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5. Renewal of Audit ContractCity of Kalispell Posy Office Box 1997 - Kalispell, Montaina 59903-1997 - Telephone (406)-158-1700 Fax (406)758-7758 REPORT TO: riayor Kennedy and City Council Members FROM: Array Robertson, Finance Director Chris Kukulski, City Manager SIUBJECT: Renewal of Audit Contract FY04, FY05, FY06 MEETING DATE. May 15, 2004 BACKGROUND: Denning, Downey & Associates, P.C. CPA's have provided us with a 3 year renewal or'our audit contract. The first War, FY04, is the sarne price as the l Y03 audit. The two subsequ€;nt years reflect an increase of 4% in man hours, about 3.5% in cost. The costs per year are $19,260, $19,990 and $20,830. Selection of the City's auditor should be a council function and not a function of the finance office. That said, the only Kalispell f`irrn eligible to audit local government is Denning, Downey and Associates. Firms must be on the State's list of approved governmental auditors. It is possible to do an RFP for outside; auditors but the reality is that the cost will be 50% higher due to travel. Those firms in Missoula, Great falls and Helena know that they cannot compete with Denning for audit costs and %rill not spend the time preparing a proposal. Additionally, with our small staff it takes gas until December to complete the financial reports and our audit is scheduled for January or February, not a time; that out of area firn.s avant to travel here. Personally, I think it is an excellent idea to rotate auditors to get a different perspective, however, r think the price is more than the benefit derived by contracting out of the area. My opinion is not a reflection on the current aUditors. 1 have nc) complaint with them. Bob Denning will be at your next work session to do the exit conference. The contract is the standard three year contract provided and approved by the State Department co ;'Adr inistratiori, Local Cjoverrrrnerat Services Division. RECOMMENDATION. Authorize the mana€aer to enter into the contract. ALTERNATIVES: At Council's discretion. � Arrry . Robertson Chris A. K.0 ulskii Finance Director City Manager Report compiled: March 9, 2004 Denning, Downey & Associates, P.C. CERTIFIED PUBLIC ACCOUNTANTS 1740 U.S_ Hwy 93 South - Suite 101 Kalispell, MT 59901 (406) 756-6879 • FAX (406) 257-7879 • E-Mail ddaudit(alcenturytel.net Kurt M. Downey, CPA, CGFM Robert K. Denning, CPA, CGFM February 26, 2004 City of Kalispell Array Robertson, Finance Officer PO Box 1997 Kalispell, MT 59901 We are pleased to confirm our understanding of the services we are to provide the City of Kalispell for the years ended June 30, 2004, June 30, 2005, and June 30, 2006. Also, the document submitted to you will include the following additional information that will be subjected to the auditing procedures applied in our audit of the general purpose financial statements: Schedule of expenditures of federal awards. We will advise you about appropriate accounting principles and their application and will assist in the preparation of our financial statements, but the responsibility for the financial statements remains with you. This responsibility includes the establishment and maintenance of adequate records and effective internal controls over financial reporting, the selection and application of accounting principles, and the safeguarding of assets. You are responsible for adjusting the financial statement to correct material misstatements and for confirming to us in the management representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. As part of our engagement we may propose standard, adjusting, or correcting journal entries to your financial statements. You are responsible for reviewing the entries and understanding the nature of any proposed entries and the impact they have on the financial statements. Further, you are responsible for designating a qualified management -level individual to be responsible and accountable for overseeing these services. Audit Objectives The objective of our audit is the expression of an opinion as to whether your general purpose financial statements are fairly presented, in all material respects, in conformity with generally accepted accounting principles and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the general purpose financial statements taken as a whole. The objective also includes reporting on the following: A ] II A edit EnQaeernent Letter Page I of 6 Internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and OMB Circular A-133, Audits of States, Local Governments, and Non -Profit Organizations. The reports on internal control and compliance will each include a statement that the report is intended for the information and use of the audit committee, management, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass -through entities. Our audit will be conducted in accordance with generally accepted auditing standards; the standards for financial audit contained in Government Auditing Standards, issued by the Comptroller General of the United States; the Single Audit Act Amendments of 1996; and the provisions of OMB Circular A-133, and will include tests of accounting records, a determination of major program(s) in accordance with Circular A-133, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the general purpose financial statements or the Single Audit compliance opinion is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. Management Responsibilities Management is responsible for establishing and maintaining internal control and for compliance with the provisions of contract, agreements, and grants. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of the controls. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorizations and recorded properly to permit the preparation of general purpose financial statements in accordance with generally accepted accounting principles, and that federal award programs are managed in compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, but the responsibility for the financial statements remains with you. That responsibility include the establishment and maintenance of adequate records and effective internal control over financial reporting and compliance, the selection and application of accounting principles, and the safeguarding of assets. A 133 Audit Engagement Letter Page 2 of 6 Management is responsible for adjusting the financial statements to correct material misstatements and for confirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregated, to the general purpose financial statements taken as a whole. Additionally, as required by OMB Circular A-133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. Audit Procedures — General An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. As required by the Single Audit Act Amendments of 1996 and OMB Circular A-133, our audit will include test of transactions related to major federal award programs for compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material errors, fraud other illegal acts, or noncompliance may exist and not be detected by us. In addition, an audit is not designed to detect immaterial errors, fraud, or illegal acts that do not have a direct effect on the general purpose financial statements or to major programs. However, we will inform you of any material errors and any fraud that comes to our attention. We will also inform you of any other illegal acts that cone to our attention, unless clearly inconsequential. We will also include such matters in the reports required for a Single Audit. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also require certain written representations from you about the financial statements and related matters. Identifying and ensuring that City of Kalispell complies with laws, regulations, contracts, and agreements is the responsibility of management. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of City of Kalispell's compliance with applicable laws and regulations and the provisions of contracts and agreements. However, the objective of our audit will not be to provide an opinion on overall compliance and we will not express such an opinion. A 133 Audit Engagement Letter Page 3 of 6 Audit Procedures -- Internal Controls In planning and performing our audit, we will consider the internal control sufficient to plan the audit in order to determine the nature, timing, and extent of our auditing procedures for the purpose of expressing our opinions on City of Kalispell's general purpose financial statements and on its compliance with requirements applicable to major programs. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. Tests of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to the general purpose financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct and material effect on the general purpose financial statements. Tests of controls relative to the general purpose financial statements are required only if control risk is assessed below the maximum level. Our tests, if performed, will be less in scope than would be necessary to render an opinion on internal control and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. As required by OMB Circular A-I33, we will perform tests of controls to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance with compliance requirements applicable to each major federal award program. However, our test will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be express in our report on internal control issued pursuant to OMB Circular A-133. An audit is .not designed to provide assurance on internal control or to identify reportable conditions. However, we will inform the governing body or audit committee of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve 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 the entity's ability to record, process, summarize, and report financial data consistent with the assertions of management in the general purpose financial statements. We will also inform you of any nonreportable conditions or other matters involving internal control, if any, as required by OMB Circular A-133. Audit Procedures — Compliance Our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. As part of obtaining reasonable assurance about whether the general purpose financial statements are free of material misstatement, we will perform test of City of Kalispell's compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures will not be to provide an opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. A 133 Audit Engagement Letter Page 4 of 6 ONM Circular A-133 requires that we also plan and perform the audit to obtain reasonable assurance about whether the auditee has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of the applicable procedures described in the OMB Circular A-133 Compliance Supplement for the types of compliance requirements that could have a direct and material effect on each of City of Kalispell's major programs. The purpose of those procedures will be to express an opinion on City of Kalispell's compliance with requirement applicable to major programs in our report on compliance issued pursuant to OMB Circular A-133. Audit Administration, Fees, and Other We understand that your employees will prepare all cash, accounts receivable, or other confirmations we request and will locate any invoices selected by us for testing. At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection Form that summarizes our audit findings. We will provide copies of our reports to the entity; however, it is management's responsibility to submit the reporting package (including financial statements, schedule of expenditures of federal awards, summary schedule of prior audit findings, auditor's reports, and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass -through entities. The Data Collection Form and the reporting package must be submitted within the earlier of 30 days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by managements as to where the reporting packages should be submitted and the number to submit. The workpapers for this engagement are the property of Denning, Downey & Associates, CPA's P.C. and constitute confidential information. However, we may be requested to make certain workpapers available to the cognizant or grantor agency pursuant to authority given to it by law or regulation. If requested, access to such workpapers will be provided under the supervision of Denning, Downey & Associates, CPA's P.C. personnel. Furthermore, upon request, we may provide photocopies of selected workpapers to the cognizant or grantor agency. The cognizant or grantor agency may intend, or decide, to distribute the photocopies or information contained therein to others, including other governmental agencies. The workpapers for this engagement will be retained for a minimum of three years after the date the auditor's report is issued or for any additional period requested by .the cognizant, oversight, or pass -through agency. If we are aware that a federal awarding agency, pass - through entity, or auditee is contesting an audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the workpapers. Our fee for these services is listed below: Federal Fiscal Year Audit June 30, 2004 $19,260 June 30, 2005 $19,990 June 30, 2006 $20,830 A 1 zz Awlif Fnnapement Letter Page 5 of 6 In the event Denning, Downey & Associates, CPA's P.C. is required to perform additional accounting procedures (examples described below) in order to comply with this agreement, Denning, Downey & Associates, CPA's P.C.'s fees for these services will be at our standard hourly rates: GASB #31 Preparation (External investment pools) Preparing the Cash Flow Statement Preparing the "Schedule of Federal Expenditures„ GASB #34 Preparation (New reporting entity) Year end closing of the accounting records Changing the scope of the audit to a "Single Audit" Preparing the Data Collection For (Single Audits Only) For services not listed above, we will meet with management and agree as to the extent of additional services prior to any work performed. Our invoices for these fees will be rendered each month as work progresses and are payable upon presentation. If we elect to terminate our services for any reason, our engagement will be deemed to have been completed even if we have not completed our report. You are obligated to compensate us for all time expended and to reimburse us for all out-of-pocket costs through the date of termination. The above fee is based on anticipated cooperation from your personnel and the assumption that unexpected circumstances will not be encountered during the audit. If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. In July of the fiscal year being audited, we will send a letter to you detailing the information we will need forwarded to us to perform the audit. Government Auditing Standards require that we provide you with a copy of our most recent quality control review report. Our most recent peer review report accompanies this letter. We appreciate the opportunity to be of service to City of Kalispell and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign this copy and return it to us. Very truly yours, r Robert K. Denning, CPA, CGFM RESPONSE: This letter correctly sets forth the understanding of the City of Kalispell. Title: Date: A 133 Audit Engagement Letter Page 6 of 6