Financial Audit Manual VOLUME 2 July 2008 _part7 ppt

Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-5 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. 7) Document the auditor’s preliminary assessment of risk of material misstatement related to intragovernmental and other related party activities and balances in the ARA form (FAM 902 A) or equivalent. II. Internal Control Phase Understand and document the design of the internal control for identifying, accounting for, eliminating, and reporting intragovernmental and other related party activity and balances (existence, completeness, valuation, rights and obligations, presentation and disclosure) (see FAM 320). Also determine if the design has been implemented. 1) Determine through inquiry of management, walkthroughs, review of prior years’ documentation and other means, how and when the entity identifies intragovernmental and other related party transactions. a) Determine whether the entity identifies transactions by trading partner when they are initiated and on all documentation thereafter. b) If the entity uses trading partner codes, determine the relationship of such codes to other document identifiers such as vendor codes. For example, trading partner codes may be integral to each vendor code, or it may be necessary to crosswalk vendor codes to a file of trading partner codes. c) If the entity does not use trading partner codes, determine how the entity identifies, analyzes, and accumulates intragovernmental activity and balances. For example, the entity may derive such amounts through off-line manual processes after the fact. d) Determine when the entity recognizes each significant category of intragovernmental and other related party transactions. For example, when an invoice is received, when processed through IPAC, when goods or services are received, when notified by the seller that an agreed-upon stage of completion has been achieved. Determine whether the entity’s policy in recording intragovernmental and other related This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-6 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. party transactions is appropriate. e) Determine whether the entity and its trading partners use consistent reciprocal ledger accounts 1 and categories of activity and balances for recording and reconciling such amounts. If so, ask what processes are in place to provide management with reasonable assurance that trading partners are recognizing reciprocal transactions in the same period, for the same amount, and by consistent or compatible accounting methods. f) Determine if the entity complies substantially with the SGL at the transaction level as it applies to intragovernmental activity and balances. (Note: The SGL accounts used should include attributes for intragovernmental activity and balances that identify (a) that these accounts contain intragovernmental transactions (e.g., attribute “F”), and (b) the trading partner (e.g., Treasury trading partner code “20”).) g) Identify policies and procedures for confirming intragovernmental and other related party activity and balances with trading partners. h) Determine how often the entity reconciles its related party activity and balances with its trading partners. Also inquire as to whether adjustments identified as necessary through the reconciliation process have been properly recognized in the financial records. If not, ask why. If the entity did not perform reconciliations, ask why not. 1 Reciprocal accounts are corresponding SGL accounts seller and buyer entities use to record like intragovernmental transactions. For example, the seller entity’s accounts receivable would normally be reconciled to the reciprocal account, accounts payable, on the buyer entity’s records. Examples of these accounts are in FMS’ Federal Intragovernmental Transactions Accounting Policies Guide. This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-7 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. i) Determine whether selling and buying entities have established processes to facilitate the timely reconciliation of activity and balances. (Note: The selling entity is typically responsible for furnishing detailed transaction information to facilitate reconciliation.) j) Inquire as to the entity’s year-end cut-off procedures related to intragovernmental and other related party activity. Determine if procedures are designed to provide assurance that intragovernmental activities occurring in the current period are recorded in the current period. (Use the above trading partner procedures to detect cutoff errors in the reconciliation process.) k) Identify the entity’s policies and procedures for intra-entity elimination. l) Determine whether the entity maintains transaction logs or detailed records of transactions to identify the postings to SGL accounts and to facilitate the reconciliation process. Determine if the logs include sufficient information to enable identification and location of supporting documents. m) Determine whether the entity reviews and approves monthly account analyses of intragovernmental accounts, examines budget-to- actual, and performs trend analyses. 2) Coordinate with the results of audit procedures for other cycles to determine if the entity has internal control deficiencies related to intragovernmental and other related party activity and balances. For example, to determine if the entity has control issues related to intragovernmental activity and balances, coordinate with the results of FBWT audit procedures to determine if the entity has issues on its FBWT/IPAC reconciliation such as material unreconciled amounts and aged unreconciled IPAC differences. This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-8 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. 3) Perform walkthroughs of processes for identifying, accounting, reconciling, confirming, eliminating, and reporting intragovernmental and other related party activity and balances to obtain or update the auditor’s understanding of these procedures and preliminarily assess the effectiveness of the design of these controls. a) Walkthrough the process from initiation to recording in the general ledger and inclusion in the financial statements or elimination for each significant type of intragovernmental and other related party activity and balances. b) Walk through the management/entity approval process of payments to trading partners. (Note: Prior audits have identified instances where payment controls for intragovernmental transactions were not sufficient. For example, the seller entity made payments to trading partners without verifying whether goods or services were provided.) c) Identify and document any differences in processing nonfederal and intragovernmental and other related party activities and balances. d) If the entity performs reconciliations of intragovernmental activity and balances with trading partners during the year, walk through both interim and year-end reconciliation processes. 4) Prepare or update the cycle memorandum (FAM 390), flowcharts (FAM 395 H and I), ARA form (FAM 902 A) and SCE form (FAM 902 B), or equivalents.) This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-9 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. III. Testing Phase A. Intragovernmental accounts For intragovernmental accounts, if the auditor preliminarily determines that the entity’s reconciliation and confirmation controls with trading partners are effectively designed and placed in operation, the auditor generally should test the entity’s policies and procedures to determine if the reconciliation and confirmation controls are effective and if intragovernmental balances appear reasonable. 1) If material differences exist in intragovernmental activity and balances, prepare an agreed-upon procedures report beginning with third quarter 2007. (See Treasury TFM; OMB audit guidance on Intragovernmental Balances: Supplementary and Agreed-Upon Procedures (AUP), sections 13.32 and 13.33; and FAM 660.) 2) Compare the amounts in the reconciliations to supporting documentation. 3) Trace the adjustments, if any, identified in the reconciliation process to the entity’s financial records. 4) Compare the amounts, excluding intra-departmental activity and balances, in the audited department consolidated financial statements to such amounts in the department’s final FACTS I or FACTS Notes reports to FMS. 5) If necessary, the auditor may design additional procedures to achieve financial audit objectives. For example: Reconciliation/confirmation (existence, completeness, valuations, rights and obligations, and classification) This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-10 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. • According to OMB’s Circular A-136, Financial Reporting Requirements, entities are required to reconcile intragovernmental balances and transactions at least quarterly. Test reconciliations to determine if the entity’s reconciliation control is effective throughout the year and each trading partner has a separate reconciliation. • This reconciliation/confirmation also may be used for within entity reconciliation/confirmation (intra- entity). a) Determine the completeness of the population by comparing the trading partners on the reconciliations and confirmation forms to subsidiary records or the entity’s trading partner list obtained during the planning phase. b) For each reconciliation/confirmation: i) Determine if the reconciliation/confirmation was reviewed and approved by appropriate personnel. ii) Compare total amounts and SGL accounts of the activity and balances reported on the reconciliation/confirmation form with the general and subsidiary ledger accounts, and the total amounts to audited financial statements and footnote disclosures. If differences are found, document each such difference. Determine the potential impact on the financial statements and post the differences identified to the Schedule of Uncorrected Misstatements (FAM 595 C-4) This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-11 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. iii) Test whether the entity used appropriate SGL accounts and whether these SGL accounts include the proper attribute(s) to indicate that they result from intragovernmental transactions. For example, when the federal attribute “F” is used with an SGL account, a trading partner should be designated for each transaction posted to the account. Entities can modify SGL accounts listed on the form to be more specific. iv) Determine whether the entity is using the reciprocal accounts delineated in the FMS Guide. Entities should use these accounts to account for intragovernmental activity and balances in the specified categories. Use of these reciprocal accounts will facilitate the reconciliation and confirmation process. v) For fiduciary activity and balances, compare amounts on the reconciliation forms to amounts on the Intragovernmental Fiduciary Confirmation System. (Note: Fiduciary activity and balances include loans from the Federal Financing Bank and Bureau of Public Debt, investments with Bureau of Public Debt, Federal Employees’ Compensation Act transactions with DOL, and employee benefit transactions with OPM. The seller entity— Bureau of Public Debt, Treasury, Federal Financing Bank, DOL, and OPM—should make balances information and other details available through the Intragovernmental Fiduciary Confirmation System for the buyer entities’ use in reconciling amounts to their records. The Intragovernmental Fiduciary Confirmation System is the official confirmation system for federal entities that engage in fiduciary intragovernmental transactions with Bureau of Public Debt, Federal Financing Bank, OPM, and DOL.) This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-12 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. vi) For transfers, test whether (1) the classification of transfers as expenditure or nonexpenditure is proper, and (2) the accounting and reporting are appropriate. vii) For trust fund transfers such as highway and airport trust funds, also test whether the trust fund amounts are properly accounted for and maintained in accordance with laws that established these funds. (Note: Test either by the trust fund auditor or as agreed-upon procedures by the auditor who audits the entity that collects the revenue for it.) This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-13 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. Reconciliation adjustments and differences (all intragovernmental categories) Exhibit I to FAM 902 C provides an illustration of a reconciliation tool that may be used to summarize reconciling items and prove amounts between a buyer and a seller entity. b) Determine whether adjustments, if any, are supported and timely by i) Tracing adjustments and reconciling items identified in the reconciliation process to the entity general and subsidiary ledgers. ii) Examining adjustments and supporting documents to determine if (1) The entity timely and properly performed the research and identified causes for differences. (2) The adjustments are agreed upon by both entities and made to proper SGL accounts. Examples of adjustments and reconciling items are: (a) Adjustments in estimated accruals: For example, the seller entity has recorded unbilled revenue and the buyer entity was not timely advised of the estimated accrual. (b) Adjustments due to timing differences: For example, timing differences caused by a buyer entity’s delay in recording IPAC transactions into proper SGL accounts. (c) Reconciling item for capitalization of assets: For example, the buyer entity purchased property and equipment or inventory and recorded them as assets. This is trial version www.adultpdf.com Substantive Testing 902 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 2008 GAO/PCIE Financial Audit Manual Page 902 C-14 Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Done by/date Doc Ref. iii) Obtain or prepare aging of outstanding unadjusted reconciling amounts for all significant intragovernmental balance sheet accounts. Identify old and/or unusual reconciling items and obtain explanations from the entity. iv) Review final yearend reconciliation for any accounting policy differences and determine if the entity explains the causes of these differences on the final reconciliation. The causes of these differences might be differences in accounting standard requirements such as different amortization methods for discounts and premiums. For example, one trading partner may use the interest method and the other trading partner may use the straight-line method to amortize discounts/premiums. However, there should be no material unresolved differences on the final year-end reconciliation forms and entities should resolve all differences with their trading partners. v) Determine the extent of unadjusted differences at year-end and assess their materiality on the financial statement line item and the overall financial statements. vi) If adjustments are made subsequent to the completion of the confirmations (during the audit period), determine if the entity revised the reconciliation and confirmation and submitted the updated data to FMS. 6) Summarize the results of testing by concluding on the effectiveness of the entity’s reconciliation and confirmation controls. Propose any adjustments on the Schedule of Uncorrected Misstatements (FAM 595 C). 7) Determine whether to change the risk of material misstatement and revise audit procedures based on the results of testing. This is trial version www.adultpdf.com [...]... of Accountability/ Transactions (Forms 121 8/ 122 1 or 121 9/ 122 0) July 20 08 Transmission of detailed checks issued weekly and at month-end FMS compares check issued detailed transmissions data (adjusted for FMS 520 6 dollar differences) to total checks issued reported on Forms 121 8/ 122 1 or 121 9/ 122 0 This is trial version www.adultpdf.com GAO/PCIE Financial Audit Manual Two-, 4-, 6-, & 8month letters notifying... Statements of Transactions (Form 22 4) or Statements of Accountability/ Transactions (Forms 121 8/ 122 1 or 121 9/ 122 0) by Agency Location Code (ALC) CASHLINK II* system data is used by the banking system to report collections and EFTs received from and on behalf of government entities) FMS compares monthly collection totals reported on entity Forms 22 4, 121 8/ 122 1, or 121 9/ 122 0 to transaction data Month-end... entities’ auditors (with entity permission) to determine whether issues identified by the other auditors affect the auditor’ s conclusions on intragovernmental transactions July 20 08 This is trial version www.adultpdf.com GAO/PCIE Financial Audit Manual Page 9 02 C -20 Substantive Testing 9 02 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Audit Procedures... version www.adultpdf.com GAO/PCIE Financial Audit Manual Page 9 02 C -22 Substantive Testing 903- Auditing Cost Information 903 - Auditing Cost Information 01 FAM 903 provides general guidance for auditors in identifying cost information and planning audit procedures The auditor should coordinate these procedures with procedures on auditing various line items and accounts The auditor is generally concerned... entity disbursements Verification of interagency transactions: NTDO entities report net interagency transactions on Forms 121 8/ 122 1 or 121 9/ 122 0 by ALC Interagency payment and collection system data FMS compares monthly net disbursement totals reported on entity Forms 121 8/ 122 1 or 121 9/ 122 0 to disbursement data in IPAC Monthly statements of differences are generated in STAR and are available to entities... government consolidated financial statement level, or does not apply to the consolidation In some cases, the consolidation refers readers to individual agency financial statement reports for further details in specific areas July 20 08 This is trial version www.adultpdf.com GAO/PCIE Financial Audit Manual Page 903-6 Substantive Procedures 921 - Auditing Fund Balance with Treasury (FBWT) 921 - Auditing Fund Balance... Determine whether to change the risk of material misstatement and revise audit procedures based on the results of testing July 20 08 This is trial version www.adultpdf.com GAO/PCIE Financial Audit Manual Page 9 02 C-19 Substantive Testing 9 02 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Audit Procedures for Intragovernmental and Other Related Parties’ Activity... transaction; and d) test the compilation of amounts that may be disclosed in the financial statements for reasonableness July 20 08 This is trial version www.adultpdf.com GAO/PCIE Financial Audit Manual Page 9 02 C-17 Substantive Testing 9 02 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances Audit Procedures for Intragovernmental and Other Related Parties’ Activity... of FBWT accounts, such as those mentioned above in FAM 921 .03 Practice Aids 23 The following practice aids are presented as appendixes to FAM 921 to assist the auditor in auditing FBWT as follows: • • FAM 921 B – Example Account Risk Analysis (ARA) for FBWT • July 20 08 FAM 921 A – Treasury Processes and Reports Related to FBWT Reconciliation FAM 921 C - Example Specific Control Evaluation (SCE) for FBWT... differences recorded in suspense accounts could represent transactions that have not been properly recorded by the entity to the appropriate accounts July 20 08 This is trial version www.adultpdf.com GAO/PCIE Financial Audit Manual Page 921 -2 Substantive Procedures 921 - Auditing Fund Balance with Treasury (FBWT) Additionally, it is important for entities to reconcile their FBWT account balances timely because . version www.adultpdf.com Substantive Testing 9 02 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 20 08 GAO/PCIE Financial Audit Manual Page 9 02 C- 12 Audit Procedures. version www.adultpdf.com Substantive Testing 9 02 C – Example Audit Procedures for Intragovernmental and Other Related Parties’ Activity and Balances July 20 08 GAO/PCIE Financial Audit Manual Page 9 02 C -21 Audit Procedures. Activity and Balances July 20 08 GAO/PCIE Financial Audit Manual Page 9 02 C -22 Exhibit I Seller Entity - Trading Partner 1 $20 0,000 Less adjustment for timing difference - (20 ,000) Add adjustment