June 23, 2005
The Honorable Gwendolyn Sykes
Chief Financial Officer
National Aeronautics and Space Administration
The Honorable Robert W. Cobb
National Aeronautics and Space Administration
Subject: Financial Audit: The National Aeronautics and Space Administration'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.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,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 National Aeronautics and Space Administration's (NASA) fiscal year 2004 management representation letter. Our objective is to help ensure that future management representation letters submitted by NASA 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."3
Results in Brief
NASA'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, NASA 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 25 of the 28 representations4 from the FAM that were applicable to NASA. The other 3 representations were not fully included. We believe that these matters can be easily addressed. We are making two recommendations to NASA's Chief Financial Officer targeted to specific changes needed. Also, we are recommending that the NASA Inspector General, with the contracted independent public accountant, work with the agency 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, NASA's Chief Financial Officer and Assistant Inspector General for Auditing, in separate letters, stated that their offices will work to address the conditions noted in our report.
1The 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.
2The 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.
3GAO, 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).
4The 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 NASA received a disclaimer of opinion on its fiscal year 2004 financial statements, NASA’s auditor did not provide any unadjusted misstatements and, therefore, NASA 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, NASA 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 NASA’s fiscal year 2004 management representation letter.