GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 

United States Government Accountability Office

Washington, DC 20548 

June 29, 2006 

Inspectors General 

Subject: Financial Audit: Guidance for Auditing Federal Employee and Veteran 

Benefit Payable Actuarial Estimates 

In our role as principal auditor of the consolidated financial statements of the U.S. 

government (CFS), we plan to use the work of the inspectors general and contracted 

independent public accountants who audit the agency-level financial statements. The 

development of the joint PCIE/GAO Financial Audit Manual (FAM) has provided a 

common framework and methodology for federal financial statement auditing. 

Adherence to the FAM will enable us to readily review the work of other auditors as a 

basis for using that work under auditing standards. We want to all be on the same 

page so that we are in the position to use your work. 

Certain CFS line items that will be subject to our concurrent review because of their 

significance, such as the federal employee and veteran benefits payable line item, 

involve federal agencies’ significant actuarial estimations. Statement on Auditing 

Standards (SAS) No. 57, Auditing Accounting Estimates applies to such estimations. 

In addition, Statement of Federal Financial Accounting Standard (SFFAS) No. 5 

requires that federal agencies disclose specific information in their financial 

statements for pensions, other retirement benefits, and other postemployment 

benefits. Additional related audit guidance was provided in November 2004 when the 

American Institute of Certified Public Accountants (AICPA) issued its Statement of 

Position (SOP) 04-1, Auditing the Statement of Social Insurance,1

 effective for 

periods beginning after September 30, 2005. This audit guidance discusses the 

auditor’s responsibility under SAS No. 57 and includes specific illustrative control 

and audit procedures that are applicable to auditing actuarial estimates to achieve 

SAS No. 57 objectives. Actuarial estimates for both social security and the federal 

employee and veteran benefit payable line item are developed by methods which 

calculate for the projection period covered by an actuarial valuation, the excess of (a) 

the present value of projected benefits of the group included in an actuarial valuation 

over (b) the actuarial value of program-related assets. Although the SOP 04-1 was 

specifically developed for use in auditing federal agencies’ statements of social 

insurance, we consider the internal control and audit procedures discussed in SOP 

04-1 to be appropriate for auditing the significant actuarial estimates in the federal 

employee and veteran benefit payable line item as well. Beginning in fiscal year 2006, 

 

1

This document is available from the AICPA at https://www.cpa2biz.com (last visited May 22, 2006). 

Once at this site, search on SOP 04-1.
we plan to use SOP 04-1 as criteria in determining the extent to which we can use 

audit work performed by agency auditors in this area. To the extent that the concepts 

and objectives of SOP 04-1 are found to be appropriate to other audit areas in the 

future, we will consider its use in such areas. 

The purpose of this letter and the enclosure is to alert you to (1) our plan to use SOP 

04-1 audit guidance in our review of agency auditors’ work on federal employee and 

veteran benefits payable estimates that are significant to the CFS and (2) 

observations made during our review of selected agency auditors’ work regarding 

such actuarial estimations as outlined in enclosure I and what additional work would 

need to be done to be consistent with SOP 04-1 audit guidance. We look forward to 

continuing to work with the federal audit community as we collectively strive to 

ensure the highest quality audits of federal financial statements. 

We are sending copies of this letter to the Controller of the Office of Management and 

Budget, the Fiscal Assistant Secretary of the Department of the Treasury (Treasury), 

and the Chief Financial Officers of the 35 federal executive agencies required by OMB 

to verify and submit a closing package to Treasury.2

 If you have any questions 

regarding the information in this letter, please contact me at (202) 512-2600, or Gary 

Engel, Director, Financial Management and Assurance at (202) 512-3406 or 

engelg@gao.gov. Major contributors to this letter are Linda P. Garrison, Assistant 

Director, and Vera M. Seekins, Auditor-in-charge. 

Sincerely yours, 

Jeffrey C. Steinhoff 

Managing Director 

Financial Management and Assurance 

Enclosure 

 2

 The closing package is a methodology developed by Treasury to directly link information from 

federal agencies’ audited financial statements to amounts reported in the CFS. A complete closing 

package consists of the special purpose audit opinion, the management representation letter for the 

closing package, audit trail report (reclassification journal voucher report), closing package financial

statement report, trading partner summary report, notes reports, and other data reports.

Page 2 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 
Page 3 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 

ADDRESSEES

The Honorable Donald A. Gambatesa 

Inspector General 

Agency for International Development 

The Honorable Phyllis Fong 

Inspector General 

Department of Agriculture 

The Honorable Johnnie E. Frazier 

Inspector General 

Department of Commerce 

Mr. Thomas Gimble 

Acting Inspector General 

Department of Defense 

The Honorable John P. Higgins, Jr. 

Inspector General 

Department of Education 

The Honorable Gregory H. Friedman 

Inspector General 

Department of Energy 

Mr. Bill Roderick 

Acting Inspector General 

Environmental Protection Agency 

Mr. Carl A. Clinefelter 

Inspector General 

Farm Credit Administration 

Mr. Kent R. Nilsson 

Acting Inspector General 

Federal Communications Commission 

Ms. Patricia Black 

Acting Inspector General 

Federal Deposit Insurance Corporation 

The Honorable Brian D. Miller 

Inspector General 

General Services Administration 

The Honorable Daniel Levinson 

Inspector General 

Department of Health and Human Services 
The Honorable Richard L. Skinner 

Inspector General 

Department of Homeland Security 

The Honorable Kenneth M. Donohue 

Inspector General 

Department of Housing and Urban Development 

The Honorable Earl E. Devaney 

Inspector General 

Department of the Interior 

The Honorable Glenn Fine 

Inspector General 

Department of Justice 

The Honorable Gordon S. Heddell

Inspector General 

Department of Labor 

The Honorable Robert W. Cobb 

Inspector General 

National Aeronautics and Space Administration 

Mr. William DeSarno 

Inspector General 

National Credit Union Administration 

Ms. Christine C. Boesz

Inspector General 

National Science Foundation 

The Honorable Hubert T. Bell 

Inspector General 

Nuclear Regulatory Commission 

The Honorable Patrick E. McFarland 

Inspector General 

Office of Personnel Management 

Mr. Robert Emmons 

Inspector General 

Pension Benefit Guaranty Corporation 

The Honorable Martin J. Dickman 

Inspector General 

Railroad Retirement Board 

Mr. Walter Stachnik 

Inspector General 

Page 4 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 
Page 5 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 

Securities and Exchange Commission 

The Honorable Eric M. Thorson 

Inspector General 

Small Business Administration 

Ms. A. Sprightley Ryan 

Acting Inspector General 

Smithsonian Institution 

The Honorable Patrick P. O’Carroll 

Inspector General 

Social Security Administration 

The Honorable Howard J. Krongard 

Inspector General 

Department of State 

The Honorable Richard Moore 

Inspector General 

Tennessee Valley Authority 

Mr. Todd J. Zinser 

Acting Inspector General 

Department of Transportation 

The Honorable Harold Damelin 

Inspector General 

Department of the Treasury 

The Honorable Dave Williams 

Inspector General 

U.S. Postal Service 

The Honorable George Opfer 

Inspector General 

Department of Veterans Affairs
ENCLOSURE 1 ENCLOSURE 1 

CERTAIN AGENCY AUDIT PROCEDURES OVER ACTUARIAL ESTIMATIONS 

WOULD NEED TO BE EXPANDED IN FUTURE AUDITS TO BE CONSISTENT WITH 

SOP 04-1 GUIDANCE

We reviewed the nature and extent of fiscal year 2004 audit work performed on 

the $4 trillion consolidated financial statements of the U.S. government’s (CFS) 

federal employee and veteran benefits payable (FEVBP) line item by independent 

public accountants contracted by agency inspectors general. For this effort, we 

compared the fiscal year 2004 audit documentation related to actuarial 

estimations for six selected postemployment benefit program liabilities to 

Statement of Position (SOP) 04-1 audit guidance. In general, we concluded that 

future years’ audit work would need to be expanded to be consistent with SOP 04-

1 audit guidance. 

Specifically, for each of the six selected benefit program liabilities, we noted that 

audit documentation for the following areas were not consistent with SOP 04-1 

§19 guidance: 

• specific audit procedures performed with the assistance of an independent 

actuary, 

• the relationship between the procedures performed with the assistance of 

an independent actuary and the auditor’s assessments of audit risk and 

materiality, and 

• any other significant matters related to the objectives and scope of the 

independent actuary’s work, including any limitations on the independent 

actuary’s procedures. 

Without a clear understanding of the independent actuary’s procedures and the 

level of assurance provided by the independent actuary’s work, the auditor may 

inappropriately use and rely on the independent actuary’s report. For example, for 

one of the selected benefit programs, agency audit officials informed us that they 

were unaware of any written program detailing the work planned by the 

independent actuary. The auditor advised us that they had relied on their 

independent actuary’s professional judgment to design and perform appropriate 

procedures. In addition, although the agency actuary for the same agency used the 

concept of materiality in developing the estimate, the auditor was not aware of 

what the agency actuary’s materiality level was and had not discussed the audit 

materiality with the agency actuary. 

In addition, SOP 04-1 illustrative procedures refine Statement on Auditing 

Standards (SAS) No. 57 audit guidance. As stated in SAS No. 57, the auditor 

should obtain an understanding of how management developed the estimate and 

use one or a combination of the following approaches to evaluate the 

reasonableness of that estimate: 

• review and test the process used by management to develop the estimates, 

Page 6 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 
Page 7 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 

• develop an independent expectation of the estimate to corroborate the 

reasonableness of management’s estimate, and 

• review subsequent events or transactions occurring prior to the completion 

of fieldwork. 

SOP 04-1 provides more specific guidance and illustrative procedures to fulfill 

these SAS No. 57 requirements. 

In accordance with SOP 04-1 §9, if controls over the estimation process are 

effective, the most practicable and efficient approach to fulfilling the auditor’s 

responsibility under SAS No. 57 may be to review and test the estimation process 

used by management. SOP 04-1 §6 describes management’s process as ordinarily 

consisting of the following activities: 

1. identifying the relevant factors that affect the estimates; 

2. developing assumptions that represent management’s best estimate of 

circumstances and events with respect to the relevant factors; 

3. accumulating relevant, sufficient, and reliable data on which to base the 

estimates; 

4. determining the estimated amounts based on assumptions and other 

relevant factors; and 

5. determining that the estimates are presented in conformity with GAAP and 

that disclosure is adequate. 

 

SOP 04-1§9 specifies that if the auditor finds that controls over the estimation 

process are ineffective, the auditor should develop an independent expectation of 

the estimate, or portions of the estimate, to corroborate management’s estimate, 

or obtain competent evidence from outside the audited agency’s process that 

would be sufficient to support the financial statement assertions. 

The five activities in management’s estimation process relate to the elements in 

figure 1 of SOP 04-1 that depicts the process of developing social insurance 

estimates. We consider these same five elements to be appropriate for auditing 

other actuarial liability estimates. As such, during our review of fiscal year 2004 

audit documentation, we looked for evidence that auditors understood the 

agencies’ process for developing and evaluating actuarial estimates, internal 

control procedures, and test procedures over these five actuarial estimate 

elements using the illustrative controls and audit procedures. For the six selected 

benefit programs, audit documentation made available for our review did not 

include evidence that the auditors performed certain procedures illustrated in the 

appendix to SOP 04-1 or equivalent procedures. The following table shows the 

illustrative procedures by liability element that we did not see documented in our 

review of fiscal year 2004 audit documentation for the six selected programs. 
Table 1: Number of Selected Programs Without Documented Procedures Included in 

the SOP 04-1’s Illustrative Procedures 

Liability 

element 

SOP 04-1 Illustrative procedure not 

documented 

Affected number 

of selected 

programs 

Factors Understand management’s process for monitoring 

the environment to determine the effect that 

changes in the environment, such as legislation or 

health, might have on the variables selected for 

use in the actuarial estimate. 

5 

Factors Understand management’s procedures to prevent 

and detect the inadvertent omission of factors that 

should be considered in developing the actuarial 

estimate. 

3 

Assumptions Understand the source of assumptions and how 

management considers and determines the effect 

that variation in the underlying assumptions will 

have on the estimates. 

3 

Assumptions Understand how the agency generates, evaluates, 

and reviews assumptions. 

3 

Assumptions Understand how the agency compares 

assumptions made in the current period with those 

of prior periods and explains or reconciles any 

differences. 

4 

Assumptions Consider the aggregate effect of individually 

insignificant assumptions. 

4 

Model Understand how management and other 

knowledgeable personnel design or select the 

model and how they document that model and the 

programs used to determine the actuarial estimate. 

3 

Model Understand procedures for assigning responsibility 

to individuals in a manner that ensures that no 

single individual has the authority to read, add, 

change, or delete information without an 

independent review of that activity. 

3 

Model Understand procedures for designating 

responsibility for significant information resources 

within the agency and establishing and maintaining 

security over such resources. 

3 

Model Review documentation that describes the 

instructions, rules, or procedures used by the 

model to calculate estimates. 

4 

Model Reperform calculations used in the model to 

translate the assumptions, data, and factors into 

the estimate. 

5 

Page 8 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 
Page 9 GAO-06-768R Guidance for Auditing Federal Employee and Veteran Benefits Payable 

Model Review management’s documentation of its 

sensitivity analysis and consider whether the 

results were consistent with the auditor’s 

expectations. 

4 

Estimate Inquire to determine who has final authority for 

reviewing and approving estimates. 

4 

Estimate Understand controls related to review of estimates 

and the related supporting documentation. 

6 

Estimate Understand controls related to the supervision of 

individuals who develop estimates. 

6 

Estimate Compare the estimated future expenditures 

predicted by the actuarial model to actual 

expenditures for the previous fiscal year. 

5 

Estimate Evaluate the reasonableness of the time period 

covered by the actuarial liability estimate. 

4 

Estimate Determine whether the information in the actuarial 

liability estimate, including related disclosures, is 

supported by sufficient competent evidential 

matter. 

3 

Source: GAO. 

(198454) 
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