Financial Audit:

The Department of Defense's Fiscal Year 2004 Management Representation Letter on Its Financial Statements

GAO-05-587R: Published: Jun 23, 2005. Publicly Released: Jun 23, 2005.

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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. 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 Defense's (DOD) fiscal year 2004 management representation letter. Our objective is to help ensure that future management representation letters submitted by DOD 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."

DOD'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, DOD's management representation letter was not signed by the appropriate level of management. Second, DOD 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. Finally, the letter included 22 of the 28 representations from the FAM that were applicable to DOD. For the other 6 representations, 4 were not fully included and 2 were not provided at all. We believe that these matters can be easily addressed. We are making three recommendations to DOD's Chief Financial Officer targeted to specific changes needed. Also, we are recommending that the DOD 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.

Recommendations for Executive Action

  1. Status: Open

    Comments: As part of our fiscal year (FY) 2005 through 2013 audits of the consolidated financial statements (CFS) of the U.S government, we evaluated significant federal agencies' management representation letters for signatures by the appropriate level of management. DOD's management representation letters for these years did not include a signature by the head of the entity. GAO will evaluate DOD's FY 2014 management representation letter to determine if it is appropriately signed.

    Recommendation: DOD's Chief Financial Officer should ensure that in the future the management representation letter is signed by the appropriate level of management.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: As part of our fiscal year 2005 audit of the consolidated financial statements (CFS) of the U.S government, we evaluated significant federal agencies' management representation letters for the inclusion of a materiality threshold used for certain representations in the letter. DOD's fiscal year 2005 management representation letter included the materiality threshold used.

    Recommendation: DOD's Chief Financial Officer should ensure that in the future the management representation letter includes materiality thresholds or such thresholds be provided separately to Treasury and OMB.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: As part of our FY 2011 audit of the consolidated financial statements (CFS) of the U.S government, we evaluated significant federal agencies' management representation letters to determine whether all applicable representations from the FAM were fully provided. DOD's management representation letter for FY 2011 fully included all applicable representations from the FAM.

    Recommendation: DOD's Chief Financial Officer should ensure that in the future the management representation letter fully includes all representations from the FAM that are applicable to DOD.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: As part of our audits of the consolidated financial statements (CFS) of the U.S government, we evaluated significant federal agencies' management representation letters to determine whether they were sufficient to help support Treasury and OMB's preparation of the CFS management representation letter. DOD's Office of Inspector General has worked with the agency to help ensure that DOD's management representation letter was sufficient.

    Recommendation: The DOD Inspector General should work with the department to help ensure that future management representation letters meet the key conditions noted as needing improvements in this report.

    Agency Affected: Department of Defense

 

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