This audit report contains the Annual Financial Statement of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) for the period from January 24, 2003 to September 30, 2003. Pursuant to the Homeland Security Act of 2002, Public Law 107-296, ATF was transferred from the Department of Treasury and became a new bureau of the Department of Justice on January 24, 2003. Under the direction of the Office of the Inspector General (OIG), KPMG LLP performed the ATF audit.

The ATF received an unqualified opinion on its FY 2003 financial statements. An unqualified opinion means that the financial statements present fairly, in all material respects, the financial position and the results of the entity's operations.

In its report on Internal Controls, the auditors noted one reportable condition related to ATF's information technology control structure. Specifically, they identified weaknesses in the general access and system software controls. In its report on Compliance with Laws and Regulations, the auditors noted that ATF is funding capital leases on an annual basis. Lease purchases and capital leases are required to be fully funded at lease inception.

The OIG reviewed KPMG's report 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, or conclusions on compliance with laws and regulations. KPMG is responsible for the attached auditor's report dated November 26, 2003 and the conclusions expressed in the report. However, our review disclosed no instances where KPMG did not comply, in all material respects, with generally accepted government auditing standards.