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, 2007, and 2006. Under the direction of the Office of the Inspector General (OIG), KPMG LLP (KPMG) performed the audit, which resulted in an unqualified opinion on the FY 2007 financial statements. 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. The FY 2006 audit also resulted in an unqualified opinion (OIG Report No. 07-12).

KPMG also issued reports on internal control and on compliance and other matters. In their Independent Auditors’ Report on Internal Control, the auditors identified two significant deficiencies, one of which was considered to be a material weakness. Effective for FY 2007, the term “reportable condition” was changed to the term “significant deficiency,” and new definitions of material weakness and significant deficiency were introduced in auditing standards generally accepted in the United States. See Government Auditing Standards and Office of Management Budget Bulletin No. 07-04, Audit Requirements for Federal Financial Statements.

Both significant deficiencies are repeat issues and were reported as material weaknesses during FY 2006. ATF 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 received a significant deficiency relating to its processes to address the weaknesses in information systems access controls. While progress has been made in addressing weaknesses in controls over information systems, the auditors noted that ATF still needs to implement effective controls over information systems access controls. 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 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 November 1, 2007, 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.