Financial Audit

GAO audited the Internal Revenue Service's (IRS) administrative financial statements for fiscal year 1996. Because IRS could not provide GAO with supporting documentation for its reported administrative accounts receivable balances, GAO could not determine if the presentation of accounts receivable and net position was reliable. In addition, because property and equipment have not been capitalized and reported, GAO could not determine the effect that capitalization would have on net position. Otherwise, in GAO's opinion, the statement of financial position presents fairly IRS' administrative assets, liabilities, and net financial position. GAO agrees with IRS' assertion that internal controls were ineffective in (1) safeguarding assets, such as administrative accounts receivable and fund balances with Treasury, from material loss; (2) ensuring material compliance with laws governing the use of budget authority and with other relevant laws and regulations; and (3) ensuring that there were no material misstatements in amounts reported in the financial statements. IRS failed to report, however, a material weaknesses GAO found in the computer security controls at IRS' Detroit Computing Center. Material weaknesses in internal control and recordkeeping systems precluded the test necessary to provide a basis for any report on compliance with laws and regulations.

GAO noted that: (1) these Administrative Financial Statements did not report on activities related to IRS' custodial responsibilities for implementing federal tax legislation, including collecting federal tax revenues, refunding overpayments of taxes, and pursuing collection of amounts owed; (2) the annual financial results relating to IRS' custodial responsibilites were reported separately in IRS' Custodial Financial Statements; (3) the Statement of Administrative Financial Position was reliable in all material respects, except that evidence about the composition and validity of administrative accounts receivable as of September 30, 1996, was not available; (4) GAO could not determine the reliability of the accounts receivable balances shown and the effect any adjustment required to correct the accounts receivable balances might have on net position; (5) GAO could not determine the effect capitalization would have on net position because property and equipment have not been capitalized and reported; (6) GAO was unable to give an opinion on the Statement of Administrative Operations and Changes in Net Position because of limitations on the scope of GAO's work; (7) GAO was unable to determine the effect on the Statement of Administrative Operations and Changes in Net Position of IRS' not recording depreciation; thus, the statement may be unreliable; (8) GAO agreed with management's assertion that internal controls were ineffective in: (a) safeguarding assets from material loss; (b) assuring material compliance with laws governing the use of budget authority and with other relevant laws and regulations; and (c) assuring that there were no material misstatements in amounts reported in the financial statements, such as administrative accounts receivable and operating revenues and expenses; and (9) material weaknesses in internal control and recordkeeping systems precluded the test necessary to provide a basis for any report on compliance with pertinent laws and regulations.