Financial Audit
The Department of State's Fiscal Year 2004 Management Representation Letter on Its Financial Statements Gao ID: GAO-05-592R June 23, 2005The Secretary of the Treasury, in coordination with the Director of the Office of Management and Budget (OMB), is required to annually prepare and submit audited financial statements of the U.S. government to the President and the Congress. We are required to audit these consolidated financial statements (CFS) and report on the results of our work. In connection with fulfilling our requirement to audit the fiscal year 2004 CFS, we evaluated the Department of the Treasury's (Treasury) financial reporting procedures and related internal control over the process for compiling the CFS, including the management representation letter provided us by Treasury and OMB. Written representation letters from management, required by U.S. generally accepted government auditing standards, ordinarily confirm oral representations given to the auditor, indicate and document the continuing appropriateness of those representations, and reduce the possibility of a misunderstanding between management and the auditor. The purpose of this report is to communicate our observations on the Department of State's (DOS) fiscal year 2004 management representation letter. Our objective is to help ensure that future management representation letters submitted by DOS are sufficient to help support Treasury and OMB's preparation of the CFS management representation letter and our ability to rely on the representations in that letter in combination with individual federal agency representation letters. We reviewed five key areas in each management representation letter: (1) signatures, (2) materiality thresholds, (3) representations, (4) summary of unadjusted misstatements, and (5) reliability of representations. In reviewing the management representation letters, we applied the American Institute of Certified Public Accountants' (AICPA) Codification of Auditing Standards, AU Section 333, Management Representations; OMB Bulletin 01-02, Audit Requirements for Federal Financial Statements; and the GAO/President's Council on Integrity and Efficiency (PCIE) Financial Audit Manual (FAM) section 1001, entitled "Management Representations."
DOS's fiscal year 2004 management representation letter did not provide all the information necessary to support Treasury and OMB's preparation of the CFS management representation letter. This in turn impacted our ability to rely on the representations in the CFS management representation letter in combination with individual federal agency representation letters. We identified some needed improvements in three of the five key areas we reviewed. First, DOS did not provide the materiality thresholds used to determine, for representation purposes, any matters that were individually or collectively material to its financial statements. Such individual federal agency thresholds are considered by Treasury and OMB in providing a materiality threshold for the CFS representation letter. Second, the letter included 24 of the 29 representations from the FAM that were applicable to DOS. For the other 5 representations, 3 were not fully included and 2 were not provided at all. Finally, DOS did not include a complete summary of unadjusted misstatements with its management representation letter, and also did not provide a description of the misstatements and distinguish between misstatements affecting intragovernmental accounts and misstatements affecting accounts with the public. We believe that these matters can be easily addressed. We are making three recommendations to DOS's Acting Chief Financial Officer targeted to specific changes needed. Also, we are recommending that the DOS Inspector General, with the contracted independent public accountant, work with the department to help ensure that future management representation letters meet the key conditions noted as needing improvements in this report.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
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June 23, 2005:
Mr. Sid L. Kaplan:
Acting Assistant Secretary and Chief Financial Officer:
Department of State:
The Honorable Howard J. Krongard:
Inspector General:
Department of State:
Subject: Financial Audit: The Department of State's Fiscal Year 2004
Management Representation Letter on Its Financial Statements:
As you know, the Secretary of the Treasury, in coordination with the
Director of the Office of Management and Budget (OMB), is required to
annually prepare and submit audited financial statements of the U.S.
government to the President and the Congress. We are required to audit
these consolidated financial statements (CFS) and report on the results
of our work.[Footnote 1] In connection with fulfilling our requirement
to audit the fiscal year 2004 CFS, we evaluated the Department of the
Treasury's (Treasury) financial reporting procedures and related
internal control over the process for compiling the CFS, including the
management representation letter provided us by Treasury and OMB.
Written representation letters from management, required by U.S.
generally accepted government auditing standards, ordinarily confirm
oral representations given to the auditor, indicate and document the
continuing appropriateness of those representations, and reduce the
possibility of a misunderstanding between management and the auditor.
In our report, which is included in the fiscal year 2004 Financial
Report of the United States Government,[Footnote 2] we reported a
limitation on the scope of our work due to identified concerns with the
adequacy of certain federal agencies' management representations on
which Treasury and OMB depend to provide their representations to us
regarding the CFS. Specifically, Treasury and OMB stated that their
representation letter to us on the CFS was based primarily on the
individual federal agency representation letters. Consequently, our
audit considered the content of the individual federal agency letters,
and the incompleteness of certain of these letters impaired our ability
to obtain sufficient evidence in support of our audit of the CFS. This
limitation contributed to our disclaimer of opinion on the CFS. We
performed sufficient audit work to provide the disclaimer of opinion
and issued our audit report, dated December 6, 2004, in accordance with
U.S. generally accepted government auditing standards.
As part of our audit of the fiscal year 2004 CFS, we received and
reviewed selected federal agencies' management representation letters
to assess their adequacy in support of our audit of the CFS. As the
federal government gets closer to an opinion on its financial
statements, it becomes more important that the federal agencies'
management representation letters be complete and reliably prepared.
The purpose of this report is to communicate our observations on the
Department of State's (DOS) fiscal year 2004 management representation
letter. Our objective is to help ensure that future management
representation letters submitted by DOS are sufficient to help support
Treasury and OMB's preparation of the CFS management representation
letter and our ability to rely on the representations in that letter in
combination with individual federal agency representation letters. We
reviewed five key areas in each management representation letter: (1)
signatures, (2) materiality thresholds, (3) representations, (4)
summary of unadjusted misstatements, and (5) reliability of
representations. In reviewing the management representation letters, we
applied the American Institute of Certified Public Accountants' (AICPA)
Codification of Auditing Standards, AU Section 333, Management
Representations; OMB Bulletin 01-02, Audit Requirements for Federal
Financial Statements; and the GAO/President's Council on Integrity and
Efficiency (PCIE) Financial Audit Manual (FAM) section 1001, entitled
"Management Representations."[Footnote 3]
Results in Brief:
DOS's fiscal year 2004 management representation letter did not provide
all the information necessary to support Treasury and OMB's preparation
of the CFS management representation letter. This in turn impacted our
ability to rely on the representations in the CFS management
representation letter in combination with individual federal agency
representation letters.
We identified some needed improvements in three of the five key areas
we reviewed. First, DOS did not provide the materiality thresholds used
to determine, for representation purposes, any matters that were
individually or collectively material to its financial statements. Such
individual federal agency thresholds are considered by Treasury and OMB
in providing a materiality threshold for the CFS representation letter.
Second, the letter included 24 of the 29 representations[Footnote 4]
from the FAM that were applicable to DOS. For the other 5
representations, 3 were not fully included and 2 were not provided at
all. Finally, DOS did not include a complete summary of unadjusted
misstatements with its management representation letter, and also did
not provide a description of the misstatements and distinguish between
misstatements affecting intragovernmental accounts and misstatements
affecting accounts with the public.
We believe that these matters can be easily addressed. We are making
three recommendations to DOS's Acting Chief Financial Officer targeted
to specific changes needed. Also, we are recommending that the DOS
Inspector General, with the contracted independent public accountant,
work with the department to help ensure that future management
representation letters meet the key conditions noted as needing
improvements in this report.
In commenting on a draft of this report, DOS's Acting Chief Financial
Officer stated that his office will work to address the issues related
to representations and the summary of unadjusted misstatements, but did
not commit to providing materiality thresholds in DOS's fiscal year
2005 management representation letter because of the effort involved.
We are unclear as to how providing materiality thresholds would entail
additional work when these amounts are needed by the auditor for its
opinion on DOS's departmentwide financial statements. In addition, in
order for Treasury and OMB to represent that all matters material to
the CFS were properly considered and included in the overall management
representation letter for the CFS, Treasury and OMB need to receive
materiality thresholds from certain federal agencies, including DOS.
The Acting Chief Financial Officer's response also stated that the
Office of the Inspector General has agreed to work with the department
to help ensure that future letters include all applicable
representations and provide a complete summary of unadjusted
misstatements.
Background:
In conducting agency financial statement audits, U.S. generally
accepted government auditing standards incorporate financial auditing
fieldwork and reporting standards issued by the AICPA. Such auditing
standards (AU Section 333) require auditors to obtain certain
representations from agency management. These representations are part
of the evidential matter to be considered by the auditor in its audit
of the agency's financial statements. The representations obtained will
depend on the circumstances of the engagement and the nature and basis
of presentation of the financial statements. AU Section 333 discusses
specific representations that should be obtained from management,
including a requirement to attach a schedule of unadjusted financial
statement misstatements for entities with uncorrected misstatements.
In addition, OMB Bulletin 01-02 and FAM section 1001 contain guidance
on preparing federal agencies' management representation letters.
According to the FAM, in addition to the representations included in AU
Section 333, the auditor generally should consider the need to obtain
representations on other matters based on the circumstances of the
audited entity. FAM section 1001A lists 35 specific representations
ordinarily included in the management representation letter and also
includes a requirement to attach a schedule of unadjusted financial
statement misstatements for entities with uncorrected misstatements.
(See enc. I for these representations.) Representations listed in FAM
section 1001A should be customized to the situation of the entity being
audited or excluded if inapplicable. We perform our audit of the CFS in
accordance with the FAM and related auditing standards.
Treasury and OMB are to receive management representation letters from
certain federal agencies. This is important because U.S. generally
accepted government auditing standards require that Treasury and OMB
provide us, as principal auditor of the CFS, a management
representation letter, and their letter depends on the information in
such agencies' management representation letters. In their
representation letter to us for the audit of the fiscal year 2004 CFS,
Treasury and OMB stated that their representations are based primarily
on the representations of those agencies covered by the Chief Financial
Officers (CFO) Act and other selected agencies that were made in
connection with the preparation of these entities' respective financial
statements and provided to OMB and Treasury. For this reason, it is
important that all federal agency representation letters be complete
and reliable.
Objectives, Scope, and Methodology:
In connection with our audit of the fiscal year 2004 CFS, we evaluated
Treasury's financial reporting procedures and related internal control,
including the CFS management representation letter. For the fiscal year
2004 CFS, 33 of the 35 "verifying agencies" submitted audited financial
statements along with their management representation letters to
Treasury.[Footnote 5] In our review of these 33 management
representation letters, our overall objective was to assess their
adequacy as it relates to our audit of the CFS. Specifically, we
reviewed each agency management representation letter to determine
whether the following five key conditions were met:
* the management representation letter was signed by appropriate agency
officials;
* the management representation letter included designation as to the
amounts above which matters were considered material (materiality
thresholds);
* the management representation letter included applicable
representations from the FAM;
* the management representation letter included a properly prepared
summary of unadjusted misstatements for agencies with uncorrected
misstatements; and:
* the representations in the management representation letter were
reliable based on a review of findings in the auditor's report.
This report is based on the audit work we performed for the audit of
the fiscal year 2004 CFS, which was performed in accordance with U.S.
generally accepted government auditing standards.
We requested comments on a draft of this report from DOS's Chief
Financial Officer and Inspector General or their designees. Written
comments from DOS's Acting Chief Financial Officer are reprinted in
enclosure II and are also discussed in the Agency Comments and Our
Evaluation section. The Acting Chief Financial Officer's response
referred to cooperative efforts with DOS's Office of Inspector General.
Identified Issues with DOS's Fiscal Year 2004 Management Representation
Letter:
With respect to DOS's fiscal year 2004 management representation
letter, we identified the following three areas that need some
improvement: (1) providing the materiality thresholds used, (2)
providing or fully including applicable representations from the FAM,
and (3) including a complete summary of unadjusted misstatements.
Details regarding these issues are as follows.
Providing the Materiality Thresholds Used:
Management representations may be limited to matters that are
considered individually or collectively material to the entity's
financial statements, provided that management and the auditor have
reached an understanding on the materiality thresholds to be used.
Likewise, in preparing the overall management representation letter for
the CFS, which is provided to us, Treasury and OMB limit the letter's
representations to matters that are considered to be material. While an
understanding between management and the auditor of materiality
thresholds used is not explicitly required by auditing standards to be
included in the management representation letter, Treasury and OMB use
agency thresholds in providing a materiality threshold for the
governmentwide management representation letter.
For fiscal year 2004, because the materiality thresholds used were not
included in DOS's and a number of other federal agencies' management
representation letters, or otherwise provided to Treasury and OMB,
Treasury and OMB's ability to represent that all matters material to
the CFS were properly considered and included in the overall management
representation letter for the CFS was impaired.
Providing or Fully Including Applicable Representations from the FAM:
Written representations from management ordinarily confirm oral
representations made to the auditor during the audit, document the
continuing appropriateness of those representations, and reduce the
possibility of a misunderstanding. To meet auditing standards and OMB
requirements, federal agencies' management and auditors need to ensure
that management representation letters are complete and accurate.
We found that DOS's fiscal year 2004 management representation letter
included 24 of the 29 representations from the FAM that were applicable
to DOS. Of the 5 other representations, 3 were not fully included and 2
were not provided at all. For the 3 incomplete representations, the DOS
management representation letter included the following representation
intended to cover the fraud and suspected fraud representations called
for by FAM 16a, 16b, and 16c. (See enc. I for these representations.)
"There has been no material fraud (intentional misstatements or
omissions of amounts or disclosures in financial statements and
misappropriation of assets that could have a material affect on the
Principal Statements or Required Supplementary Stewardship Information)
or any fraud involving management or employees who have significant
roles in internal control."
While this representation addresses fraud, it should also address
suspected fraud as called for by FAM 16a, 16b, and 16c.
In addition, the two representations not provided were as follows.
* FAM #15: We acknowledge our responsibility for the design and
implementation of programs and controls to prevent and detect fraud
(intentional misstatements or omissions of amounts or disclosures in
the financial statements and misappropriation of assets that could have
a material effect on the financial statements).
* FAM #17: We have no knowledge of any allegations of fraud or
suspected fraud affecting the agency received in communications from
employees, former employees, or others.
When agencies do not provide all representations or include incomplete
representations in their management representation letters, it impairs
our ability to audit the CFS and Treasury and OMB's ability to make
these types of representations in the CFS management representation
letter.
Including a Complete Summary of Unadjusted Misstatements:
U.S. generally accepted government auditing standards require that for
each federal agency with uncorrected misstatements, a summary of
unadjusted misstatements be attached to the agency's management
representation letter. Treasury and OMB use the summaries of unadjusted
misstatements to assess the impact of federal agencies' unadjusted
misstatements on the CFS and make appropriate management
representations to us at the governmentwide level. The summaries are
also used by us, as principal auditor of the CFS, to develop an overall
governmentwide summary of unadjusted misstatements, which is then
attached to the CFS management representation letter prepared by
Treasury and OMB.
Also, in a matter related to the compilation process for the CFS, in
fiscal year 2004, Treasury required agencies to submit a summary of
unadjusted misstatements as part of the closing package using the
standardized format provided for in the Treasury Financial Manual
(TFM). The TFM, however, required additional details to be added to
this summary of unadjusted misstatements than those called for by the
FAM. Specifically, agencies were to also (1) include a description of
the misstatements and (2) distinguish between misstatements affecting
intragovernmental accounts and misstatements affecting accounts with
the public. We need this additional information to develop the overall
governmentwide summary of unadjusted misstatements. In order to avoid
duplication of effort by the agencies in preparing two summaries of
unadjusted misstatements, the additional information should also be
included in the summary of unadjusted misstatements attached to the
management representation letter. As such, we plan to work with PCIE to
modify the FAM to call for these two additional disclosures to be
included in the summary of unadjusted misstatements attached to the
management representation letter.
DOS included a summary of unadjusted misstatements with its management
representation letter, but the summary as called for by the FAM was
incomplete. Specifically, DOS did not (1) identify the financial
statements affected by the misstatements, (2) separately identify the
carry-forward effect of the prior year's unadjusted misstatements, and
(3) separate "known" and "likely" misstatements. In addition, DOS did
not submit a summary of unadjusted misstatements as part of its closing
package to Treasury as required by the TFM. As such, DOS also did not
(1) include a description of the misstatements and (2) distinguish
between misstatements affecting intragovernmental accounts and
misstatements affecting accounts with the public.
Without a complete summary of unadjusted misstatements from each of the
verifying agencies with uncorrected misstatements, it is not possible
for us, as principal auditor of the CFS, to reasonably determine the
audit risk exposure for each of the line items in the CFS or to prepare
an adequate summary of unadjusted misstatements at the governmentwide
level.
Conclusions:
In three of the five key areas we reviewed, DOS's fiscal year 2004
management representation letter did not provide all the information
necessary to support Treasury and OMB's preparation of the CFS
management representation letter and our ability to rely on the
representations in that letter in combination with individual federal
agency representation letters, including that of DOS. The additional
information needed from DOS is straightforward and should be easy to
address.
Recommendations for Executive Action:
We recommend to DOS's Acting Chief Financial Officer that in the future
the management representation letter:
* include materiality thresholds or such thresholds be provided
separately to Treasury and OMB;
* fully include all representations from the FAM that are applicable to
DOS; and:
* include a complete summary of unadjusted misstatements if there are
any uncorrected misstatements, that also (1) provides a description of
the misstatements and (2) distinguishes between misstatements affecting
intragovernmental accounts and misstatements affecting accounts with
the public.
We recommend that the DOS Inspector General, with the contracted
independent public accountant, work with the department to help ensure
that future management representation letters meet the key conditions
noted as needing improvements in this report.
Agency Comments and Our Evaluation:
In commenting on a draft of this report, DOS's Acting Chief Financial
Officer stated that his office will work to address the issues related
to representations and the summary of unadjusted misstatements. He also
stated that DOS will consider including materiality thresholds in
future periods but does not plan to do so in its 2005 management
representation letter because sufficient resources would need to be
devoted to developing such disclosures given that materiality has many
quantitative and qualitative aspects and his office questions the
relative impact that DOS's representations have on the CFS. The Acting
Chief Financial Officer's response, which was coordinated with the
Office of the Inspector General, also stated that the Office of the
Inspector General has agreed to work with the department to help ensure
that future letters include all applicable representations and provide
a complete summary of unadjusted misstatements.
With respect to materiality, U.S. generally accepted government
auditing standards state that management representations may be limited
to matters that are considered individually or collectively material to
the entity's financial statements, provided that management and the
auditor have reached an understanding on the materiality thresholds to
be used. As a result, the materiality thresholds used for the
representations should be known by management and the auditor when the
management representation letter is prepared. Further, materiality
thresholds are needed by the auditor for its opinion on DOS's
departmentwide financial statements. Therefore, DOS should be able to
provide the materiality thresholds to Treasury and OMB with no
additional work. In addition, as stated in our report, Treasury and OMB
use agency materiality thresholds in providing a materiality threshold
for the governmentwide management representation letter. In their
representation letter to us for the audit of the fiscal year 2004 CFS,
Treasury and OMB stated that their representations are based primarily
on the representations of those agencies covered by the Chief Financial
Officers (CFO) Act, which include DOS, and other selected agencies that
were made in connection with the preparation of these entities'
respective financial statements and provided to OMB and Treasury.
Treasury has defined these agencies as "verifying agencies". Therefore,
in order for Treasury and OMB to represent that all matters material to
the CFS were properly considered and included in the overall management
representation letter for the CFS, Treasury and OMB need to receive
materiality thresholds from all of the verifying agencies.
Within 60 days of the date of this report, we would appreciate
receiving a written statement on actions taken to address these
recommendations.
We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Homeland Security and
Governmental Affairs; the Subcommittee on Federal Financial Management,
Government Information, and International Security, Senate Committee on
Homeland Security and Governmental Affairs; the House Committee on
Government Reform; and the Subcommittee on Government Management,
Finance, and Accountability, House Committee on Government Reform. In
addition, we are sending copies to the Fiscal Assistant Secretary of
the Treasury and the Controller of OMB. Copies will be made available
to others upon request. This report is also available at no charge on
GAO's Web site at [Hyperlink, http://www.gao.gov].
We appreciate the courtesy and cooperation extended to us by your staff
throughout our work. We look forward to continuing to work with your
offices to help improve financial management in the federal government.
If you have any questions about the contents of this report, please
contact me at (202) 512-3406.
Signed by:
Gary T. Engel:
Director:
Financial Management and Assurance:
Enclosures - 2:
[End of section]
Enclosure I: Representations in FAM 1001A:
Guidance contained in FAM 1001 and FAM 1001A deals with the management
representations that the auditor should obtain from current management
as part of the audit. This guidance also acknowledges that judgment
needs to be exercised to obtain representations that depend on the
circumstances of the engagement and the nature and basis of
presentation of the financial statements. Representations given in FAM
section 1001A should be customized to the situation of the entity being
audited, and additional representations may need to be obtained.
FAM 1001A lists 27 representations that are ordinarily included, if
applicable, in the management representation letter that an agency
provides to the auditor. For representations 3, 11, 16, and 18, the
agency should address three separate components. As such, each agency
is ordinarily expected to make a total of 35 representations.
Representations 18, 19, 20, and 21 are not applicable unless the agency
received an opinion on its internal control. In addition,
representations 22, 23, and 24 address the three requirements of the
Federal Financial Management Improvement Act of 1996 and are only
applicable to the 24 CFO Act agencies. The 35 representations in FAM
1001A are as follows.
1. We are responsible for the fair presentation of the financial
statements and stewardship information in conformity with U.S.
generally accepted accounting principles.
2. The financial statements are fairly presented in conformity with
U.S. generally accepted accounting principles.
3. We have made available to you all:
* financial records and related data;
* where applicable, minutes of meetings of the Board of Directors [or
other similar bodies, such as congressional oversight committees] or
summaries of actions of recent meetings for which minutes have not been
prepared; and:
* communications from the Office of Management and Budget (OMB)
concerning noncompliance with or deficiencies in financial reporting
practices.
4. There are no material transactions that have not been properly
recorded in the accounting records underlying the financial statements
or disclosed in the notes to the financial statements.
5. We believe that the effects of the uncorrected financial statement
misstatements summarized in the accompanying schedule are immaterial,
both individually and in the aggregate, to the financial statements
taken as a whole. [If management believes that certain of the
identified items are not misstatements, management's belief may be
acknowledged by adding to the representation, for example, "We believe
that items XX and XX do not constitute misstatements because
[description of reason]."]
6. The [entity] has satisfactory title to all owned assets, including
stewardship property, plant, and equipment; such assets have no liens
or encumbrances; and no assets have been pledged.
7. We have no plans or intentions that may materially affect the
carrying value or classification of assets and liabilities.
8. Guarantees under which the [entity] is contingently liable have been
properly reported or disclosed.
9. Related party transactions and related accounts receivable or
payable, including assessments, loans, and guarantees, have been
properly recorded and disclosed.
10. All intraentity transactions and balances have been appropriately
identified and eliminated for financial reporting purposes, unless
otherwise noted. All intragovernmental transactions and balances have
been appropriately recorded, reported, and disclosed. We have
reconciled intragovernmental transactions and balances with the
appropriate trading partners for the four fiduciary transactions
identified in Treasury's Intra-governmental Fiduciary Transactions
Accounting Guide, and other intragovernmental asset, liability, and
revenue amounts as required by the applicable OMB Bulletin.
11. There are no:
* possible violations of laws or regulations whose effects should be
considered for disclosure in the financial statements or as a basis for
recording a loss contingency,
* material liabilities or gain or loss contingencies that are required
to be accrued or disclosed that have not been accrued or disclosed, or:
* unasserted claims or assessments that are probable of assertion and
must be disclosed that have not been disclosed.
12. We have complied with all aspects of contractual agreements that
would have a material effect on the financial statements in the event
of noncompliance.
13. No material events or transactions have occurred subsequent to
September 30, 20X2 [or date of latest audited financial statements],
that have not been properly recorded in the financial statements and
stewardship information or disclosed in the notes.
14. We are responsible for establishing and maintaining internal
control.
15. We acknowledge our responsibility for the design and implementation
of programs and controls to prevent and detect fraud (intentional
misstatements or omissions of amounts or disclosures in financial
statements and misappropriation of assets that could have a material
effect on the financial statements).
16. We have no knowledge of any fraud or suspected fraud affecting the
[entity] involving:
* management,
* employees who have significant roles in internal control, or:
* others where the fraud could have a material effect on the financial
statements.
[If there is knowledge of any such instances, they should be described.]
17. We have no knowledge of any allegations of fraud or suspected fraud
affecting the [entity] received in communications from employees,
former employees, or others. [If there is knowledge of any such
allegations, they should be described.]
18. Pursuant to 31 U.S.C. 3512(c), (d) (commonly known as the Federal
Managers' Financial Integrity Act), we have assessed the effectiveness
of the [entity's] internal control in achieving the following
objectives:
* reliability of financial reporting--transactions are properly
recorded, processed, and summarized to permit the preparation of
financial statements and stewardship information in accordance with
U.S. generally accepted accounting principles, and assets are
safeguarded against loss from unauthorized acquisition, use or
disposition;
* compliance with applicable laws and regulations--transactions are
executed in accordance with (i) laws governing the use of budget
authority and with other laws and regulations that could have a direct
and material effect on the financial statements and (ii) any other
laws, regulations, and governmentwide policies identified by OMB in its
audit guidance; and:
* reliability of performance reporting--transactions and other data
that support reported performance measures are properly recorded,
processed, and summarized to permit the preparation of performance
information in accordance with criteria stated by management.
[If the entity bases its internal control assessment on suitable
criteria other than 31 U.S.C. 3512(c), (d), this item should cite the
criteria used (for example, Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission).]
19. Those controls in place on September 30, 20X2 [or date of latest
audited financial statements], and during the years ended 20X2 and
20X1, provided reasonable assurance that the foregoing objectives are
met. [If there are material weaknesses, the foregoing representation
should be modified to read:
* Those controls in place on September 30, 20X2, and during the years
ended 20X2 and 20X1, provided reasonable assurance that the foregoing
objectives are met except for the effects of the material weaknesses
discussed below or in the attachment.
* or: Internal controls are not effective.
* or: Internal controls do not meet the foregoing objectives.]
20. We have disclosed to you all significant deficiencies in the design
or operation of internal control that could adversely affect the
entity's ability to meet the internal control objectives and identified
those we believe to be material weaknesses.
21. There have been no changes to internal control subsequent to
September 30, 20X2 [or date of latest audited financial statements], or
other factors that might significantly affect it. [If there were
changes, describe them, including any corrective actions taken with
regard to any significant deficiencies or material weaknesses.]
22. We are responsible for implementing and maintaining financial
management systems that substantially comply with federal financial
management systems requirements, federal accounting standards (U.S.
generally accepted accounting principles), and the U.S. Government
Standard General Ledger at the transaction level.
23. We have assessed the financial management systems to determine
whether they substantially comply with these federal financial
management systems requirements. Our assessment was based on guidance
issued by OMB.
24. The financial management systems substantially complied with
federal financial management systems requirements, federal accounting
standards, and the U.S. Government Standard General Ledger at the
transaction level as of [date of the latest financial statements].
[If the financial management systems substantially comply with only one
or two of the above elements, this representation should be modified as
follows:
* As of [date of financial statements], the [entity's] financial
management systems substantially comply with [specify which of the
three elements for which there is substantial compliance (e.g., federal
accounting standards and the SGL at the transaction level)], but did
not substantially comply with [specify which of the elements for which
there was a lack of substantial compliance (e.g., federal financial
management systems requirements)], as described below (or in an
attachment).]
[If the financial management systems do not substantially comply with
any of the three elements, the following paragraph should be used
instead:
* As of [date of financial statements], the [entity's] financial
management systems do not substantially comply with the federal
financial management systems requirements.]
[If there is a lack of substantial compliance with one or more of the
three requirements, identify herein or in an attachment all the facts
pertaining to the noncompliance, including the nature and extent of the
noncompliance and the primary reason or cause of the noncompliance.]
25. We are responsible for the [entity's] compliance with applicable
laws and regulations.
26. We have identified and disclosed to you all laws and regulations
that have a direct and material effect on the determination of
financial statement amounts.
27. We have disclosed to you all known instances of noncompliance with
laws and regulations.
[End of section]
Enclosure II: Comments From the Department of State:
United States Department of State:
Assistant Secretary and Chief Financial Officer:
Washington, D.C. 20520:
JUN 10 2005:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548-0001:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "Financial
Audit: The Department of State's Fiscal Year 2004 Management
Representation Letter on Its Financial Statements," GAO Job Code
198371.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Sheila Conley, Director, Bureau of Resource Management, Office of
Financial Reporting, Policy and Analysis at (202) 663-1447.
Sincerely,
Signed by:
Sid L. Kaplan, (Acting):
cc: GAO - John Kelly;
RM - Chris Flaggs:
State/OIG - Howard J. Krongard, Mark Duda:
Department of State Comments on GAO Draft Report Financial Audit: The
Department of State's Fiscal Year 2004 Mana ement Representation Letter
on Its Financial Statements (GAO-05-592R, GAO Code 198371):
Thank you for the opportunity to comment on your draft report entitled
Financial Audit: The Department of State's Fiscal Year 2004 Management
Representation Letter on Its Financial Statements. During the
Government Accountability Office's (GAO) entrance and exit conference
held on May 19, 2005, your representatives described the following
three areas for improvement. Our response follows each recommendation.
1. Provide the materiality thresholds used. The draft report states
that the Department of State "did not provide the materiality
thresholds used to determine, for representation purposes, any matters
that were individually or collectively material to its financial
statements." The draft also states that certain omissions from agency
representation letters contributed to GAO's disclaimer of opinion on
the Consolidated Financial Statements (CFS) of the United States
Government (USG).
The Department will consider this recommendation in future periods but
does not plan to include materiality thresholds in its 2005 management
representation letter for several reasons including the following:
* As noted in your draft report, providing materiality thresholds in
the management representation letter is not required by professional
auditing standards promulgated by the American Institute of Certified
Public Accountants (AICPA), or the Office of Management and Budget's
(OMB) requirements for conducting financial statement audits under the
Chief Financial Officers Act.
* Materiality has many quantitative and qualitative aspects. Careful
consideration and exercise of professional judgment are needed when
determining and disclosing materiality thresholds. We would need to
devote sufficient resources to developing such disclosures.
* We question the relative impact that the Department's financial
activities and representations have on the CFS (e.g., for FY 2004,
State's net costs were $12.6 billion compared to USG net costs of $2.5
trillion).
2. Include all applicable representations from the GAO/PCIE Financial
Audit Manual (FAM). Certain representations relating to fraud and
suspected fraud were either incomplete or omitted from our 2004
representation letter. We will include the required representations
relating to fraud and suspected fraud in the Department's 2005
management representation letter.
3. Provide a complete summary of unadjusted misstatements. For FY 2005,
the Department will revise its summary of unadjusted misstatements to
conform to the requirements of the FAM and Treasury's Financial Manual
(TFM).
The Department's Office of Inspector General, in conjunction with the
contracted independent public accountant, has agreed to work with us to
help ensure that future management representation letters include all
applicable representations and provide a complete summary of unadjusted
misstatements in conformance with the FAM and TFM.
[End of section]
(198371):
FOOTNOTES
[1] The Government Management Reform Act of 1994 has required such
reporting, covering the executive branch of government, beginning with
financial statements prepared for fiscal year 1997. 31 U.S.C. § 331
(e). The federal government has elected to include certain financial
information on the legislative and judicial branches in the CFS as
well.
[2] The fiscal year 2004 Financial Report of the United States
Government was completed by the Department of the Treasury on December
15, 2004, and is available through both GAO's Web site at www.gao.gov
and Treasury's Web site at www.fms.treas.gov/fr/index.html.
[3] GAO, GAO/PCIE: Financial Audit Manual: Update, GAO-04-1015G
(Washington, D.C.: July 30, 2004), an update to Financial Audit Manual:
Volumes 1 and 2, GAO-01-765G (Washington, D.C.: Aug. 1, 2001).
[4] The FAM lists 27 representations that are ordinarily included, if
applicable, in the management representation letter that an agency
provides to the auditor. For 4 of the representations, the agency is
required to address three separate components. As such, each agency is
ordinarily expected to make a total of 35 representations. Six of the
35 representations are not applicable unless the agency received an
opinion on its internal control. Since DOS did not receive an opinion
on its internal control for fiscal year 2004, only 29 of the 35
representations were applicable to DOS's fiscal year 2004 management
representation letter.
[5] See Treasury Financial Manual, vol. I, part 2, ch. 4700, for a list
of the 35 agencies. These agencies, for fiscal year 2004, consisted of
23 CFO Act agencies and 12 material other agencies. The 33 agencies we
reviewed did not include the U.S. Securities and Exchange Commission
and the Smithsonian Institution because these audits were not complete
before the fiscal year 2004 Financial Report of the United States
Government was issued. The Department of Homeland Security (DHS)
Financial Accountability Act, Pub. L. No. 108-330, 118 Stat. 1275 (Oct.
16, 2004), added DHS to the list of CFO Act agencies, increasing the
number of CFO Act agencies again to 24 for fiscal year 2005.
