Financial Audit Manual

Financial Audit Manual

Volume 2

June 2018

GAO-18-625G

Council of the

INSPECTORS GENERAL

on I N T E G R I T Y and E F F I C I E N C Y

441 G St. N.W. Washington, DC 20548

June 2018

To Audit Officials, Agency Chief Financial Officers, and Others Interested in Federal Financial Auditing and Reporting

This letter transmits the revised Financial Audit Manual (FAM) of the U.S. Government Accountability Office (GAO) and the Council of the Inspectors General on Integrity and Efficiency (CIGIE). The FAM presents a methodology for performing financial statement audits of federal entities in accordance with professional standards and consists of three volumes. FAM Volume 1 contains the audit methodology. FAM Volume 2 provides detailed implementation guidance. FAM Volume 3 contains checklists for Federal Accounting (FAM 2010) and Federal Reporting and Disclosures (FAM 2020). Subsequent to this release, FAM Volume 3 will be updated and distributed periodically.

We have revised the FAM to reflect significant changes in auditing financial statements in the U.S. government since the last major revisions of FAM Volumes 1 and 2 (issued in July 2008) and FAM Volume 3 (issued in August 2007). The revisions to the FAM are primarily based on changes in (1) professional auditing and attestation standards of the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA), (2) GAO's Government Auditing Standards (2011), (3) GAO's Standards for Internal Control in the Federal Government (2014), and (4) the Office of Management and Budget's audit and reporting guidance.

To help the FAM continue to meet the needs of the federal audit community and the public it serves, GAO and CIGIE worked jointly to update the FAM. In July 2017, CIGIE distributed an exposure draft of FAM Volume 1 for a comment period that ended September 2017. In November 2017, CIGIE distributed an exposure draft of FAM Volume 2 for a comment period that ended in January 2018. In September 2017 (FAM 2010) and October 2017 (FAM 2020), CIGIE distributed an exposure draft of FAM Volume 3 for a comment period that ended in December 2017. All comments we received were considered in the final FAM.

This FAM supersedes previously issued versions of FAM and can be used immediately to audit federal entity financial statements.

Should you need additional information, please contact us at fam@.

J. Lawrence Malenich Managing Director Financial Management and Assurance U.S. Government Accountability Office Enclosures

Page 1

Tom Howard Chair, Audit Committee Council of the Inspectors General on Integrity and Efficiency

GAO-18-625G GAO/CIGIE Financial Audit Manual

GAO Team Project Team J. Lawrence Malenich , Managing Director Robert F. Dacey, Chief Accountant Lynda Downing, Assistant Director Paul Foderaro, Assistant Director Anne Sit-Williams, Assistant Director Contributors Dawn Simpson, Director Phyllis Anderson, Assistant Director Sharon O. Byrd, Audit Sampling Specialist Lauren S. Fassler, Senior Attorney Michael LaForge, Assistant Director Carrie Morrison, Assistant Director Lisa Motley, Assistant General Counsel Sabrina Rivera, Senior Auditor Carolyn Voltz, Assistant Director

CIGIE FAM Working Group Members Bobbie Jean Bartz, Office of the Inspector General, U.S. Department of Justice Thomas Chin, Office of Inspector General, Corporation for National and Community Service Mark Jenson, Office of Inspector General, National Aeronautics and Space Administration Gregory Spencer, Office of Inspector General, U.S. Department of Education Mark L. Hayes, Office of the Inspector General, U.S. Department of Justice Debra Alford, Office of the Inspector General, U.S. Department of Defense Todd Jones, Office of Inspector General, U.S. Department of State

Page 2

GAO-18-625G GAO/CIGIE Financial Audit Manual

CONTENTS

Contents ? FAM Volume 2 ? Detailed Implementation Guidance

.01 Volume 2 provides detailed implementation guidance which include activities that would be performed during other phases of the audit. Thus, the auditor may refer to the FAM sections in volume 2 early in the audit. For example, FAM 600s includes guidance to auditors on designing and performing oversight and other procedures when using the work of others. FAM 701, Determining Financial Management Systems' Compliance with the Federal Financial Management Improvement Act (FFMIA) Section 803(a) Requirements, 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, FAM 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.

.02 The audit procedures presented in the examples in the FAM sections of volume 2 are examples of some of the audit steps typically performed in each area. They are used in conjunction with the appropriate FAM sections. In using these procedures, the auditor uses professional 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 entity to be audited. The auditor may integrate these steps with the audit programs for related line items. For example, tests of intragovernmental activity and balances in FAM 902 may be integrated with tests of accounts receivable and payable, and, to improve effectiveness, the auditor may coordinate those tests with related nonintragovernmental activity and balances.

June 2018

GAO/CIGIE Financial Audit Manual

Contents-2

Contents ? FAM Volume 2 ? Detailed Implementation Guidance

600 610 615

620 625 630

640 640 A 645 670

670 A

670 B

700 701

701 A

701 B

710 710 A 710 B

710 C

710 D

710 E 800 802 803

804

805

806 807

808

Using the Work of Others

Overview of Using the Work of Others Evaluating the Objectivity and Competence of Other Auditors or

Specialists Using the Work of an Auditor's Specialist Using the Work of a Management's Specialist Audits of Group Financial Statements (and Using the Work of

Component Auditors) Entities Using a Service Organization Service Organization Type 2 Report Assessment Tool Using the Work of an Internal Auditor IG Oversight of Audits Performed by Contracted Independent Public

Accounting (IPA) Firms Summary of Procedures and Documentation for Oversight of Audits

Performed by Contracted IPA Firms Example Transmittal Letter when Providing Oversight of Audits

Performed by Contracted IPA Firms

FFMIA Guidance and Agreed-Upon Procedures Guidance

Determining Financial Management Systems' Compliance with the Federal Financial Management Improvement Act of 1996 (FFMIA)

Example Audit Procedures for Testing Systems for Compliance with FFMIA

Summary Schedule of Instances of Financial Management Systems Noncompliance with FFMIA

Agreed-Upon Procedures Example Agreed-Upon Procedures Engagement Letter Example Representation Letter from Responsible Party on Agreed-Upon

Procedures Engagement Example Representation Letter from Engaging Party on

Agreed-Upon Procedures Engagement Example Agreed-Upon Procedures Report Where Engaging Party Is Not

the Responsible Party Agreed-Upon Procedures Engagement Completion Checklist

Compliance

General Compliance Checklist Antideficiency Act (ADA), as provided primarily in Chapters 13 and 15

of Title 31, U.S. Code Federal Credit Reform Act (FCRA), as provided in Sections 661

through 661f of Title 2, U.S. Code Federal Debt Collection Authorities, as provided in 31 U.S.C. Chapter

37 Prompt Payment Act (PPA), as provided in 31 U.S.C. Chapter 39 Pay and Allowance System for Civilian Employees, as provided

primarily in Chapters 51 through 59 of Title 5, U.S. Code Civil Service Retirement Act (CSRA), as provided in 5 U.S.C. Chapter

83

June 2018

GAO/CIGIE Financial Audit Manual

Contents-3

Contents ? FAM Volume 2 ? Detailed Implementation Guidance

809

810

811

900 902 902 A

902 B

902 C

903 904 905 921 921 A 921 B 921 C 931 941

1000 1001 1001 A 1002 1002 A 1002 B 1002 C 1002 D 1003 1005

Federal Employees Health Benefits Act (FEHBA), as provided in 5 U.S.C. Chapter 89

Federal Employees' Compensation Act (FECA), as provided in 5 U.S.C. Chapter 81

Federal Employees' Retirement System Act (FERSA), as provided in 5 U.S.C. Chapter 84

Substantive Testing Implementation Guidance

Intragovernmental Activity and Balances Example Line Item Risk Analysis (LIRA) for Intragovernmental

Accounts Example Specific Control Evaluation (SCE) for Intragovernmental

Accounts Example Audit Procedures for Intragovernmental Activity and

Balances Auditing Cost Information Related Parties Accounting Estimates Auditing Fund Balance with Treasury (FBWT) Example Line Item Risk Analysis for Fund Balance with Treasury Example Specific Control Evaluation for Bund Balance with Treasury Example Audit Procedures for Fund Balance with Treasury Auditing Heritage Assets and Stewardship Land Auditing the Statement of Social Insurance and the Statement of

Changes in Social Insurance Amounts

Reporting Implementation Guidance

Management Representations Management Representation Letter Example Inquiries of Legal Counsel Example Audit Procedures for Inquiries of Legal Counsel Example Legal Letter Request Example Legal Representation Letter Example Management Summary Schedule Financial Statement Audit Completion Checklist Subsequent Events Review

June 2018

GAO/CIGIE Financial Audit Manual

Contents-4

SECTION 600

Using the Work of Others

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