SECTION 500: Reporting Phase:

Figure 500.1: Methodology Overview:

Planning Phase:   

* Understand the entity's operations: Section 220:
 
* Perform preliminary analytical procedures: Section 225:
 
* Determine planning, design, and test materiality: Section 230:
 
* Identify significant line items, accounts, assertions, and RSSI: 
Section 235:
 
* Identify significant cycles, accounting applications, and financial 
management systems: Section 240:
 
* Identify significant provisions of laws and regulations: Section 245:
 
* Identify relevant budget restrictions: Section 250:
 
* Assess risk factors: Section 260:
 
* Determine likelihood of effective information system controls: 
Section 270:
 
* Identify relevant operations controls to evaluate and test: Section 
275:
 
* Plan other audit procedures: Section 280:
 
* Plan locations to visit: Section 285:

Internal Control Phase: 

* Understand information systems: Section 320:
 
* Identify control objectives: Section 330:
 
* Identify and understand relevant control activities: Section 340:
 
* Determine the nature, timing, and extent of control tests and of 
tests for systems’ compliance with FFMIA requirements: Section 350:
 
* Perform nonsampling control tests and tests for systems’ compliance 
with FFMIA requirements: Section 360:
 
* Assess controls on a preliminary basis: Section 370:

Testing Phase:
 
* Consider the nature, timing, and extent of tests: Section 420:
 
* Design efficient tests: Section 430:
 
* Perform tests and evaluate results: Section 440:
 
** Sampling control tests: Section 450:
 
** Compliance tests: Section 460:
 
** Substantive tests: Section 470:
 
*** Substantive analytical procedures: Section 475:
 
*** Substantive detail tests: Section 480:

Reporting Phase:

* Perform overall analytical procedures: Section 520:
 
* Determine adequacy of audit procedures and audit scope: Section 530:
 
* Evaluate misstatements: Section 540:
 
* Conclude other audit procedures: Section 550:
 
** Inquire of attorneys: 

** Consider subsequent events: 

** Obtain management representations: 

** Consider related party transactions: 

* Determine conformity with generally accepted accounting principles: 
560:
 
* Determine compliance with GAO/PCIE Financial Audit Manual: Section 
570:

* Draft reports: Section 580:

[End of figure]

[End of section]

510 - OVERVIEW: 

.01: 
Based on the work in the preceding phases, the auditor must form 
conclusions on the information in the financial statements, the 
entity's internal control, the financial management systems' 
substantial compliance with the three FFMIA requirements, the entity's 
compliance with laws and regulations, and other information 
(management's discussion and analysis (or the overview of the reporting 
entity), required supplementary information (unaudited RSSI is 
considered required supplementary information), and other accompanying 
information). Additionally, findings coming to the auditor's attention 
should be reported in an appropriate manner. The following sections 
provide guidance to assist the auditor in making these determinations 
and in formulating the report type and form. Guidance is also provided 
on other activities that should be performed by the auditor during the 
reporting phase. (See figure 500.1.):

[End of section]

520 - PERFORM OVERALL ANALYTICAL PROCEDURES: 
PURPOSES OF OVERALL ANALYTICAL PROCEDURES:

.01: 
As the audit nears completion, the auditor must perform overall 
analytical procedures as required by GAAS (AU 329). These procedures, 
which are part of the reporting phase, have the following purposes:

* to determine if an adequate understanding of all fluctuations and 
relationships in the financial statements has been obtained from other 
audit procedures,

* to determine if other audit evidence is consistent with explanations 
for fluctuations documented during overall analytical procedures, and:

* to assist the auditor in forming an opinion on the financial 
statements 
that is consistent with the conclusions reached during tests of 
individual account balances and classes of transactions.

.02: 
If overall analytical procedures indicate that an adequate 
understanding of relationships and fluctuations has not been obtained 
or if there are inconsistencies in audit evidence gathered from other 
audit procedures, further inquiries and testing are necessary to obtain 
an adequate understanding or to resolve the inconsistencies.

.03: 
The auditor may find it effective and efficient to perform overall 
analytical procedures in more detail than the financial statement level 
(supplemental analytical procedures) and then use the results of these 
procedures to "roll up" into and support the overall analytical 
procedures at the financial statement level. For example, the auditor 
might perform overall analytical procedures at the account level and 
roll them up to the financial statement line item to which they belong.

.04: 
The auditor may choose to use analytical procedures to obtain complete 
or partial substantive assurance for certain accounts or to perform 
supplemental analytical procedures when detail tests are used 
exclusively to obtain substantive assurance. The information obtained 
during these procedures can be used as the basis for explanations of 
fluctuations for overall analytical procedures.

.05: 
Having the auditor who conducted the detail tests on an account also 
conduct supplemental analytical procedures usually maximizes 
efficiency and effectiveness by building on the knowledge of the 
account obtained during detail tests.

.06: 
Overall analytical procedures should be coordinated with the auditor's 
evaluation of the MD&A (overview of the entity) included in the 
Accountability Report (annual financial statement). For example, the 
auditor should use the MD&A, if available, to assist in performing 
overall analytical procedures and should use the results of the 
analytical procedures to assist in forming conclusions about the 
information in the MD&A.

PERFORMANCE OF OVERALL ANALYTICAL PROCEDURES:

.07:  
The auditor should take the following steps to achieve the purposes of 
overall analytical procedures described above:

* Compare current-year amounts with comparative financial information 
and with budget execution information: This information may be on a 
summarized level, such as the level of financial statements, or a more 
detailed level, as discussed in paragraph 520.03. If available, audited 
prior-year information that is comparable to the current-period 
information should be used for comparison. If audited prior-year 
information is not available, the auditor should use any other 
information that provides a reasonable basis for comparison. The 
audited, final amounts for the current year must be used for these 
procedures. The auditor may also perform ratio analysis on current-year 
data and compare these with ratios derived from prior periods or 
budgets.

* Identify significant fluctuations: The auditor should establish 
parameters for determining if a fluctuation is significant. 
Fluctuations identified are a matter of the auditor's judgment. The 
auditor should also consider the absence of expected fluctuations when 
identifying significant fluctuations.

* Understand identified fluctuations: The auditor should understand all 
significant fluctuations identified. The causes for the fluctuations 
should be briefly described and referenced to corroborating evidence in 
the workpapers. If the auditor does not understand the cause of the 
fluctuation or if the understanding is not consistent with the evidence 
in the workpapers, the auditor should perform appropriate procedures to 
obtain an understanding or to resolve any inconsistencies.

* Consider the results of overall analytical procedures: The auditor 
should consider these results to determine if an adequate understanding 
of significant fluctuations was obtained and evidence is consistent and 
adequate to support the report on the financial statements.

[End of section]

530 - DETERMINE ADEQUACY OF AUDIT PROCEDURES AND AUDIT SCOPE: 

.01: 
In the planning phase, the auditor determined planning materiality 
based on preliminary information. Based on planning materiality, the 
auditor determined design and test materialities, which affected the 
extent of testing. In light of the final assessment of combined risk, 
the overall level of audit assurance used, and the audited materiality 
base, the auditor should consider whether the extent of substantive 
audit procedures was sufficient (i.e. appropriateness of sample sizes 
for detail tests and the limit for investigation of differences during 
substantive analytical procedures). When there are questions regarding 
the adequacy of work performed, the auditor should consult with the 
Reviewer to determine the necessity of additional procedures.

.02: 
When determining whether an opinion can be expressed on the financial 
statements, any limitations on the nature, timing, or extent of work 
performed should be considered. Additional guidance on scope 
limitations and their impact is provided in paragraphs 580.14-.18.

[End of section]

540 - EVALUATE MISSTATEMENTS: 

OVERVIEW:

.01: 
The auditor may detect misstatements during substantive tests or other 
procedures. These misstatements should be evaluated in both 
quantitative and qualitative terms. Based on this evaluation, the 
auditor should determine the type of report to issue on the financial 
statements.

.02: 
Additionally, the auditor needs to consider the implications of 
misstatements on the following.

* The auditor's evaluation of internal control (see paragraphs 580.32-
.61):

Consider whether the misstatements indicate control weaknesses that had 
not been previously identified, whether the assessment of the controls 
remains appropriate, and whether the categorization of control 
weaknesses for reporting purposes is appropriate.

* The consideration of the risk of material misstatement due to fraud 
(see paragraphs 540.18-.21):

Consider whether the accumulated results of audit procedures and other 
observations would change the risk of material misstatement due to 
fraud identified during planning.

* The auditor's evaluation of the financial management systems' 
substantial compliance with the three FFMIA requirements (see paragraph 
580.62-.66):

Consider whether the misstatements would have a significant impact on 
the auditor's conclusions with respect to the financial management 
systems' substantial compliance with the three FFMIA requirements.

* The entity's compliance with laws and regulations (see paragraphs 
580.67-.75):

Consider whether the misstatements would change the auditor's 
conclusions with respect to the entity's compliance with laws and 
regulations.

* budget formulation and execution:

Consider whether the misstatements would have a significant impact on 
budget related matters for purposes of reporting budget control 
weaknesses, reporting on the statements of budgetary resources and 
financing, and reporting on compliance with budget-related provisions 
of laws and regulations.

* Other reports:

Consider whether the misstatements and any underlying internal control 
weaknesses affect reported performance measures or other reports 
prepared by the entity that are (1) used for management decision-making 
or (2) distributed outside the entity.

.03: 
The auditor should follow the guidance in sections 475 (substantive 
analytical procedures) and 480 (substantive detail tests) regarding 
evaluation of individual misstatements from a quantitative standpoint. 
Following that guidance, the auditor should quantify the effects of the 
misstatements and classify them as follows:

* known misstatement: the amount of misstatement actually found or

* likely misstatement: the auditor's best estimate of the amount of the 
misstatement (including the known misstatement). For sampling 
applications, this amount is the projected misstatement. (Also see 
paragraph 540.11.):

ACCUMULATION OF MISSTATEMENTS:

.04: 
To evaluate the aggregate effects of misstatements on the financial 
statements, the auditor should accumulate the adjustments necessary to 
correct all known and likely misstatements on the Summary of Possible 
Adjustments. This schedule should include all misstatements detected by 
the auditor, including any that the entity corrected during the audit. 
It is important to consider all misstatements to have a record of the 
impact of the audit, bring all misstatements to the attention of the 
appropriate level of management, and assist the auditor in evaluating 
the risk of further misstatement as a part of the consideration of 
unadjusted misstatements (paragraphs 540.11-.12). An example format is 
included as section 595 C. The Reviewer should review the Summary of 
Possible Adjustments. Per AU 312.40, the auditor may designate an 
amount below which misstatements need not be accumulated. This amount 
should be set so that any such misstatements, either individually or 
when aggregated with other such misstatements, would not be material to 
the financial statements, after the possibility of further undetected 
misstatements is considered.

.05: 
The financial statements usually include various estimates made by 
management, such as the recoverability of assets (allowances for 
doubtful accounts receivable or loans) and liabilities for loan 
guarantees. If the recorded amount falls outside of a range of amounts 
that the auditor considers reasonable, the auditor should consider the 
difference between the recorded amount and the closest end of the 
auditor's range to be a likely misstatement to be included in the 
Summary of Possible Adjustments and should discuss the difference with 
entity management.

.06: 
Additionally, the auditor should consider whether management's 
estimates consistently overstate or understate components of the 
financial statements, such as total assets or total expenditures. If 
so, the auditor should consider the effects on the financial statements 
in addition to any unadjusted misstatements when determining the 
appropriate type of opinion. Further guidance on evaluating estimates 
is provided in AU 312.36 and AU 342.

REVIEW OF MISSTATEMENTS WITH MANAGEMENT:

.07:  
After accumulating and summarizing the adjustments, the auditor:

* must bring all misstatements found (except those below the auditor-
designated amount at which misstatements need not be accumulated) to 
the attention of appropriate entity management;

* should encourage entity management to adjust the entity's records to 
correct all known misstatements; and:

* should encourage entity management to determine the cause of the 
likely misstatements and to make appropriate adjustments; unless the 
entity's analysis determines another adjustment is appropriate, the 
auditor should encourage entity management to establish valuation 
allowances for likely misstatements, net of known misstatements (since 
the likely misstatement represents the best estimate of the correction 
needed).

.08:  
In presenting the proposed adjustments to management, the auditor 
should remind management that SAS 89 requires the audited entity to 
indicate in the management representation letter that the unadjusted 
misstatements, individually or in the aggregate, are not material to 
the financial statements taken as a whole. SAS 89 also requires that a 
summary of the unadjusted misstatements be attached to the 
representation letter. Thus, management may consider some of the same 
factors presented in paragraphs 540.09-.16.

CONSIDERATION OF UNADJUSTED MISSTATEMENTS:

.09:  
If entity management declines to record adjustments for any 
misstatements, the auditor considers the potential effects of these 
misstatements on the auditor's report in both quantitative and 
qualitative terms. The auditor should prepare a Summary of Unadjusted 
Misstatements, following the format provided in section 595 D or 
equivalent. Overall guidance on evaluating misstatements is provided in 
AU 312.34-.40. If total unadjusted likely misstatements are material, 
the auditor should modify the opinion on the financial statements (see 
paragraph 580.22). Misstatements, individually or in the aggregate, are 
material if, in light of surrounding circumstances, it is probable that 
the judgment of a reasonable person relying on the information would 
have been changed or influenced by the correction of the items. The 
concept of materiality includes both quantitative and qualitative 
considerations. Deciding whether and how to modify the opinion based on 
the materiality of total unadjusted likely misstatements is a 
significant auditor's judgment. The decision and the basis for it 
should be documented. The Audit Director should be involved in the 
decision and review the documentation related to it. Also, the Reviewer 
should review and approve the documentation of the decision.

Quantitative Considerations:

.10:  
Although there is some point where unadjusted likely misstatements 
would generally be considered material, there is no single amount that 
can be used for deciding to modify the opinion. Instead, the auditor 
should follow a process that considers a number of quantitative factors 
in reaching this decision.

.11:  
The auditor should add an allowance for further misstatement to the 
unadjusted likely misstatement. This risk of further misstatement 
relates to the imprecision of audit procedures. This risk includes the 
allowance for sampling risk (the combined precision of all sampling 
applications), an allowance for imprecision of analytical and other 
substantive audit procedures, and an allowance for unaudited immaterial 
account balances. The Statistician should compute the combined 
precision for all sampling applications.

.12:
This total of likely misstatement plus allowance for further 
misstatement should then be considered in relation to planning 
materiality and the relative importance of the misstated items to 
readers of the financial statements to determine whether the financial 
statements as a whole may be materially misstated. For example, if the 
aggregate unadjusted likely misstatement is $10 million and the 
allowance for imprecision of audit procedures is probably no more than 
$15 million, the auditor should determine whether the total 
($25 million) materially misstates the financial statements taken as a 
whole. The Reviewer should be consulted in considering these issues.

.13:
The auditor's report addresses the fair presentation of the financial 
statements as a whole. When considering the effects of any unadjusted 
misstatements on the financial statements, the auditor should bear in 
mind that he/she is taking less responsibility for individual line 
items in the financial statements and in any combining statements and 
supplemental schedules than for the financial statements as a whole.

Qualitative Considerations:

.14:
The auditor should consider numerous qualitative factors when 
determining the effect of unadjusted misstatements on the auditor's 
report. The auditor may choose to modify or qualify the report on the 
financial statements, even if the amounts of any unadjusted 
misstatements are not quantitatively material. Examples of 
misstatements for which the auditor may consider issuing a modified or 
qualified report include:

* misstatements of account balances or transactions that are considered 
sensitive to the financial statement users;

* misstatements that offset one another in the aggregate but are 
individually significant; and:

* misstatements that have a significant effect on the MD&A (overview) 
presented by management, including the entity's performance indicators.

Treatment of Unadjusted Misstatements Detected in Prior Periods:

15
The auditor should consider the effects on the current-period financial 
statements of any misstatements detected in prior periods. If corrected 
in the current period, the auditor should record the impact on current-
period financial statements in the Summary of Possible Adjustments. If 
uncorrected, the auditor should consider the misstatement in 
combination with current-period misstatements. Guidance is provided in 
AU 312.37.

Treatment of Misstatements That Arose in Prior Periods But Were 
Detected in the Current Period:

16
If, during the audit of the current period, the auditor detects a 
misstatement that arose in a prior period but was not previously 
detected, the auditor should determine if the misstatement is material 
to the prior-or current-period financial statements. If the 
misstatement is considered to be material, the auditor should consult 
the Reviewer to determine the effects on the current-period statements 
and the auditor's report. Any material misstatements of this type 
should be discussed with entity management and should be included on 
the Summary of Possible Adjustments if not corrected through a prior-
period adjustment to the financial statements.

MANAGEMENT DISAGREEMENT WITH LIKELY MISSTATEMENTS:

17
If management disagrees with the auditor's likely misstatements and if 
the disagreement involves amounts that are material, the auditor may 
consider the following options:

* The entity may perform procedures, such as reviewing all or 
substantially all of the items in the relevant population, to refine 
the estimated amount of the misstatement. In these situations, the 
auditor should test management's procedures and conclusions.

* The auditor may believe that sufficient evidence has already been 
obtained and may form his/her opinion on the financial statements based 
on his/her estimate.

* The auditor may want to increase assurance in the likely misstatements 
in order to convince entity management of the amount or to support the 
report on the financial statements. For example, the auditor may choose 
to increase his/her assurance in the likely misstatement by testing 
additional items. These additional procedures will most likely increase 
the auditor's assurance in the previous findings but generally will not 
materially affect the amount of the likely misstatement. Before 
deciding to perform additional procedures, the auditor should obtain 
agreement from entity management on the extent of additional evidence 
needed to be persuasive to them. The auditor also should consult with 
the Reviewer before beginning any of these additional procedures.

* The Audit Director may decide not to expend additional resources to 
resolve the disagreement, for example, because additional testing is 
unlikely to provide different conclusions. If the auditor believes the 
estimate is sufficiently accurate, he or she would express a qualified 
or adverse opinion, depending on the materiality of the item to the 
financial statements taken as a whole. If the auditor believes the 
estimate is not sufficiently accurate, he or she would qualify or 
disclaim an opinion for a scope limitation, depending on the 
materiality of the item to the financial statements taken as a whole.

RECONSIDERATION OF FRAUD RISK:

18
The consideration of the risk of material misstatement due to fraud is 
a cumulative process that should be ongoing throughout the audit. The 
auditor should consider whether the audit test results indicate the 
need for a change in the original consideration of fraud risk made in 
planning (see section 260) or whether the results indicate a need for 
additional or different audit procedures.

19
When audit tests identify misstatements, the auditor should consider 
whether these may be indicative of fraud. If the auditor determines 
that misstatements are or may be the result of fraud, he or she should 
consult with the Audit Director and the Reviewer who will determine 
whether to seek help from the Special Investigator Unit and/or OGC. If 
the effect is not material to the financial statements, the auditor 
should consider the implications, especially regarding the 
organizational position of the individual(s) involved. If the person 
involved in the fraud is a relatively low-level employee, there is 
little significance to the audit, although the misstatement should be 
reported at least to the next level of management. However, if the 
person is of a higher level of management, even though the amount of 
misstatement found is immaterial, the auditor should consider whether 
it may indicate a more pervasive problem and should reevaluate fraud 
risk as well as the assessment of inherent and control risk; the 
assignment of personnel; and the nature, timing, and extent of 
substantive testing.

20
If the misstatement is or may be the result of fraud and the effect 
could be material or the auditor is unable to evaluate whether the 
effect is material, he or she, in consultation with the issue area 
director, should (1) consider the implications on other aspects of the 
audit (see previous paragraph), (2) discuss the matter with at least 
the next level of entity management and with senior management, (3) 
consider whether to attempt to obtain additional evidence to determine 
whether material fraud has occurred or is likely to have occurred and 
the effect on the financial statements and the audit report, and (4) 
consider whether to advise entity management to consult with its 
general counsel.

21
Fraud involving senior management and fraud that causes a material 
misstatement of the financial statements should be included in the 
audit report in the compliance section and in the report on the 
financial statements section if the financial statements are misstated. 
When the auditor identifies evidence of these cases, the Special 
Investigator Unit and/or OGC should be consulted. If the auditor has 
identified fraud risk factors that have continuing control 
implications, the auditor should consider whether these risk factors 
represent reportable conditions that should then be included in the 
audit report in the internal control section.

FINANCIAL MANAGEMENT SYSTEMS:

22
For audits of the CFO Act agencies and components identified by OMB in 
its audit guidance, the auditor should determine whether the entity's 
financial management systems comply substantially with the three 
requirements of FFMIA. Federal financial management systems 
requirements and the SGL at the transaction level were considered in 
sections 350 and 360. At this point, the auditor should reassess those 
preliminary conclusions and conclude on the federal accounting 
standards based on the results of control, compliance, and substantive 
testing and evaluation of misstatements found. If the auditor concludes 
that the systems do not comply with the requirements, he or she should 
report the noncompliance. In addition, if the auditor concluded the 
systems were not in substantial compliance with FFMIA based on limited 
testing, he or she should report that the work on FFMIA would not 
necessarily disclose all instances of lack of substantial compliance 
with FFMIA requirements. (See section 580.):

[End of section]

550 - CONCLUDE OTHER AUDIT PROCEDURES: 

.01: 
To issue the auditor's report, procedures in the following areas should 
be concluded during the reporting phase:

* inquiries of attorneys (see paragraphs 550.02.-.03),

* subsequent events (see paragraphs 550.04.-.06),

* management representations (see paragraphs 550.07-.11), and:

* related party transactions (see paragraph 550.12).

INQUIRIES OF ATTORNEYS:

.02: 
In considering any contingent liabilities or uncertainties that may 
affect the entity or its financial statements, the auditor should make 
inquiries of the entity's counsel regarding litigation, claims, and 
assessments. Guidance on these inquiries, as well as on interpreting 
and using responses received from counsel, is provided in AU 337 and 
9337 and OMB audit guidance (see also section 280).

.03: 
The inquiries and responses should cover the entire period under audit 
and the subsequent period through completion of fieldwork (the date of 
the auditor's report). A response should be obtained from counsel at 
the approximate end of fieldwork. If a long period elapses from end of 
fieldwork to report issuance, a subsequent update generally should be 
obtained, either written or oral (and documented in the workpapers), 
for material events to report issuance.

SUBSEQUENT EVENTS:

.04: 
Events or transactions may occur after the balance sheet date but 
before the audit report is issued. Such events or transactions that 
have a material effect on the financial statements and therefore 
require adjustment to or disclosure in the financial statements are 
referred to as subsequent events. AU 560 provides guidance on 
determining whether a particular subsequent event requires adjustment 
to or disclosure in the financial statements (see also section 1005).

.05: 
To identify subsequent events that would require either adjustment to 
or disclosure in the financial statements, the auditor should follow 
the procedures described in AU 560.10-12 (see also section 1005). These 
procedures should be performed at or near the completion of fieldwork. 
If a long period elapses from end of fieldwork to report issuance, the 
procedures generally should be updated for material events through the 
issuance of the auditor's report. The auditor should follow the 
guidance in AU 530 on dating the auditor's report if any subsequent 
events are identified that affect the report.

.06: 
The auditor generally has no obligation to perform procedures to 
identify subsequent events after the report is issued. If the auditor 
becomes aware of facts that might have affected the report if they had 
been known before issuance, the auditor should follow the guidance in 
AU 561.

MANAGEMENT REPRESENTATIONS:

.07:  
The auditor is required to obtain written representations from 
management as part of the audit. These representations supplement the 
other audit procedures performed by the auditor but are not a 
substitute for them. Written representations help avoid any 
misunderstandings that could arise if only oral representations were 
received from management. In some circumstances, corroborating evidence 
for representations may not be readily available, such as for those 
involving management's intent concerning a future transaction or 
business decision. AU 333.06, AT 501.44 (SSAE 10, paragraph 5.44), and 
AU 801.07 provide examples of the written representations usually 
obtained from management (see also sections 1001 and 1001 A). 
Additionally, the auditor may request representations on other matters.

.08:  
Federal government auditors should obtain further representations from 
management in addition to those required by generally accepted auditing 
standards. These are management assertions about the effectiveness of 
internal control and about substantial compliance of financial 
management systems with the three requirements of FFMIA.

.09:  
If management refuses to provide the requested written representations, 
the auditor considers this a limitation on the audit scope and modifies 
the report (see paragraphs 580.14-.18). In these situations, the 
auditor should consider the reliability of other representations 
received from management during the audit.

.10:  
The representation letter should be signed by members of management 
who, in the auditor's view, are responsible for and knowledgeable, 
directly or through others, about the matters in the representation 
letter, as discussed in AU 333.09.

.11:  
The representation letter should be dated as of the date of the 
auditor's report. If there is a significant delay between the report 
date and the issuance of the report, the auditor should consider 
obtaining updated management representations.

RELATED PARTY TRANSACTIONS:

.12:  
The auditor should be aware of the possible existence of relationships 
with related parties and material related party transactions that could 
affect the financial statements. AU 334 provides guidance on 
identifying related parties, examining related party transactions, and 
considerations for disclosure (see also section 1006).

[End of section]

560 - DETERMINE CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING 
PRINCIPLES: 

.01: 
Generally accepted accounting principles (GAAP) for federal government 
entities are developed by the Federal Accounting Standards Advisory 
Board (FASAB), an entity created by GAO, OMB, and Treasury. FASAB was 
recognized by the American Institute of Certified Public Accountants 
(AICPA) as the body to establish GAAP for federal governmental entities 
under Rule 203, "Accounting Principles," of the AICPA's Code of 
Professional Conduct. Pursuant to the resolution adopted by the AICPA 
Council on October 19, 1999, Statements of Federal Financial Accounting 
Standards (SFFAS) issued by FASAB are recognized as GAAP for the 
applicable federal governmental entities. FASAB develops federal 
accounting concepts or standards and transmits them to the Comptroller 
General, the Secretary of the Treasury, and the Director of OMB (the 
three principals). The accounting concepts or standards become final 90 
days after transmittal, provided no principal advises FASAB of an 
objection during the 90 days. The concepts or standards are then issued 
by FASAB.

.02: 
Federal executive agencies are to follow the hierarchy of accounting 
principles given below. This means that the entity is to use the 
guidance in item "a" unless that item is silent about a particular 
topic. In that case, the entity is to use the guidance in item "b," 
unless it also does not address the topic, and so on to item "c," or 
"d," until guidance addressing the topic is found. This hierarchy is 
recognized by the AICPA as GAAP for applicable federal entities, 
according to SAS 91:

a. FASAB Statements and Interpretations plus AICPA and FASB 
pronouncements if made applicable to federal governmental entities by a 
FASAB Statement or Interpretation.

b. FASAB Technical Bulletins and the following pronouncements if 
specifically made applicable to federal governmental entities by the 
AICPA and cleared by FASAB: AICPA Industry Audit and Accounting Guides 
and AICPA Statements of Position.

c. AICPA AcSEC Practice Bulletins if specifically made applicable to 
federal governmental entities and cleared by FASAB and Technical 
Releases of its Accounting and Auditing Policy Committee.

d. Implementation guides published by FASAB staff and practices that are 
widely recognized and prevalent in the federal government.

.03: 
In the absence of a pronouncement in the above hierarchy, the auditor 
may consider other accounting literature, including FASAB Concepts 
Statements; pronouncements in categories "a" through "d" above when not 
specifically made applicable to federal governmental entities; FASB and 
GASB Concepts Statements; GASB Statements, Interpretations, and 
Technical Bulletins; AICPA Issues Papers; International Accounting 
Standards of the International Accounting Standards Committee; 
pronouncements of other professional associations or regulatory 
agencies; AICPA Technical Practice Aids; and accounting textbooks, 
handbooks, and articles.

.04: 
Entities are required to summarize the significant accounting policies 
used in the notes to the principal statements.

.05: 
The auditor should review the financial statements for conformity with 
GAAP and should identify any instances of nonconformity. Such 
nonconformity may include incomplete disclosure or use of an accounting 
principle that is contrary to GAAP. A Checklist for Reports Prepared 
Under the CFO Act is in section 1004 (Part II) for reviewing the 
financial statements for appropriate and adequate disclosure in 
accordance with GAAP.

.06: 
The auditor should consider the impact of nonconformity with GAAP on 
the financial statements and should determine the effects, if any, on 
the auditor's report (see paragraph 580.22).

[End of section]

570 - DETERMINE COMPLIANCE WITH GAO/PCIE FINANICAL AUDIT MANUAL: 

.01: 
The auditor must determine whether the audit was conducted in 
accordance with GAGAS, OMB audit guidance, and GAO/PCIE financial audit 
methodology. The auditor should use the audit completion checklist 
included in section 1003 (Part II) for determining and documenting 
compliance.

[End of section]

580 - DRAFT REPORTS: 

.01: 
At the conclusion of the audit, the auditor finalizes the draft of the 
auditor's report(s), which includes the auditor's conclusions on:

* the financial statements (see paragraphs 580.10-.31);

* internal control (see paragraphs 580.32-.61);

* whether the financial management systems substantially comply with 
the requirements of FFMIA: federal financial management systems 
requirements, federal accounting standards (GAAP), and the SGL at the 
transaction level (see paragraphs 580.62-.66); and:

* compliance with laws and regulations (see paragraphs 580.67-.75);

* the MD&A (see requirements in SFFAS No. 15) and other information 
included in the Accountability Report (including RSSI) (see paragraphs 
580.76-.81).

.02: 
The auditor's report should clearly identify the entity audited, the 
Accountability Report on which the auditor is reporting, and the period 
covered by the Accountability Report.

.03: 
The report should be dated as of the completion of fieldwork. If a 
subsequent event occurs after that time that requires disclosure in the 
report, the auditor should follow the guidance in AU 530 with respect 
to dating the report.

REPORT FORMAT:

.04: 
An example of an unqualified auditor's report is presented in section 
595 A. The auditor may use another reporting format, such as issuing 
separate reports on the financial statements (see AU 508) and on 
internal control and compliance (see AICPA Audit and Accounting Guide: 
Audits of State and Local Governmental Units or OMB audit guidance) and 
should document the reasons for deviations from the language required 
by the professional standards. GAO auditors also should document the 
reasons for deviations from the example reporting format or language in 
sections 595 A and/or B. The example report includes the following 
sections:

Introduction;

Significant Matters (when applicable);

Conclusions on:

** financial statements,

** internal control,

** financial management systems' substantial compliance with FFMIA 
requirements,

** compliance with laws and regulations, and:

** consistency of other information;

Objective, Scope, and Methodology; and

Agency Comments and Our Evaluation (if applicable).

.05: 
The introduction summarizes the auditor's conclusions on the entity's 
financial statements, internal control, financial management systems' 
substantial compliance with the three FFMIA requirements, and 
compliance with laws and regulations.

.06: 
A significant matters section is included if any of the following 
situations exist:[Footnote 1]

* significant limitations on the scope of the audit (paragraphs 580.14-
.18, .34-.36, and .73-.75);

* uncertainties for which the auditor disclaimed an opinion (paragraph 
580.19);

* material departures from generally accepted accounting principles 
(paragraph 580.22);

* material weaknesses in internal control (including performance 
measures controls) or other weaknesses that the auditor has decided to 
describe in the audit report (paragraphs 580.51-.55);

* material conflicts between the Summary of Management's Report on 
Internal Controls prepared under FMFIA and the results of the auditor's 
evaluation of internal control (paragraph 580.61);

* instances of lack of substantial compliance with the three 
requirements of FFMIA (paragraphs 580.63-.66):

* instances of noncompliance that are reportable under GAGAS or OMB 
audit guidance, that is, any that are not clearly inconsequential 
(paragraphs 580.71-.72);

* material inconsistencies between other information (MD&A, required 
supplementary information, including RSSI, and other accompanying 
information) and the financial statements, or material nonconformity of 
the other information with OMB guidance for such information 
(paragraphs 580.76-.80); or 

* any other significant matters coming to the auditor's attention, that 
in his/her judgment, should be communicated to the entity head, OMB, 
and the Congress.

This section should be phrased similar to an executive summary. Matters 
should be described in nontechnical language so that report users can 
readily grasp their significance. Other sections of the report would 
not repeat this narrative, but would refer to it using phrases such as 
"as described above." If two or more of the above items affect the same 
area, the auditor should combine the discussion of the situations to 
the extent possible. Each significant matter should begin with a 
summary heading. Also, if significant matters exist, the auditor's 
report should indicate that such matters were considered in forming the 
audit conclusions (as discussed in section 595 B, note 1).

.07:  
The conclusions section of the report is used to report the auditor's 
overall conclusions on the financial statements, internal control, 
financial management systems' substantial compliance with the three 
requirements of FFMIA, compliance with laws and regulations, and 
consistency of other information.

.08:  
The objectives, scope, and methodology section includes a discussion of 
management's and the auditor's responsibilities, what the auditor did 
to fulfill his/her responsibilities, the scope of the auditor's work on 
internal control, and a statement that the audit was performed in 
accordance with GAGAS and OMB's audit guidance.

.09:  
The remainder of this section provides guidance on forming conclusions 
on the financial statements, internal control, financial management 
systems' substantial compliance with the three requirements of FFMIA, 
compliance with laws and regulations, and other information.

* Example report wording of an unqualified auditor's report is included 
in section 595 A.

* Section 595 B provides guidance on modifying the report based on the 
auditor's conclusions. In some cases, when findings are extensive, the 
report format may also be modified.

FINANCIAL STATEMENTS:

.10:  
Under GAAS, the fourth standard of reporting on financial statements 
follows (see AU 508.04):

"The report shall either contain an expression of opinion regarding the 
financial statements, taken as a whole, or an assertion to the effect 
that an opinion cannot be expressed. When an overall opinion cannot be 
expressed, the reasons therefor should be stated. In all cases 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, and the degree of responsibility the auditor is taking.":

.11:  
When reporting on financial statements, the auditor considers the 
following areas: (1) audit scope, (2) uncertainties, (3) consistency, 
and (4) departures from GAAP. Each of these areas and their effects on 
the report are discussed below.

.12:  
The auditor considers these four areas and the results of all audit 
procedures performed to determine if an opinion can be expressed on the 
financial statements and, if so, the type of opinion. If an opinion 
cannot be expressed, the auditor should issue a disclaimer report. If 
an opinion can be expressed, the auditor may issue one of the following 
opinion types: unqualified, unqualified with an explanatory paragraph, 
qualified, or adverse.

.13:
The auditor should formulate the type of report on the financial 
statements following the guidance provided below and in sections 595 A 
and 595 B.

Audit Scope:

.14:
To express an opinion, first the auditor must determine if the audit 
has been conducted in accordance with GAGAS and OMB audit guidance. If 
the auditor is not able to perform all procedures considered necessary, 
the scope of the audit is considered to have been limited or 
restricted.

.15:
Restrictions on the scope of the auditor's work may be imposed by the 
entity or may be caused by circumstances beyond the entity's control. 
Scope limitations may result from the timing of the audit work; the 
inability to obtain sufficient, competent evidential matter; or 
inadequate accounting records. If the audit scope has been limited, the 
auditor should refer to the guidance in AU 508.22-.28 to determine 
whether to qualify or disclaim an opinion.

.16:
When determining if sufficient competent evidence has been obtained, 
the auditor should consider the impact of any misstatements on the 
audit scope from a qualitative standpoint. The auditor should also 
consider whether the audit scope is adequate in light of any 
misstatements or other findings that indicate noncompliance with laws 
and regulations.

.17:
Whether to qualify or disclaim an opinion because of a scope limitation 
is a matter of the auditor's judgment. The auditor should assess how 
important the omitted procedures were to his/her ability to form an 
opinion on the financial statements. This assessment is influenced by 
the nature, significance, and magnitude of the items to which the 
omitted procedures relate. For example, the potential effect of a scope 
limitation on a material account is likely to be greater than on an 
immaterial account.

.18:
If the audit scope is adequate for expressing an opinion, the auditor 
determines the appropriate type of opinion. Three areas that the 
auditor should consider when forming the opinion are uncertainties, 
consistency, and departures from GAAP.

Uncertainties:

.19:
Uncertainties are matters affecting the financial statements whose 
outcome is expected to be resolved at a future date when conclusive 
evidential matter will become available. Uncertainties may be related 
to the resolution of litigation or the valuation of assets, such as 
real estate owned. Uncertainties include the contingencies discussed in 
SFFAS No. 5 (amended by SFFAS No. 12), estimates covered by AICPA 
Statement of Position 94-6, as well as other matters. Guidance on 
considering uncertainties and their effects on the auditor's report is 
provided in AU 508.29-.32 (SAS 79). Depending on the nature of the 
uncertainty, the auditor may need to add an explanatory paragraph or 
disclaim an opinion, as discussed in AU 508. Because of the nature of 
uncertainties, conclusive evidence cannot be expected to exist at the 
time of the audit. Management is responsible for estimating the effect 
of future events on the financial statements or determining that a 
reasonable estimate cannot be made and making required disclosures. The 
auditor generally should give an unqualified opinion if, in his or her 
judgment, evidence is sufficient to support management's analysis of 
the nature of the uncertainty and its presentation or disclosure in the 
financial statements. (The auditor may add a matter of emphasis 
paragraph; see AU 508.19.) Additionally, if the uncertainty involves a 
scope limitation (unavailable or insufficient evidence to support 
recorded amounts or disclosure relating to the uncertainty) a 
qualification or disclaimer may be appropriate as discussed in 
paragraphs 580.28-.29 and .31 (see AU 508.29-.32). If the uncertainty 
involves a departure from accounting principles (inadequate disclosure, 
inappropriate accounting principles, and unreasonable accounting 
estimates), the auditor may need to express a qualified or adverse 
opinion as discussed in paragraphs 580.28-.29 and .30, respectively 
(see AU 508.45-.49).

Consistency:

.20:
The auditor is concerned with comparability between the financial 
statements for all periods presented or with the prior period if only 1 
year is presented. A lack of comparability may be caused by an 
inconsistency in the accounting principles used; the method of applying 
these principles; or other factors, such as the classification of 
accounts for reporting purposes. For first-year audits, the auditor 
should determine if accounting principles are consistent with the prior 
period, following the guidance in AU 420.22 -.25. Guidance on the 
auditor's consideration of accounting and other changes that may affect 
the consistency of the financial statements may be found in AU 420. 
Inconsistencies may result in an explanatory paragraph or departure 
from GAAP. Guidance on reporting on a lack of consistency is provided 
in AU 508.16-.18.

.21:
If the entity has a change in accounting principles when it first 
adopts FASAB standards, the auditor should include a paragraph on 
consistency in the audit report, regardless of whether or not the 
financial statements of the previous period are presented. The 
paragraph should state that the entity adopted SFFAS No. X, as 
discussed in note XX. The SFFASs generally specify what disclosures are 
required upon adoption.

Departure from GAAP:

.22:
The auditor must consider whether the financial statements are 
materially affected by a departure from GAAP. If such a departure 
exists, the auditor should determine the extent of the effects of the 
departure on the financial statements, considering both quantitative 
and qualitative factors, as discussed in AU 508.35-.36. The auditor 
also should consider whether adequate disclosures have been made in the 
financial statements and related notes (see AU 431 and AU 508.41-.44) 
and should evaluate whether any changes in accounting principles used 
by the entity are appropriate (see AU 508.50-.57). Depending on the 
extent of the departure, the auditor should express either a qualified 
or adverse opinion. Guidance on reporting these departures is included 
in AU 508.37-.40 for qualified opinions and AU 508.58-.60 for adverse 
opinions (see section 595 B for modifications to be made to the 
auditor's report). In rare cases when compliance with accounting 
principles would result in misleading financial statements, a departure 
from GAAP may not result in a qualified or adverse opinion (see AU 
508.14 -.15).

Types of reports:

.23:
As discussed, the auditor may express various types of opinions or may 
disclaim an opinion. Guidance on reporting is included in AU 411, 420, 
431, 504, 508, and 558. Additionally, section 595 A includes an example 
of an unqualified report. Section 595 B includes specific changes to be 
made to the unqualified report under various circumstances. Each type 
of report is discussed in paragraphs 580.24-.31.

Unqualified Opinion:

.24:
In an unqualified opinion on the financial statements, the auditor 
concludes that the financial statements and accompanying notes present 
fairly, in all material respects, the assets, liabilities, and net 
position of the entity at the end of the period, and the net costs, 
changes in net position, budgetary resources, reconciliation of net 
costs with budgetary obligations, and custodial activity (if 
applicable) for the period then ended, in conformity with generally 
accepted accounting principles.

.25:
If, in the auditor's judgment, he/she cannot make this conclusion (for 
reasons discussed in paragraphs 580.14-.22) the auditor's report on the 
financial statements should be modified. This report modification may 
take the form of an explanatory paragraph, or the opinion expressed in 
the report may be qualified or adverse. Additionally, if the auditor 
opines only on the balance sheet, the auditor should follow the 
guidance in AU 508.33-.34.

Explanatory Paragraphs:

.26:
An auditor may express an unqualified opinion and also include 
explanatory paragraphs in the report. An explanatory paragraph may be 
included in either the significant matters section or the opinion on 
the financial statements section of the auditor's report based on the 
auditor's judgment about its significance. The following types of 
situations usually require the addition of an explanatory paragraph or 
other explanatory language. (See AU 508.11 for further guidance.):

* The auditor's opinion refers to another auditor's report.

* The predecessor auditor's report is not presented for comparative 
financial statements.

* The accounting principles or their method of application materially 
changes between periods. (See paragraph 580.20 for a discussion of 
consistency.):

* Certain circumstances exist relating to reports on comparative 
financial statements. (See AU 508.68-.69 and .72-.74.):

* Supplementary information required by FASAB or OMB has been omitted, 
the presentation of such information departs materially from FASAB or 
OMB guidelines or is materially inconsistent with information in the 
financial statements, the auditor is unable to complete prescribed 
procedures concerning such information, or the auditor is unable to 
remove substantial doubts about whether the supplementary information 
conforms to FASAB or OMB guidelines. (See AU 558 for guidance on 
required supplementary information.):

* There is substantial doubt about the entity's ability to continue to 
carry out its mission without substantial additional resources or 
changes in operations (see AU 341).

.27:
An explanatory paragraph may also be added to emphasize a matter, such 
as significant transactions with related parties, as discussed in AU 
508.19. Also, although not required, an explanatory paragraph may be 
added when the financial statements are affected by uncertainties 
concerning future events whose outcome cannot be reasonably estimated 
as of the report date. (See paragraph 580.19 for a discussion of 
uncertainties.):

Qualified Opinion:

.28:
A qualified opinion states that except for the effects of the matter to 
which the qualification relates, the financial statements present 
fairly, in all material respects, the assets, liabilities, net 
position, net costs, changes in net position, budgetary resources, 
reconciliation of net costs with budgetary obligations, and custodial 
activities (if applicable) in conformity with GAAP. Guidance on 
qualified opinions is provided in various paragraphs of AU 508.

.29:
The following situations may require a qualified opinion, as discussed 
in AU 508.20:

* The audit scope is limited (see paragraphs 580.14-.18.):

* Based on the audit results, the auditor believes that a departure 
from GAAP had a material effect on the financial statements but has 
decided not to express an adverse opinion (see paragraph 580.22).

AU 508.21 provides guidance on qualified opinions. Section 595 B 
provides guidance on specific report modifications for qualified 
opinions.

Adverse Opinion:

.30:
An adverse opinion states that the financial statements do not fairly 
present the assets, liabilities, net position, net costs, changes in 
net position, budgetary resources, reconciliation of net costs with 
budgetary obligations, or custodial activities (if applicable) in 
conformity with generally accepted accounting principles. This type of 
opinion is expressed on the financial statements taken as a whole when 
there are material departures from GAAP as discussed in paragraph 
580.22. Guidance on adverse opinions is provided in AU 508.58-.60. 
Section 595 B provides specific report modifications for adverse 
opinions.

Disclaimer Report:

.31:
In a disclaimer report, the auditor does not express an opinion on the 
financial statements. A disclaimer report is appropriate when the audit 
scope is not sufficient to enable the auditor to express such an 
opinion, as discussed in paragraphs 580.14-.18, or when there are 
material uncertainties involving a scope limitation, as discussed in 
paragraph 580.19. AU 508.61-.63 provides guidance on issuing disclaimer 
reports. The reasons that caused the auditor to disclaim an opinion 
should be described in the significant matters section of the report 
following the guidance in AU 508.25-.26. Specific guidance on the 
wording of disclaimer reports is included in section 595 B.

INTERNAL CONTROL:

.32:
Federal financial auditors may take one of two different approaches to 
reporting on internal control: (1) management provides an assertion 
about the effectiveness of its internal control and the auditor 
expresses an opinion on internal control (see paragraphs 580.38-
.48)[Footnote 2] or (2) the auditor reports weaknesses found but does 
not give an opinion (see paragraphs 580.49-.50). (OMB audit guidance 
requires management to include representations about internal control 
in the management representation letter in either case.) GAO auditors 
generally express an opinion on internal control. In either case, the 
auditor considers whether internal control is sufficient to meet the 
following control objectives insofar as those objectives pertain to 
preventing or detecting misstatements, losses, or noncompliance that 
would be material in relation to the financial statements:

* Reliability of financial reporting--transactions are properly 
recorded, processed, and summarized to permit the preparation of the 
financial statements and RSSI in accordance with GAAP, and assets are 
safeguarded against loss from unauthorized acquisition, use, or 
disposition.

* Compliance with applicable laws and regulations--transactions are 
executed in accordance with 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 RSSI and any other laws, 
regulations, and governmentwide policies identified by OMB in its audit 
guidance.

The auditor also should report any reportable conditions detected in 
performance measures controls but does not need to express an opinion 
on whether internal control is sufficient to meet the objective that 
data supporting performance measures are properly recorded, processed, 
and summarized to permit preparation of performance information in 
accordance with criteria stated by management.

Classifying Control Weaknesses:

.33:
The following definitions and guidelines should be used for classifying 
internal control weaknesses:

* A material weakness is a reportable condition (see below) in which 
the design or operation of one or more of the internal control 
components does not reduce to a relatively low level the risk that 
misstatements, whether caused by errors or fraud, losses, or 
noncompliance in amounts that would be material in relation to the 
financial statements, RSSI, or a performance measure or aggregation of 
related performance measures may occur and not be detected within a 
timely period by employees in the normal course of their assigned 
duties.[Footnote 3]

* Reportable conditions are matters coming to the auditor's attention 
that in the auditor's judgment, should be communicated because they 
represent significant deficiencies in the design or operation of 
internal control, which could adversely affect the entity's ability to 
meet the internal control objectives described in the report.

.34:
The auditor should consider whether reportable conditions, in 
combination, result in material weaknesses. If so, the auditor should 
consider them to be material weaknesses in concluding as to the 
effectiveness of internal control and reporting findings, as discussed 
in paragraphs 580.42-.48 and 580.51-.58. Additional guidance on 
classification of internal control weaknesses is provided in AU 325.

.35:
OMB has provided guidance, supplementing Circulars A-123 (June 21, 
1995) and A-127 (July 23, 1993 and revisions in Transmittal Memorandum 
No. 2, dated June 10, 1999), on materiality for reporting matters under 
FMFIA. The term "material weakness" as used by OMB in this guidance 
(FMFIA material weakness) is different from the above definition. 
Management and the auditor should evaluate the material weaknesses 
reported under FMFIA to determine whether they meet the auditor's 
definitions of material weakness and reportable condition for reporting 
as part of management's assertion about the effectiveness of internal 
control (see paragraph 580.33).

.36:
According to OMB criteria, an internal control weakness is an FMFIA 
material weakness under A-123 if it is significant enough to be 
reported outside the agency, as determined by the agency head (that is, 
included in the annual Integrity Act report to the President and the 
Congress).

.37:
According to OMB criteria (A-127), nonconformance of entity budget or 
accounting information and financial systems is material for FMFIA 
reporting under A-123 if it is material, as judged by the agency head, 
when weighed against other agency deficiencies.

Opinion on Internal Control:

.38:
The auditor's evaluation of the entity's internal control and the 
results of other audit procedures form the basis for the auditor's 
opinion on internal control. The opinion may be unqualified, 
unqualified with reference to reportable conditions, qualified, or 
adverse. Additionally, there may be restrictions on the scope of the 
procedures that result in a qualified opinion or a disclaimer report 
(see paragraphs 580.39-.49). The auditor should communicate any 
identified internal control weaknesses (including weaknesses in 
operations controls), as discussed in paragraphs 580.51-.58, and 
consider the effects of such weaknesses on other reports prepared by 
the entity (paragraph 580.60).

Scope of Procedures:

.39: 
To express an unqualified opinion on internal control, the auditor must 
have an assertion from management about the effectiveness of internal 
control and must be able to perform all of the procedures considered 
necessary, as described in sections 300 and 450. If there is a 
restriction on the scope of the audit (i.e., not all of these 
procedures can be performed), the auditor may need to qualify or 
disclaim the opinion on internal control. Scope restrictions may be 
imposed by the entity or may be due to other circumstances. The 
decision of whether to qualify or disclaim an opinion is a matter of 
the auditor's judgment regarding the importance of the omitted 
procedures to forming an opinion on internal control. However, if a 
significant scope restriction is imposed by the entity, the auditor 
should disclaim an opinion.

.40:
When determining the severity of a scope limitation on internal 
control, the auditor should consider the control objectives listed in 
the report--financial reporting, including safeguarding assets, and 
compliance with laws and regulations. If the scope of work on internal 
control relevant to one of these objectives is limited, the auditor may 
need to qualify or disclaim the opinion on internal control regarding 
that objective. Also, the auditor should determine whether that 
limitation affects his/her ability to opine on the other objective. If 
a scope limitation is encountered for a control objective, the auditor 
should exercise judgment in determining if it is appropriate to give an 
unqualified opinion on internal control over either objective. In the 
case of a scope limitation, the auditor should review the guidance in 
AT 501.59-.62 (SSAE 10, paragraphs 5.59-.62) and consult with the 
Reviewer to determine the appropriate type of opinion. Section 595 B 
contains example language for situations in which (1) the auditor is 
satisfied that the scope limitation affects only one control objective 
and that it is considered appropriate to give an opinion on internal 
control over the other objective and (2) the auditor believes a 
disclaimer report on internal control, as a whole, is appropriate due 
to a scope limitation.

.41:
If the auditor has determined that an opinion can be expressed on one 
or both of the control objectives, the type of opinion to be given 
depends on whether any internal control weaknesses are identified and 
the significance of such weaknesses. In concluding as to the 
effectiveness of internal control, weaknesses should be categorized, in 
order of decreasing significance, as (1) material weaknesses, (2) 
reportable conditions that are not considered to be material weaknesses 
(other reportable conditions), and (3) other weaknesses less 
significant than reportable conditions (other weaknesses). Each of 
these types of weaknesses and its effects on the auditor's conclusion 
on internal control is discussed below. If no material weaknesses or 
other reportable conditions are identified, the auditor concludes that 
internal control is effective in meeting the control objectives.

Effects of Control Weaknesses on the Auditor's Conclusion as to the 
Effectiveness of Internal Control:

.42:
Based on the types of weaknesses noted, the auditor should conclude as 
to the effectiveness of internal control as of the end of the audit 
period, as discussed in paragraphs 580.43-.47. Management also 
concludes as to the effectiveness of internal control in deciding what 
assertion to make.

Material weaknesses:

.43:
If material weaknesses exist at the end of the audit period, the 
auditor should conclude that the entity's internal control is 
ineffective or effective "except for" the weakness for the control 
objective(s) that the weakness affects. The existence of a material 
weakness precludes a conclusion that internal control is effective for 
that objective. If a material weakness relates only to one control 
objective, the auditor should determine whether internal control is 
effective in achieving the other control objective. The auditor should 
exercise judgment when concluding that the effects of a material 
weakness are isolated to one control objective.

.44:
The auditor also should exercise judgment in deciding whether it is 
appropriate in the circumstances to conclude that "except for" a 
material weakness, internal control is effective for the objective. 
Management should exercise judgment in deciding what assertion to make 
about the effectiveness of internal control. By definition, a material 
weakness is a very significant condition (see paragraph 580.33) that 
could allow misstatements, losses, or noncompliance of such a magnitude 
that the judgment of a reasonable person relying on the information 
would have been changed or influenced. If, after careful consideration, 
the auditor determines that although a material weakness, the weakness 
is not severe enough to judge that internal control for that objective 
is ineffective, he or she may conclude that internal control for that 
objective is effective "except for" the material weakness. However, if 
the auditor determines that the material weakness(es) is(are) 
significant enough that he or she cannot judge internal control to be 
effective for that objective, even "except for" the material 
weakness(es), he or she should conclude that internal control is 
ineffective for that objective. Factors the auditor should consider in 
deciding whether an "except for" conclusion is appropriate are:

* whether there is a single material weakness related to the objective 
or several,

* whether the material weakness relates to ancillary areas that are 
less significant or to one of the more significant aspects of the 
entity, and 

* whether the material weakness is limited to one or a few assertions 
that are not generally considered the most significant ones related to 
the line item or the assertions are quite significant.

.45:
If a material weakness is presented in a report that also includes an 
unqualified opinion on the financial statements, a statement should be 
added to the unqualified opinion to indicate that material 
misstatements may nevertheless occur in other financial information 
reported by the entity as a result of the material weakness. Example 
report modifications for material weaknesses are provided in section 
595 B.

Reportable conditions other than material weaknesses:

.46:
If reportable conditions other than those considered to be, 
individually or in combination, material weaknesses exist at the end of 
the audit period, the auditor generally may conclude that the controls 
are effective in achieving the control objectives. However, the 
auditor's report should be revised (see section 595 B) to highlight 
that the work performed identified the need to improve certain internal 
controls.

Weaknesses that do not meet the criteria for reportable conditions:

.47:
Weaknesses that do not meet the criteria for reportable conditions 
(paragraph 580.33) do not affect the auditor's conclusion as to the 
effectiveness of internal control. They may be reported in a management 
letter or orally.

Type of Opinion:

.48:
As described in paragraphs 580.39-.41, if the auditor is unable to 
apply all the audit procedures he or she considers necessary in the 
circumstances, a scope limitation exists and the report on internal 
control may need to be a qualified opinion or a disclaimer of opinion. 
If all the procedures considered necessary were performed, the opinion 
may be one of the following.

* If the auditor and management agree as to the effectiveness of 
internal control and there are no material weaknesses or other 
reportable conditions in internal control, the opinion on internal 
control is unqualified (see section 595 A).

* If the auditor and management agree as to the effectiveness of 
internal control and there are no material weaknesses in internal 
control, but there is(are) other reportable condition(s), the auditor 
modifies the report on internal control by stating that internal 
control is effective but could be improved and by referring to the 
reportable condition(s) (see section 595 B).

* If the auditor and management agree as to the effectiveness of 
internal control and there are material weaknesses in internal 
control, the auditor modifies the opinion on internal control by (1) 
referring to the material weakness(es) noted in management's assertion 
(which states that internal control with respect to one or both of the 
internal control objectives--financial reporting, including 
safeguarding, or compliance--is either effective "except for" the 
material weakness (qualified opinion) or ineffective (adverse 
opinion)) and (2) describing the material weakness(es). (See section 
595 B.):

* If the auditor and management disagree as to the effectiveness of 
internal control, either because (1) management does not agree that 
material weakness(es) exist or (2) management does not appropriately 
modify its assertion about the effectiveness of internal control in 
light of the material weakness(es), the auditor's opinion is also 
adverse. (The existence of a material weakness precludes management 
from asserting that its internal control is effective for that 
objective.) Thus, an adverse opinion is appropriate if management 
states that internal control is effective "except for" the material 
weakness(es) when, in the auditor's judgment, the material weakness(es) 
is(are) so severe that internal control is ineffective (see paragraph 
580.44 and section 595 B).

The auditor should consult with the Reviewer on the opinion on internal 
control, especially in instances where he or she concludes that a 
material weakness is isolated to one control objective or that internal 
control is effective "except for" a material weakness.

Nonopinion Report:

.49:
If the purpose of the audit is not to render an opinion on internal 
control, the auditor should report material weaknesses and other 
reportable conditions in internal control, or state that no material 
weaknesses were found. (See sections 595 A and/or B.) If, in the 
auditor's judgment, material weaknesses were so significant that the 
auditor concludes internal control was ineffective for one or more 
objectives, he or she may state that conclusion in the report. (See 
section 595 B.):

.50:
The AICPA, in SAS No. 87, states that a report on internal control in 
which no opinion is issued is a by-product report, a report that 
provides a limited degree of assurance about internal control. When no 
opinion is issued, the report on internal control is not the primary 
objective of the engagement. SAS 87 states that the auditor should 
indicate the intended use of the internal control report because of the 
potential for misunderstanding related to a by-product report's limited 
degree of assurance. Because the distribution of government audit 
reports is not restricted, the reports should explain their 
limitations. (See section 595 A where, in a footnote explaining changes 
for a nonopinion internal control section, the example report cautions 
the reader that the internal control testing performed may not be 
sufficient for other purposes.):

Where to Report Control Weaknesses:

.51:
The means of communicating weaknesses in internal control depends on 
the type of weakness, as discussed in paragraph 580.33. Each type of 
weakness is discussed in paragraphs 580.52-.55 below.

Reportable conditions (including material weaknesses):

.52: 
If, in the auditor's judgment, a reportable condition is considered to 
be a significant matter that should be communicated to the entity head, 
OMB, and the Congress, it should be described in the auditor's report. 
Any material weakness identified by the auditor should be reported in 
this manner. These matters should be included in the significant 
matters section of the auditor's report and combined with related 
matters to the extent possible as discussed in paragraph 580.06. If 
management's assertion about the effectiveness of internal control is 
printed with the audit report, the auditor's report should refer to the 
discussion of the material weakness (or other reportable condition) in 
management's assertion.

.53:
The significant matters section of the auditor's report should be 
limited to summarized information. As such, control weaknesses included 
in the significant matters section generally should be limited to 
providing the reader with an understanding of the nature and extent of 
the weakness. If more complete information concerning the weakness is 
provided in other reports issued prior to or at the same time as the 
auditor's report, a reference to such other reports (such as date and 
title or report number) generally should be included in the auditor's 
report.

.54:
Reportable conditions not considered to be significant matters 
individually, as described in paragraph 580.52, should be listed in the 
significant matters section or in the internal control section of the 
report. Related weaknesses should be combined. Such weaknesses may be 
reported in more detail in a management letter (or other written 
communication). The opinion or report on internal control generally 
should refer to such letters or communications. To the extent that any 
such weaknesses contribute to significant matters, they should be 
described in conjunction with the related significant matter.

.55:
The auditor may report weaknesses that do not meet the criteria for 
reportable conditions in a management letter (including the elements 
that are reported in the management letter as discussed in paragraph 
580.57), orally communicate the weakness to an appropriate level of 
entity management, or determine that no further consideration is 
necessary. The auditor should document any oral communication or the 
basis for the decision not to communicate the weakness.

What to Report About Control Weaknesses:

.56:
Control weaknesses identified by the auditor are considered to be 
findings. The "yellow book" (paragraph 6.49) describes the four 
elements of a finding:

* criteria (what should be),

* condition (what is),

* cause (why the condition occurred), and 

* effect (the nature of the possible past or future impact).

.57:
Fully developing each of the four elements of a finding is not always 
necessary. The auditor should use judgment in applying the resources to 
investigate a control weakness, based on the elements that are to be 
reported. For each reportable condition, the minimum extent to which 
the elements of a finding should be developed depends on how it is 
communicated.

* Reportable conditions reported in the auditor's report: The auditor 
should identify at least the criteria, condition, cause, and possible 
asserted effect (as to nature, not necessarily amount) to permit 
federal officials to determine the effect and to take prompt and proper 
corrective action. Each reported finding should include a 
recommendation.

* Reportable conditions reported in a management letter: The auditor 
should identify at least the condition and the criteria and generally 
should identify the possible asserted effect. Also, the auditor should 
provide suggestions for improvements. The auditor should consider the 
benefits of identifying the cause, which would generally strengthen the 
suggested improvement.

In discussing each reportable condition that meets FMFIA reporting 
criteria, the auditor should state whether the reportable condition was 
identified in the entity's FMFIA report or in the FMFIA report of the 
organization of which the entity is a part.

.58: 
For weaknesses that do not meet the criteria for reportable conditions, 
developing all of the elements of a finding is generally not necessary. 
The auditor should apply judgment to limit the resources applied to 
investigate this type of control weakness.

Other Considerations:

.59: 
To communicate audit findings promptly, the auditor should consider 
issuing reports and/or management letters during the audit. In such 
instances, the audit report describes significant matters and the 
general nature of other reportable conditions (as discussed in 
paragraphs 580.52-.54) and refers to such reports and/or management 
letters. The reference generally should be sufficient to allow the 
reader to request these reports and/or management letters. For example, 
titles and dates or accession numbers generally should be included.

.60: 
The auditor should consider whether internal control weaknesses, 
particularly material weaknesses, could affect information in other 
reports generated by the entity for external distribution or internal 
decision-making. The auditor should make inquiries and consider other 
knowledge obtained during the audit concerning use of reports affected 
by the weaknesses. The auditor should determine, based on his/her 
judgment, whether such reports are significant and likely to contain 
inaccuracies as a result of such control weaknesses that would likely 
influence the judgment of the report users. If so, the auditor 
generally should describe, in the auditor's report, the nature of such 
reports and the effect of control weaknesses on them. In determining if 
such reports are significant, the auditor should consider whether user 
judgments or management decisions based on such reports could affect 
the entity in amounts that would be material in relation to the 
financial statements.

Reporting on management's FMFIA reports:

.61: 
In the internal control section of the auditor's report, the auditor 
considers whether material weaknesses, other reportable conditions, or 
financial management systems' nonconformances identified during the 
audit were identified in management's FMFIA report. The auditor should 
investigate any material weaknesses, other reportable conditions, or 
systems' nonconformances discovered during the audit that were not 
included in the entity's FMFIA report or the FMFIA report of the 
organization of which the entity is a part. If the auditor found 
reportable conditions or systems' nonconformances that should have been 
reported under FMFIA (see paragraphs 580.35-.37), he or she should 
refer to them and should determine whether management's FMFIA process 
has weaknesses that should be reported. Such weaknesses might result 
from one of the following problems.

* Management did not initially recognize internal control weaknesses or 
systems' nonconformances, perhaps due to a lack of training or 
understanding or to limitations in the scope of the FMFIA process. (For 
example, certain areas were not reviewed annually or certain types of 
controls or systems were not reviewed.):

* Management did not recognize that identified weaknesses were FMFIA 
material weaknesses or systems' nonconformances.

* Management relied on controls that the auditor concluded were 
ineffective.

* Management failed to report identified weaknesses due to 
inappropriate report preparation (perhaps due to errors in aggregating 
the internal control weaknesses or systems' nonconformances of 
branches or agencies).

FINANCIAL MANAGEMENT SYSTEMS:

.62: 
FFMIA requires the auditor to report whether the financial management 
systems of CFO Act agencies or the components designated by OMB comply 
substantially with three federal financial management systems 
requirements. These requirements, also required by OMB Circular A-127, 
are:

* federal financial management systems requirements, including those 
found in the JFMIP functional requirements documents;

* applicable federal accounting standards, which are now recognized as 
GAAP (see section 560); and:

* the SGL at the transaction level.

Reporting on Systems' Substantial Compliance with FFMIA Requirements:

.63: 
Specific guidance for FFMIA reporting when the auditor determines that 
the financial management systems are in substantial compliance with the 
three FFMIA requirements will be provided in the future. OMB and GAO 
are reviewing this reporting issue and FFMIA implementation generally, 
which may result in revision to OMB Bulletin No. 01-02 and additional 
guidance in the FAM.

.64: 
If the auditor finds lack of substantial compliance with any of the 
three requirements, see section 595 B for reporting guidance; the lack 
of substantial compliance should be discussed in the significant 
matters section of the audit report. Frequently, lack of substantial 
compliance is related to material weaknesses or other reportable 
conditions in internal control. If so, the discussion should be 
combined in the significant matters section to avoid redundancy.

.65: 
If the the auditor finds that the entity's systems did not 
substantially comply with the requirements, the auditor is required by 
FFMIA to identify the entity or organization responsible for the 
systems found not to comply; include pertinent facts, including nature 
and extent of the noncompliance, areas in which there is substantial 
but not full compliance, primary reason or cause, and any relevant 
comments from management or responsible employees; and make 
recommendations of remedial actions and time frames for implementing 
the recommendations. This information also should be included in the 
significant matters section and/or a recommendation section, if either 
is used.

Scope of Procedures:

.66: 
If the auditor is unable to perform all the procedures considered 
necessary, as discussed in section 350, the scope of the audit is 
restricted. Generally, if the scope of the audit is restricted, such as 
due to unavailability of needed information from the system, the 
auditor reports that the financial management systems are not in 
substantial compliance with FFMIA requirements. Also, if the auditor 
concluded the systems were not in substantial compliance with FFMIA 
based on limited testing, he or she should report that the work on 
FFMIA would not necessarily disclose all instances of lack of 
substantial compliance with FFMIA requirements. (See section 595 B.):

COMPLIANCE WITH LAWS AND REGULATIONS:

.67: 
The auditor reports on the results of compliance testing and on 
compliance matters (including fraud--see section 540) coming to his or 
her attention during procedures other than compliance tests. The manner 
in which noncompliance is reported depends on the significance of the 
noncompliance and whether such noncompliance is material to the 
financial statements, as described below. The auditor should consult 
with OGC regarding conclusions on the entity's compliance with laws and 
regulations.

.68: 
The following definitions and guidelines should be used for classifying 
noncompliance detected during the audit.

* Reportable noncompliance includes all matters coming to the auditor's 
attention except those that in the auditor's judgment, are clearly 
inconsequential.

* Material noncompliance is reportable noncompliance in which a failure 
to comply with laws or regulations results in misstatements that are 
material to the financial statements. Any instances of material 
noncompliance should be described in the significant matters section of 
the audit report.

.69: Reportable noncompliance, other than material noncompliance, 
should be described in the significant matters section of the 
auditor's report if, in the auditor's judgment, it is considered to be 
a significant matter that should be communicated to the entity head, 
OMB, and the Congress. Otherwise, the auditor should list the 
reportable noncompliance in the significant matters section or in the 
compliance section of the report. Related instances of noncompliance 
should be combined. Such noncompliance may be reported in detail in 
another report or in the management letter, and that other report or 
management letter should be referred to in the auditor's report. To 
the extent that any such noncompliance contributes to significant 
matters, it should be described in conjunction with the related 
significant matter.

.70: 
Noncompliance that does not meet the criteria for reportable 
noncompliance may be orally communicated to an appropriate level of 
entity management, or the auditor may determine that no further 
consideration is necessary. The auditor should document any oral 
communication in the workpapers.

Reporting on compliance tests:

.71: 
The auditor states directly whether any reportable noncompliance was 
detected during compliance tests. This type of direct statement is 
illustrated in section 595 A for a situation in which the compliance 
tests disclosed no reportable noncompliance. If reportable 
noncompliance is noted, the statement should be modified as shown in 
section 595 B, and the reportable noncompliance should be discussed in 
the significant matters section of the auditor's report according to 
the guidance in paragraphs 580.69-.70.

.72: 
The AICPA, in SAS No. 87, states that a report on compliance with laws 
and regulations in which no opinion is issued is a by-product report, a 
report that provides a limited degree of assurance about compliance. 
When no opinion is issued, the report on compliance is not the primary 
objective of the engagement. SAS 87 states that the auditor should 
indicate the intended use of the compliance report because of the 
potential for misunderstanding related to a by-product report's limited 
degree of assurance. Because the distribution of government audit 
reports is not restricted, the reports should explain their 
limitations. (See section 595 A in the objectives, scope, and 
methodology section).

Scope of procedures:

.73: 
The auditor should be able to perform all of the procedures considered 
necessary to obtain sufficient evidence to report on compliance with 
laws and regulations. If the auditor is unable to perform all of the 
procedures for each of the significant provisions of laws and 
regulations, he or she may be able to report on the laws and 
regulations tested; however, the auditor should modify the report to 
alert the reader that not all of the laws that were considered 
necessary were tested. See section 595 B for report modifications.

.74: 
If the scope limitation is so significant that the auditor believes 
that any statement could be misleading, he or she may omit it. 
Significant scope limitations should be described in the significant 
matters section of the auditor's report, and the auditor's report 
should be modified as described in section 595 B. The auditor should 
also consider the effect of such a scope limitation on the opinion on 
the financial statements.

.75: 
If weaknesses in compliance controls are identified but no instances of 
noncompliance are found during compliance testing, the auditor should 
reconsider whether controls or other mitigating factors prevented or 
detected instances of noncompliance. If sufficient additional controls 
or other mitigating factors are not identified, the auditor should 
consult with the Reviewer and OGC concerning the appropriate reporting 
of such weaknesses and compliance tests.

OTHER INFORMATION IN THE ACCOUNTABILITY REPORT:

.76: 
As discussed in OMB Bulletin, Form and Content of Agency Financial 
Statements, certain other information is to be included in the annual 
financial statement. This information consists of MD&A (the overview of 
the reporting entity), required supplementary information including 
RSSI, and other accompanying information.

.77: 
GAAP require the reporting of certain RSSI: stewardship property, 
plant, and equipment (PP&E) and its condition (reported in units, 
including heritage assets, national defense PP&E, and stewardship 
land); stewardship investments (including nonfederal physical 
property, such as highways; human capital, such as expenditures for 
training and education; and research and development); risk-assumed 
information (such as pension and deposit insurance projections); and 
social insurance information. OMB and GAO, which are responsible for 
determining audit scope related to this information, do not require 
RSSI to be audited. RSSI presented should be marked "unaudited.":

.78: 
As this information is "required supplementary information," the 
auditor should apply procedures consistent with AU 558. As discussed in 
AU 558, the auditor should compare the consistency of the information 
with the financial statements and should discuss the methods of 
measurement and presentation with entity officials.

.79: 
If there are no material inconsistencies or nonconformance with OMB 
guidance that come to the auditor's attention during these or other 
audit procedures, the auditor should state this as shown in section 595 
A. (Although AU 558.08 requires reporting on the other information only 
if material inconsistencies or nonconformances with OMB guidance are 
found, OMB audit guidance requires the auditor to report based on AU 
551.15.) If material inconsistencies or instances of nonconformance are 
noted and are not remedied by the entity, the auditor should describe 
these situations in the significant matters section of the auditor's 
report and refer to the discussion in the significant matters section 
as illustrated in section 595 B.

.80: 
The auditor should also consider whether circumstances that resulted in 
modification of the auditor's report, such as a scope limitation or 
departure from GAAP, also affect this other information and disclose 
these effects in the discussion of those circumstances in the 
significant matters section of the report as described in section 595 
B.

.81: 
Following the objectives, scope, and methodology section of the report, 
there generally should be a section on agency comments. The auditor 
should allow the audited entity to review a draft of the report prior 
to issuance and provide either written or oral comments on it to assure 
the report is fair, objective, accurate, and complete. Written comments 
are generally preferred, especially when the report is sensitive or 
controversial, when significant disagreements exist, or when the report 
makes wide-ranging recommendations. Oral comments are preferred when 
there is a time-critical need to expedite issuance and the auditor has 
worked closely with the agency so that it is familiar with the findings 
and issues addressed in the draft, which are not expected to cause 
disagreements or controversy. If the report is unqualified, the entity 
may decide not to comment on it. The auditor should briefly 
characterize the overall response to the draft and summarize the major 
points made in the comments, whether written or oral, in the final 
section of the report. If agency officials concurred with all the 
findings, conclusions, and recommendations, the auditor should state 
that they concurred, mention actions the agency has agreed to take, and 
provide responses the auditor has to those actions. If agency officials 
disagree with or have concerns regarding portions of the report, the 
auditor should discuss these concerns fully and provide the auditor's 
response to them. Written comments generally should be included as an 
appendix to the report if they relate to the message.

[End of section]

590 - DOCUMENTATION: 

.01: 
The auditor should document the nature and extent of work performed in 
the reporting phase and the related conclusions. Such documentation 
should include:

* evaluation of misstatements,

* inquiries of attorneys,

* subsequent events,

* management representations,

* related party transactions, and 

* procedures performed to determine consistency of the other 
information in the Accountability Report with the financial statements 
and on conformity with OMB guidelines on form and content of financial 
statements.

SPECIFIC DOCUMENTATION CONSIDERATIONS:

Audit Summary Memorandum:

.02: 
At the completion of the audit, an audit summary memorandum should be 
prepared that summarizes the audit results and demonstrates the 
adequacy of the audit procedures and the reasonableness of the 
conclusions on the financial statements, internal control, substantial 
compliance of the financial management systems with the FFMIA 
requirements, the entity's compliance with laws and regulations, MD&A 
(the overview of the entity), required supplementary information 
(including RSSI), and other accompanying information.

.03: 
The audit summary memorandum generally should refer to other workpapers 
where this information is described in more detail. The memorandum 
should briefly summarize and allow the reader to easily refer in the 
workpapers to:

* any significant changes from the auditor's original assessment of the 
control environment, risk assessment, communication, and monitoring or 
inherent or control risks and significant revisions of audit 
procedures;

* additional fraud risk factors or other conditions (beyond those 
considered in planning--section 260) identified during the audit that 
caused the auditor to believe that an additional response was required 
and any further response that the auditor concluded was appropriate;

* significant accounting, auditing, or reporting issues;

* any limitations on the audit scope and the auditor's assessment of 
whether the audit procedures were adequate to support conclusions on 
the financial statements, internal control, the systems' substantial 
compliance with FFMIA requirements, compliance with laws and 
regulations, MD&A, required supplementary information (including 
RSSI), and other accompanying information;

* the auditor's conclusions on whether the audit evidence obtained 
supports the conclusions on the financial statements, internal control, 
the systems' substantial compliance with FFMIA requirements, compliance 
with laws and regulations, MD&A, required supplementary information 
(including RSSI), and other accompanying information;

* the auditor's conclusion on whether the audit was done in compliance 
with GAGAS, OMB audit guidance, and the GAO/PCIE Financial Audit Manual 
and whether the report is appropriate;

* the auditor's conclusion on whether the entity's financial statements 
comply with generally accepted accounting principles;

* significant subsequent events, if any;

* the Summary of Unadjusted Misstatements;

* a summary of internal control weaknesses and a comparison of those 
the auditor found to the weaknesses reported in management's assertion 
about the effectiveness of internal control;

* a summary of instances of lack of substantial compliance with FFMIA 
requirements, including areas in which there is substantial but not 
full compliance;

* a summary of instances of noncompliance with laws and regulations; and:

* the documentation of overall analytical procedures.

Overall Analytical Procedures:

.04: 
The following items should be documented in the workpapers for overall 
analytical procedures:

* Data used and sources of data: The documentation on the specific 
financial data used for the current-year amounts and the data used for 
comparison should include the amounts of the financial items; the dates 
or periods covered by the data; whether the data were audited or 
unaudited; the persons from whom the data were obtained, if applicable; 
and the source of the information (e.g., the general ledger trial 
balance, prior-year audit workpapers, or prior-year financial 
statements).

* Parameters for identifying significant fluctuations: These parameters 
are left to the auditor's judgment.

* Explanations for significant fluctuations and sources of these 
explanations: Explanations obtained should be consistent with 
corroborating evidence in the workpapers and should be referenced to 
this work.

* Auditor's conclusions on the results of the procedures: The auditor's 
conclusions on the results of overall analytical procedures generally 
should be documented in the reporting phase workpapers.

Considering Weaknesses in Internal Control:

.05: 
The basis for considering internal control weaknesses as material 
weaknesses, other reportable conditions, or as not reportable, should 
be documented in the workpapers. Any oral communications of control 
weaknesses that are not included in a written report should be 
documented in the workpapers. Procedures performed to determine the 
effects of misstatements and weaknesses in internal control on other 
reports prepared and used by the entity also should be documented.

Reporting Lack of Substantial Compliance With FFMIA Requirements:

.06: 
The basis for considering whether noncompliances with FFMIA 
requirements represent lack of substantial compliance should be 
documented in the workpapers.

Reporting Instances of Noncompliance:

.07: 
The basis for classification of instances of noncompliance as material 
noncompliance, other reportable noncompliance, or as not reportable 
should be documented in the workpapers. Any oral communications of 
noncompliance that are not included in a written report should be 
documented in the workpapers.

[End of section]

595 A - EXAMPLE AUDITOR'S REPORT - UNQUALIFIED: 

In our audit of [name of entity] for fiscal year [year], we found:

*  the financial statements are presented fairly, 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,[Footnote 4]

*  [FFMIA reporting, see note 2 below],[Footnote 5] and:

*  no reportable noncompliance with laws and regulations we tested.

The following sections discuss in more detail (1) these conclusions and 
our conclusions on Management's Discussion and Analysis and other 
supplementary information and (2) the scope of our audit.

Opinion on Financial Statements:

The financial statements including the accompanying notes present 
fairly, in all material respects, in conformity with U.S. generally 
accepted accounting principles, [name of entity's] assets, liabilities, 
and net position; net costs; changes in net position; budgetary 
resources; reconciliation of net costs to budgetary obligations; and 
custodial activity (if applicable)[Footnote 6] as of September 30, 20XX 
and for the year then ended.

Opinion on Internal Control[Footnote 7]

[Entity] maintained, in all material respects, effective internal 
control over financial reporting (including safeguarding assets) and 
compliance as of [end of fiscal year] that provided reasonable 
assurance that misstatements, losses, or noncompliance material in 
relation to the financial statements or to stewardship information 
would be prevented or detected on a timely basis. Our opinion is based 
on criteria established under 31 U.S.C. 3512 (c), (d), the Federal 
Managers' Financial Integrity Act, and the Office of Management and 
Budget (OMB) Circular A-123, Management Accountability and Control [or 
other criteria].

Systems' Compliance With FFMIA Requirements[Footnote 8]

Compliance With Laws and Regulations:

Our tests for compliance with selected provisions of laws and 
regulations disclosed no instances of noncompliance that would be 
reportable under U.S. generally accepted government auditing standards 
or OMB audit guidance. However, the objective of our audit was not to 
provide an opinion on overall compliance with laws and regulations. 
Accordingly, we do not express such an opinion.

Consistency of Other Information:

Management's Discussion and Analysis, required supplementary 
information (including stewardship information), and other 
accompanying information contain a wide range of data, some of which 
are not directly related to the financial statements. We do not express 
an opinion on this information. However, we compared this information 
for consistency with the financial statements and discussed the methods 
of measurement and presentation with [name of entity] officials. Based 
on this limited work, we found no material inconsistencies with the 
financial statements or nonconformance with OMB guidance.

Objectives, Scope, and Methodology:

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

We are responsible for obtaining reasonable assurance about whether (1) 
the financial statements are presented fairly, in all material 
respects, in conformity with generally accepted accounting principles 
and (2) management maintained effective internal control, the 
objectives of which are the following:[Footnote 9]

*  Financial reporting: Transactions are properly recorded, processed, 
and summarized to permit the preparation of financial statements and 
stewardship information in conformity with 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[Footnote 10] (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.

In order to fulfill these responsibilities, we (1) examined, on a test 
basis, evidence supporting the amounts and disclosures in the financial 
statements, (2) assessed the accounting principles used and significant 
estimates made by management, (3) evaluated the overall presentation of 
the financial statements, (4) obtained an understanding of internal 
control related to financial reporting (including safeguarding assets), 
compliance with laws and regulations (including execution of 
transactions in accordance with budget authority), and performance 
measures reported in Management's Discussion and Analysis of the 
Accountability Report, (5) tested relevant internal controls over 
financial reporting, and compliance, and evaluated the design and 
operating effectiveness of internal control, (6) considered the process 
for evaluating and reporting on internal control and financial 
management systems under the Federal Managers' Financial Integrity Act, 
(7) tested whether [entity's] financial management systems 
substantially complied with the three FFMIA requirements, and (8) 
tested compliance with selected provisions of the following laws and 
regulations [list laws and regulations].

We did not evaluate all internal controls relevant to operating 
objectives as broadly defined by the Federal Managers' Financial 
Integrity Act, such as those controls relevant to preparing statistical 
reports and ensuring efficient operations. We limited our internal 
control testing to controls over financial reporting and compliance. 
Because of inherent limitations in internal control, misstatements due 
to error or fraud, losses, or noncompliance may nevertheless occur and 
not be detected. We also caution that projecting our evaluation to 
future periods is subject to the risk that controls may become 
inadequate because of changes in conditions or that the degree of 
compliance with controls may deteriorate.[Footnote 11]

We did not test compliance with all laws and regulations applicable to 
[entity]. We limited our tests of compliance to those laws and 
regulations required by OMB audit guidance that we deemed applicable to 
the financial statements for the fiscal year ended [date]. We caution 
that noncompliance may occur and not be detected by these tests and 
that such testing may not be sufficient for other purposes.

We performed our work in accordance with U.S. generally accepted 
government auditing standards and OMB audit guidance.

Agency Comments and Our Evaluation:

In commenting on a draft of this report (see appendix x), [entity] 
concurred with the facts and conclusions in our report.

[End of section]

595 B - SUGGESTED MODIFICATIONS TO AUDITOR'S REPORT: 

This section suggests how to modify each major section of the 
unqualified auditor's report on the Accountability Report (annual 
financial statement) illustrated in section 595 A for each of the 
situations listed below.

Situations relating to the financial statements:

1. Scope limitation resulting in a qualified opinion on the financial 
statements: 595 B-3:

2. Scope limitation resulting in a disclaimer of an opinion on the 
financial statements: 595 B-3:

3. Uncertainty resulting in the addition of an explanatory paragraph: 
595 B-4:

4. Lack of consistency in the application of accounting principles 
resulting in the addition of an explanatory paragraph: 595 B-4:

5. Departure from generally accepted accounting principles resulting 
in a qualified opinion on the financial statements: 595 B-5:

6. Departure from generally accepted accounting principles resulting 
in an adverse opinion on the financial statements: 595 B-5:

Situations relating to internal control:

7. Scope limitation resulting in a disclaimer of opinion on internal 
control: 595 B-6:

8. Scope limitation resulting in a qualified opinion on internal 
control: 595 B-7:

9. Material weaknesses in internal control: 595 B-9:

10. Reportable conditions (other than material weaknesses) in internal 
control: 595 B-12:

11. The purpose was not to give an opinion on internal and other 
reportable conditions were found: 595 B-14:

12. The purpose was not to give an opinion on internal control and one 
or a few material weaknesses were found: 595 B-16:

13. The purpose was not to give an opinion on internal control and 
many material weaknesses were found: 595 B-18:

Situations relating to financial management systems' substantial 
compliance with FFMIA requirements:

14. Lack of financial management systems' substantial compliance with 
FFMIA requirements: 595 B-20:

Situations relating to compliance with laws and regulations:

15. Scope limitation--some laws and regulations could not be tested: 
595 B-21:

16. Scope limitation--all laws and regulations could not be tested--
disclaimer: 595 B-22:

17. Material noncompliance with laws and regulations: 595 B-23:

18. Reportable noncompliance (other than material noncompliance) with 
laws and regulations: 595 B-24:

Situations relating to the consistency of other information in the 
Accountability Report (management' discussion and analysis (or 
overview), required supplementary information (including stewardship 
information), and other accompanying information):

19. Material inconsistency between other information and the principal 
statements: 595 B-26:

20. Nonconformance of other information with OMB guidance: 595 B-27:

21. Any situation that caused the auditor to modify the report on the 
financial statements, internal control, or compliance with laws and 
regulations that also affects other information: 595 B-28:

Financial Statements: 

Situation: 1. Scope limitation--qualified opinion (see paragraph 580.
14); 

Introduction: First bullet: "Evidence about [identify account(s) 
affected by the scope limitation] in the financial statements was not 
available because of limitations on the scope of our work. Otherwise, 
we found the financial statements are presented fairly in conformity 
with generally accepted accounting principles”;

Significant Matters (See Note 1): Describe significant limitations on 
the scope of the work; 

Opinion or Conclusion: "Qualified Opinion on Financial Statements: 
"Because of the limitation on the scope of our work described above, 
we cannot determine if the financial statements' presentation of 
[identify account(s) affected by the scope limitation] is free of 
material misstatement. Otherwise, the financial statements including 
the accompanying notes present fairly...” 

Objectives, Scope, and Methodology: After the last sentence add: "We 
considered the limitations on the scope of our work in forming our 
conclusions.”

Situation: 2. Scope limitation--disclaimer (see paragraph 580.14); 

Introduction: First bullet "We are unable to give an opinion on the 
fiscal year [year] financial statements of [name of entity] because of 
limitations on the scope of our work. Thus, the financial statements 
may be unreliable."; 

Significant Matters (See Note 1): Describe scope limitations that 
caused the disclaimer of the opinion and conclude with the following 
statement: "Because of this limitation on the scope of our work, we 
are unable to give an opinion on the financial statements."; 

Opinion or Conclusion: "Disclaimer of Opinion on Financial Statements: 
"As described above, we are unable to give an opinion on the financial 
statements." 

Objectives, Scope, and Methodology: Because we did not audit the 
financial statements, delete all references to the auditor's 
responsibility for auditing the financial statements and how that 
responsibility was fulfilled. (See note 2.).

Situation: 3. Uncertainty --explanatory paragraph (see paragraph 580.
19); 

Introduction: No changes; 

Significant Matters (See Note 1) No changes. (See note 7.) 

Opinion on Financial Statements (see note 7) After the opinion, 
include an explanatory paragraph describing the uncertainty. 

No changes.

Situation: 4. Lack of consistency in the application of accounting 
principles--explanatory paragraph (see paragraph 580.20); 

Introduction:  No changes; 

Significant Matters (See Note 1) No changes. (See note 7.) 

Opinion on Financial Statements (see note 7) After the opinion, 
include an explanatory paragraph explaining the accounting change. For 
example "As discussed in Note X to the financial statements, the 
entity changed its method of computing depreciation in fiscal year 
[year]." 

No changes.

Situation: 5. Departure from GAAP--qualified opinion (see paragraph 
580.22); 

Introduction: First bullet "Entity departed from generally accepted 
accounting principles in [identify account(s) affected by the 
departure from GAAP]. Otherwise the financial statements are presented 
fairly in conformity with generally accepted accounting principles." 

Significant Matters (See Note 1): Describe material departures from 
GAAP. 

Opinion or Conclusion: "Qualified Opinion on Principal Statements 
"Except for the departure from U.S. generally accepted accounting 
principles described above, the financial statements, including the 
accompanying notes, present fairly ...." 

Objectives, Scope, and Methodology: No changes.

Situation: 6. Departure from GAAP--adverse opinion (see paragraph 580.
22); 

Introduction: First bullet "The financial statements are not presented 
fairly in conformity with generally accepted accounting principles." 

Significant Matters (See Note 1): Describe material departures from 
GAAP. 

"Adverse Opinion on Financial Statements "Because of the departure 
from U.S. generally accepted accounting principles described above, 
the financial statements, including the accompanying notes, do not 
present fairly ...." 

No changes.

[End of table]

 Internal Control:

 Situation: 7. Scope limitation--disclaimer (see paragraph 580.39); 

Bullets: Second bullet: "We are unable to give an opinion on internal 
control because of limitations on the scope of our work;" 

Significant Matters (See Note 1): Describe limitations on the scope of 
work that caused the disclaimer of the opinion and conclude with the 
following statement "Because of this limitation on the scope of our 
work, we are unable to give an opinion on internal control." 

Opinion or Conclusion: "Disclaimer of Opinion on Internal Control "As 
described above, we are unable to give an opinion on internal control." 

Objectives, Scope, and Methodology: Because we did not perform 
adequate procedures to give an opinion on internal control, delete all 
references to the auditor's responsibility for giving such an opinion 
and how that responsibility was fulfilled. (See note 3.).

Situation: 8. Scope limitation on one objective--qualified opinion 
(see paragraph 580.39) (continued on next page); 

Bullets: Second bullet "We are unable to give an opinion on internal 
control over [state objective affected, for example, financial 
reporting] because of limitations on the scope of our work. We found 
that management had effective internal control over [state objective 
not affected, for example, compliance with laws and regulations.]" 

Significant Matters (See Note 1): Describe significant limitations on 
the scope of the work. This should follow the discussion of a scope 
restriction on the audit of the financial statements, if any, and 
should conclude with the following statement "Because of this 
limitation on the scope of our work, we are unable to give an opinion 
on internal control over [state the affected control objective, such 
as financial reporting]." 

Opinion or Conclusion: "Qualified Opinion on Internal Control "As 
described above, we are unable to give an opinion on internal control 
over [state control objective affected]. However, we did evaluate 
internal control over [list control objective not affected by scope 
limitation]." 

Objectives, Scope, and Methodology: State the opinion on the other 
objective: "[Entity] maintained in all material respects effective 
internal control over [list unaffected areas, for example, financial 
reporting or compliance] as of [end of fiscal year] that provided 
reasonable assurance that [list unaffected areas, for example, 
misstatements and losses or noncompliance] material in relation to the 
financial statements or to stewardship information would be prevented 
or detected on a timely basis. Our opinion is based on.... [continue 
with second sentence]. 

After the last sentence add "We considered the limitations on the 
scope of our work in forming our conclusions.".

Situation: 9. Material weakness in internal control relevant to one or 
more control objective(s) (see paragraph 580.43) (continued on next 
page);  

Bullets: Second bullet "[Entity] did not have effective internal 
control over [state objective(s) affected, for example, financial 
reporting], but had effective internal control over [state objective 
not affected, for example, compliance with laws and regulations]." 

Significant Matters (See Note 1): Describe material weaknesses in 
internal control and include the term "material weakness" in the 
description. Indicate whether management in FMFIA reports reported 
each weakness. Add the following to address the possible effects of 
material weaknesses on other reports "These deficiencies in internal 
control may adversely affect any decision by management that is based, 
in whole or in part, on information that is inaccurate because of the 
deficiencies. Unaudited financial information reported by [name of 
entity], including budget information, also may contain misstatements 
resulting from these deficiencies."

Opinion or Conclusion: "Adverse Opinion on Internal Control "Because 
of the material weakness(es) in internal control described above, 
[entity] did not maintain effective internal control over [state 
objective(s) affected, for example, financial reporting or compliance] 
as of [end of fiscal year], which thus did not provide reasonable 
assurance that [state control objective(s) affected, such as 
misstatements and losses or noncompliance] material in relation to the 
financial statements or to stewardship information would be prevented 
or detected on a timely basis." If controls were effective over one 
objective, add the following "However, [entity] maintained in all 
material respects effective internal control over [state objective not 
affected, such as compliance or financial reporting] as of [date of 
fiscal year-end] that provided reasonable assurance that [state 
appropriate effect(s) such as, noncompliance or misstatements and 
losses] material in relation to the financial statements or to 
stewardship information would be prevented or detected on a timely 
basis." Continue with sentence about the basis of the opinion. Opinion 
on Financial Statements If the opinion on financial statements is 
unqualified, include the following at the end of the opinion on the 
financial statements "However, misstatements may nevertheless occur in 
other financial information reported by [name of entity] as a result 
of the internal control weakness(es) described above." If the report 
also includes reportable conditions other than material weaknesses, 
see note 6.

Objectives, Scope, and Methodology: No changes unless both control 
objectives are affected by material weakness(es). In that Situation:  
delete the sentences of caution on projection of the evaluation of 
controls to future periods that begins "Because of inherent 
limitations [delete rest of paragraph]....".

Situation: 10. Reportable conditions (other than material weaknesses) 
(see paragraph 580.46) (continued on next page); 

Bullets: Second bullet "Although internal controls should be improved, 
[entity] had effective internal control over..." 

Significant Matters (See Note 1): For reportable conditions considered 
to be significant matters that should be communicated to the entity 
head, OMB, and the Congress (as defined in paragraph 580.52) Describe 
the weaknesses and indicate (1) that the weaknesses are not material 
weaknesses and (2) whether the weak-nesses were reported by management 
in the summary of FMFIA reports. For reportable conditions that are 
not considered to be significant matters individually (as defined in 
paragraph 580.52) List the weaknesses. Combine related weaknesses.

Opinion or Conclusion: Opinion on Internal Control No change to the 
two sentences. Following that, continue "However, our work identified 
the need to improve certain internal control, as described above and 
in [identify other reports or management letters that discuss these 
internal control weaknesses in more detail by reference to date and 
GAO document number]. These weaknesses in internal control, although 
not considered to be material weaknesses, represent significant 
deficiencies in the design or operations of internal control, which 
could adversely affect the entity's ability to meet the internal 
control objectives listed above or meet OMB criteria for reporting 
matters under FMFIA." If reportable conditions are included as 
significant matters and the opinion on the financial statements is 
unqualified, include the following "In addition, misstatements may 
occur in other financial information reported by [name of entity] as a 
result of the internal control weakness(es) described above." If the 
report also includes material weaknesses, see note 6.

Objectives, Scope, and Methodology: No changes.

Situation: 11. The purpose was not to give an opinion on internal 
control and other reportable conditions were found (see paragraph 
580.49) 

Bullets: Second bullet "No material weaknesses in internal control 
over financial reporting (including safeguarding assets) and 
compliance and its operation, although internal control should be 
improved." 

Significant Matters (See Note 1): If reportable conditions considered 
to be significant matters that should be communicated to the entity 
head, OMB, and the Congress (as defined in paragraph 580.52) were 
found Describe the weaknesses and indicate (1) that the weaknesses are 
not material weaknesses and (2) whether the weaknesses were reported 
by management in the summary of FMFIA reports. If reportable 
conditions are not considered to be significant matters individually 
(as defined in paragraph 580.52) List the weaknesses. Combine related 
weaknesses.

Opinion or Conclusion: "Consideration of Internal Control "We 
considered internal control over financial reporting and compliance. 
"We do not express an opinion on internal control over financial 
reporting and compliance because the purpose of our work was to 
determine our procedures for auditing the financial statements and to 
comply with OMB audit guidance, not to express an opinion on internal 
control. However, our work identified the need to improve certain 
internal controls, as described above. These weaknesses in internal 
control, although not considered material weaknesses, represent 
significant deficiencies in the design or operation of internal 
control, which could adversely affect the entity's ability to meet the 
internal control objectives listed in the objectives, scope, and 
methodology or meet OMB criteria for reporting matters under FMFIA. A 
material weakness is a condition in which the design or operation of 
one or more of the internal control components does not reduce to a 
relatively low level the risk that errors, fraud, or noncompliance in 
amounts that would be material to the financial statements may occur 
and not be detected promptly by employees in the normal course of 
performing their duties. Our internal control work would not 
necessarily disclose all material weaknesses."

Objectives, Scope, and Methodology: See note 8.

Situation: 12. The purpose was not to give an opinion on internal 
control and one or a few material weaknesses were found (see paragraph 
580.49) (continued on next page);  

Bullets: Second bullet "Material weakness(es) over [briefly describe 
area affected by material weakness(es), for example, reporting 
expenditures]." 

Significant Matters (See Note 1): Describe material weaknesses found 
and include the term "material weakness" in the description. Indicate 
whether each weakness was reported by management in FMFIA reports. Add 
the following to address the possible effects of material weaknesses 
on other reports "These deficiencies in internal control may adversely 
affect any decision by management that is based, in whole or in part, 
on information that is inaccurate because of the deficiencies. 
Unaudited financial information reported by [name of entity], 
including budget information, also may contain misstatements resulting 
from these deficiencies."

Opinion or Conclusion: "Consideration of Internal Control "We 
considered internal control over financial reporting and compliance. 
"We do not express an opinion on internal control over financial 
reporting and compliance because the purpose of our work was to 
determine our procedures for auditing the financial statements and to 
comply with OMB audit guidance, not to express an opinion on internal 
control. However, we found the material weakness(es) described above. 
A material weakness is a condition in which the design or operation of 
one or more of the internal control components does not reduce to a 
relatively low level the risk that errors, fraud, or noncompliance in 
amounts that would be material to the financial statements may occur 
and not be detected promptly by employees in the normal course of 
performing their duties. Our internal control work would not 
necessarily disclose all material weaknesses." 

Objectives, Scope, and Methodology: See note 8.

Situation: 13. The purpose was not to give an opinion on internal 
control and many material weaknesses were found (see paragraph 580.49) 
(continued on next page);  

Bullets: Second bullet "Material weaknesses in internal control that 
resulted in ineffective controls over [state objectives(s) affected, 
for example, financial reporting]." 

Significant Matters (See Note 1): Describe material weaknesses found 
and include the term "material weakness" in the description. Indicate 
whether each weakness was reported by management in FMFIA reports. Add 
the following to address the possible effects of material weaknesses 
on other reports "These deficiencies in internal control may adversely 
affect any decision by management that is based, in whole or in part, 
on information that is inaccurate because of the deficiencies. 
Unaudited financial information reported by [name of entity], 
including budget information, also may contain misstatements 
resulting from these deficiencies."

Opinion or Conclusion: "Consideration of Internal Control "We 
considered internal control over financial reporting and compliance. 
"We do not express an opinion on internal control over financial 
reporting and compliance because the purpose of our work was to 
determine our procedures for auditing the financial statements and to 
comply with OMB audit guidance, not to express an opinion on internal 
control. However, we found the material weakness(es) described above, 
which resulted in ineffective controls over [state objective(s) 
affected, for example, financial reporting]. A material weakness is a 
condition in which the design or operation of one or more of the 
internal control components does not reduce to a relatively low level 
the risk that errors, fraud, or noncompliance in amounts that would be 
material to the financial statements may occur and not be detected 
promptly by employees in the normal course of performing their duties. 
Our internal control work would not necessarily disclose all material 
weaknesses."

Objectives, Scope, and Methodology: See note 8.

[End of table]

Financial Management Systems' Substantial Compliance with FFMIA 
Requirements: 

Situation: 14. Lack of financial management systems' substantial 
compliance with FFMIA requirements (see paragraph 580.64);  

Bullets: Third bullet "[entity's] financial management systems did not 
substantially comply with the requirements of FFMIA." 

Significant Matters (See Note 1): Describe instances of lack of 
substantial compliance of financial management systems with federal 
financial management systems requirements, federal accounting 
standards, or the SGL at the transaction level. Indicate whether each 
instance was reported by management in FMFIA reports. In addition, as 
required by FFMIA, identify the entity or organization responsible for 
the systems found not to comply include the nature and extent of the 
noncompliance, areas in which there was substantial but not full 
compliance, primary reason or cause, and relevant management comments 
and make recommendations (in the recommendation section) and set time 
frames for implementing recommendations. 

Opinion or Conclusion: Systems' Compliance With FFMIA Requirements 
"Our work disclosed instances, described above, in which [entity's] 
financial management systems did not substantially comply with 
[specify the requirements where a lack of substantial compliance was 
found, such as federal financial management systems requirements or 
the U.S. Government Standard General Ledger at the transaction level]." 
See section 595A, footnote 2, re reporting on other requirements. 

Objectives, Scope, and Methodology: Add "Our work on FFMIA would not 
necessarily disclose all instances of lack of substantial compliance 
with FFMIA requirements.".

[End of table]

Compliance with Laws and Regulations:

Situation: 15. Scope limitation --some laws could not be tested (see 
paragraph 580.73);  

Bullets: Fourth bullet "No reportable noncompliance with laws and 
regulations we tested however, we could not test compliance with 
certain laws we considered necessary because of limitations on the 
scope of our work." 

Significant Matters (See Note 1): Describe significant scope 
limitations, including a list of the laws not tested. 

Opinion or Conclusion: "Compliance With Laws and Regulations "Our 
tests for compliance with selected provisions of laws and regulations 
disclosed no instances of noncompliance that would be reportable under 
U.S. generally accepted government auditing standards or OMB audit 
guidance however, as discussed above, we could not test for compliance 
with all the laws we considered necessary."  

Objectives, Scope, and Methodology: Exclude laws not tested from list 
of laws. After the last sentence add "We considered the limitations on 
the scope of our work in forming our conclusions."

Situation: 16. Scope limitation --all laws could not be tested--
disclaimer (see paragraph 580.73);  

Bullets: Fourth bullet "We were unable to test [entity's] compliance 
with laws and regulations because of limitations on the scope of our 
work." 

Significant Matters (See Note 1): Describe scope limitation. Conclude 
with "Because of this limitation on the scope of our work, we were 
unable to test [entity's] compliance with laws and regulations." 

Opinion or Conclusion: Compliance With Laws and Regulations Omit 
statement regarding compliance with laws and regulations. Replace with 
"We were unable to test for compliance with the laws we considered 
necessary accordingly, we are unable to report on the entity's 
compliance with laws and regulations." Omit the last two sentences. 

Objectives, Scope, and Methodology: Delete all references to the 
auditor's responsibility for testing compliance with laws and 
regulations and how that responsibility was fulfilled. (See note 4.).

Situation: 17. Material noncompliance with laws and regulations (see 
paragraph 580.68) 

Bullets: Fourth bullet "Reportable noncompliance with laws and 
regulations we tested." 

Significant Matters (See Note 1): Describe the material noncompliance 
and place the findings in proper perspective to give readers a basis 
for judging the prevalence and consequences of the conditions. Although it is not necessary to use the word "material," a fuller description is necessary than for reportable noncompliance that is not material. 

Opinion or Conclusion: Compliance with Laws and Regulations "Except as 
noted above, our tests for compliance with the provisions of selected 
laws and regulations disclosed no other instances of noncompliance 
that would be reportable under U.S. generally accepted government 
auditing standards or OMB audit guidance." [Continue paragraph with 
last two sentences.]  

Objectives, Scope, and Methodology: No changes.

Situation: 18. Reportable noncompliance (other than material 
noncompliance)(see paragraph 580.69);  

Bullets: Fourth bullet "Reportable noncompliance with laws and 
regulations we tested." 

Significant Matters (See Note 1): For noncompliance that is considered 
to be a significant matter that should be communicated to the entity 
head, OMB, and the Congress 
Describe the noncompliance. Indicate that the noncompliance is not 
material to the financial statements. For reportable noncompliance 
that is not considered to be significant  List the noncompliance. 
Combine related instances of noncompliance. 

Opinion or Conclusion: Compliance With Laws and Regulations "Except as 
noted above, our tests for compliance with selected provisions of 
laws and regulations disclosed no other instances of noncompliance 
that would be reportable under U.S. generally accepted government 
auditing standards or OMB audit guidance." [Continue paragraph with 
last two sentences.] 

Objectives, Scope, and Methodology: No changes.

[End of table]

Consistency of Other Information (MD&A (Overview), Required 
Supplementary Information (including Stewardship Information), and 
Other Accompanying Information):

Situation: 19. Material inconsistency between other information and 
financial statements (see paragraph 580.79) 

Bullets: No changes. 

Significant Matters (See Note 1): Describe material inconsistency. 

Opinion or Conclusion: Consistency of other information Omit statement 
that we found no material inconsistencies. Add "As discussed above, 
the [list type(s) of other information in the Accountability Report 
(or annual financial statement)--MD&A (or overview), required 
supplementary information (including stewardship information), other 
accompanying information--that is not consistent with the financial 
statements] is inconsistent with the financial statements." If certain 
type(s) of information are consistent, add "Otherwise, we found no 
other material inconsistencies with the financial statements and the 
[state type(s) of information not affected] or nonconformance with OMB 
guidance." 

Objectives, Scope, and Methodology: No changes.

Situation: 20. Nonconformance of other information with OMB guidance 
(see paragraph 580.79);  

Bullets: No changes. 

Significant Matters (See Note 1): Describe nonconformance with OMB 
guidance. 

Opinion or Conclusion: Consistency of other information Omit statement 
that we found no nonconformance with OMB guidance. Add "As discussed 
above, the [list the type(s) of other information in the 
Accountability Report (or annual financial statement)--MD&A (or 
overview), required supplementary information, or other accompanying 
information--that is not in conformity] does not conform with OMB 
guidance." If certain type(s) of other information conforms to OMB 
guidance, add "Otherwise, we found no other material inconsistencies 
with the financial statements or nonconformance of the [state type(s) 
of information not affected] with OMB guidance." 

Objectives, Scope, and Methodology: No changes.

Situation: 21. Any Situation: that caused the auditor to modify the 
report on the financial statements, internal control, or compliance 
with laws and regulations that also affects other information (see 
paragraph 580.80)  

Bullets: No changes. 

Significant Matters (See Note 1): In the discussion of the Situation: 
include the effects on the other information in the Accountability 
Report. 

Opinion or Conclusion: Consistency of other information Omit statement 
that we found no inconsistency or nonconformance (or modify to refer 
only to unaffected type(s) of other information in the Accountability 
Report--MD&A (overview), required supplementary information, or other 
accompanying information ) if considered to be misleading in light of 
the particular Situation: . Omit statement that we found no 
inconsistencies or nonconformance if there is a scope limitation that 
resulted in a disclaimer of a report on the financial statements. 

Objectives, Scope, and Methodology: If a scope limitation on the work 
on the principal statements, internal control, or compliance with laws 
and regulations results in the omission of the statement that we found 
no inconsistency of other information, delete all references to the 
auditor's responsibility for this other information and how we 
fulfilled that responsibility. (See note 5.).

[End of table]

Note 1: Significant matters:

If a significant matters section is included in the auditor's report, 
add the following statement in quotation marks to the introduction 
immediately preceding "The following sections describe...":

"Described below are significant matters considered in performing our 
audit and forming our conclusions.":

Note 2: Disclaimer due to a scope limitation on financial statements:

In the "Objectives, Scope and Methodology" section delete the following 
words in quotation marks.

We are responsible for obtaining reasonable assurance about whether 
"(1)the financial statements are presented fairly, in all material 
respects, in conformity with generally accepted accounting principles], 
and (2)" [continue with rest of paragraph].

Delete the following:

" (1) examined, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements,

(2) assessed the accounting principles used and significant estimates 
made by management,

(3) evaluated the overall presentation of the financial statements,":

Add the following words in quotation marks:

We performed our work in accordance with U.S. generally accepted 
government auditing standards and OMB audit guidance. "We considered 
the limitations on the scope of our work in forming our conclusions.":

Note 3: Disclaimer of opinion on internal control due to a scope 
limitation:

In the ":Objectives, Scope, and Methodology" section, delete the 
following words in quotations marks:

We are responsible for obtaining reasonable assurance about whether 
"(1)" the financial statements are presented fairly, in all material 
respects, in conformity with 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 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." [continue 
with rest of paragraph]

Delete the following:

"(4)obtained an understanding of internal control related to financial 
reporting (including safeguarding assets), compliance with laws and 
regulations (including execution of transactions in accordance with 
budget authority), and performance measures reported in Management's 
Discussion and Analysis (or the overview) of the Accountability Report;

(5)tested relevant internal controls over financial reporting 
(including safeguarding assets), compliance, and evaluated the design 
and operating effectiveness of internal control;

(6)considered the process for evaluating and reporting on internal 
control and financial management systems under the Federal Managers' 
Financial Integrity Act of 1982," ...[continue with rest of paragraph]

"We did not evaluate all internal controls relevant to operating 
objectives as broadly defined by FMFIA, such as those controls relevant 
to preparing statistical reports and ensuring efficient operations. We 
limited our internal control testing to those controls over financial 
reporting and compliance. Because of inherent limitations in internal 
control, misstatements due to error or fraud, losses, or noncompliance 
may nevertheless occur and not be detected. We also caution that 
projecting our evaluation to future periods is subject to the risk that 
controls may become inadequate because of changes in conditions or that 
the degree of compliance with controls may deteriorate.":

Add the following words in quotation marks:

We performed our work in accordance with U.S. generally accepted 
government auditing standards and OMB audit guidance. "We considered 
the limitations on the scope of our work in forming our conclusions.":

Note 4: Disclaimer of a report on compliance with laws and regulations 
due to a scope limitation:

In the objectives, scope and methodology section, delete the following 
words in quotation marks:

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.

Delete the following:

"(8)tested compliance with selected provisions of the following laws 
and regulations [do not list any laws and regulations].":

Add the following words in quotation marks:

We performed our work in accordance with U.S. generally accepted 
government auditing standards and OMB audit guidance. "We considered 
the limitations on the scope of our work in forming our conclusions.":

Note 5: Disclaimer of a report on the financial statements, internal 
control, or compliance with laws and regulations:

If scope limitations on our work on the financial statements, internal 
control, or compliance with laws and regulations result in the omission 
of the statement that we found no inconsistency of other information, 
delete the following words in quotation marks from the objectives, 
scope, and methodology section:

We are also responsible for ... "and (3) performing limited procedures 
with respect to certain other information appearing in the 
Accountability Report.":

Add the following words in quotation marks:

We performed our work in accordance with U.S. generally accepted 
government auditing standards and OMB audit guidance. "We considered 
the limitations on the scope of our work in forming our conclusions.":

Note 6: Reporting both material weaknesses and other reportable 
conditions in the significant matters section:

If both material weaknesses and other reportable conditions are 
included in the significant matters section, the opinion on internal 
control should include the changes for material weaknesses first, and 
then should continue with an additional paragraph for reportable 
conditions that begins "Our work also identified the need to improve 
certain internal controls....":

Note 7: Explanatory paragraphs:

Explanatory paragraphs may be included in either the significant 
matters section or the opinion section of the report as discussed in 
paragraph 580.26.

Note 8:No management assertion about the effectiveness of internal 
control:

In the objectives, scope, and methodology section, delete the following 
words in quotations marks:

We are responsible for obtaining reasonable assurance about whether 
"(1)" the financial statements are presented fairly, in all material 
respects, in conformity with 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 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." ... 
[continue with rest of paragraph]

Insert the following words in quotation marks into the sentence 
following the objectives:

We are also responsible for "obtaining a sufficient understanding of 
internal control over financial reporting and compliance to plan the 
audit and for" testing compliance with ...

Add the following sentence at the end of the paragraph that begins, "We 
did not evaluate all internal controls...":

"In addition, we caution that our internal control testing may not be 
sufficient for other purposes.":

[End of section]

595 C - EXAMPLE SUMMARY OF POSSIBLE ADJUSTMENTS: 

[See PDF for image]

[End of table]

[End of section]

595 D - EXAMPLE SUMMARY OF UNADJUSTED MISSTATEMENTS: 

.01: 
The Summary of Unadjusted Misstatements, as discussed in paragraph 
540.09, is used to accumulate known and likely misstatements that are 
identified by the auditor but not corrected by the entity in the 
principal statements. The source of these unadjusted misstatements is 
the Summary of Possible Adjustments (section 595 C).

[See PDF for image]

[End of table]

FOOTNOTES

[1] The auditor may include certain other matters in this section as 
discussed in paragraphs 580.26-.27.

[2] If the auditor finds no material weaknesses in internal control, 
the auditor may express an opinion on management's assertion, rather 
than opining directly on internal control.

[3] This definition is used to determine whether a material weakness 
exists. Abbreviated language is used in an opinion report (see section 
595 A).

[4] If the auditor does not express an opinion on internal control, the 
following should replace the second bullet:

"* no material weaknesses in internal control over financial reporting 
(including safeguarding assets) and compliance with laws and 
regulations,"

[5] Specific guidance for FFMIA reporting will be provided in the 
future. OMB and GAO are reviewing this reporting issue and FFMIA 
implementation generally, which may result in revision to OMB Bulletin 
No. 01-02 and additional guidance in the FAM.

[6] This list assumes the entity follows GAAP issued by FASAB. If the 
entity follows GAAP issued by FASB (government corporations and others 
such as the U.S. Postal Service), modify the list accordingly.

[7] If the auditor does not express an opinion on internal control, 
this section should be replaced with the following:

"Consideration of Internal Control

"In planning and performing our audit, we considered [entity's] 
internal control over financial reporting and compliance. [Here the 
auditor should include a footnote stating the objectives of internal 
control, which are reasonable assurance that the two bullets in the 
objectives, scope, and methodology section are achieved.] We did this 
to determine our procedures for auditing the financial statements and 
to comply with OMB audit guidance, not to express an opinion on 
internal control. Accordingly, we do not express an opinion on internal 
control over financial reporting and compliance. However, for the 
controls we tested, we found no material weaknesses in internal control 
over financial reporting (including safeguarding assets) and 
compliance. A material weakness is a condition in which the design or 
operation of one or more of the internal control components does not 
reduce to a relatively low level the risk that errors, fraud, or 
noncompliance in amounts that would be material to the financial 
statements may occur and not be detected promptly by employees in the 
normal course of performing their duties. Our internal control work 
would not necessarily disclose all material weaknesses."

[8] See footnote 2.

[9] If the auditor does not express an opinion on internal control, 
delete the numbers in parentheses, put a period after "generally 
accepted accounting principles," and delete the rest of the sentence 
including the two bullets.

[10] If the auditor does not express an opinion on internal control, 
insert the following after the "for," "(1) obtaining a sufficient 
understanding of internal control over financial reporting and 
compliance to plan the audit," and renumber the following phrases.

[11] If the auditor does not express an opinion on internal control, 
add at the end of this paragraph, "In addition, we caution that our 
internal control testing may not be sufficient for other purposes."

[End of section]