STANDARDS FOR AUDIT OF GOVERNMENTAL ORGANIZATIONS, PROGRAMS, ACTIVITIES & FUNCTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00933R000400020001-7
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 60
• Document Creation Date: December 9, 2016
• Document Release Date: June 22, 2001
• Sequence Number: 1
• Publication Date: January 1, 1972
• Content Type: REPORT

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STA11DARD1 FOR AUDIT
OF GOYERR1r1E11TAL
ORGAf1IZATIOAS . PROGRAMS.
ACTIVITIES & FURCTIORS
BY THE COMPTROLLER GENERAL
OF THE UNITED STATES
1972
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AUDIT STANDARDS SUPPLEMENT SERIES
No. 1 What GAO Is Doing To Improve Governmental Auditing Standards (out of print)
No. 2 Auditors - Agents for Good Government
No. 3 Case Study - Illinois' Use of Public Accountants For Auditing State Activities
No. 4 Examples of Findings From Governmental Audits
No. 5 Questions and Answers on the Standards for Audit of Governmental Organiza-
tions, Programs, Activities and Functions
The supplements are for sale by the Superintendent of Documents, U.S. Government Print-
ing Office, Washington, D.C. 20402 as follows:
Supplement
Price
No.
2
25 cents
2000-00109
No.
3
60 cents
2000-00114
No.
4
55 cents
2000-00115
No.
5
50 cents
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For
C1iLlll~d'3te?1~f~ :IAP'B~D~lfl~@1~6~ -7
ton, D.C., 20402, price 70 cents. Stock Number 2000-00110.
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FOREWORD
In earlier and simpler times in our Nation's history, when the
responsibilities of each level of government could be more clearly
divided, each level could work fairly independently. Today, profound
changes in our social, political, and economic order have brought
steadily mounting demands for new and better public services in a va-
riety and on a scale unprecedented in our history. Response to these
demands requires a process of policymaking, financing, and adminis-
tration which involves the cooperation of Federal, State, and local gov-
ernments in solving public problems. Thus the -Federal system of
government today rests on an elaborate structure of interlocking re-
lationships among all levels of government- -between the executive and
legislative branches of each, between the Federal and the State Gov-
ernments, and between both and the local communities--for the con-
duct of programs designed to improve the quality of American life.
Accompanying this increased complexity in the relationship
among the various levels of government has been an increased demand
for information about government programs. Public officials, legisla-
tors, and the general public want to know whether governmental funds
are handled properly and in compliance with existing laws and whether
governmental programs are being conducted efficiently, effectively,
and economically. They also want to have this information provided,
or at least concurred in, by someone who is not an advocate of the pro-
gram but is independent and objective.
This demand for information has widened the scope of govern-
mental auditing so that such auditing no longer is a function concerned
primarily with financial operations. Instead, governmental auditing
now is also concerned with whether governmental organizations are
achieving the purposes for which programs are authorized and funds
are made available, are doing so economically and efficiently, and are
complying with applicable laws and regulations. The standards con-
tained in this statement were developed to apply to audits of this wider
scope. These standards are intended to be applicable to all levels of
government in the United States.
The survey and research work on which the accompanying state-
ment is based was conducted by an interagency working group com-
posed of representatives of the General Accounting Office and the Fed-
eral executive departments and agencies having the predominance of
Federal grant programs. Assistance was also obtained from audit
representatives of the State, county, and city governments visited dur-
ing the course of the work and from leading professional organizations,
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including the American Institute of Certified Public Accountants, the Insti-
tute of Internal Auditors, the Federal Government Accountants Association,
the Municipal Finance Officers Association, and the American Accounting
Association.
Consultative assistance was provided by university consultants; theAd-
visory Commission on Intergovernmental Relations; a consultant selected
from one State, county, and city; and public interest groups generally rep-
resenting State and local governments. Among the public interest groups
participating were the Council of State Governments, the National Associ-
ation of Counties, the National League of Cities, the United States Confer-
ence of Mayors, and the International City Management Association.
These standards were reviewed by a committee of the American Insti-
tute of Certified Public Accountants during 1973. The committee's report
stated:
"The members of this Committee agree with the philosophy and
objectives advocated by the GAO in its standards and believe that
the GAO's broadened definition of auditing is a logical and worth-
while continuation of the evolution and growth of the auditing dis-
cipline." I
The General Accounting Office, on October 1, 1968, issued a statement
entitled "Internal Auditing in Federal Agencies," which set forth the basic
principles and concepts to be followed by Federal agencies in developing and
operating their internal audit organizations. The purpose of that state-
ment was to describe the role of the internal auditor in the Federal Govern-
ment, the scope of his work, his proper location in the organizational struc-
ture, and related matters. A revision of that statement which incorporates
these standards will be issued shortly.
These standards were originally published in June 1972. This reprint
includes minor changes, none of which are considered to be of sufficient sub-
stance to merit explanatory comment. It is not intended that this reprint sup-
/ ~- d et "_
Comptroller General
of the United States
1"Auditing Standards Established by the GAO - Their Meaning and Signifi-
cance for CPAs, A Report," American Institute of Certified Public Account-
ants, Committee on Relations with the General Accounting Office, New York,
1973, p. 12.
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C o n t e n t s
Page
PART
I
II
III
INTRODUCTION
SUMMARY
GENERAL STANDARDS
Chapter 1 Scope of audit work
10
13
2
Qualifications
3
Independence
15
4
Due professional care
19
IV
EXAMINATION AND EVALUATION STANDARDS
21
Chapter 1 Planning
21
26
2
Supervision
3
Legal and regulatory requirements
28
4
Internal control
32
5
Evidence
35
Chapter
1
Form and distribution
39
2
Timeliness
41
3
Content
42
4
Financial reports
49
I Qualifications of independent auditors
engaged by governmental organizations 54
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PART I--INTRODUCTION
PURPOSE
This statement contains a body of audit standards that
are intended for application to audits of all government
organizations, programs, activities, and functions--whether
they are performed by auditors employed by Federal, State, or
local Governments; independent public accountants; or others
qualified to perform parts of the audit work contemplated un--
d.er these standards. These standards are also intended to
apply to both internal audits and audits of contractors,
grantees, and other external organizations performed by or for
a governmental entity. These audit standards relate to the
scope and quality of audit effort and to the characteristics
of a professional and meaningful audit report.
The American Institute of Certified Public Accountants
(AICPA) has adopted standards and procedures that are appli-
cable to audits performed to express opinions on the fairness
with which financial statements present the financial position
and results of operations.) These standards are generally
accepted for such audits and have been incorporated into this
statement. However, the interests of many users of reports on
Government audits are broader than those that can be satisfied
by audits performed to establish the credibility of financial
reports. To provide for audits that will fulfill these broader
interests, the standards in this statement include the essence
of those prescribed by the American Institute of Certified
Public Accountants and additional standards for audits of a
broader scope as will be explained subsequently.
SCOPE
A fundamental tenet of a democratic society holds that
governments and agencies entrusted with public resources and
the authority for applying them have a responsibility to
render a full accounting of their activities. This account-
ability is inherent in the governmental process and is not
always specifically identified by legislative provision.
This governmental accountability should identify not only
1The basic standards are included in "Statements on Auditing
Procedure No. 33," issued by the Committee on Auditing Pro-
cedure of the American Institute of Certified Public Account-
ants.
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the objects for which the public resources have been devoted
but also the manner and effect of their application.
This concept of accountability is woven into the basic
premises supporting these standards. These standards pro-
vide for a scope of audit that includes not only financial
and compliance auditing but also auditing for economy,
efficiency, and achievement of desired results. Provision
for such a scope of audit is not intended to imply that all
audits are presently being conducted this way or that such
an extensive scope is always desirable. However,an audit
that would include provision for the interests of all poten-
tial users of government audits would ordinarily include pro-
vision for auditing all the above elements of the accountabil-
ity of the responsible officials.
1. Financial and compliance--determines (a) whether fi-
nancial operations are properly conducted, (b) whether
the financial reports of an audited entity are pre-
sented fairly, and (c) whether the entity has com-
plied with applicable laws and regulations.
2. Economy and efficiency--determines whether the entity
is managing or utilizing its resources (personnel,
property, space, and so forth) in an economical and
efficient manner and the causes of any inefficiencies
or uneconomical practices, including inadequacies in
management information systems, administrative pro-
cedures, or organizational structure.
3. Program results--determines whether the desired re-
sults or benefits are being achieved, whether the ob-
jectives established by the legislature or other au-
thorizing body are being met, and whether the agency
has considered alternatives which might yield desired
results at a lower cost.
The audit standards are intended to be more than the mere
codification of current practices, tailored to existing audit
capabilities. Purposely forward-looking, these standards in-
clude some concepts and areas of audit coverage which are
still evolving in practice but which are vital to the account-
ability objectives sought in the audit of governments and of
intergovernmental programs. Therefore the audit standards
have been structured so that each of the three elements of
audit can be performed separately if this is deemed desirable.
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It should be recognized that a concurrent audit of all
three parts would probably by the most economical manner of
audit, but often this may not be practical. Furthermore, it
may not be practical or necessary to perform all three ele-
ments of the audit in particular circumstances. For most
government programs or activities, however, the interests of
many potential government users will not be satisfied unless
all three elements are performed.
In memorandums of engagements between governments and
independent public accountants or other audit organizations,
the arrangements should specifically identify whether all, or
specifically which, of the three elements of the audit are to
be conducted. Such agreements are needed to ensure that the
scope of audit to be made is understood by all concerned.
The following certain basic premises underlie these
standards and were considered in their development.
1. The term "audit" is used to describe not only
work done by accountants in examining financial re-
ports but also work done in reviewing (a) compliance
with applicable laws and regulations, (b) efficiency
and economy of operations, and (c) effectiveness in
achieving program results.
2. Public office carries with it the responsibility to
apply resources in an efficient, economical, and ef-
fective manner to achieve the purposes for which the
resources were furnished. This responsibility ap-
plies to all resources, whether entrusted to the
public officials by their own constituency or by
other levels of government.
3. A public official is accountable to those who pro-
vide the resources he uses to carry out governmental
programs. He is accountable both to other levels of
government for the resources such levels have pro-
vided and to the electorate, the ultimate source of
all governmental funds. Consequently he should be
providing appropriate reports to those to whom he is
accountable. Unless legal restrictions or other
valid reasons prevent him from doing so, the auditor
should make the results of audits available to other
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levels of government that have supplied resources
and to the electorate.
4. Auditing is an important part of the accountability
process since it provides independent judgments of
the-credibility of public officials' statements
about the manner in which they have carried out
their responsibilities. Auditing also can help de-
cisionmakers improve the efficiency, economy, and
effectiveness of governmental operations by identi-
fying where improvements are.needed.
5. The interests of individual governments in many fi-
nancially assisted programs often cannot be isolated
because the resources applied have been commingled.
Different levels of government share common inter-
ests in many programs. Therefore an audit should be
designed to satisfy both the common and discrete
accountability interests of each contributing gov-
ernment.
6. Cooperation by Federal, State, and local governments
in auditing programs of common interest with a mini-
mum of duplication is of mutual benefit to all con-
cerned and is a practical method of auditing inter-
governmental operations.
7. Auditors may rely upon the work of auditors at
other levels of government if they satisfy them-
selves as to the other auditors' capabilities by
appropriate tests of their work or by other accept-
able methods.
An inherent assumption that underlies all the standards
is that governments will cooperate in making audits in which
they have mutual interests. For many programs that are fed-
erally assisted, it would be neither practical nor economical
to have every auditor at every level of government do his
own background research on the laws, regulations, objectives,
and goals of his segment of the program. Therefore, to pro-
vide the auditor with the necessary background information
and to guide his judgment in the application of the accom-
panying standards, Federal or State agencies that request
State, local, or other levels to make audits are expected
to prepare broad, comprehensive audit instructions, tai-
lored to particular programs or program areas.
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The content of such audit guidance should include a
digest of, or as a minimum, citations to applicable statutes,
regulations, instructions, manuals, grant agreements, and
other program documents; identification of specific audit
objectives and reporting requirements in terms of matters
of primary interest in such areas as program compliance,
economy, and effectiveness; and other audit guidelines
covering specific areas in which the auditor is expected
to perform.
5
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PART II--SUMMARY
Part II is a summary of the standards. Parts III,
IV, and V explain the standards more fully.
PART III--GENERAL_STANDARgS
1. The full scope of an audit of a governmental pro-
gram, function, activity, or organization should
encompass:
An examination of financial transactions,
accounts, and reports, including an evalu-
#+.tion of compliance with applicable laws and
regulations.
. A review of efficiency and economy in the use
t)f resources.
c. A review to determine whether desired results are
=3ffectively achieved.
In determining the scope for a particular audit,
responsible officials should give consideration to
the needs of the potential users of the results of
that audit.
2. The auditors assigned to perform the audit must
collectively possess adequate professional profi-
ciency for the tasks required.
3. In all matters relating to the audit work, the
audit organization and the individual auditors
;hall maintain an independent attitude.
4. Due professional care is to be used in conducting
the audit and in preparing related reports.
PART IV--EXAMINATION AND EVALUATION STANDARDS
1. Work is to be adequately planned.
2. Assistants are to be properly supervised.
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3. A review is to be made of compliance with legal
and regulatory requirements.
4. An evaluation is to be made of the system of
internal control to assess the extent it can. be
relied upon to ensure accurate information, to
ensure compliance with laws and regulations, and
to provide for efficient and effective operations.
5. Sufficient, competent, and relevant evidence is to
be obtained to afford a reasonable basis for the
auditor's opinions, judgments, conclusions, and
recommendations.
PART V--REPORTING STANDARDS
1. Written audit reports are to be submitted to the
appropriate officials of the organizations
requiring or arranging for the audits. Copies
of the reports should be sent to other officials
who may be responsible for taking action on audit
findings and recommendations and to others
responsible or authorized to receive such reports.
Unless restricted by law or regulation, copies
should also be made available for public inspection.
2. Reports are to be issued on or before the dates
specified by law, regulation, or other arrangement
and, in any event, as promptly as possible so as
to make the information available for timely use
by management and by legislative officials.
a. Be as concise as possible but, at the same
time, clear and complete enough to be under-
stood by the users.
b. Present factual matter accurately, completely,
and fairly.
c. Present findings and conclusions objectively
and in language as clear and simple as the
subject matter permits.
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d. Include only factual information, findings, and
conclusions that are adequately supported by
enough evidence in the auditor's working papers
to demonstrate or prove, when called upon, the
bases for the matters reported and their
correctness and reasonableness. Detailed
supporting information should be included in the
report to the extent necessary to make a
convincing presentation.
e. Include, when possible, the auditor's recom-
mendations for actions to effect improvements
in problem areas noted in his audit and to other-
wise make improvements in operations. infor-
mation on underlying causes of problems reported
should be included to assist in implementing or
devising corrective actions.
f. Place primary emphasis on improvement rather
than on criticism of the past; critical
comments should be presented in balanced
perspective, recognizing any unusual diffi-
culties or circumstances faced by the opera-
ting officials concerned.
g. Identify and explain issues and questions
needing further study and consideration by the
auditor or others.
h. Include recognition of noteworthy accomplish-
ments, particularly when management improvements
in one program or activity may be applicable
elsewhere.
i. Include recognition of the views of responsible
officials of the organization, program, function,
or activity audited on the auditor's findings,
conclusions, and recommendations. Except where
the possibility of fraud or other compelling
reason may require different treatment, the
auditors tentative findings and conclusions
should be reviewed with such officials. When
possible, without undue delay, their views should
be obtained in writing and objectively considered
and presented in preparing the final report.
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j. Clearly explain the scope and objectives of the
audit.
k. State whether any significant pertinent infor-
mation has been omitted because it is deemed
privileged or confidential. The nature of such
information should be described, and the law
or other basis under which it is withheld
should be stated.
4. Each audit report containing financial reports
shall:
a. Contain an expression of the auditor's opinion
as to whether the information in the financial
reports is presented fairly in accordance with
generally accepted accounting principles (or
with other specified accounting principles
applicable to the organization, program, func-
tion, or activity audited), applied on a basis
consistent with that of the preceding reporting
period. If the auditor cannot express an
opinion, the reasons therefor should be stated
in the audit report.
b. Contain appropriate supplementary explanatory
information about the contents of the financial
reports as may be necessary for full and informa-
tive disclosure about the financial operations of
the organization, program, function, or activity
audited. Violations of legal or other regulatory
requirements, including instances of non-
compliance, and material changes in accounting
policies and procedures, along with their effect
on the financial reports, shall be explained in
the audit report.
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PART III--GENERAL STANDARDS
CHAPTER 1
SCOPE OF AUDIT WORK
The first general standard for governmental auditing
The full scope of an audit of a govern-
mental program, function, activity, or
organization should encompass:
An examination of financial transactions, ac-
counts, and reports, including an evaluation
or compliance with applicable laws and regula-
tions.
A review of efficiency and economy in the use
of resources.
3. A review to determine whether desired results are
effectively achieved.
in determining the scope for a particular audit,
responsible officials should give consideration
to the needs of the potential users of the results
r?f the audit.
his standard places on officials who authorize and
prescribe the scope of governmental audits the responsibil-
ity for providing for audit work that is broad enough to
`ulfill the needs of all potential users of the results of
auch audits. The standard is not intended to prevent such
officials from authorizing specific assignments of parts of
the total scope of the audit work required by the standard
or from authorizing special audits, nor is it intended to
prevent auditors from performing such audits. However,
those responsible for authorizing governmental audits are
charged with the knowledge that, for most governmental pro-
grams, their full responsibility for obtaining audit work is
not discharged unless the full scope of audit work set forth
in the standard is performed.
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The general objectives of the above categories of audit:
work are as follows:
1. Examinations of financial transactions, accounts,
and reports and compliance with applicable laws and
regulations shall include sufficient audit work to
determine whether:
a. The audited entity is maintaining effective con-
trol over revenues, expenditures, assets, and
liabilities.
b. The audited entity is properly accounting for re-
sources, liabilities, and operations.
c. The financial reports contain accurate, reliable,
and useful financial data and are fairly pre-
sented.
d. The entity is complying with the requirements of
applicable laws and regulations.
2. A review of efficiency and economy shall include in-
quiry into whether, in carrying out its responsibili-
ties, the audited entity is giving due consideration
to conservation of its resources and minimum expendi-
ture of effort. Examples of uneconomical practices or
inefficiencies the auditor should be alert to include:
a. Procedures, whether officially prescribed or
merely followed, which are ineffective or more
costly than justified.
b. Duplication of effort by employees or between or-
ganizational units.
c. Performance of work which serves little or no
useful purpose.
d. Inefficient or uneconomical use of equipment.
e. Overstaffing in relation to work to be done.
f. Faulty buying practices and accumulation of un-
needed or excess quantities of property, materi-
als, or supplies.
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g. Wasteful use of resources.
Efficiency and economy are both relative terms and it
is virtually impossible to give an opinion as to
whether an organization has reached the maximum prac-
ticable level of either. Therefore it is not contem-
pLated in these standards that the auditor will be
called upon to give such an opinion.
3. A review of the results of programs or activities
shall include inquiry into the results or benefits
achieved and whether the programs or activities are
meeting established objectives. The auditor should
consider:
a. The relevance and validity of the criteria used
by the audited entity to judge effectiveness in
achieving program results.
D. The appropriateness of the methods followed by
the entity to evaluate effectiveness in achiev-
ing program results.
c. The accuracy of the data accumulated.
d. The reliability of the results obtained.
In some cases an auditor may be asked to participate in
a program evaluation effort by accumulating data himself for
evaluation of a program or activity under audit. When such
work is to be done on a coordinated basis, the evaluation
techniques should be uniformly prescribed for the whole pro-
gram at some central level. The auditors at the various
program sites should only be required to accumulate data
and compare it with the prescribed measures. To do other-
wise would be economically unfeasible and would lead to wide
variations in the measurements applied to similar projects
by different auditors.
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CHAPTER 2
QUALIFICATIONS
The second general standard for governmental auditing
The auditors assigned to perform the au-
dit must collectively possess adequate
professional proficiency for the tasks
required.
This standard places upon the auditor the responsibil-
ity for ensuring that the audit is conducted by personnel
who collectively have the skills necessary for the type of
audit that is to be performed.
The qualifications of the staff assigned to the audit
should be commensurate with the scope and complexities of
their audit assignments. Audits vary in purpose and scope.
Some require an opinion on financial statements and the
evaluation of compliance with specific laws and other re-
quirements; others require reviews of efficiency and economy
or effectiveness in achieving program results; still others
require some or all of these three elements of audit work.
Performing all three elements of audit work, in some cases,
will require a wide variety of skills. The need for diverse
skills may require cooperative audits by different audit
organizations whose personnel. collectively have the required
capabilities.
Because there are variations in program objectives and
organizational forms, as well as differences in laws, rules,
and regulations applicable to such programs, the qualifica-
tions mentioned herein should apply to the skills of the
audit organization as a whole and not necessarily to indi-
vidual auditors. Thus, if an organization possesses person-
nel or consultants with acceptable skills in accounting,
statistics, law, engineering, actuarial science, and related
skills, each individual member of the organization need not
himself possess all of these skills.
Requirements for staffs performing government audits
1. A basic knowledge of auditing theory and procedures
and the education, ability, and experience to apply
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such knowledge to the type of auditing work re-
quired for the task at hand.
2. A basic knowledge of governmental organization and
operation. This knowledge may be acquired by ap-
propriate education, study, or experience.
3. Skills appropriate for the work required in the au-
dit. For auditing financial reports which lead to
an opinion, the auditor must be proficient in ac-
counting. Language setting forth the qualifica-
tions for independent public accountants who wish
to perform such work is included in appendix I.
For other types of auditing work, the skills of the
auditors must be appropriate for the work to be
done. For instance:
a. It the work requires use of statistical tech-
niques, the audit staff must include persons
having the appropriate statistical skills.
These skills may be possessed by staff members
or by consultants to the staff.
b. If the work requires extensive review of comput-
erized systems, the audit staff must include
persons having the appropriate computer skills.
These skills may be possessed by staff members
or by consultants to the staff.
c. If the work involves review into complex engi-
neering data, the audit staff must include per-
sons having the appropriate engineering skills.
These skills may be possessed by staff members
or by consultants to the staff.
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CHAPTER 3
INDEPENDENCE
The third general standard for governmental auditing
In all matters relating to the audit
work, the audit organization and the
individual auditors shall maintain an
independent attitude.
This standard places upon the auditor and the audit
organization the responsibility for maintaining sufficient
independence so that their opinions, conclusions, judgments,
and recommendations will be impartial. If the auditor is
not sufficiently independent to produce unbiased opinions,
conclusions, and judgments, he should state in a prominent
place in the audit report his relationship with the orga-
nization or officials being audited.l
The auditor should consider not only whether his own
attitudes and beliefs permit him to be independent but also
whether there is anything about his situation which would
lead others to question his independence. Both situations
deserve consideration since it is important not only that
the auditor be, in fact, independent and impartial but also
that other persons will consider him so.
There are three general classes of impairments that
the auditor needs to consider; these are personal, exter-
nal, and organizational impairments. If one or more of
these are of such significance as to affect his ability to
perform his work and report its results impartially, he
should decline to perform the audit or indicate in his re-
port that he was not fully independent.
PERSONAL IMPAIRMENTS
There are some circumstances in which an auditor can-
not be impartial because of his views or his personal
situation. These circumstances might include:
11f the auditor is not fully independent because he is an
employee of the audited entity, it will be adequate disclo-
sure to so indicate. If the auditor is a practicing cer-
tified public accountant, his conduct should be governed by
the AICPA "Statements on Auditing Procedure."
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1. Relationships of an official, professional, and/or
personal nature that might cause the auditor to
limit the extent or character of his inquiry, to
limit disclosure, or to weaken his findings in any
way.
2. Preconceived ideas about the objectives or quality
of a particular operation or personal likes or dis-
likes of individuals, groups, or objectives of a
particular program.
3. Previous involvement in a decisionmaking or manage-
ment capacity in the operations of the governmental
entity or program being audited.
4. Biases and prejudices, including those induced by
political or social convictions, which result from
employment in or loyalty to a particular group, en-
tity, or level of government.
5. Actual or potential restrictive influence when the
auditor performs preaudit work and subsequently
performs a post audit.
6. Financial interest, direct or indirect, in an orga-
nization or facility which is benefiting from the
audited programs.
EXTERNAL IMPAIRMENTS
External factors can restrict the audit or impinge on
the auditor's ability to form independent and objective
opinions and conclusions. For example, under the follow-
ing conditions either the audit itself could be adversely
affected or the auditor would not have complete freedom to
make an independent judgment.1
1. Interference or other influence that improperly or
imprudently eliminates, restricts, or modifies the
scope or character of the audit.
ISome of these situations may constitute justifiable limita-
tions on the scope of the work. In such cases the limita-
tion should be identified in the auditor's report.
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2. Interference with the selection or application of
audit procedures or the selection of activities to
be examined.
3. Denial of access to such sources of information as
books, records, and supporting documents or denial
of opportunity to obtain explanations by officials
and employees of the governmental organization,
program, or activity under audit.
4. Interference in the assignment of personnel to the
audit task.
5. Retaliatory restrictions placed on funds or other
resources dedicated to the audit operation.
6. Activity to overrule or significantly influence the
auditor's judgment as to the appropriate content of
the audit report.
7. Influences that place the auditor's continued em-
ployment in jeopardy for reasons other than compe-
tency or the need for audit services.
8. Unreasonable restrictions on the time allowed to
competently complete an audit assignment.
ORGANIZATIONAL IMPAIRMENTS
The auditor's independence can be affected by his
place within the organizational structure of governments.
Auditors employed by Federal, State, or local government
units may be subject to policy direction from superiors who
are involved either directly or indirectly in the govern-
ment management process. To achieve maximum independence,
such auditors and the audit organization itself not only
should report to the highest practicable echelon within
their government but should be organizationally located
outside the line-management function of the entity under
audit.
These auditors should also be sufficiently removed from
political pressures to ensure that they can conduct their
auditing objectively and can report their conclusions com-
pletely without fear of censure. Whenever feasible they
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should be under a system which will place decisions on com-
pensation, training, job tenure, and advancement on a merit
basis.
When independent public accountants or other inde-
pendent professionals are engaged to perform work that in-
cludes inquiries into compliance with applicable laws and
regulations, efficiency and economy of operations, or
achievement of program results, they should be engaged by
someone other than the officials responsible for the direc-
tion of the effort being audited. This practice removes the
pressures that may result if the auditor must criticize the
performance of those who engaged him. To remove this ob-
stacle to independence, governments should arrange to have
such auditors engaged by officials not directly involved in
operations co be audited.
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CHAPTER 4
DUE PROFESSIONAL CARE
The fourth general standard for governmental auditing
Due professional care is to be used in
conducting the audit and in preparing
related reports.
This standard places upon the auditor and the audit or-
ganization the responsibility for employing high profes-
sional standards in performing the work required in making
examinations of governmental entities.
This standard does not imply unlimited responsibility
for disclosure of irregularities or noncompliance; neither
does it imply infallibility on the part of either the audit
organization or the individual auditor. The standard does
require professional performance of a quality appropriate
for the complexities of the audit assignment undertaken.
The standard imposes upon the auditor a requirement to
be alert for situations or transactions that could be indic-
ative of fraud, improper or illegal expenditures or opera-
tions, inefficiency, waste, or lack of effectiveness. It
does not, however, require that the auditor give absolute
assurance that no material impropriety exists; nor does it
require that a detailed audit of all transactions normally
be undertaken.
The audit process should not be considered as a substi-,
tute for internal control. It is management's responsibil-
ity to institute adequate procedures and controls to prevent
irregularities and improprieties and to encourage adherence
to adopted. policies and prescribed requirements. Auditing
is primarily a test of these procedures and controls and is
not a substitute for them.
Exercising due professional care means using good judg-
ment in the choice of tests and procedures and doing a good
job in applying them and in preparing reports. As a minimum
the choice of tests and procedures requires consideration of:
1. What is necessary to achieve the audit objectives.
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2. Relative materiality or importance of matters to
which the procedures will be applied.
3. Effectiveness of internal controls.
4. Cost of the work being performed in relation to the
benefits to be derived.
The quality of audit work and related reports depends
upon the degree to which:
1. 'Tests and procedures are properly applied by compe-
tent persons.
2. Findings and conclusions are based on an objective
evaluation of all pertinent facts.
3. Factual statements and conclusions contained in re-
ports are fully supported by information obtained
or developed during the audit.
4. The audit process conforms with the examination and
evaluation standards prescribed in part IV and the
reporting standards prescribed in part V.
5. A critical review is performed at every level of
supervision of the work done and of the judgment
exercised by those assisting in the examination.
Due professional care also includes obtaining a mutual
understanding of the audit scope and objectives with the
audited entity and those authorizing the audit if different
from the entity. It also includes obtaining a good working
understanding of the operations to be audited and any avail-
able underlying criteria of performance (including pertinent
laws and regulations) to be utilized for evaluation purposes.
When the established criteria for performance are vague, the
auditor should attempt. to obtain authoritative interpreta-
tion of the criteria. If the auditor is required to se-
lect measurement criteria, he should strive to reach agree-
ment on the appropriateness of these measures with the in-
terested parties.
Due professional care also includes followup work on
findings resulting from similar audits made previously to
determine whether appropriate corrective measures have been
taken.
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PART IV--EXAMINATION AND EVALUATION STANDARDS
CHAPTER 1
The first examination and evaluation standard for gov-
ernmental auditing is:
Work is to be adequately planned.
This standard places upon the auditor or audit organi-
zation the responsibility for performing sufficient advance
planning to provide a basis for an effective audit. The
auditor should see that necessary or desired work steps are
systematically laid out so that they can be understood by
all levels in the audit structure, which will minimize the
expenditure of staff time and resources on unnecessary work.
Planning in intergovernmental auditing is especially
important because, in many instances, the audit work per-
formed at one level of government should be correlated with
work performed at other levels of government, all or some of
which may have an interest in, or a statutory requirement to
review, the discharge of financial, management, or program
accountability of a single organization, function, activity,
or program. When such correlation is necessary, it is
essential that planning be done by some central agency which
will set the objectives of the work so that the scope of the
participatory audits done at individual program sites will
be comparable and the results can be consolidated.
Where the required work includes reviews into the ef-
ficiency, economy, or achievement of desired results, ade-
quate planning is especially important because the proce-
dures employed in such audits are more varied and complex
and, thus, more care is needed to select the appropriate
procedures for the case at hand. Finally, planning is im-
portant to ensure that the results of the audit will sat-
isfy the objectives of the audit.
Adequate planning should include planning for:
1. Coordination with other governmental auditors,
when appropriate.
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Personnel to be used on the assignment.
Work to be performed.
The format and general content of the report to
be issued.
COORDINATION
In governmental auditing there frequently is a need for
=articipatory audit work by groups of auditors at different
ocations who often are associated with an entity other than
Lhe one directing the auditors planning the audit work.
This situation frequently involves audits of Federal grants
under which the grantee is required to have audits made and
to provide reports on such audits to the grantor. The situ-
~tion also arises when a central audit agency having several
field offices makes an audit of a program or activity that
being carried out at various locations and uses its field
offices to make the audits at specific locations. Very
careful planning by the central agency directing the audit
i.s necessary if such audits are to be performed effectively
-nd economically.
Planning for such coordinated audits must be tailored
to the specific objectives of the audit. Ordinarily the
central agency should specify such things as the laws and
regulations that are to be considered by the auditor in re-
-.viewing, compliance; the goals, objectives, and criteria of
t_?.ie program that are to be used in the review of program
results; and the particular aspects of economy and effi-
Jencv that are to be considered in that part of the audit.
Unless such planning is carefully performed and communicated
-:o the participating audit staffs, the results of the audit
.re likely to be below the needs and expectations of the
lentrai agency. Unplanned audit effort also will offer dif-
6icult problems in comparing or consolidating the results of
,:edits from various locations.
Furthermore, much of the planning necessary for a co-
ordinated audit can only be done efficiently and economi-
-ally at the central-agency level. Researching the laws and
regulations applicable to a program and presenting clear,
concise audit objectives is challenging and time-consuming
work. To leave such work to each participating audit staff
would result in excessive duplication and hence unacceptable
-additional cost. Moreover, some audits in which part of a
Transaction must be audited at one location and part at
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another require even closer coordination if more than one
audit staff does the work. The preparation of detailed
guides for such audits is an integral part of the standard
that audits should be properly planned.'
MULTIPLE-USE AUDITS
In some cases audits of the same organizations, pro-
grams, activities, or functions may be required by Federal
law or regulation, State law or regulation, and/or munici-
pal ordinances. Whenever practicable, planning for such
audits should include planning for the requirements of all
levels of government with the objective of making one audit
serve the needs of all interested governmental levels.
Planning for use of personnel should include:
1. Assigning qualified staff having education and ex-
perience commensurate with the nature of the audit
work required to be performed.
2. Efficiently employing the staff, including the as-
signment of a sufficient number of experienced work-
ers and appropriate numbers and levels of supervi-
sors. The planning should also include securing the
services of outside consultants when necessary.
3. Providing appropriate on-the-job training for in-
experienced personnel.
WORK TO BE PERFORMED
A written audit program should be prepared for each au-
dit to provide for effective communication of the objectives
of the audit to all staff members, to facilitate control of
the audit work during the review phase, and to provide a
permanent record of the audit plan. The information needed
i
A publication issued in 1972 by the American Institute of
Certified Public Accountants provides guidance for use in
preparation of audit guides. The publication is entitled
"Suggested Guidelines for the Structure and Content of Au-
dit Guides Prepared by Federal Agencies For Use by CPA's."
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by the auditor to prepare a satisfactory audit program
should vary with the types of audit and the entities to be
audited; however, in most cases it is advisable to precede
the preparation of the audit program with a survey of the
entity to be audited to obtain basic working information
about its operations and practices.
A skillfully performed survey should provide informa-
tion about the size and scope of the entity's activities and
any areas in which there may be weaknesses in internal con-
trols, uneconomical or inefficient operations, lack of ef-
fectiveness in achieving prescribed goals, or lack of com-
pliance with applicable laws and regulations. However, tests
to determine the significance of such matters are to be per-
formed in the detailed audit work and should be carefully set
out in the audit program.
The audit program should ordinarily provide such infor-
mation as:
1. Purpose and scope--The purpose of the audit and its
scope should be described, and information should be
provided as to whether the work is to include one or
more of the three elements of an audit--financial
and compliance, economy and efficiency, or program
results.
2. Background--Information should be provided about the
legal authority for the existence and operation of
the organization, program, function, or activity to
be audited, its sources of revenue, principal loca-
tions, and similar items needed to understand the
objectives and operational characteristics of its
work.
3. Definition of terms--Definitions and explanations
should be included for any unique terms or abbrevia-
tions used by the audited organization, program,
activity, or function.
4. Objectives of the audit--A carefully drawn statement
of what the auditor is expected to produce as a re-
sult of his audit should be provided. This state-
ment should be clearly expressed--ambiguous words
should be carefully avoided--so that the auditor
knows on what issues he is expected to reach con-
clusions. In financial and compliance audits, the
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financial reports to be examined should be specified
and the principal laws and regulations to which com-
pliance is to be determined should be specified. In
audits of program results, the criteria prescribed
for evaluating the effectiveness of the program should
be clearly set out.
5. Procedures--For many audits it is desirable to pre-
scribe procedures for the auditor to follow in
achieving the audit objectives. When multilocation
programs involving program effectiveness are to be
performed at a number of locations, the audit organi-
zation planning the work centrally should ordinarily
prescribe very specific methods to be followed in the
examination to be sure that the data obtained from
all participating locations will be comparable. How-
ever, this should be done in a manner that does not
restrict the auditor's professional judgment. Audit
programs should never be used as a blind checklist
or in a way that stifles initiative, imagination,
and thoroughness in performing an audit.
6. Report--The audit program should set forth the gen-
eral format to be followed in the auditor's report
and a general discussion of the type of information
desired in it.
ACCESS TO WORKING PAPERS
Arrangements should be made to ensure that working
papers will be made available upon request to other govern-
mental audit staffs and auditors who follow at later dates.
A provision relative to access of working papers should be
written into all contractual arrangements for governmental
audits.
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CHAPTER 2
SUPERVISION
The second examination and evaluation standard for gov-
ernmental auditing is:
Assistants are to be properly supervised.
This standard places upon the auditor or audit organi-
zation the responsibility for ensuring that less skilled
staff members receive appropriate guidance in the perform-
ance of their work.
The most effective way to control the quality and to
expedite the progress of an assignment is by exercising
proper supervision from the start of the preparatory work to
the completion of the report draft. Supervision adds sea-
soned judgment to the work performed by less experienced
members of the staff and provides necessary training for
such staff members.
The assignment and use of assistants is an important
factor in achieving the established objectives in a satis-
factory manner. Since training, experience, and other quali-
fications vary among auditors, specific work assignments
must be commensurate with abilities.
Supervisors should see that assistants have a clear
understanding of their assigned tasks before they start the
work. Assistants should be informed not only of what work
they are to do and the way they are to proceed but also of
what the work is expected to accomplish. With a seasoned
staff the supervisor's part may be more general in charac-
ter. He may outline the broad course of the work and leave
details to assistants. With a less experienced staff the
supervisor may have to go into many of the details himself
and instruct his staff specifically as to what they are to
do and how they are to do it.
Supervisory review should be directed to both the sub-
stance and the method of auditing. The review should ensure
that (1) conformance with audit standards is obtained,
(2) the audit programs are followed, unless deviation is
justified and authorized, (3) the working papers adequately
support findings and conclusions, (4) the working papers
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provide adequate data to prepare a meaningful report, and
(5) the auditor will accomplish the audit objectives. Docu-
mentation of supervisory reviews should be prepared and re-
tained.
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CHAPTER 3
LEGAL AND REGULATORY REQUIREMENTS
The third examination and evaluation standard for gov-
ernmental auditing is:
A review is to be made of compliance with
legal and regulatory requirements.
In governmental auditing, compliance with pertinent
laws and regulations is particularly significant because
government organizations, functions, programs, or activi-
ties are creatures of law and have more specific rules and
regulations than are usually applicable to private organiza-
tions.
This standard places upon the auditor the responsibil-
ity for determining whether the organization, program, func-
tion, or activity under audit has complied with the require-
ments placed upon it by pertinent laws and regulations. In
reviewing compliance with pertinent laws and regulations, the
auditor should consider not only statutes and implementing
regulations but also the related legislative history, legal
opinions, court cases, and regulatory requirements, includ-
ing such documents as grant or loan agreements.
When the auditor is at the central-agency level, he
should ordinarily take the responsibility for determining
the laws and regulations which should be considered in the
audit. When grants from another level of government are
involved, legal and regulatory requirements should ordinar-
ily be obtained from that level and should be made avail-
able through audit guides to the grantee's auditor. To do
otherwise would result in substantial duplicate work in
cases in which there are two or more entities to be audited.
Furthermore, the grantor is familiar with these statutes and
requirements and can provide them and the related supporting
data with far less effort than would be required by the
grantee's auditor.
In making his review, the auditor at the central-
agency level should select and review those laws and regula-
tions which have a direct bearing or a significant impact
upon the entity to be audited or its operations. The laws
and regulations which may apply to a specific government
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organization, program, function, or activity are often very
extensive, and the auditor cannot be expected to review
every law or regulation which may in some way impact on the
entity. Consequently, this type of review requires consid-
erable judgment. As a general rule, the auditor first
should find out from the audited entity's management the
legal and regulatory requirements it is required to follow.
He then should make his on tests to determine whether any
requirements are being overlooked by the entity. Some
sources of information on legal and regulatory requirements
follow.
1. Legal or legislative data, including:
a. Basic legislation,
b. Reports of hearings.
c. Legislative committee reports.
d. Annotated references from reference services
covering related court decisions and legal opin-
ions.
e. Historical data relating to the movements to
achieve the legislation and similar prior legis-
lation.
f. State constitutions, statutes, resolutions, and
legislative orders.
g. Local charters, ordinances, and resolutions.
2. External administrative requirements, including:
a. Memorandums from Federal, State, or local admin-
istrative agencies.
b. Guidelines and other administrative regulations
affecting program operations from Federal,
State, or local agencies.
3. Grant arrangements, when grants are involved, in-
cluding:
a. Proposals from grantees.
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b. Pertinent correspondence from grantors and grant-
ees.
c. Memorandums of meetings held to discuss the
grants.
d. The grant documents, including amendments.
e. Grant regulations.
f. Grant budgets and supporting schedules.
The nature and purpose of the review of legal and ad-
ministrative requirements will tend to vary with the ele-
ment of auditing being performed.
Financial and compliance--The auditor is to test
the financial transactions and operations of the au-
dited organization, program, function, or activity to
determine whether that entity is in compliance with
pertinent laws or regulations. The auditor also is to
make a review to satisfy himself that the audited en-
tity has not incurred significant unrecorded liabili-
ties (contingent or actual) through failure to comply
with, or through violation of, pertinent laws and
regulations.
Economy and efficiency--The auditor is to make
a review of the laws and regulations applying to any
aspect of the audited organization, program, function,
or activity in which he attempts to make a judgment
regarding whether existing practices can be made
significantly more efficient or economical. Such a
review is needed because determinations of how the
entity's tasks can be accomplished more efficiently
and economically cannot be done properly without an
understanding of the purpose of the entity and what
it is legally required to do. Such a review is needed
also to provide the auditor with information on
constraints on the entity's authority to change its
practices to make them more efficient and economical.
Program results--The auditor is to review the laws
and regulations pertaining to the goals and ob-
jectives of the audited entity's programs or activi-
ties in sufficient depth to gain a working understand-
ing of the results that are expected from the programs
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or activities. He must also do sufficient testing to
determine whether the programs or activities are being
performed in conformity with applicable laws and regu--
lations.
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CHAPTER 4
INTERNAL CONTROL
The fourth examination and evaluation standard for gov-
ernmental auditing is:
An evaluation is to be made of the system
of internal control to assess the extent
it can be relied upon to ensure accurate
information, to ensure compliance with
laws and regulations, and to provide for
efficient and effective operations.
This standard places upon the auditor the responsibil-
ity for determining how much reliance he can place on the
audited entity's internal controls to ensure accurate in-
formation, ensure compliance with applicable laws and regu-
lations, promote efficiency and economy, and produce effec-
tive results. His findings will help him determine the ex-
tent of detailed examination work he must perform to achieve
the objectives of the audit.
Internal control comprises the plan of organization and
all the coordinate methods and measures adopted to safeguard
assets, check the accuracy and reliability of accounting
data, promote operational efficiency, and encourage adher-
ence to prescribed managerial policies. The term embraces
the policies, procedures, and practices established or en-
couraged by management as well as the plan of organization
and other measures intended to carry them out.
The characteristics of a satisfactory system of inter-
nal, control would include:
1. A plan of organization that provides segregation of
duties appropriate for proper safeguarding of the
entity's resources.
2. A system of authorization and record procedures ad-
equate to provide effective accounting control over
assets, liabilities, revenues, and expenses.
3. An established system of practices to be followed in
performance of duties and functions of each of the
organizational departments.
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4. Personnel of a quality commensurate with their re-
sponsibilities.
These elements, as important as each is in its own
right, are mutually reinforcing and all are so basic to ade-
quate internal control that serious deficiencies in any one
normally would preclude effective operation of the system.
A complete review of internal controls as a specific
requirement would often be prohibitive in terms of avail-
able resources. Examining all such controls would not be
efficient auditing because of the irrelevance of some con-
trols to the basic issues which are the subject of the au-
dit effort. Therefore the auditor should concentrate his
attention on those controls which are important to the
issues being audited.
The extent of work required to adequately review in-
ternal control will vary with the element of an audit be-
ing performed.
Financial and compliance--A sufficient review is to
be made of internal controls to permit the auditor
to determine how much reliance he can place upon the
accounting records and reports to accurately portray
the financial condition of the organization, program,
function, or activity and to safeguard its resources.
The extent of his own tests of the accounting data
should be based upon his assessment of the reliability
of the audited entity's internal control. The review
should be sufficient to permit the auditor to deter-
mine whether policies, procedures, and practices are
consistent with the applicable laws and regulations
and whether the system of internal control can be
relied upon to provide reasonable assurance that such
policies and practices are being followed.
Efficiency and economy--The review is to include a
review of policies, procedures, practices, and inter-
nal controls applicable to any aspect of the activi-
ties in which the auditor attempts to make a judg-
ment regarding whether existing practices can be made
significantly more efficient or economical.
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Program results--The auditor is to review those policies,
procedures, practices, and controls which have a specific
bearing on the attainment of the goals and objectives
specified by the law or regulations that created the
program, activity, function, or organization under audit.
Internal review is an important part of internal control
and the auditor should look into such work in performing any
of the three audit elements listed above. The auditor should
consider the extent of the internal review work and the extent
to which that work can be relied upon to ensure that other as-
pects of internal control are functioning properly. The audi-
tor should take full advantage of the products of the internal
review in making his audit.
In view of the wide range in the size, variety, and nature
of governmental organizations, programs, activities, and func-
tions, and in view of their organizational concepts and operat-
ing methods, no single pattern for internal review activities
can be specified. Many governmental entities have internal
review activities identified by other names, such as inspection,
appraisal, investigation, organization and methods, and manage-
ment analysis. These activities are often in the nature of man-
agement services, and in varied ways they assist management in
currently supervising, advising, and reviewing designated func-
tions. To prevent duplication of effort, all auditors--regard-
less of their level of government--should use, to the maximum
practical extent, the work that other auditors or internal re-
view personnel have previously performed.
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CHAPTER 5
EVIDENCE
The fifth examination and evaluation standard for gov-
ernmental auditing is:
Sufficient, competent, and relevant evi-
dence is to be obtained to afford a rea-
sonable basis for the auditor's opinions,
judgments, conclusions, and recommendations.
This standard places upon the auditor the responsibil-
ity for accumulating sufficient evidence to provide an
appropriate factual basis for his opinions, conclusions,
judgments, and recommendations.
Evidence needed to support the auditor's findings may
be (1) physical evidence obtained by observation, photo-
graph, or similar means, (2) testimonial evidence obtained
by interviewing or taking statements from involved persons,
(3) documentary evidence consisting of letters, contracts,
extracts from books of account, and so forth, and (4) ana-
lytical evidence secured by analysis of information the
auditor has obtained.
Regardless of the type, the evidence involved should
meet the basic tests of sufficiency, competence, and rele-
vance. The auditor's working papers should reflect the de-
tails of the evidence he has relied upon and should disclose
the procedures he has employed in obtaining it.
SUFFICIENCY
Sufficiency is the presence of enough factual, adequate,
and convincing evidence to lead a prudent person to the same
conclusion as the auditor. Determining the sufficiency of
evidence requires judgment, because there frequently is con-
flicting evidence and the auditor must make an impartial
judgment as to what position is supported by the weight of
evidence. When appropriate, statistical methods may be
employed to establish sufficiency.
There is no need for elaborate documentation to support
noncontroversial or insignificant points. For significant
matters, however, the auditor should gather sufficient evi-
dence to show the factors he relied upon to reach his con-
clusion.
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COMPETENCE
Competent evidence should be reliable and the best
attainable through the use of reasonable audit methods. In
evaluating the competence of evidence, the auditor should
carefully consider whether there is any reason to doubt its
validity or completeness. If there is reason for doubt, the
auditor should take additional measures to authenticate the
evidence.
The following presumptions are useful in judging the
competence of evidence; however, these presumptions are not
to be considered as sufficient in themselves to reach a
conclusion.
1. Evidence obtained from an independent source provides
greater assurance of reliability than that secured
from the audit organization.
2. Evidence developed under a good system of internal
control is more likely to be reliable than that
obtained where such control is weak or unsatisfac-
tory.
3. Evidence obtained by the auditor through physical
examination, observation, computation, and inspec-
tion is more reliable than evidence obtained indi-
rectly.
4. Original documents are more reliable than copies.
RELEVANCE
Relevance refers to the relationship of the information
to its use. The facts and opinions used to prove or dis-
prove an issue must have logical sensible relationship to
that issue. Information which does not have this relation-
ship is irrelevant and therefore should not be included as
evidence to prove or disprove a point.
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WORKING PAPERS
Working papers serve as the connecting link between the
auditor's fieldwork and his report and, as such, should con-
tain the evidence accumulated in support of the conclusions
and recommendations included in the report. Auditors should
adopt reasonable procedures to ensure the safe custody and
retention of their working papers for a period of time
sufficient to satisfy pertinent legal and administrative
requirements.
General guidelines for the preparation of working pa-
pers follow.
1. Completeness and accuracy--Working papers should be
complete and accurate in order to provide proper
support for findings, conclusions, and recommen-
dations and to enable demonstration of the nature
and scope of examination work, when necessary.
2. Clarity and understandability--Working papers should
be clear and understandable without supplementary
oral explanations. The information they reveal
should be clear and complete, but concise. Anyone
using the working papers should be able to readily
determine their purpose, the nature and scope of
the work done, and the preparer's conclusions.
Conciseness is important, but clarity and complete-
ness should not be sacrificed just to save time or
paper.
3. Legibility and neatness--Working papers should be
legible and as neat as practicable. Otherwise time
will be wasted in reviewing them and in preparing
reports. Sloppy working papers may lose their worth
as evidence. Crowding and writing between lines
should be avoided by anticipating space needs and
arranging the working papers before writing.
4. Pertinence--The information contained in working
papers should be restricted to matters which are
materially important, pertinent, and useful with
reference to the objectives established for the
assignment. There are no substitutes for a working
understanding of the specific objectives of the
audit, the reasons for performing a specific task,
and their relation to approved objectives. This
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knowledge comes from well-planned and well-organized
work programs and effective instruction by super-
visors. The practice of having all working papers
contain clear statements of purpose is very helpful
in ensuring that information accumulated is properly
tied to audit objectives and reporting.
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PART V--REPORTING STANDARDS
CHAPTER 1
FORM AND DISTRIBUTION
The first reporting standard for governmental auditing
Written audit reports are to be submitted
to the appropriate officials of the orga-
nizations requiring or arranging for the
audits. Copies of the reports should be
sent to other officials who may be re-
sponsible for taking action on audit
findings and recommendations and to
others responsible or authorized to re-
ceive such reports. Copies should also
be made available for public inspection.
This standard provides that a written record of the re-
sults of each governmental audit be prepared. The standard
is not intended to limit or prevent discussions of findings,
judgments, conclusions, and recommendations with persons who
have responsibilities involving the area being audited. On
the contrary, such discussions should be encouraged. However,
regardless of whether such discussions are held, a written
report should be prepared.
There are a number of reasons why written reports are
particularly necessary. Reports should be prepared in
written form (1) so that the results can be widely commu-
nicated to responsible officials at all levels of govern-
ment, (2) to make the auditor's findings and recommenda-
tions less susceptible to misunderstanding, (3) to make
the auditor's findings available for public inspection,
and (4) to facilitate subsequent followup work to deter-
mine whether appropriate measures have been taken in re-
sponse to the auditor's findings and recommendations.
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Distribution of audit reports should be to as many of
the interested officials as practicable. In some cases the
subject matter of the audit may involve material that is
classified for security purposes or is not releasable for
other valid reasons. As a general rule, however, the audit
report should be distributed to those officials having a di-
rect interest in the results of the auditor's work. Such
officials include those designated by law or regulation to
receive such reports; those responsible, either directly or
in supervisory capacity, for taking action on the auditor's
findings and recommendations; legislators; and those of oth-
er levels of government that have provided funds to the au-
dited organization. Also, unless restricted by law or reg-
ulation, copies of audit reports should be made available
for distribution to or inspection by interested members of
the public.
When independent public accountants are engaged, it
shall be the responsibility of the engaging organization to
ensure that appropriate distribution is made to interested
parties. If it is desired that the public accountants make
the distribution of their report, arrangements for such dis-
tribution should be made a part of the engagement agreement
indicating precisely what officials or organizations shall
receive the report.
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CHAPTER 2
TIMELINESS
The second reporting standard for governmental auditing
Reports are to be issued on or before the
dates specified by law, regulation, or
other arrangement and, in any event, as
promptly as possible so as to make the
information available for timely use by
management and by legislative officials.
To be of maximum use, the audit report must be as
timely as possible. The auditor should realize that every
day delayed in issuing his report diminishes its value;
therefore he should plan and conduct his work with the ob-
jective of reporting the results of his work in the shortest:
feasible time.
The auditor should consider interim communication of
significant matters to appropriate officials during the
course of his audit work. Such communication is not a sub-
stitute for a final written report, but it does alert of-
ficials to matters needing correction at an earlier date and
permits these officials to instigate corrective measures
earlier than is possible if the auditor's findings and rec-
ommendations are withheld until his final report is com-
pleted.
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CHAPTER 3
CONTENT
The third reporting standard for governmental auditing
All reports shall:
1. Be as concise as possible but, at the
same time, clear and complete enough
to be understood by the users.
2. Present factual matter accurately,
completely, and fairly.
3. Present findings and conclusions ob-
jectively and in language as clear
and simple as the subject matter per-
mits.
4. Include only factual information,
findings, and conclusions that are
adequately supported by enough evi-
dence in the auditor's working papers
to demonstrate or prove, when called
upon, the bases for the matters re-
ported and their correctness and rea-
sonableness. Detailed supporting in-
formation should be included in the
report to the extent necessary to
make a convincing presentation.
5. Include, when possible, the auditor's
recommendations for actions to effect
improvements in problem areas noted in
his audit and to otherwise make im-?
provements in operations. Information
on underlying causes of problems re-
ported should be included to assist in
implementing or devising corrective
actions.
6. Place primary emphasis on improvement
rather than on criticism of the past;
critical comments should be presented
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in balanced perspective of any unusual
difficulties or circumstances faced
by the operating officials con-
cerned.
7. Identify and explain issues and ques-
tions needing further study and con-
sideration by the auditor or others.
8. Include recognition of noteworthy ac-
complishments, particularly when man-
agement improvements in one program or
activity may be applicable elsewhere.
9. Include recognition of the views of re-
sponsible officials of the organization,
program, function, or activity audited on
the auditor's findings, conclusions, and
recommendations. Except where the pos-
sibility of fraud or other compelling
reason may require different treatment,
the auditor's tentative findings and
conclusions should be reviewed with such
officials. When possible, without undue
delay, their views should be obtained in
writing and objectively considered and
presented in preparing the final report.
10. Clearly explain the scope and objec-
tives of the audit.
11. State whether any significant perti-
nent information has been omitted be-
cause it is deemed privileged or con-
fidential. The nature of such in-
formation should be described, and
the law or other basis under which it
is withheld should be stated.
This standard places upon the auditor the responsibil-
ity for preparing a report that will be easy to understand,
will present the scope of the audit and the auditor's find-
ings and conclusions in an objective and complete manner
with appropriate support for positions taken, and will
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provide recommendations for improvement whenever feasible
and appropriate.
CONCISENESS
The reports should be no longer than necessary to com-
municate the information the auditor is reporting. Reports
should not be mired down with too much detail--words, sen-
tences, paragraphs, or sections that do not clearly tie in
with the report messages. Too much detail detracts from
the reports, may even conceal the real messages and may
confuse or discourage readers.
Although there is room for considerable judgment in
determining the content of reports, it should be kept in
mind that reports which are complete, but still concise,
are more likely to receive attention.
ACCURACY, COMPLETENESS, AND FAIRNESS
Report preparation, review, and processing procedures
should be applied to produce reports that contain no errors
of fact, logic, or reasoning.
The need for accuracy is based on the need to be fair
and impartial in reporting and to assure users and readers
of reports that what is reported is reliable. One inac-
curacy in a report can cast doubt on the validity of an en-
tire report and can divert attention from the substance of
the report.
Although reports should be concise, they should not
be so concise that they do not fully inform the user. Re-
ports should contain sufficient information about findings,
conclusions, and recommendations to promote adequate under-
standing of the matters reported and to provide convinc-
ing, but fair, presentations in proper perspective. Suffi-
cient amounts of background information should also be in-
cluded.
Readers should not be expected to possess all the same
facts that the auditor has, and therefore reports should
not be written on the bases that the bare recitals of facts
make the conclusions reached obvious or inescapable. If
the auditor has conclusions or opinions that he wants the
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readers to know about, he should state them specifically
rather than leave them to be inferred by the readers.
OBJECTIVITY
Findings should be presented in an objective and un-
biased manner and should include sufficient information on
the subject matter to provide readers with proper perspec-
tive. The objective is to produce reports which are fair
and not misleading and which, at the same time, place pri-
mary emphasis on matters needing attention. The auditor
should guard against the tendency to exaggerate or over-
emphasize deficient performance noted during his review.
The information needed to provide proper report balance
and perspective should include:
1. Appropriate information as to why the examination
was made.
2. Information about the size and nature of the activ-
ities or programs to which findings relate so as to
provide perspective against which the significance
of the findings can be judged.
3. Correct and fair descriptions of findings so as to
avoid misinterpretation and misunderstanding. In-
formation should be included on the size of tests
and the methods of selecting items to test so that
the readers may relate such information to the
total activity and to the findings.
ADEQUATE SUPPORT
All factual data, findings, and conclusions in reports
should be supported by enough objective evidence to demon-
strate or prove the bases for the matters reported and
their accuracy or reasonableness. Except as necessary to
make convincing presentations, detailed supporting data
need not be included in reports.
Opinions and conclusions in reports should be clearly
identified as such and should be based on enough audit work
to warrant them. In most cases one example of a deficiency
cannot support a broad conclusion and a related recommen-
dation for corrective action. All that it supports
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is the finding of the fact that there was a deviation,
error, or weakness.
RECOMMEENDATIONS
The auditor's report should contain appropriate recom-
mendations whenever his review discloses that significant
improvement in the audited entity is possible. He should
also make recommendations to effect compliance with legal or
regulatory requirements when significant instances of non-
compliance are noted.
If the auditor cannot make appropriate recommendations
because of limited audit scope or other reasons, he should
state in his report the reason that he is unable to recom-
mend appropriate corrective measures and what additional
work would need to be done to formulate recommendations.
CONSTRUCTIVENESS OF TONE
The tone of reports should be designed to encourage
favorable reaction to findings and recommendations. The
titles, captions, and texts of reports should be stated in
constructive terms. Although findings should be presented
in clear, forthright terms, the auditor should keep in mind
that his objective is to obtain favorable reaction and that
this can best be accomplished by avoiding language which
unnecessarily generates defensiveness and opposition. Al-
though criticism of past performance often is necessary to
demonstrate the need for some management improvements, the
emphasis in reports should be on the needed improvements
rather than on criticism.
ISSUES NEEDING FURTHER STUDY
If the scope of the audit or other factors limits
the auditor's ability to inquire into certain matters
which he believes should be studied, the auditor should
include in his report such matters, if of sufficient impor-
tance, and the reasons why he believes these matters merit
further study.
RECOGNITION OF NOTEWORTHY ACCOMPLISHMENTS
Information as to the satisfactory aspects, not just
the deficient aspects, of operations examined, when
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significant and when warranted by the extent of the work,
should be included in the auditor's report. Such informa-
tion is often necessary to fairly present the situation
which the auditor finds and to provide appropriate balance
to his report. In addition, when such accomplishment may be
emulated by others, the inclusion in the auditor's report
may result in improved performance by other government orga-
nizations that read the report.
VIEWS OF RESPONSIBLE OFFICIALS
One of the most effective ways of ensuring that re-
ports are fair, complete, and objective is through advance
reviews and comments by persons or by officials of the or-
ganizations, programs, functions, or activities whose opera-
tions are discussed in the reports. This produces a re-
port which shows not only what was found and what the au-
ditor thinks about it but also what the responsible persons
think about it and what, if anything, they are going to do
about it. This kind of report is more useful to the recip-
ient
Comments on report drafts should be objectively con-
sidered and evaluated, and the report presentations and
conclusions should give appropriate recognition to them.
The advance comments and analyses of them should be fairly
presented in the text of reports. An agency promise of
corrective action should be noted in proper context but
should not be accepted as justification for dropping a
significant point or a related recommendation.
When the advance comments oppose the auditor's find-
ings or conclusions and are not, in his opinion, meritori-
ous, the auditor should state his reasons for rejecting
them. Conversely, he should drop a point or modify a posi-
tion if he finds the argumentation to be meritorious.
SCOPE AND OBJECTIVES
The scope of the audit should be stated in all reports.
Some audits are more limited in scope than others, e.g.,
those confined to specific functions, activities, or loca-
tions. Such limitations of scope should be clearly and
explicitly identified. When successive audits vary in
scope, the auditor should explain why particular work was
or was not performed and also should use individually tai-
lored language in the scope section of the report to
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define the limited nature or special aspects considered in
performing the audit. The time period covered in the audit
should be indicated.
The scope of the audit should clearly indicate whether
each of the three elements of audit examinations--financial
and compliance, efficiency and economy, and program results--
were made and the extent of each element.
The audit report should include a summary statement of
the objectives of the audit as identified in the audit guide
or engagement memorandum. This statement is essential to
provide the reader with the proper perspective, i.e., a back-
ground against which any reported findings may be considered.
Management may request special coverage; this too should be
provided in the audit instructions.
PRIVILEGED AND CONFIDENTIAL INFORMATION
Certain financial or operating information is pro-
hibited from general disclosure by management or by Federal,
State, or local laws or regulations. Such information is
usually provided only to persons authorized by law or regula-
tion on a need-to-know basis.
If the auditor is prohibited by such requirements from
including some pertinent data in his report, he should de-
scribe what has been omitted and the requirement that makes
the omission necessary. The auditor should obtain assurance
that a valid requirement for the omission exists and that the
doctrine of privilege or confidentiality is not applied to
information that would reflect unfavorably on management but
for which there is no valid reason for withholding.
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CHAPTER 4
FINANCIAL REPORTS
The fourth reporting standard for governmental auditing
Each audit report containing financial
reports shall:
1. Contain an expression of the auditor's opinion
as to whether the information in the financial
reports is presented fairly in accordance with
generally accepted accounting principles (or
with other specified accounting principles
applicable to the organization, program, func-
tion, or activity audited), applied on a basis
consistent with that of the preceding report-
ing period. If the auditor cannot express an
opinion, the reasons therefor should be stated
in the audit report.
2. Contain appropriate supplementary explanatory
information about the contents of the finan-
cial reports as may be necessary for full and
informative disclosure about the financial
operations of the organization, program, func-
tion, or activity audited. Violations of
legal or other regulatory requirements, in-
cluding instances of noncompliance, and
material changes in accounting policies and
procedures, along with their effect on the
financial reports, shall be explained in the
audit report.
This standard places upon the auditor the responsibil-
ity for informing the reader on the degree of responsibil-
ity the auditor assumes for the financial data presented
and for providing appropriate explanatory comments on
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significant financial issues affecting the reports and com-
pliance with legal or other regulatory requirements.
OPINIONS ON FINANCIAL REPORTS
When financial reports of Federal departments, States,
cities, counties, and other units of government and their
programs, functions, or activities are being examined, the
auditor should give his opinion as to whether the reports
have been prepared in accordance with appropriate principles
of accounting, applied on a basis consistent with that of the
preceding period, and whether the auditor's examination was
made in accordance with the accompanying auditing standards.
Illustrative opinions are included in Federal audit guides
and in pronouncements of the American Institute of Certified
Public Accountants.1 When conformity with special account-
ing principles is required instead of with generally ac-
cepted accounting principles, the special accounting prin-
ciples followed by the audited organization, program, func-
tion, or activity should be specified in the opinion.
ACCOUNTING PRINCIPLES
Accounting principles are guides or rules developed
from experience or from research. Their purpose is to pro-
vide assurance that the information presented in the finan-
cial statements is valid, useful, and reliable. The auditor
should make sufficient examination into the accounting prin-
ciples used to permit a professional opinion as to whether
the accounting system and the representations of management
evidenced by financial reports are in conformity with such
principles. Material changes and the reasons for them, if
ascertainable, should be identified and their effect upon
the financial reports, both historically and prospectively,
should be explained. The auditor should also state his
opinion as to the propriety of the change. Accounting prin-
ciples on which the auditor's opinion is based should be
identified in his report, as should statutory or administra-
tive provisions adversely affecting the accounting princi-
ples in use by the organization, program, or activity.
1See "Statements on Auditing Procedure," particularly State-
ment 33.
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CONSISTENCY
The auditor should state whether the entity under au-
dit has consistently followed the same accounting princi-
ples from one reporting period to another. This standard
applies not only to data shown in statements of financial
condition and operating reports but also to budgetary or
statistical data which may be covered by the auditor's re-
port.
When a qualification is required because of a lack of
consistency that is material to the financial report, the
qualification statement should describe (1) the reasons for
the qualification, (2) the effect upon the financial reports
of the audited entity, and (3) the auditor's opinion of the
acceptability of the change.
DISCLOSURE
A governmental entity's reports and statements, both
financial and operational, ideally should contain the in-
formation necessary for users--management, the electorate,
creditors, grantors, and others--to form an opinion on the
effectiveness of the stewardship exercised by the respon-
sible public officials. The responsibility for providing
such information is that of management. However, the au-
ditor should comment if the data provided is insufficient
to disclose any matters which may have a material effect
upon the financial reports.
Adequate disclosure does not imply or require that an
excessive amount of information be furnished. Disclosure
should, however, be fair and reasonably complete--but not so
complex as to confuse or impede understanding. Information
should be reduced to manageable and understandable propor-
tions, yet it should avoid summarization to such an extent
that needed background or relationships are omitted or
blurred.
Weight should be given to materiality, which is the
relative importance or relevance of an item included in or
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omitted from a financial or operating report. There are no
universal ratios or percentages that can be used as standards
of materiality for financial or operational processes or
transactions. Materiality should be based on judgment.
Six specific indicators of materiality which can be
used individually or in combinations are:
2. Ratio of amount of an item to an appropriate base
figure.
3. Length of life of an asset.
4. Importance of the item to the accomplishment of the
mission.
5. Importance to the maintenance of adequate controls,
such as a pattern of small discrepancies.
6. The characteristic of the items involved, such as
indications of malfeasance or misfeasance.
Events that occur subsequent to the end of the period
under audit may have a material effect on the operations of
the entity or on its operational or financial reports. Such
events may affect financial reports directly, may affect the
entity with indirect effects on financial reports, or may
affect conditions under which the operations take place. If
such events occur they should be disclosed in the audit re-
port either by revision of the financial reports or by com-
mentary in the auditor's report.
LEGAL OR REGULATORY REQUIREMENTS
In any governmental audit in which the auditor is ex-
pected to give an opinion on the fairness of the presenta-
tions in financial reports, compliance with applicable laws
and regulatory requirements is a matter of importance be-
cause noncompliance might result in liabilities not dis-
closed in the financial reports. Compliance with laws and
regulatory requirements, in many instances, assumes an even
greater importance since the recipients of the financial re-
ports and the audit reports also want to know whether funds
designated for certain purposes were spent for those pur-
poses.
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The standards for examination and evaluation require
consideration of applicable laws and regulations in the au-
ditor's examination. The standards for reporting require a
statement in his report regarding any significant instances
of noncompliance disclosed by his examination and evaluation
work. What is to be included in this statement requires
judgment. Significant instances of noncompliance, even those
not resulting in legal liability to the audited entity, should
be included. Minor procedural noncompliance need not be
disclosed.
Although the reporting standard is generally on an ex-.
ception basis--that only noncompliance need be reported--
it should be recognized that governmental entities often want
positive statements regarding whether or not the auditor's
tests disclosed instances of noncompliance. This is particu-
larly true in grant programs where authorizing agencies fre-
quently want assurance in the auditor's report that this
matter has been considered. For such audits auditors should
obtain an understanding with the authorizing agency as to the
extent to which such positive comments on compliance are
desired. When coordinated audits are involved, the audit
program should specify the extent of comments that the au-
ditor is to make regarding compliance.
When noncompliance is reported, the auditor should
place his findings in proper perspective. The extent of
instances of noncompliance should be related to the number
of cases examined to provide the reader with a basis for
judging the prevalence of noncompliance.
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QUALIFICATIONS OF INDEPENDENT AUDITORS
When outside auditors are employed for assignments re-
quiring the expression of an opinion on financial reports of
governmental organizations, only fully qualified public ac-
countants should be employed. The type of qualifications,
as stated by the Comptroller General, deemed necessary for
financial audits of governmental organizations and programs
is quoted below:
"Such audits shall be conducted *** by inde-
pendent certified public accountants or by inde-
pendent licensed public accountants, licensed on
or before December 31, 1970, who are certified
or licensed by a regulatory authority of a
State or other political subdivision of the
United States: Except that independent public
accountants licensed to practice by such regula-
tory authority after December 31, 1970, and per-
sons who although not so certified or licensed,
meet, in the opinion of the Secretary, standards
of education and experience representative of the
highest prescribed by the licensing authorities
of the several States which provide for the con-
tinuing licensing of public accountants and which
are prescribed by the Secretary in appropriate
regulations may perform such audits until Decem-
ber 31, 1975; provided, that if the Secretary
deems it necessary in the public interest, he
may prescribe by regulation higher standards than
those required for the practice of public ac-
countancy by the regulatory authorities of the
States."1
1Letter (B-148114, Sept. 15, 1970) from the Comptroller Gen-
eral to heads of Federal departments and agencies. The ref-
erence to "Secretary" means the head of the department ex-
ecuting the instrument in which the quotation appears.
*U.S.GOVERNMENT PRINTING OFFICE: 1974 731-339/101 1-3 54
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AN EQUAL OPPORTUNITY EMPLOYER
U. S. GENERAL ACCOUNTING OFFICE
WASHINGTON, D. C. 20548
OFFICIAL BUSINESS U.S.MAIL
PENALTY FOR PRIVATE USE, $300
POSTAGE AND FEES PAID
GENERAL ACCOUNTING OFFICE
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