that indicate significant uncertainty as 

to whether the entity will prevail: 

• "In our opinion, the entity has a substantial chance of prevailing in this 

action." (A "substantial chance," a "reasonable opportunity," and similar 

terms indicate more uncertainty than an opinion that the entity will 

prevail.) 

• "It is our opinion that the entity will be able to assert meritorious defenses 

to this action." (The term "meritorious defenses" indicates that the court 

will not summarily dismiss the entity's defenses; it does not indicate legal 

counsel's opinion that the entity will prevail.) 

.30 To avoid unclear and incomplete responses, the auditor generally should ask 

management to request legal counsel to use Justice's standard forms to describe 

legal contingencies (see pages 1002 C-4 to 6 for examples of these forms). When 

legal counsel does not indicate whether the unfavorable outcome is probable or 

remote, management and the auditor should conclude that the outcome is 

reasonably possible and the case should be considered for disclosure. 

(Management, with legal counsel's advice, determines whether cases are 

probable, reasonably possible, or remote, to decide whether they should be 

recognized as liabilities and/or disclosed in the notes to the financial statements.) 

.31 If the auditor is not certain about the legal counsel's evaluation, the auditor 

should discuss the matters with the legal counsel and entity management (and 

document the oral discussion) and/or obtain written clarification in a follow-up 

letter. Sometimes legal counsel may give a clearer indication of likelihood orally. 

If legal counsel is unable to give a clear evaluation of the likelihood of an 
 Reporting 

 1002 - Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002-11 

unfavorable outcome, management should disclose the uncertainty and the 

auditor should consider the uncertainty's effect on the audit report. 

Example Legal Letter Request 

.32 The legal letter request, which the auditor may assist management to draft, 

should be on the audited entity's letterhead, signed by the Chief Financial Officer 

(CFO), or equivalent, and request a reply directly to the auditor and a copy to 

management by specified due dates. FAM section 1002 B shows an example legal 

letter request that includes requests for interim and updated responses from legal 

counsel and matters that should be covered in the letter. 

Example Legal Counsel's Responses and Management's Schedule 

.33 The General Counsel should respond on General Counsel letterhead to the 

auditor with a copy to management by the agreed-upon due dates. The response 

should indicate that it is provided for the auditor's use in connection with the 

audit. 

.34 FAM section 1002 C shows an example of a legal counsel response, including the 

legal representation letter and Justice's legal contingency standard forms for 

each case or group of cases, respectively. Justice's forms (pages 1002 C-4 to 6) 

are on Justice's website: http://www.usdoj.gov/civil/forms/forms.htm. 

.35 FAM section 1002 D shows an example of management's schedule that 

documents how the information contained in the legal counsel's responses was 

considered in preparing the financial statements. Management should include 

each case discussed in the legal letter and indicate (1) the amount accrued for 

probable cases and (2) note disclosure for reasonably possible cases, probable 

cases where the amount cannot be estimated, and probable cases where a range 

of amounts above the accrued amount is estimated. The electronic templates for 

FAM sections 1002 C (pages 1002 C-1 to 3) and 1002 D are on OMB's website: 

http://www.whitehouse.gov/omb/bulletins/index.html. 

PRACTICE AIDS 

.36 The following practice aids are appended: 

Section 1002 A – Example Audit Procedures; 

Section 1002 B – Example Legal Letter Request; 

Section 1002 C – Example Legal Representation Letter, including Justice's 

Example Legal Contingencies Forms; and 

Section 1002 D – Example Management Summary Schedule. 
[This page intentionally left blank.]
 Reporting 

 

 1002 A – EXAMPLE AUDIT PROCEDURES FOR 

INQUIRIES OF LEGAL COUNSEL 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 A-1 

Entity ______________________________________________________________ 

Period of financial statements _________________________________________ 

Job code ___________________________________________________________ 

Example Audit Procedures Done 

by/date 

W/P 

ref 

I. Testing Procedures 

1. Ask management about the entity's policies and 

procedures for identifying, evaluating, and accounting for 

litigation, claims, and assessment. 

 

2. Obtain from management a description and evaluation of 

litigation, claims, and assessments existing as of the 

balance sheet date and through the date of management's 

response (which should be near the end of fieldwork). 

(This may instead be obtained from the entity's legal 

counsel.) 

 

3. To determine whether an outside legal counsel is 

performing services for the entity, inquire of 

management whether outside legal counsel has been 

used by the entity and matters handled. Ask 

management for a list of pending litigation, claims, and 

assessments from the Department of Justice and/or 

examine correspondence and invoices from other 

outside legal counsel (e.g., for legal fees), if any. 

 
 Reporting 

 1002 A – Example Audit Procedures for Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 A-2 

Example Audit Procedures Done 

by/date 

W/P 

ref 

4. Ask whether the entity has changed its general counsel or 

outside legal counsel or the general counsel or outside 

legal counsel has resigned or has indicated an intention 

to resign. If so, determine if there are matters that may 

affect the financial statements. For example, in 

appropriate circumstances, a legal counsel may be 

required by the ABA Code of Professional Responsibility 

to resign the engagement if the legal counsel's advice 

concerning disclosures is disregarded by the entity. 

 

5. To identify litigation, claims, and assessments read 

minutes of management meetings, contracts, loan 

agreements, leases, and correspondence from other 

government entities and discuss pertinent items with 

management. 

 

6. If information comes to the auditor' s attention that may 

indicate a potential contingency with respect to 

litigation, claims, or assessments that may require 

adjustment to or disclosure in the financial statements, 

discuss with the entity its possible need to consult legal 

counsel. Depending on the severity of the matter, refusal 

by the entity to consult legal counsel in those 

circumstances may result in a scope limitation. Consider 

the effect of such a limitation on the auditor's report. 

 
 Reporting 

 1002 A – Example Audit Procedures for Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 A-3 

Example Audit Procedures Done 

by/date 

W/P 

ref 

7. Request entity management to send a legal letter request 

to the general counsel asking counsel to respond directly 

to the auditor. (Obtain a copy of the legal letter request.) 

Consider whether to also request legal letters from any 

outside legal counsel. The legal letter should cover 

litigation, claims, and assessments pertaining to the 

reporting entity, including matters handled by the 

Department of Justice or other outside legal counsel. 

(See Sections 1002 B for an example legal letter request.) 

Coordinate with management and legal counsel to 

• determine the timing of legal letter requests and 

responses and related management's 

summary/schedules of information contained in legal 

responses and 

• determine a materiality level to be included in the 

legal representation letter. 

 

8. Read the legal letter responses and management's 

schedules to identify litigation, claims, and assessments. 

 

9. Compare the description and evaluation of the current 

year's legal letter responses to the prior year's audit 

documentation. If this comparison indicates that certain 

legal matters in the prior year are no longer included, 

discuss these matters with management or legal counsel 

to obtain an understanding of the reasons for the 

changes. 

 

10. Determine whether the information in the legal 

representation letter is consistent with management's 

schedule summarizing the information in the letter and 

related supporting documentation. 

 

11. Discuss with legal counsel if the information obtained is 

not complete, clear, or consistent. 

 

12. Evaluate legal counsel's responses and determine the 

effects of the responses on liabilities and related note 

disclosures in the financial statements and on the 

auditor's report. 

 
 Reporting 

 1002 A – Example Audit Procedures for Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 A-4 

Example Audit Procedures Done 

by/date 

W/P 

ref 

13. If a response date is substantially in advance of the audit 

report date, for example, earlier than 2 weeks prior to 

date of auditors' report, obtain a written or oral update 

response. (The longer the period between the legal letter 

and the audit report date, the more important a written 

update becomes.) 

 

II. Reporting Procedures 

Obtain a representation from management in the 

management representation letter (see FAM sections 550 

and 1001) that the entity has disclosed all unasserted claims 

that legal counsel has advised are probable of assertion that, 

if asserted, would have at least a reasonable possibility of an 

unfavorable outcome and must be disclosed. 

1. Discuss the description and evaluation of litigation, 

claims, and assessments obtained with management to 

determine if, subsequent to the date of legal counsel's 

response, there have been any changes in status of the 

matters, changes in management's evaluation of the 

outcome, or additional matters to be considered. 

 

2. If there are significant changes in the status of the 

matters or new matters, obtain a written confirmation or 

updated response from legal counsel. 

 

3. Have management include in the management 

representation letter representations related to 

contingencies and determine if they are appropriately 

accrued and disclosed as required by SFFAS No. 5, as 

amended. If management has not consulted legal 

counsel, obtain a written representation from 

management that legal counsel has not been consulted. 

This representation may be incorporated in the 

management representation letter (see FAM sections 550 

and 1001). 

 
 Reporting 

 1002 A – Example Audit Procedures for Inquiries of Legal Counsel 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 A-5 

Example Audit Procedures Done 

by/date 

W/P 

ref 

4. Read the entity's financial statements and notes and 

a. consider the adequacy of financial statement 

disclosure for contingencies with respect to litigation, 

claims, and assessments; 

 

b. determine if the financial statement disclosures for 

contingencies with respect to litigation, claims, and 

assessments are prepared in accordance with the 

OMB guidance on form and content of agency 

financial statements; and 

 

c. for federal entities involved in litigation for which the 

Judgment Fund is a likely source of judgment or 

settlement, determine if a note to the financial 

statements discusses the Judgment Fund's role in the 

payment of a possible loss, as required by FASAB 

Interpretation No. 2, Accounting for Treasury 

Judgment Fund Transactions. 

 

5. Document conclusions reached concerning the 

accounting for and disclosure of litigation, claims, and 

assessments, determine if adjustments are necessary, 

and consider whether modification of the auditor's 

report is appropriate (see FAM section 580). 

 
[This page intentionally left blank.]
 Reporting 

 

 1002 B – EXAMPLE LEGAL LETTER REQUEST 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 B-1 

 [Audited Entity Letterhead] 

 Date: [date] 

 To: General Counsel 

 From: Chief Financial Officer [signed] 

 Subject: [Auditor 's] Audits of the Fiscal Years 20X1 and 20X0 Financial 

Statements 

Pursuant to 31 U.S.C. 3515, [Auditor name] is performing audits of the financial 

statements of [entity] as of and for the fiscal years ended September 30, 20X1, and 

20X0. In performing audits of government entities, auditors comply with 

Government Auditing Standards, issued by the Comptroller General of the United 

States (the "yellow book"). For financial statement audits, Government Auditing 

Standards incorporate the fieldwork and reporting standards of the American 

Institute of Certified Public Accountants (AICPA) and the Statements on Auditing 

Standards that interpret them. Consistent with the procedures contained in AU 

337 of the AICPA's Codification of Statements on Auditing Standards, [Auditor] 

has inquired about litigation, claims, and assessments to obtain evidence as to the 

financial accounting and reporting of such matters with respect to the financial 

statements. The purpose of this letter is to request your assistance in responding 

to that inquiry. The American Bar Association Statement of Policy Regarding 

Lawyers' Responses to Auditors' Request for Information (December 1975) 

provides relevant guidance for the lawyer 's response to the auditor 's request. 

In accordance with Statement of Federal Financial Accounting Standards 

(SFFAS) Number 5, Accounting for Liabilities of the Federal Government, as 

amended by SFFAS Number 12, and Interpretation Number 2 of SFFAS Numbers 

4 and 5, [entity] reports certain information in its financial statements and notes 

concerning contingent liabilities for litigation, claims, and assessments. We 

request that you provide [Auditor] (with a copy to me) with information on 

matters with respect to which you have been engaged and to which you have 

devoted substantive attention on behalf of the [entity] in the form of legal 

consultation or representation. You should furnish an interim response by 

[agreed-upon date], including matters that existed as of September 30, 20X1, and 

from that date through at least [interim date]. You should furnish an updated 

response by [agreed-upon date], that is effective no earlier than [agreed-upon 

date], that includes any changes from the interim response or furnish a statement 

that there are no changes. 
 Reporting 

 1002 B – Example Legal Letter Request 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 B-2 

Include any cases with respect to which you have been engaged and to which you 

have devoted substantive attention on behalf of the [entity] in the form of legal 

consultation or representation, even those cases for which you believe the 

Judgment Fund or some financing source other than [entity]'s budgetary 

resources will pay any potential loss. Under generally accepted accounting 

principles, these amounts should be included as liabilities or disclosure items in 

the [entity]'s financial statements. Cases similar in nature should be aggregated 

where appropriate. It would be helpful if you could list the matters in order of the 

amount of potential loss, starting with the largest. 

Pending or Threatened Litigation (excluding unasserted claims) 

We and [Auditor] have determined that any matters for which the amount of 

potential loss exceeds $XX, individually or in the aggregate, could be material to 

the financial statements. Please provide to [Auditor] the information described 

below about pending or threatened litigation where the amount of potential loss 

exceeds $XX: 

1. The nature of the matter. Include a description of the case or cases and 

amount claimed, if specified. 

2. The progress of the case to date. 

3. The government's response or planned response (for example, to contest the 

case vigorously or to seek an out-of-court settlement). 

4. An evaluation of the likelihood of unfavorable outcome. Please categorize 

likelihood as probable (an unfavorable outcome is likely to occur), reasonably 

possible (the chance of an unfavorable outcome is less than probable but more 

than remote), or remote (the chance of an unfavorable outcome is slight). 

5. An estimate of the amount or range of potential loss, if one can be made, for 

losses considered to be probable or reasonably possible. 

6. The name of the [entity]'s legal counsel handling the case and names of any 

outside legal counsel/other lawyers representing or advising the government in 

the matter (Department of Justice or outside law firms). 

Unasserted Claims and Assessments 

[If legal counsel is a part of management use this paragraph.] Please provide the 

following information for all unasserted claims and assessments that you consider 

to be probable of assertion and which, if asserted, would have at least a 

reasonable possibility (more that remote) of an unfavorable outcome in an 

amount over $XX, individually or in the aggregate, involving matters to which you 

have devoted substantive attention. 

[If the legal letter request will be sent to a legal counsel that is not part of 

management, such as an outside legal counsel, use this paragraph.] We have 
 Reporting 

 1002 B – Example Legal Letter Request 

 April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 B-3 

provided an attachment to this request that lists the unasserted claims and 

assessments that we believe are probable of assertion and which, if asserted, 

would have at least a reasonable possibility (more than remote) of an unfavorable 

outcome in an amount over $XX, individually or in the aggregate, involving 

matters to which you have devoted substantive attention. Please provide the 

following information for each matter and for any additional matters that you 

believe meet these criteria. 

1. A description of the nature of the matter. 

2. The government's planned response if the claim is asserted. 

3. An evaluation of the likelihood of an unfavorable outcome. (Categorize 

likelihood as probable (likely to occur) or reasonably possible (less than 

probable but more than remote).) 

4. An estimate of the amount or range of potential loss, if one can be made. 

Please specifically confirm to [Auditor] that our understanding of the following is 

correct: Whenever, in the course of performing legal services for us, with respect 

to a matter recognized to involve an unasserted possible claim or assessment that 

may call for financial statement disclosure, if you have formed a professional 

conclusion that we should disclose or consider disclosure concerning such 

possible claim or assessment, as a matter of professional responsibility to us, you 

will (1) advise us of your conclusion and (2) consult with us concerning the 

question of such disclosure and the applicable requirements of SFFAS No. 5, as 

amended. 

Please separately identify any cases with respect to which you have been engaged 

and to which you have devoted substantive attention on behalf of the [entity] in 

the form of legal consultation or representation for which you believe another 

government entity will be responsible for any potential liability. 

Please specifically identify the nature of and reasons for any limitations on your 

response to this request. 

Please address your reply to [Auditor], and contact him/her at (phone number), 

when your reply is available for pick up, and send a copy of your reply to me. Do 

not hesitate to contact me or [Auditor] if you have any questions about this 

request. 
[This page intentionally left blank.]
 Reporting 

 

 1002 C – EXAMPLE LEGAL REPRESENTATION 

LETTER 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 C-1 

[General Counsel Letterhead] 

[Date] 

[Auditor] 

[Title] 

[Agency or Firm Name] 

[City] 

Subject: Legal Response in Connection with the Fiscal Years 20X1 and 20X0 

Financial Statement Audits of [entity name] 

Dear [Auditor]: 

As General Counsel of [entity], I am writing in response to the legal letter request 

from the [entity]'s Chief Financial Officer (CFO) dated [date], in connection with 

the audit of [entity]'s financial statements as of and for the fiscal years ended 

September 30, 20X1 and 20X0. [In an interim response, add "I will, as further 

requested by the CFO, provide an updated response by [date]."] 

I call your attention to the fact that as General Counsel for [entity], I have general 

supervision of [entity]'s legal affairs. [If the general legal supervisory 

responsibilities of the person signing the letter are limited, set forth a clear 

description of those legal matters over which such person exercises general 

supervision, indicating exceptions to such supervision and situations where 

primary reliance should be placed on other sources.] In such capacity, I have 

reviewed litigation and claims threatened or asserted involving [entity] and have 

consulted with outside legal counsel about them when I have deemed appropriate. 

Subject to the foregoing and to the last paragraph of this letter, I advise you that 

since [insert date of beginning of fiscal year period under audit] neither I, nor any 

of the lawyers over whom I exercise general legal supervision, have given 

substantive attention to, or represented [entity] in connection with loss 

contingencies [over the amount of (state materiality level agreed to with auditor 

and stated in request letter)] coming within the scope of clause (a) of Paragraph 5 

of the Statement of Policy referred to in the last paragraph of this letter, except as 

follows: 

[Describe litigation and claims that fit the foregoing criteria as follows (it is 

recommended that general counsels use the attached Department of Justice forms 
 Reporting 

 1002 C – Example Legal Representation Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 C-2 

(one for pending or threatened litigation, another for unasserted claims) to 

describe the cases):]1

Pending or Threatened Litigation (excluding unasserted claims)

1. Nature of the matter (include a description of the case or cases and amount 

claimed, if specified). 

2. Progress of the case to date. 

3. Current or intended response. 

4. Evaluation of the likelihood of an unfavorable outcome (categorize likelihood 

as probable, reasonably possible, or remote). 

5. Estimated amount or range of potential loss, if determinable, for losses 

considered to be probable or reasonably possible. 

6. Name of [entity]'s legal counsel handling the case and names of any outside 

legal counsel representing or advising the government in the matter. 

With respect to matters that have been specifically identified as contemplated by 

clauses (b) or (c) of paragraph 5 of the ABA Statement of Policy, I advise you, 

subject to the last paragraph of this letter, as follows: 

Unasserted Claims and Assessments (considered to be probable of assertion 

and which, if asserted, would have at least a reasonable possibility of an 

unfavorable outcome) 

1. Nature of the matter. 

2. Intended response if claim would be asserted. 

3. Evaluation of the likelihood of an unfavorable outcome. (Categorize 

likelihood as probable or reasonably possible.) 

4. Estimated amount or range of potential loss, if determinable. 

The information set forth herein is [(as of the date of this letter) or (as of (insert 

date), the date on which we commenced our internal review procedures for 

purposes of preparing this response)], except as otherwise noted. [If an interim 

response, add "Upon submission of the updated response, which is due on 

[date],"] I disclaim any undertaking to advise you of changes that, thereafter, may 

be brought to my attention or the attention of our lawyers over whom I exercise 

general legal supervision. 

This response is limited by, and in accordance with, the ABA Statement of Policy 

Regarding Lawyers' Responses to Auditors' Requests for Information (December 

1975); without limiting the generality of the foregoing, the limitations set forth in 

such statement on the scope and use of this response (Paragraphs 2 and 7) are 

specifically incorporated herein by reference, and any description herein of any 

 1

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

 1002 C – Example Legal Representation Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 C-3 

"loss contingencies" is qualified in its entirety by Paragraph 5 of the statement and 

the accompanying commentary (which is an integral part of the statement). 

Consistent with the last sentence of Paragraph 6 of the ABA Statement of Policy, 

this will confirm as correct [entity]'s understanding that whenever, in the course 

of performing legal services for [entity] with respect to a matter recognized to 

involve an unasserted possible claim or assessment that may call for financial 

statement disclosure, I have formed a professional conclusion that the entity must 

disclose or consider disclosure concerning such possible claim or assessment, I, 

as a matter of professional responsibility to [entity], will so advise [entity] and will 

consult with [entity] concerning the question of such disclosure and the 

applicable requirements of Statement of Federal Financial Accounting Standards 

(SFFAS) Number 5, Accounting for Liabilities of the Federal Government, as 

amended by SFFAS Number 12, and Interpretation Number 2 of SFFAS Numbers 

4 and 5. [Describe any other or additional limitation as indicated by Paragraph 4 

of the statement.] 

Sincerely yours, 

_______________________________________ 

[Name of General Counsel] 

[Title] 

cc: Chief Financial Officer 
 Reporting 

 1002 C – Example Legal Representation Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 C-4 

SUGGESTED DEPARTMENT OF JUSTICE FORM 

PENDING OR THREATENED LITIGATION 

AGENCY/COMPONENT: _____________________________ 

Amount of potential loss exceeds 

the agency/component materiality 

threshold of: _____________________________ 

1. Case name. (Include case citation, case number, and other names by 

which the case or group of cases is commonly known.)

2. Nature of matter. (Include a description of the case or cases and 

amount claimed, if specified.)

3. Progress of the case.

4. The government's response or planned response. (For example, to 

contest the case vigorously or to seek an out-of-court settlement.)

5. An evaluation of the likelihood of unfavorable outcome. (Choose 

one.) 

_______ PROBABLE – An unfavorable outcome is likely to occur. 

_______ REASONABLY POSSIBLE – the chance of an unfavorable outcome 

is less than probable but more than remote. 

_______ REMOTE – the chance of an unfavorable outcome is slight. 

6. An estimate of the amount or range of potential loss (if one can be 

made, for losses considered to be probable or reasonably possible). 
 Reporting 

 1002 C – Example Legal Representation Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 C-5 

7. The name and phone number of the government attorney 

handling the case (and names and phone numbers of any outside legal 

counsel/other lawyers representing or advising the government in the 

matter.)

8. The sequence number (based on the total number of pending or 

threatened cases in litigation, claims, and assessments the 

agency/component is submitting. 

 e.g., Number ___ of ___) 

 (#) (total) 
 Reporting 

 1002 C – Example Legal Representation Letter 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1002 C-6 

SUGGESTED DEPARTMENT OF JUSTICE FORM 

UNASSERTED CLAIMS AND ASSESSMENTS 

AGENCY/COMPONENT: _____________________ 

Amount of Potential Loss Exceeds the 

agency/component materiality threshold of: _____________________ 

1. Name of Matter. (Include name by which the matter is commonly 

known.)

2. Nature of the Matter. (Include a description of the matter.)

3. The Government's Planned Response (if the claim is asserted).

4. An Evaluation of the likelihood of Unfavorable Outcome. (Choose 

one.) 

 _______ PROBABLE – (An unfavorable outcome is likely to occur.) 

 REASONABLY POSSIBLE _______ – (the chance of an unfavorable outcome is 

less than probable but more than remote.) 

5. An Estimate of the Amount or Range of Potential Loss (if one can 

be made, for losses considered to be probable or reasonably possible). 

6. The Name and phone number of the Government Attorney 

Handling the Matter (and names and phone numbers of any outside 

legal counsel/other lawyers representing or advising the government in 

the matter). 

7. The Sequence Number (based on the total number of Unasserted 

Claims and Assessments the agency/component is submitting. 

 e.g., Number ___ of ____).

 (#) (total) 
Reporting

1002 D - Example Management Summary ScheduleManagement should prepare this schedule (or equivalent) summarizing the information contained in the legal letters. In management should conclude as to the likelihood of loss about each case to determine whether an amount should be rthe financial statements and/or if note disclosure is necessary for the financial statements to conform with GAAP. Althomost information comes directly from the legal letter, the financial staff should add the information in the last two columnto indicate the disposition of each case in the financial statements.

Management's Schedule of Information Contained in Legal Letter Responses 

for Financial Reporting Purposes

Amounts in thousands

12 3 4 5 6 

(a) P (b) R/P (c) Upper Amt. record

****insert rows here as necessary  ** *insert rows here as necessary*** ***insert rows here as necTOTALS - $ - $ - $ - $ 

$ 

Guidance for Preparation:1. Matters should be listed on this schedule in order of the amount or range of potential loss, starting with the largest. 2. The level of aggregation should generally be at the same level as in the general counsel's letter. However, there ma where the level of aggregation is too high to be able to prepare this schedule in a way that is meaningful. In such ca should work with legal counsel to provide further disaggregation of dissimilar cases. There may also be other instan higher level of aggregation is desirable. CFOs should use professional judgment, considering the purpose of this sc determining the level of aggregation.April 2003 GAO/PCIE Financial Audit Manual - Part II 

Reference

key

Amount

claimed

Name of case/

related cases

Likelihood

of loss

Amount or range 

of potential loss

fina
Reporting

1002 D - Example Management Summary ScheduleColumn:

1 Reference key: Page number of legal representation letter obtained from General Counsel discussing the 

other reference information.

2 Amount claimed: Amount claimed in the litigation, claim, or assessment (if specified)

3 Name of case or related cases: Where appropriate, provide name of case or aggregated cases which m

materiality threshold.

4 Likelihood of loss: Indicate management's evaluation of the likelihood of loss on individual or aggregated 

Options: P: probable (loss likely to occur);

R/P: reasonably possible (the chance of loss is less than probable, but more than remote)R: remote (the chance of loss is slight).

5 Amount or range of potential loss:

Options: 5a: Probable (P) -- Provide single estimate or lower end of range, if known. Enter "U" if un

provide column totals.)

5b: Reasonably possible (R/P) -- Provide single estimate or lower end of range, if provided

unknown. Also provide column totals.

5c: If amounts in P or R/P are ranges, provide upper end of range; otherwise, enter "n/a."

6 Disposition in financial statements - amount recorded: If applicable, provide corresponding dollar amo

recorded as a liability in the financial statements. (Also provide column totals.)

7 Disposition in financial statements - note disclosure: If applicable, indicate by note reference number

where case information is separately disclosed or included in amounts disclosed in notes to the financial sta(Also provide column totals.)

April 2003 GAO/PCIE Financial Audit Manual - Part II 
 Reporting 

 

 1006 - RESERVED 

April 2003 GAO/PCIE Financial Audit Manual - Part II Page 1006-1 

[For related parties, see FAM section 902] 
[This page intentionally left blank.]
 GLOSSARY 

April 2003 GAO/PCIE Financial Audit Manual Glossary-1 

Accountability report An agency’s accountability report integrates the 

(1) Federal Managers’ Financial Integrity Act (FMFIA) 

Report; (2) Chief Financial Officers’ (CFO) Act Annual 

Report, including audited financial statements; 

(3) Management’s Report on Final Action as required 

by the Inspector General Act; (4) the Debt Collection 

Improvement Act, Civil Monetary Penalty Act and 

Prompt Payment Act reports; and (5) available 

information on agency performance compared with 

the agency’s stated goal and objectives.

 

Accounting 

applications

 The procedures and records used to identify, record, 

process, summarize, and report a class of transactions. Common accounting applications are 

(1) billings, (2) accounts receivable, (3) cash receipts, 

(4) purchasing and receiving, (5) accounts payable, 

(6) cash disbursements, (7) payroll, (8) inventory 

control, and (9) property and equipment. 

 

Accounting system The methods and records established to identify, 

assemble, analyze, classify, record, and report an 

entity's transactions and to maintain accountability for 

the related assets and liabilities. 

 

Activity In cost accounting, an activity is the actual work task 

or step performed in producing and delivering 

products and services. An aggregation of actions 

performed within an organization that is useful for 

purposes of activity-based costing. 

 

Analytical procedures The comparison of recorded account balances with 

expectations developed by the auditor, based on an 

analysis and understanding of the relationships 

between the recorded amounts and other data, to 

form a conclusion on the recorded amount. A basic 

premise underlying the application of analytical 

procedures is that plausible relationships among data 

may reasonably be expected to continue unless there 

are known conditions that would change the 

relationships. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-2 

Annual financial 

statement

 As defined by OMB, the annual financial statement 

comprises 

• an overview of the reporting entity (or 

Management’s Discussion and Analysis, MD&A), 

• the financial statements and related notes, 

• required supplementary stewardship information, 

• required supplementary information, and 

• other accompanying information. 

 

Application controls Management’s control activities that are incorporated 

directly into individual computer applications to 

provide reasonable assurance of accurate and reliable 

procession. Application controls address (1) data 

input, (2) data processing, and (3) data output. 

FISCAM categories of application controls that more 

closely tie into the FAM methodology are 

(1) authorization control, (2) completeness control, 

(3) accuracy control, and (4) control over integrity of 

processing and data files. 

 

Appropriation The most common form of budget authority; an 

authorization by an act of the Congress that permits 

federal agencies to incur obligations and to make 

payments out of the Treasury for specified purposes. 

Appropriations do not represent cash actually set 

aside in the Treasury for purposes specified in the 

appropriation acts. They represent limitations of 

amounts that agencies may obligate during the period 

specified in the appropriation acts. 

 

Assertions Management's representations that are embodied in 

the account balance, transaction class, and disclosure 

components of the financial statements. The primary 

assertions (described in paragraph 235.02) are 

• Existence or occurrence 

• Completeness 

• Rights and obligations 

• Valuation or allocation 

• Presentation and disclosure 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-3 

Assessing control risk The process of evaluating the effectiveness of an 

entity's internal control in preventing or detecting 

misstatements in financial statement assertions. 

 

Assurance, level of The complement of audit risk, which is an auditor 

judgment. This is not the same as confidence level, 

which relates to an individual sample. 

 

Attributes sampling Statistical sampling that reaches a conclusion about 

the population in terms of a rate of occurrence. 

 

Audit risk The overall risk that the auditor may unknowingly fail 

to appropriately modify his or her opinion on financial 

statements that are materially misstated. This is an 

auditor judgment. 

 

Back door authority Any type of budget authority that is provided by 

legislation outside the normal appropriations process. 

 (See contract authority.) 

 

Base data Data used to develop the expectation in an analytical 

procedure. 

 

Borrowing authority Statutory authority that permits obligations to be 

incurred but requires that funds be borrowed to liquidate the obligations (see title 7 of the GAO Policies 

and Procedures Manual for Guidance of Federal 

Agencies). Usually, the amount that may be borrowed 

and the purposes for which the borrowed funds must 

be used are stipulated by the authorizing statute. 

Borrowing authority sometimes is referred to as back 

door authority. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-4 

Budget authority Authority provided by law (1) to enter into obligations 

that will result in immediate or future outlays 

involving government funds or (2) to collect offsetting 

receipts (2 U.S.C. 622(2)). The Congress provides an 

entity with budget authority and may place 

restrictions on the amount, purpose, and timing of the 

obligation or expenditure of such authority. The three 

forms of budget authority are 

• appropriations 

• borrowing authority 

• contract authority 

 

Budget controls Management's policies and procedures to manage and 

control the use of appropriated funds and other forms 

of budget authority. (These are considered part of 

financial reporting and compliance controls.) 

 

Budget functional 

classification

 A way of grouping budgetary resources so that all 

budget authority and outlays of on-budget and offbudget federal entities and tax expenditures can be 

presented according to national needs being 

addressed. To the extent feasible, functional 

classifications are made without regard to entity or 

organizational distinctions. 

 

Case study See nonsampling selection. 

 

Cause and effect basis In cost accounting, a way to group costs into cost 

pools in which an intermediate activity may be a link 

between the cause and the effect. 

 

Classical probability 

proportional to size 

sampling

 A sampling approach where the sample is selected 

proportional to the size (usually dollar amount) of an 

item and the evaluation is performed using variables 

methods (not dollar unit sampling). 

 

Classical variables 

estimation sampling

 A sampling approach that measures precision using 

the variation of the underlying characteristic of 

interest. This method includes mean per unit 

sampling, difference estimation, ratio estimation, and 

regression estimation. 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-5 

 

Closed account A budget account for which the expired budget 

authority has been canceled. 

 

Combined precision A judgment of precision for all tests in the audit. Used 

at the end of the audit to evaluate the results of all 

tests. 

 

Combined risk The auditor’s judgment of the combined inherent and 

control risk (high, moderate, or low); the risk that the 

financial statements contain material misstatements 

before audit. 

 

Common data source In cost accounting, this includes all financial and nonfinancial data, such as environmental data, that are 

necessary for budgeting and financial reporting, as 

well as evaluation and decision information 

developed as a result of prior reporting and feedback.

 

Compliance control A process, effected by management and other 

personnel, designed to provide reasonable assurance 

that transactions are executed in accordance with 

(1) laws governing the use of budget authority and 

other laws and regulations that could have a direct 

and material effect on the financial statements or 

required supplementary stewardship information and 

(2) any other laws, regulations, and governmentwide 

policies identified in OMB audit guidance. 

 

Compliance tests Tests to obtain evidence on the entity's compliance 

with significant laws and regulations. 

 

Confidence interval The projected misstatement or point estimate plus or 

minus precision at the desired confidence level. 

 

Confidence level The probability associated with the precision; the 

probability that the true misstatement is within the 

confidence interval. This is not the same as level of 

assurance. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-6 

Contingency An existing condition, situation, or set of 

circumstances involving uncertainty as to possible 

gain or loss. 

 

Contract authority Statutory authority that permits obligations to be 

incurred before appropriations or in anticipation of 

receipts to be credited to a revolving fund or other 

account (offsetting collections). By definition, 

contract authority is unfunded and must subsequently 

be funded by an appropriation to liquidate the 

obligations incurred under the contract authority or 

by the collection and use of receipts. 

 

Control environment A component of internal control, in addition to risk 

assessment, monitoring, information and 

communication, and control activities. The control 

environment sets the tone of an organization, 

influencing the control consciousness of its people. It 

is the foundation for all other components of internal 

control, providing discipline and structure. The 

control environment represents the collective effect of 

various factors on establishing, enhancing, or 

mitigating the effectiveness of specific control 

activities. Such factors include (1) integrity and 

ethical values, (2) commitment to competence, 

(3) management's philosophy and operating style, 

(4) organizational structure, (5) assignment of 

authority and responsibility, (6) human resource 

policies and practices, (7) control methods over 

budget formulation and execution, (8) control 

methods over compliance with laws and regulations, 

and (9) oversight groups. 

 

Control risk The risk that a material misstatement that could occur 

in an assertion will not be prevented or detected on a 

timely basis by the entity's internal controls (classified 

as high, moderate, or low). This is an auditor 

judgment. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-7 

Control activities 

(techniques)

 A component of internal control, in addition to the 

control environment, risk assessment, monitoring, and 

information and communication. The policies and 

procedures that help ensure that management 

directives are carried out. 

 

Control tests Tests of a specific control activity to assess its 

effectiveness in achieving control objectives. 

 

Core financial 

management system 

(CFMS)

 As developed by JFMIP, a system that consists of six 

functional areas: general ledger management, funds 

management, payment management, receivable 

management, cost management, and reporting, and 

affects all financial event transaction processing 

because it maintains reference tables used for editing 

and classifying data, controls transactions, and 

maintains security. 

 

Cost The monetary value of resources used or sacrificed or 

liabilities incurred to achieve an objective, such as to 

acquire or produce a good or to perform an activity or 

service. 

 

Costing methodology Methodology for accumulating the costs of resources 

that directly or indirectly contribute to the production 

of outputs and assigning those costs to outputs. 

 

Department (per 

FASAB Interpretation 

No. 6) 

 Any department, agency, administration, or other 

financial reporting entity (see SFFAC No. 2) that is not 

part of a larger financial reporting entity other than 

the government as a whole. Used in distinguishing 

inter- and intradepartmental activity and balances. 

 

Design materiality The portion of planning materiality that the auditor 

allocates to line items or accounts. This amount 

should be the same for all line items or accounts 

(except for certain offsetting balances as discussed in 

paragraph 230.10). The auditor should set design 

materiality for the audit as one-third of planning 

materiality. (See discussion in paragraph 230.12.) 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-8 

Detection risk The risk that audit procedures will not detect a 

material misstatement that exists in the financial 

statements. The auditor determines the desired 

detection risk based on combined risk and audit risk. 

(In statistical terms, beta risk or type II risk.) 

 

Errors Unintentional misstatements or omissions of amounts 

or disclosures in financial statements. 

 

Expectation The auditor's estimate of an account balance in an 

analytical procedure. 

 

Expected 

misstatement

 The dollar amount of misstatements the auditor 

expects in a population. 

 

Expired account A budgetary account in which the balances are no 

longer available for incurring new obligations because 

the time available for incurring such obligations has 

expired. After 5 years, these accounts are canceled 

and are then considered to be closed accounts. 

 

Federal financial 

management systems 

requirements

 One of the three requirements of FFMIA. They 

include the requirements of OMB Circulars A-127, 

A-123, and A-130 and the JFMIP Federal Financial 

Management Systems Requirements series. 

 

Financial reporting 

control

 A process, effected by management and other 

personnel, designed to provide reasonable assurance 

that transactions are properly recorded, processed, 

and summarized to permit the preparation of the 

financial statements and required supplementary 

stewardship information in accordance with GAAP, 

and that assets are safeguarded against loss from 

unauthorized acquisition, use, or disposition. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-9 

Financial statements 

(also called principal 

statements)

 The components of a federal entity's annual financial 

statement (also referred to as the Accountability 

report), which are 

• Balance Sheet 

• Statement of Net Cost 

• Statement of Changes in Net Position 

• Statement of Budgetary Resources 

• Statement of Financing 

• Statement of Custodial Activity (if applicable) 

• Related Notes 

 

Fraud Although fraud is a broad legal concept, the auditor is 

interested in fraudulent acts that cause a material 

misstatement of financial statements. Fraud is 

distinguished from error because fraud is intentional 

whereas error is unintentional. Two relevant types of 

misstatements are those arising from fraudulent 

financial reporting and those arising from 

misappropriation of assets. 

 

Fraudulent financial 

reporting

 Intentional misstatements or omissions of amounts or 

disclosures in financial statements to deceive financial 

statement users. This may involve acts such as 

manipulation, falsification, or alteration of accounting 

records or supporting documents; misrepresentation 

or intentional omission of events, transactions, or 

other significant information in the financial 

statements; or intentional misapplication of 

accounting principles relating to amounts, 

classification, manner of presentation, or disclosure. 

 

Full cost In cost accounting, the sum of all costs required by a 

cost object including the costs of activities performed 

by other entities regardless of funding sources. 

 

Fund Balance with 

Treasury account 

(FBWT)

 An asset account representing the unexpended 

spending authority in agencies' appropriations. Also 

serves as a mechanism to prevent agencies' 

disbursements from exceeding appropriated amounts. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-10 

General controls Management’s policies and procedures that apply to 

an entity’s overall computer operations and that 

create the environment in which application controls 

and certain user controls (which are control activities) 

operate. They are classified in the FISCAM as 

(1) entitywide security management program, 

(2) access control, (3) application software 

development and change control, (4) system software, 

(5) segregation of duties, and (6) service continuity 

control. 

 

Generally accepted 

accounting principles 

(GAAP) 

The accounting principles that the entity should use. 

For federal executive agencies, these are federal 

accounting standards following the hierarchy listed in 

SAS 91. The standards issued by FASAB are the first 

level of the hierarchy. For government corporations, 

generally accepted accounting principles are 

commercial generally accepted accounting principles 

issued by FASB.

 

Haphazard sample A sample consisting of sampling units selected 

without any conscious bias, that is, without any 

special reason for including or omitting items from the 

sample. It does not consist of sampling units selected 

in a careless manner, but is selected in a manner that 

can be expected to be representative of the 

population.

 

Information and 

communication

 A component of internal control in addition to the 

control environment, risk assessment, monitoring, and 

control activities. The identification, capture, and 

exchange of information in a form and time frame that 

enable people to carry out their responsibilities. The 

accounting system and accounting manuals are 

examples of this component. 

 

Information systems 

(IS) auditor

 A person with specialized technical knowledge and 

skills who can understand the IS concepts discussed 

in the manual and apply them to the audit. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-11 

IS controls Controls whose effectiveness depends on computer 

processing, including general, application, and user 

controls (described in section 295 F). 

 

Inherent risk The susceptibility of an assertion to a material 

misstatement, assuming there are no related specific 

control activities. This is an auditor judgment. 

 

Interdepartmental 

amounts 

 Activity and balances between two different 

departments. (See department.) The 

intradepartmental and interdepartmental amounts are 

subsets of intragovernmental activity and balances. 

 

Interentity Activities or balances between two or more agencies, 

departments, or bureaus. (See inter- and 

intradepartmental.) 

 

Internal control A process, effected by an entity's management and 

other personnel, to provide reasonable assurance that 

the entity's specific objectives are achieved. 

Following are the types of internal controls: 

• financial reporting (including safeguarding and 

budget) 

• compliance (including budget) 

• operations 

 

Intradepartmental 

amounts 

 Activity and balances within the same department. 

(See department.) The intradepartmental and 

interdepartmental amounts are subsets of 

intragovernmental activity and balances. 

 

Intragovernmental 

amounts 

 Activity and balances occurring within or between 

federal departments. 

 

Intragovernmental 

Payment and 

Collection System 

(IPAC)

 The primary method used by most federal agencies to 

electronically bill and/or pay for services and supplies 

within the government. Used to communicate to the 

Treasury and the trading partner agency that the 

online billing and/or payment for services and supplies 

has occurred. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-12 

Joint Financial 

Management 

Improvement Program 

(JFMIP)

 The joint undertaking of the U.S. Department of the 

Treasury, the U.S. General Accounting Office, the 

Office of Management and Budget, and the Office of 

Personnel Management to improve financial 

management in the federal government. The source of

governmentwide requirements for financial 

management systems software functionality that 

describes the basic elements of an integrated financial 

management system (including the core financial 

system). 

 

Judgment fund A permanent and indefinite appropriation that is 

available to pay final judgments, settlement 

agreements, and certain types of administrative 

awards against the United States when payment is not 

otherwise provided for. The Secretary of the Treasury

certifies all payments from the fund. 

 

Known misstatement The amount of misstatement found by the auditor. 

 

Likely misstatement The auditor's best estimate of the amount of the 

misstatement in the tested population (including 

known misstatement). For sampling applications, this 

amount is the projected misstatement. 

 

Limit Used in performing substantive analytical procedures, 

the limit is the amount of difference between the 

expectation and the recorded amount that the auditor 

will accept without investigation. Therefore, the 

auditor should investigate amounts that exceed the 

limit during analytical procedures. 

 

Materiality The magnitude of an item's omission or misstatement 

in a financial statement that, in the light of 

surrounding circumstances, makes it probable that the 

judgment of a reasonable person relying on the 

information would have been changed or influenced 

by the inclusion or correction of the item (FASB 

Statement of Financial Concepts No. 2). See planning 

materiality, design materiality, and test materiality. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-13 

Misappropriation of 

assets

 Theft of an entity's assets causing the financial 

statements not to be presented in conformity with 

GAAP. 

 

Monitoring A component of internal control in addition to the 

control environment, risk assessment, information 

and communication, and control activities. The 

process by which management assesses internal 

control performance over time. It may include 

ongoing activities, separate evaluations, or a 

combination of both. 

 

Multipurpose testing Performing several tests, such as control tests, 

compliance tests, and substantive tests, on a common 

selection, usually a sample. 

 

Nonsampling selection A selection of items to reach a conclusion only on the 

items selected. Sometimes called a case study, the 

auditor using a nonsampling selection may not project 

the results to the population, but should be satisfied 

that there is a low risk of material misstatement in the 

untested items. 

 

Obligation ceiling A limit set by the Congress on the amount of 

obligations and expenditures the entity may incur 

even though the budget authority (such as an 

appropriation) is greater than this limit. 

 

Offsetting collections Collections of a business- or market-oriented nature 

and intragovernmental transactions. If, pursuant to 

law, they are deposited to receipts accounts and are 

available for obligation, they are considered budget 

authority and referred to as offsetting receipts. 

Contract authority and immediate availability of 

offsetting receipts for use are the usual forms of 

budget authority for revolving funds. 

 

Operations controls Management's policies and procedures to carry out 

organizational objectives, such as planning, 

productivity, programmatic, quality, economy, 

efficiency, and effectiveness objectives. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-14 

Output Any product or service generated from the 

consumption of resources. This can include 

information generated by the completion of a task or 

activity. 

 

Overall analytical 

procedures

 Analytical procedures performed as an overall 

financial statement review during the audit reporting 

phase. 

 

Performance measures 

controls

 Policies and procedures management uses to assure 

data that support performance measures reported in 

the MD&A of the Accountability report are properly 

recorded, processed, and summarized to permit 

preparation of performance information in 

accordance with criteria stated by management. 

 

Planning materiality The auditor's judgment of the total amount of 

misstatements that would be material in relation to 

the financial statements to be audited; used for 

planning the audit scope. The auditor determines an 

appropriate base (usually the greater of assets, 

liabilities, revenues, or expenses); then the auditor 

multiplies by a percent, usually 3 percent. 

 

Point estimate Most likely amount of the population characteristic 

based on the sample. 

 

Population The items comprising a financial statement line item, 

account balance, or class of transactions from which 

selections are made for audit testing. 

 

Precision The difference between the point estimate and the 

upper or lower limit. Thus, precision tells the auditor 

how close the point estimate could be from the true 

population amount. 

 

Preliminary analytical 

procedures

 Analytical procedures performed during the audit 

planning phase. 

 

Principal statements See financial statements. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-15 

Probable The chance of the future confirming event(s) 

occurring is likely, for pending or threatened litigation 

and unasserted claims. (For other contingencies, the 

future event or events are more likely than not to 

occur.) 

 

Projected 

misstatement

 An estimate of the misstatement in a population, 

based on the misstatements found in the examined 

sample items; represents misstatements that are 

probable. The projected misstatement includes the 

known misstatement. 

 

Providing agency The agency providing services, products, goods, 

transfer funds, investments, debt, and/or incurring the 

reimbursable costs. This includes bureaus, 

departments, and/or programs within agencies. The 

providing agency is the seller. The providing agency is 

the agency transferring out funds to another agency 

(transfers-out) when appropriations are transferred 

without the exchange of goods or services. 

 

Random sample A sample selected so that every combination of the 

same number of items in the population has an equal 

chance of selection. A random sample should be 

selected by using computer software or a random 

number table. A systematic sample with a random 

start, although not technically meeting the definition, 

may generally be evaluated as if it were a random 

sample. 

 

Reasonably possible The chance of the future event or events occurring is 

more than remote but less than probable. 

 

Receiving agency The agency receiving services, products, goods, 

transfer funds, purchasing investments, and/or 

borrowing from Treasury (or other agency). This 

includes bureaus, departments, and/or programs 

within agencies. The receiving agency is the 

purchaser. The receiving agency is the agency 

receiving transfers of funds (transfers in) when 

appropriations are transferred without the exchange 

of goods or services. 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-16 

 

Reciprocal accounts Corresponding SGL accounts that should be used by a 

providing and receiving agency to record like intragovernmental transactions. For example, the 

providing entity's accounts receivable would normally 

be reconciled to the reciprocal account, accounts 

payable, on the receiving entity's records. 

 

Recorded amount The financial statement amount being tested by the 

auditor in the specific application of substantive tests. 

 

Reimbursable activity In intragovernmental activity, similar to goods or 

services, except the amounts billed to the receiving 

entity by the providing entity are based on actual costs 

incurred instead of on fees. 

 

Related parties Affiliates, management of the entity, their immediate 

families, and other parties the entity deals with if one 

party controls or can significantly influence the 

management or operating policies of the other to an 

extent that one of the parties might be prevented from 

fully pursuing its own separate interests. 

 

Remote The chance of the future event or events occurring is 

slight. 

 

Responsibility segment In cost accounting, a significant organizational, 

operational, functional, or process component that 

has the following characteristics: (a) its manager 

reports to the entity's top management, (b) it is 

responsible for carrying out a mission, performing a 

line of activities or services, or producing one or a 

group of products, and (c) for financial reporting and 

cost management purposes, its resources and results 

of operations can be clearly distinguished, physically 

and operationally, from those of other segments of the 

entity. 

 

Risk See audit risk, inherent risk, control risk, detection 

risk. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-17 

Risk assessment A component of internal control in addition to the 

control environment, monitoring, information and 

communication, and control activities. The entity's 

identification and analysis of relevant risks to 

achievement of its objectives, forming a basis for 

determining how the risks should be managed. 

 

Safeguarding controls Internal controls to protect assets from loss from 

unauthorized acquisition, use, or disposition arising 

from misstatements in processing transactions and 

handling the related assets. Safeguarding controls are 

considered part of financial reporting controls. Some 

safeguarding controls are operations controls. 

 

Sample Items selected from a population to reach a 

conclusion about the population as a whole. 

(Compare with nonsampling selection.) 

 

Sampling The application of audit procedures to fewer than all 

items composing a population to reach a conclusion 

about the entire population. The auditor selects 

sample items in such a way that the sample and its 

results are expected to be representative of the 

population. Each item must have an opportunity to be 

selected, and the results of the procedures performed 

must be projected to the entire population.

 

Sampling interval The amount between two consecutive sample items, 

used in selecting the items in systematic sampling. In 

dollar-unit sampling, this amount may be determined 

by dividing the test materiality by a statistical risk 

factor. 

 

Sampling risk The risk that the auditor's conclusion based on a 

sample might differ from the conclusion that would be 

reached by applying the test in the same way to the 

entire population. 

 

Specific control 

evaluation (SCE)

 Evaluating the effectiveness of the design and 

operation of specific control activities. This process is 

documented on the SCE worksheet. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-18 

Standard General 

Ledger (SGL)

 A uniform chart of accounts and guidance for 

standardizing federal agency accounting. Composed 

of five major sections: (1) chart of accounts, 

(2) account descriptions, (3) accounting transactions, 

(4) SGL attributes, and (5) report crosswalks. 

Prescribed by the Department of the Treasury in its 

Treasury Financial Manual.

 

Standard General 

Ledger (SGL) at the 

transaction level

 One of the three requirements of FFMIA. 

Implementing the SGL at the transaction level means 

that the entity's general ledger is in full compliance 

with the SGL chart of accounts descriptions and 

posting rules, that transactions from feeder systems 

are fed into the general ledger following SGL 

requirements through an automated or, in certain 

cases, a manual interface, that detail supporting these 

transactions can be traced back to the source 

transactions in the feeder systems, and that the feeder 

systems process transactions consistent with SGL 

account descriptions and posting rules. 

 

Statistical sampling Sampling that uses the laws of probability for 

selecting and evaluating a sample from a population 

for the purpose of reaching a conclusion about the 

population. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-19 

Stewardship 

information 

Required supplementary stewardship information 

includes (1) stewardship property, plant, and 

equipment (property owned by the federal 

government including: heritage assets [PP&E of 

historical, natural, cultural, educational, or artistic 

significance], national defense PP&E [weapons 

systems and vessels], and stewardship land [land 

other than that acquired for, or in connection with, 

general PP&E]), (2) stewardship investments (items 

treated as expenses in calculating net cost but 

meriting special treatment to highlight their 

substantial investment and long-term-benefit nature, 

including: nonfederal physical property [grants 

provided for properties financed by the federal 

government but owned by the state and local 

governments], human capital [education and training 

programs financed by the federal government for the 

benefit of the public], and research and development 

[basic and applied]), (3) stewardship responsibilities 

(current services assessment showing receipt and 

outlay data on the basis of projections of future 

activities—required in the consolidated statements of 

the U.S. government only—and social insurance 

information), and (4) risk-assumed information on 

insurance and guarantee programs (generally, the 

present value of unpaid expected losses net of 

associated premiums). 

 

Stratification Separation of a population into what the auditor 

believes are relatively homogeneous groups, each of 

which is referred to as a stratum, usually to improve 

sampling efficiency in a classical variables estimation 

sample. 

 

Stratified sample A classical variables estimation sample where the 

auditor first stratifies the population then selects a 

random sample from each stratum. 

 

Substantive analytical 

procedures

 Analytical procedures used as substantive tests. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-20 

Substantive assurance The auditor’s judgment that the assurance provided by 

all substantive tests of an assertion will detect 

misstatements that exceed materiality. Not the same 

as confidence level. 

 

Substantive tests Specific tests to detect material misstatements in an 

assertion relating to the account balance, transaction 

class, and disclosure components of financial 

statements. 

 

Suitable criteria In agreed upon procedures engagements, suitable 

standards that have the attributes of objectivity, 

measurability, completeness, and relevance. 

 

Supplemental 

analytical procedures

 Analytical procedures to increase the auditor's 

understanding of account balances and transactions 

when detail tests are used as the sole source of substantive assurance. 

 

Systematic sampling A method of selecting a sample in which every nth 

item is selected. See random sample. 

 

Test materiality 

(tolerable 

misstatement)

 The maximum misstatement that the auditor can 

tolerate in a population. This materiality is used in 

determining the extent of a specific substantive test. 

(In statistical terms, margin or bound of error.) Test 

materiality is design materiality, reduced when 

• the audit is being performed at some, but not all, 

entity locations (requiring increased audit 

assurance for those locations visited); 

• the area tested is deemed to be sensitive to the 

users of the financial statements; or 

• the auditor expects to find a significant amount of 

misstatements 

 

Tolerable 

misstatement

 See test materiality. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-21 

Tolerable rate In attribute sampling for control testing, the maximum 

rate of deviation from a prescribed control that the 

auditor would be willing to accept without altering the 

assessment of the effectiveness of the control. For 

tests of compliance with laws and regulations, the 

tolerable rate is the maximum rate of noncompliance 

that the auditor would accept in the population 

without reporting the noncompliance. (In statistical 

terms, margin or bound of error.) 

 

Top stratum item An item in a dollar-unit sample that equals or exceeds 

the amount of the sampling interval or implicit 

sampling interval. Top stratum items are tested 

100 percent. 

 

Trading partner code As assigned by the U.S. Department of the Treasury, 

trading partner code is the attribute defined within the 

accounting for a transaction used to identify the 

trading partner entity. The trading partner code is 

illustrated next to the SGL account and is a two-digit 

number. 

 

Trading partners As defined by the U.S. Department of the Treasury, 

trading partners are agencies, bureaus, programs, or 

other entities (within or between agencies/ 

departments) participating in transactions with each 

other. 

 

Transfers Funding moved from one entity to another based on 

an agreement between the providing entity and the 

receiving entity 

 

Treasury Financial 

Manual (TFM)

 The Treasury Financial Manual (TFM) is Treasury's 

official publication for financial accounting and 

reporting of all receipts and disbursements of the 

federal government. Provides procedures for federal 

agencies to account for and reconcile transactions 

occurring within and between each other. Includes 

procedures for CFO Act agencies to reconcile and 

confirm with their trading partners intragovernmental 

activity and balances. 

 
 Glossary 

April 2003 GAO/PCIE Financial Audit Manual Glossary-22 

Universe See population. 

 

User controls Manual comparisons of computer output (generally 

totals) to source documents or other input (including 

control totals). 

 

Walkthroughs Audit procedures to help the auditor understand the 

actual operation of significant aspects of accounting 

system processing and control techniques. 

Walkthroughs of financial reporting controls consist 

of tracing one or more transactions from initiation, 

through all processing, to inclusion in the general 

ledger; observing the processing and applicable 

controls in operation; making inquiries of personnel 

applying the controls; and examining related 

documents. 

 

FISCAM has a glossary of IS terms. 
ABBREVIATIONS 

 April 2003 GAO/PCIE Financial Audit Manual Abbrev-1 

AAPC Accounting and Auditing Policy Committee 

ABA American Bar Association 

AcSEC Accounting Standards Executive Committee of the AICPA 

AICPA American Institute of Certified Public Accountants 

ALC agency locator code 

ARA Account Risk Analysis 

AT Reference to Statements on Standards for Attestation Engagements 

in the sections of the Codification of Statements on Auditing 

Standards 

AU Reference to Statements on Auditing Standards in the sections of 

the Codification of Statements on Auditing Standards 

AUP agreed-upon procedures 

CFO Chief Financial Officer 

COSO Committee of Sponsoring Organizations of the Treadway 

Commission 

CSRS Civil Service Retirement System 

DUS dollar-unit sampling 

DCIA Debt Collection Improvement Act 

FACTS Federal Agencies' Centralized Trial Balance System 

FAM GAO/PCIE Financial Audit Manual

FASAB Federal Accounting Standards Advisory Board 

FASB Financial Accounting Standards Board 

FBWT fund balance with Treasury 
 Abbreviations 

 April 2003 GAO/PCIE Financial Audit Manual Abbrev-2 

FCRA Federal Credit Reform Act 

FERS Federal Employees' Retirement System 

FISCAM Federal Information System Controls Audit Manual 

FFMIA Federal Financial Management Improvement Act of 1996 

FMFIA Federal Managers' Financial Integrity Act of 1982 

FMS Financial Management Service 

GAAP generally accepted accounting principles 

GAAS generally accepted auditing standards 

GAGAS generally accepted government auditing standards 

GAO General Accounting Office 

G/L general ledger 

GRA General Risk Analysis 

IG Inspector General 

IPAC Intragovernmental Payments and Collection System 

IS Information Systems 

JFMIP Joint Financial Management Improvement Program 

MD&A management’s discussion and analysis 

NTDO Non-Treasury Disbursing Office 

OGC Office of General Counsel 

OMB Office of Management and Budget 

OPM Office of Personnel Management 

PCIE President’s Council on Integrity and Efficiency 
 Abbreviations 

 April 2003 GAO/PCIE Financial Audit Manual Abbrev-3 

PP&E property, plant, and equipment 

RSI required supplementary information 

RSSI required supplementary stewardship information 

SAS Statement on Auditing Standards 

SCE Specific Control Evaluation 

SF standard form 

SFFAC Statement of Federal Financial Accounting Concepts 

SFFAS Statement of Federal Financial Accounting Standards 

SGL U.S. Government Standard General Ledger 

SSAE Statement on Standards for Attestation Engagements 

TFM Treasury Financial Manual 

W/P workpaper 
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