Biodiesel, also known as fatty acid methyl ester (FAME), is usually prepared using edible vegetable oils by transesterification. In this work, a clean method for biodiesel production was developed using frying palm oil (FPO) and free Candida antarctica lipase A (CALA) as feedstock and catalyst, respectively. The effect of transesterification conditions (water content, lipase load, substrate ratio, time and temperature) on FAME yield was evaluated and optimized by response surface methodology. Results showed that free lipase CALA had the excellent methanol resistance. And lipase CALA can simultaneously catalyze the transesterification of FPO and the esterification of free fatty acid (FFA) in the presence of excess water. Low mass transfer limitation of the system using lipase CALA as catalyst was found. The effect of reaction conditions on FAME yield decreased in order of water content > reaction time > enzyme load. The optimal reaction conditions were 16.6 wt% water content and 5.5 wt% enzyme load with 7:1 molar ratio of methanol to FPO at 30 °C for 22 h. The maximum FAME yield (94.6 ± 1.4%) was achieved under the optimal conditions. Arrhenius equation and Ea of the transesterification were lnV0 = 9.45–3964.4/T and 32.96 kJ/mol, respectively. K’m and Vmax were 6.75 × 10−1 mol/L and 2.38 × 10−2 mol/(L·min), respectively. This work supplied a clean method to produce biodiesel using waste frying oil with high water and FFA contents as feedstock and a green method using cheap free liquid lipase as catalyst.