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	Cover Letter Summary of Results Background Audit Objective Report on USAID's Financial Statements Report on Internal Control Accruals Reporting System Process for Reconciling Fund Balance with the U.S. Treasury Intragovernmental Transactions Process for Recognizing and Reporting Overseas Accounts Receivable Report on Compliance with Laws and Regulations Reportable FFMIA Noncompliance Evaluation of Management Comments Appendix I - Scope and Methodology Appendix II - Management Comments Appendix III - Status of Prior Year Findings and Recommendations
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Independent Auditor's Report on Internal Control

We have audited the consolidated balance sheets of USAID as of September 30, 2005 and 2004. We have also audited the consolidated statements of changes in net position, consolidated statements of net cost, combined statements of budgetary resources, and consolidated statements of financing for the fiscal years ended September 30, 2005 and 2004, and have issued our report thereon dated November 14, 2005. We conducted the audits in accordance with generally accepted auditing standards; 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 audits of USAID's financial statements for the fiscal years ended September 30, 2005 and 2004, we considered its internal control over financial reporting by obtaining an understanding of the agency'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 system of internal control testing to those controls necessary to achieve the objectives described in OMB Bulletin 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, 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 internal control over financial reporting would not necessarily disclose all matters in internal control over financial reporting that might be reportable conditions. Under standards established 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 internal control that, in our judgment, could adversely affect the Agency'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 control, misstatements, losses, or noncompliance may occur and not be detected. Our consideration of internal control over financial reporting would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. We noted certain matters (discussed in the following paragraphs) involving internal control and its operation that we consider to be reportable conditions and one matter that we consider to be a material weakness.

The material internal control weakness relates to USAID's need to improve its Accruals
Reporting System.

The reportable conditions relate to USAID's need to improve its:

• Process for reconciling its Fund Balance with the U.S. Treasury
• Process for reconciling intragovernmental transactions
• Process for recognizing and reporting its overseas accounts receivable.

With respect to internal control related to performance measures reported in USAID's Performance and Accountability Report, we obtained an understanding of the design of significant internal controls relating to the existence and completeness assertions, as required by OMB Bulletin 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 matters involving the internal control over financial and performance reporting which we reported to USAID management in a separate letter dated November 14, 2005.

• USAID's Accruals Reporting System Needs Improvement
• Reportable Condition: USAID's Process for Reconciling Its Fund Balance with the U.S. Treasury Needs Improvement
• Reportable Condition: USAID's Intragovernmental Transactions Remain Unreconciled
• Reportable Condition: USAID's Process for Recognizing and Reporting Its Overseas Accounts Receivable Needs Improvement

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