Audit ReportFederal Government-Wide Financial Statements

Facts: One of the GAO's responsibilities is to audit the consolidated U.S. government-wide financial report on an annual basis. However, fiscal year 2017 marked the twentieth consecutive year that the GAO expressed a disclaimer of opinion on this report. The following example focuses on the GAO's reported internal control findings which were, in part, responsible for this disclaimer of opinion.

The following excerpts from the Yellow Book describe auditor reporting requirements related to internal controls:

Reporting on Internal Control; Compliance with Provisions of Laws, Regulations,

Contracts, and Grant Agreements

6.40 When providing an opinion or a disclaimer on financial statements, auditors should

report as findings any significant deficiencies or material weaknesses in internal control over financial reporting that the auditors identified based on the engagement work performed.

Presenting Findings in the Audit Report

6.50 When presenting findings, auditors should develop the elements of the findings to the extent necessary to assist management or oversight officials of the audited entity in understanding the need for corrective action

The next excerpt is from the GAO's consolidated federal government audit report:

Basis for Disclaimers of Opinion on the Consolidated Financial Statements

The federal government is not able to demonstrate the reliability of significant portions of

[its] financial statements . . . principally resulting from limitations related to certain material

weaknesses in internal control over financial reporting and other limitations affecting the

reliability of these financial statements and the scope of our work . . . As a result of these

limitations, readers are cautioned that amounts reported in the accrual-based consolidated

financial statements and related notes may not be reliable.

. . . The underlying material weaknesses in internal control, which have existed for

years, contributed to our disclaimer of opinion on the accrual-based consolidated financial

statements. [These include] the federal government's inability to

satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the Department of Defense (DOD), were properly reported in the accrual-based consolidated financial statements;

reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported;

support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities;

adequately account for and reconcile intergovernmental activity and balances between federal entities;

reasonably assure that the consolidated financial statements are (1) consistent with the underlying audited entities' financial statements, (2) properly balanced, and (3) in accordance with [GAAP]; . .

Questions:

1.According to par. 6.40 of the Yellow Book, when must auditors report on internal controls over financial reporting?

2.What reasons does the GAO give for its disclaimer of opinion?

3.Describe how the GAO's audit report excerpt satisfies the requirements in par. 6.50 of the Yellow Bookand identify any areas not shown in this particular excerpt that are also required by par. 6.50.