2001 Annual Report - Independent Auditor's Report on Internal Control

Office of the Inspector General
United States Department of Justice

Board of Directors
Federal Prison Industries, Inc.

We have audited the financial statements of the Federal Prison Industries, Inc. (FPI), a component of the United States Department of Justice (DOJ), as of and for the year ended September 30, 2001, and have issued our report thereon, dated January 2, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial Statements.

In planning and performing our audit, we considered FPI’s internal control over financial reporting by obtaining an understanding of FPI’s internal control, determined whether internal controls had been placed in operation, assessed control risk, and performed tests of controls in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements. We limited our internal control testing to those controls necessary to achieve the objectives described in OMB Bulletin No. 01-02. We did not test all internal controls relevant to operating objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), such as those controls relevant to ensuring efficient operations. The objective of our audit was not to provide assurance on internal control. Consequently, we do not provide an opinion on internal control.

Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be reportable conditions. Under standards issued by the American Institute of Certified Public Accountants, reportable conditions are matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect FPI’s ability to record, process, summarize, and report financial data consistent with the assertions by management in the financial statements. Material weaknesses are reportable conditions in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. Because of inherent limitations in internal controls, misstatements, losses, or noncompliance may nevertheless occur and not be detected.

However, we noted certain matters involving the internal control and its operation that we consider to be reportable conditions, and, with respect to the first two items below, material weaknesses.

The conditions, detailed on the following pages, are summarized as follows:

1. The FPI does not have adequate controls over inventories. (Updated finding)
2. The FPI does not have adequate controls over accounts receivable. (Updated finding)
3. The FPI requires improvement in the financial statement preparation process. (Updated finding)
4. The FPI information security program management and controls require improvement. (Updated finding)

In addition, with respect to internal controls related to performance measures reported in Management’s Discussion and Analysis contained within accompanying information, we obtained an understanding of the design of significant internal controls relating to the existence and completeness assertions, as required by OMB Bulletin No. 01-02. Our procedures were not designed to provide assurance on internal control over reported performance measures, and, accordingly, we do not provide an opinion on such controls.

We also noted other less significant matters involving the internal control and its operation, which we have reported to the management of the FPI in a separate letter, dated January 2, 2002.

This report is intended solely for the information and use of the Office of the Inspector General, the management of the FPI and the DOJ, the FPI Board of Directors, the OMB, and Congress and is not intended to be and should not be used by anyone other than these specified parties.

Washington, DC
January 2, 2002

Detailed information concerning the reportable conditions noted in Federal Prison Industries, Inc., internal control report can be obtained from the Department of Justice, Office of Inspector General for Audit, Office of Policy and Planning, 1425 New York Avenue, NW, Suite 5000, Washington, DC 20530 and from the Internet site at www.unicor.gov.