Financial Audit
The Department of Housing and Urban Development's Fiscal Year 2004 Management Representation Letter on Its Financial Statements Gao ID: GAO-05-598R July 22, 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 Housing and Urban Development's (HUD) fiscal year 2004 management representation letter. Our objective is to help ensure that future management representation letters submitted by HUD 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.
HUD's fiscal year 2004 management representation letter, as well as several other federal agencies' management representation letters, 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 two of the five key areas we reviewed. First, the letter included 24 of the 29 representations from the FAM that were applicable to HUD. For the other 5 representations, 3 were not fully included and 2 were not provided at all. Finally, HUD did not include a complete summary of unadjusted misstatements with its management representation letter and also did not 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 two recommendations to HUD's Acting Deputy Chief Financial Officer targeted to specific changes needed. Also, we are recommending that the HUD Inspector General 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.
Director: Team: Phone:GAO-05-598R, Financial Audit: The Department of Housing and Urban Development's Fiscal Year 2004 Management Representation Letter on Its Financial Statements
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July 22, 2005:
Mr. George J. Tomchick III:
Acting Deputy Chief Financial Officer:
Department of Housing and Urban Development:
The Honorable Kenneth M. Donohue, Sr.:
Inspector General:
Department of Housing and Urban Development:
Subject: Financial Audit: The Department of Housing and Urban
Development'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 Housing and Urban Development's (HUD) fiscal year 2004
management representation letter. Our objective is to help ensure that
future management representation letters submitted by HUD 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:
HUD'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 two of the five key areas we
reviewed. First, the letter included 24 of the 29
representations[Footnote 4] from the FAM that were applicable to HUD.
For the other 5 representations, 3 were not fully included and 2 were
not provided at all. Finally, HUD did not include a complete summary of
unadjusted misstatements with its management representation letter and
also did not 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
two recommendations to HUD's Acting Deputy Chief Financial Officer
targeted to specific changes needed. Also, we are recommending that the
HUD Inspector General 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, the offices of HUD's Acting
Deputy Chief Financial Officer and Inspector General, in separate
letters, stated that they will work to address the conditions noted in
our report.
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 HUD's Acting
Deputy Chief Financial Officer and Inspector General or their
designees. Written comments from HUD's Acting Deputy Chief Financial
Officer and Inspector General are reprinted in enclosures II and III
and are also discussed in the Agency Comments section.
Identified Issues with HUD's Fiscal Year 2004 Management Representation
Letter:
With respect to HUD's fiscal year 2004 management representation
letter, we identified the following two areas that need some
improvement: (1) providing or fully including applicable
representations from the FAM and (2) including a complete summary of
unadjusted misstatements. Details regarding these issues are as
follows.
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 HUD's fiscal year 2004 management representation letter
included 24 of the 29 representations from the FAM that were applicable
to HUD. Of the 5 other representations, 3 were not fully included and 2
were not provided at all. For the incomplete representations, the HUD
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
Financial Statements or Required Supplementary Stewardship Information
and other Required Supplementary 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.
HUD included a summary of unadjusted misstatements with its management
representation letter, but the summary as called for by the FAM was
incomplete. Specifically, HUD did not (1) identify the financial
statements affected by the misstatement, (2) identify the standard
general ledger account number, standard general ledger account name, or
financial statement line item for the misstatement, (3) separately
identify the carry-forward effect of the prior year's unadjusted
misstatements, and (4) separate "known" and "likely" misstatements. In
addition, HUD did not submit a summary of unadjusted misstatements as
part of its closing package to Treasury as required by the TFM. As
such, HUD also did not 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 two of the five key areas we reviewed, HUD'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 HUD. The additional
information needed from HUD is straightforward and should be easy to
address.
Recommendations for Executive Action:
We recommend to HUD's Acting Deputy Chief Financial Officer that in the
future the management representation letter:
* fully include all representations from the FAM that are applicable to
HUD and:
* include a complete summary of unadjusted misstatements, if there are
any uncorrected misstatements, that also distinguishes between
misstatements affecting intragovernmental accounts and misstatements
affecting accounts with the public.
We recommend that the HUD Inspector General 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:
In written comments on a draft of this report, which are reprinted in
enclosures II and III, the offices of HUD's Acting Deputy Chief
Financial Officer and Inspector General, in separate letters, stated
that they will work to address the conditions noted in our report.
Specifically, HUD's Acting Deputy Chief Financial Officer stated that
HUD agrees to use the FAM representations as the starting point for
this year's management representation letter in support of the fiscal
year 2005 audit cycle and will ensure that its summary of any
unadjusted misstatements contains all required details. In his
comments, HUD's Inspector General stated that his office will work with
the department to ensure that the FAM representations are specifically
followed and that the additional details on uncorrected misstatements
are included.
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 - 3:
[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:
a. financial records and related data;
b. 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:
c. 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:
a. 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,
b. material liabilities or gain or loss contingencies that are required
to be accrued or disclosed that have not been accrued or disclosed, or:
c. 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:
a. management,
b. employees who have significant roles in internal control, or:
c. 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:
a. 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;
b. 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:
c. 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 Office of the Chief Financial Officer
at the Department of Housing and Urban Development:
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT:
OFFICE OF THE CHIEF FINANCIAL OFFICER:
WASHINGTON, DC 20410-3000:
JUN - 7 2005:
Mr. Gary T. Engel:
Director:
Financial Management and Assurance:
United States General Accountability Office:
Washington, DC 20548:
Dear Mr. Engel:
Thank you for the opportunity to comment on the GAO draft report
entitled Financial Audit. The Department of Housing and Urban
Development's Fiscal Year 2004 Management Representation Letter on Its
Financial Statements. The Department of Housing and Urban Development's
(HUD) Fiscal Year 2004 management representation letter on its
financial statements was mutually agreed to by HUD management and the
HUD Office of Inspector General's (OIG) financial auditors, following
the illustrative example provided in Office of Management and Budget
(OMB) Bulletin 01-02, Audit Requirements for Federal Financial
Statements, as amended by OMB Memorandum No. M-04-22, Amendments to OMB
Bulletin No. 01-02, dated July 27, 2004. Historically, this OMB
guidance is widely disseminated to and utilized by the federal Chief
Financial Officer and OIG audit communities. Until receipt of your
subject draft report, HUD management was unaware of GAO's July 2004
Financial Audit Manual (FAM) revisions and the fact that GAO's guidance
differed in some respects from the OMB guidance. We suggest that GAO
work with OMB to resolve any differences in their respective management
letter guidance to avoid any problems on the FY 2005 and subsequent
year audits.
Since the subject draft report now makes clear which representations
GAO requires to support the government-wide audit, HUD agrees to use
the 35 FAM representations as the starting point for this year's
management letter in support of the FY 2005 audit cycle. HUD will also
assure that its summary of any unadjusted misstatements contains all
required details. In addition to resolving discrepancies between OMB
and GAO guidance, we also suggest that GAO's financial audit group
review this year's proposed management representation letters to ensure
each agency meets all GAO's representational requirements. This would
be more effective than an after-the-fact review and reporting of
problems and would be more in keeping with common practices between
management representatives and their financial auditors.
Sincerely,
Signed by:
George J. Tomchick III:
Acting Deputy Chief Financial Officer:
cc: Kenneth M. Donohue, Sr., HUD Inspector General:
The following are our comments on the Department of Housing and Urban
Development's (HUD) Office of the Chief Financial Officer's letter
dated June 7, 2005.
GAO Comments:
1. HUD's Acting Deputy Chief Financial Officer stated that HUD
management was unaware of the July 2004 update to the GAO/President's
Council on Integrity and Efficiency (PCIE) Financial Audit Manual (FAM)
and that the FAM differed in some respects from the OMB audit guidance.
He suggested that we work with OMB to resolve differences between the
FAM and OMB audit guidance. In addition, HUD's Inspector General noted
there were differences in guidance between OMB and the FAM regarding
representations for fraud in the management representation letter and
that HUD's fraud representation followed the guidance provided by OMB.
The representations noted in this report as not being provided or fully
included in HUD's management representation letter are required by U.S.
generally accepted auditing standards (AU Section 333) and are the
result of Statement on Auditing Standards No. 99, Consideration of
Fraud in a Financial Statement Audit, issued in October 2002. The FAM
was updated in July 2004 to incorporate the new fraud representations.
The OMB audit guidance has not been updated since then, but does refer
to AU Section 333. In addition, we recently provided comments on OMB's
draft circular for federal financial reporting, of which Part B
discusses management representation letters, and are continuing to work
with OMB to resolve differences in such guidance.
2. HUD's Acting Deputy Chief Financial Officer suggested that we review
the agencies' management representation letters before they are
finalized to ensure they meet our requirements. Reviews of agencies'
management representation letters should be done by the respective
agencies' auditors in connection with their audits of the agencies'
financial statements. In addition, we have previously recommended to
Treasury and OMB that they establish written policies and procedures
that require an evaluation and assessment of the omission of
representations ordinarily included in agency management representation
letters.
[End of section]
Enclosure III: Comments From the Office of the Inspector General at the
Department of Housing and Urban Development:
U.S. Department of Housing and Urban Development:
Office of Inspector General:
451 7th St., S.W.:
Washington, D.C. 20410:
JUN 9 2005:
Mr. Gary T. Engel:
Director:
Financial Management and Assurance:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Engel:
In response to your draft report entitled Financial Audit: The
Department of Housing and Urban Development's Fiscal Year 2004
Management Representation Letter on Its Financial Statements, we are
providing the following comments to be reflected in your final report.
In response to your recommendation that the U.S. Department of Housing
and Urban Development (HUD), Office of Inspector General (OIG) work
with the Department to help ensure that future management
representation letters meet the key conditions noted as needing
improvements in this report, we concur and will continue to work with
the Department to ensure future management representation letters meet
the requirements of the Financial Audit Manual. In that regard, we will
work with the Department to ensure that the HUD's FAM 16
representations specifically address suspected fraud and that FAM 15
and 17 representations are specifically followed. HUD's management
representation of fraud followed the guidance provided by OMB Bulletin
01-12, Appendix E and was intended to cover the fraud, as well as
suspected fraud representations laid out by FAM 15, 16, and 17.
In addition, we noted there were differences in guidance between OMB
and GAO regarding the management representation letter. These
differences revolved around SAS No. 99: The Consideration of Fraud in a
Financial Statement Audit. In performing the FY 2004 audit of HUD's
financial statements, HUD OIG did apply additional procedures to meet
the requirements of SAS No. 99.
Regarding the closing package submitted to Treasury, we will work with
the Department to ensure that the additional details on uncorrected
misstatements required by the closing package guidance are included.
These requirements were not clearly stated in the FY 2004 Treasury
closing package guidance. The requirements have been clarified in the
closing package guidance for FY 2005 and this should eliminate any
ambiguity.
We appreciate the opportunity to provide comments. Should you have any
questions regarding our comments, please contact Randy McGinnis,
Director, Financial Audits Division at (202) 708-0614 extension 8107.
Sincerely,
Signed by:
Kenneth M. Donohue:
Inspector General:
The following are our comments on the Department of Housing and Urban
Development's (HUD) Office of the Inspector General's letter dated June
9, 2005.
GAO Comments:
1. HUD's Inspector General noted there were differences in guidance
between OMB and the GAO/President's Council on Integrity and Efficiency
(PCIE) Financial Audit Manual (FAM) regarding representations for fraud
in the management representation letter and that HUD's fraud
representation followed the guidance provided by OMB. The
representations noted in this report as not being provided or fully
included in HUD's management representation letter are required by U.S.
generally accepted auditing standards (AU Section 333) and are the
result of Statement on Auditing Standards No. 99, Consideration of
Fraud in a Financial Statement Audit, issued in October 2002. The FAM
was updated in July 2004 to incorporate the new fraud representations.
The OMB audit guidance has not been updated since then, but does refer
to AU Section 333. In addition, we recently provided comments on OMB's
draft circular for federal financial reporting, of which Part B
discusses management representation letters, and are continuing to work
with OMB to resolve differences in such guidance.
2. HUD's Inspector General stated that the additional details on the
summary of unadjusted misstatements required by the closing package
were not clearly stated in the fiscal year 2004 Treasury guidance. The
Treasury Financial Manual (TFM) for fiscal year 2004 included a
template for the summary of unadjusted misstatements that showed the
additional details to be provided. This template has been removed from
the TFM for fiscal year 2005. However, the TFM for fiscal year 2005
states under section 4705.55 that each applicable verifying agency must
provide a management representation letter on the closing package,
including a summary of unadjusted misstatements. As noted in our
report, we plan to work with PCIE to modify the FAM to call for the
additional disclosures on the summary of unadjusted misstatements that
were required by the TFM in fiscal year 2004.
(198378):
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 HUD did not receive an opinion
on its internal control for fiscal year 2004, only 29 of the 35
representations were applicable to HUD'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.
