This audit report contains the Annual Financial Statement of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) for the fiscal years (FY) ended September 30, 2006, and 2005. Under the direction of the Office of the Inspector General (OIG), the FY 2006 audit was performed by KPMG LLP (KPMG) and resulted in an unqualified opinion. An unqualified opinion means that the financial statements present fairly, in all material respects, the financial position and the results of operations in conformity with generally accepted accounting principles in the United States. For FY 2005, the ATF also received an unqualified opinion on its financial statements (OIG Report No. 06-21).

In their Independent Auditors’ Report on Internal Control, the auditors identified two reportable conditions, both of which were considered to be repeat material weaknesses from prior years. In the first material weakness the auditors reported that the ATF needs to implement effective controls over information systems general access controls and system software. The ATF also received a repeat material weakness on its process for recording accounts payable due to the continued existence of errors and inaccuracies with the accrual process used to record accounts payable. ATF’s weakness in information systems controls was initially reported in FY 2003 and the accounts payable weakness was first reported in FY 2004. In its Independent Auditors’ Report on Compliance and Other Matters, the auditors also noted that ATF’s financial management systems did not substantially comply with applicable federal financial management systems requirements and federal accounting standards.

The OIG reviewed KPMG’s reports and related documentation and made necessary inquiries of its representatives. Our review, as differentiated from an audit in accordance with U.S. generally accepted government auditing standards, was not intended to enable us to express, and we do not express, an opinion on the ATF’s financial statements, conclusions about the effectiveness of internal control, conclusions on whether ATF’s financial management systems substantially complied with the Federal Financial Management Integrity Act of 1996, or conclusions on compliance with laws and regulations. KPMG is responsible for the attached auditor’s reports dated October 30, 2006, and the conclusions expressed in the reports. However, our review disclosed no instances where KPMG did not comply, in all material respects, with generally accepted government auditing standards.