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.
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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
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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:
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