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entitled 'Financial Audit: The Department of Defense's Fiscal Year 2004 
Management Representation Letter on Its Financial Statements' which was 
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June 23, 2005: 

The Honorable Tina W. Jonas: 
Chief Financial Officer: 
Department of Defense: 

The Honorable Joseph E. Schmitz: 
Inspector General: 
Department of Defense: 

Subject: Financial Audit: The Department of Defense'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 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."[Footnote 3]

Results in Brief: 

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[Footnote 4] 
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. 

In commenting on a draft of this report, DOD's Office of the 
Comptroller concurred with the recommendations to improve DOD's future 
management representation letters. The Office of the Comptroller's 
response stated that they had coordinated with the Office of the 
Inspector General and that the Office of the Inspector General would 
work with the department to ensure that future letters contain the 
specific language in the FAM, when appropriate. 

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 DOD's Chief 
Financial Officer and Inspector General or their designees. Written 
comments from DOD's Principal Deputy in the Office of the Comptroller 
are reprinted in enclosure II and are also discussed in the Agency 
Comments section. The Principal Deputy stated that the office's 
response was coordinated with DOD's Office of the Inspector General. 

Identified Issues with DOD's Fiscal Year 2004 Management Representation 
Letter: 

With respect to DOD's fiscal year 2004 management representation 
letter, we identified the following three areas that need some 
improvement: (1) providing the appropriate signatures, (2) providing 
the materiality thresholds used, and (3) providing or fully including 
applicable representations from the FAM. Details regarding these issues 
are as follows. 

Providing the Appropriate Signatures: 

The management representation letter should be obtained from the 
highest level of the federal agency. Officials who sign the management 
representation letter should be those who are responsible for and 
knowledgeable about the matters in the representation letter. These 
officials should generally be the head of the entity and the CFO or CFO 
equivalent. Federal agencies' management and auditors need to ensure 
that management representation letters are signed by appropriate 
management officials. 

DOD's fiscal year 2004 management representation letter was not signed 
by the CFO. A management representation letter that is not signed by 
officials at the appropriate level of management provides less 
assurance than an appropriately signed letter that has been reviewed 
and approved by the person or persons most knowledgeable about the 
matters it addresses. The auditor cannot be certain that 
representations made in a letter that has not been appropriately signed 
actually reflect management's position or are complete. Letters that 
have not been appropriately signed impair Treasury's and OMB's ability 
to rely on representations made in the letters in order to prepare the 
CFS management representation letter. 

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 DOD'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 DOD's fiscal year 2004 management representation letter 
included 22 of the 28 representations from the FAM that were applicable 
to DOD. Of the 6 other representations, 4 were not fully included and 2 
were not provided at all. For one of the incomplete representations, 
the DOD management representation letter included the following 
representation intended to cover the responsibility to prevent and 
detect fraud representation called for by FAM 15. (See enc. I for this 
representation.)

"I am responsible for establishing and overseeing the maintenance of 
internal controls for financial management to prevent and detect 
fraud." 

While this representation addresses controls to prevent and detect 
fraud, it should also address programs to prevent and detect fraud as 
called for by FAM 15. 

For 3 of the incomplete representations, the DOD 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, the RSSI or the RSI) nor any fraud involving 
management or employees who have significant roles in internal control, 
that is not a matter of public record."

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 #3b: We have made available to you all, 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. 

* 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. 

Conclusions: 

In three of the five key areas we reviewed, 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 and our ability to rely on the 
representations in that letter in combination with individual federal 
agency representation letters, including that of DOD. The additional 
information needed from DOD is straightforward and should be easy to 
address. 

Recommendations for Executive Action: 

We recommend to DOD's Chief Financial Officer that in the future the 
management representation letter: 

* be signed by the appropriate level of management;

* include materiality thresholds or such thresholds be provided 
separately to Treasury and OMB; and: 

* fully include all representations from the FAM that are applicable to 
DOD. 

We recommend 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. 

Agency Comments: 

In commenting on a draft of this report, DOD's Office of the 
Comptroller concurred with the recommendations to improve DOD's future 
management representation letters. The Office of the Comptroller's 
response stated that they had coordinated with the Office of the 
Inspector General and that the Office of the Inspector General would 
work with the department to ensure that future letters contain the 
specific language in the FAM, when appropriate. The comments are 
reprinted in enclosure II. 

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 Defense: 

UNDER SECRETARY OF DEFENSE: 
COMPTROLLER: 

1100 DEFENSE PENTAGON: 
WASHINGTON DC 20301-1100: 

JUN 7 2005: 

Gary T. Engel: 
Director: 
Financial Management and Assurance:
United States Government Accountability Office: 
Washington, DC 20548: 

Dear Mr. Engel: 

This is the Department of Defense response to the Government 
Accountability Office (GAO) draft report GAO-05-578R, "Financial Audit: 
The Department of Defense's (DoD) Fiscal Year 2004 Management 
Representation Letter On Its Financial Statements," dated May 18, 2005. 
The Department appreciates the opportunity to review the draft and 
provide comments. 

We concur with the recommendations to improve the DoD's future 
management representation letters. More detailed comments are at the 
attachment. This response has been coordinated with the DoD Office of 
the Inspector General. 

Our point of contact for this matter is Ms. Karen Nakama. She may be 
reached by e-mail: karen.nakama@osd.mil or by telephone at (703) 693- 
5657. 

Sincerely,

Signed by: 

Robert J. Henke: 
Principal Deputy: 

Attachment: As stated: 

GAO DRAFT REPORT DATED MAY 18, 2005: 
GAO-05-587R: 

"FINANCIAL AUDIT: THE DEPARTMENT OF DEFENSE'S FISCAL YEAR 2004 
MANAGEMENT REPRESENTATION LETTER ON ITS FINANCIAL STATEMENTS: 

DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATIONS: 

RECOMMENDATION 1: The GAO recommends to the DoD's Chief Financial 
Officer (CFO) that future management representation letters be signed 
by the appropriate level of management. 

DoD RESPONSE: Concur. The Department plans to have the Deputy Secretary 
of Defense and the CFO sign future letters. 

RECOMMENDATION 2: The GAO recommends to the DoD's CFO that future 
management representation letters include materiality thresholds or 
such thresholds be provided separately to Treasury and OMB. 

DoD RESPONSE: Concur. The Department will include appropriate 
materiality thresholds in future letters. 

RECOMMENDATION 3: The GAO recommends to the DoD's CFO that future 
management representation letters fully include all representations 
from the Financial Audit Manual (FAM) that are applicable to DoD. 

DoD RESPONSE: Concur. The Department will include all representations 
from the FAM that are appropriate and applicable to DoD in future 
letters. 

RECOMMENDATION 4: The GAO recommends that the DoD Office of the 
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. 

DoD RESPONSE: Concur. The Office of the Inspector will work with the 
Department to ensure that future letters contain the specific language 
in the FAM, verbatim, when appropriate. 

[End of section] 

(198365): 

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. However, 
because DOD received a disclaimer of opinion on its fiscal year 2004 
financial statements, DOD's auditor did not provide any unadjusted 
misstatements and, therefore, DOD was not required to make the related 
representation. Also, 6 of the 35 representations are not applicable 
unless the agency received an opinion on its internal control. Since, 
for fiscal year 2004, DOD received a disclaimer of opinion on its 
financial statements and did not receive an opinion on its internal 
control, only 28 of the 35 representations were applicable to DOD'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.