HomeMy WebLinkAboutFY 2015-16 Report on Internal Controls
INDEPENDENT AUDITORS’ REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS
BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE
WITH GOVERNMENT AUDITING STANDARDS
To the Honorable Mayor and Members of the City Council
City of Azusa, California
We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, the financial statements of the governmental
activities, the business-type activities, each major fund, and the aggregate remaining fund information of
the City of Azusa, California, (the City) as of and for the year ended June 30, 2016, and the related notes
to the financial statements, which collectively comprise the City’s basic financial statements, and have
issued our report thereon dated December 28, 2016.
Internal Control over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City’s internal control
over financial reporting (internal control) to determine the audit procedures that are appropriate in the
circumstances for the purpose of expressing our opinions on the financial statements, but not for the
purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not
express an opinion on the effectiveness of the City’s internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and
was not designed to identify all deficiencies in internal control that might be material weaknesses or
significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were
not identified. However, we identified certain deficiencies in internal control that we consider to be material
weaknesses and significant deficiencies.
A deficiency in internal control exists when the design or operation of a control does not allow management
or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct,
misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in
internal control such that there is a reasonable possibility that a material misstatement of the entity’s
financial statements will not be prevented, or detected and corrected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a
material weakness, yet important enough to merit attention by those charged with governance. We consider
the following deficiencies to be material weaknesses:
2016-001: Cash and Investments Reconciliation
In performing our audit procedures, it was noted that the City’s cash and investments were not properly
reconciled to the general ledger. During the course of the audit, cash and investments balances were
adjusted to reduce the City’s recorded amounts by $23,001,509 in order to properly reconcile. The
adjustments were primarily caused due to errors surrounding the recorded cash balances of various debt
service accounts following the issuances of refunding bonds.
203 N. Brea Blvd., Suite 203 Brea, CA 92821 Phone: 714.672.0022
An Association of Independent Accounting Firms
To the Honorable Mayor and Members of the City Council
City of Azusa, California
Recommendation: The design of internal control should be improved upon to include a formalized
procedure to properly balance and reconcile all of the City’s cash and investments as reported in the City’s
financial statements. We recommend that the City ensure all items included on the bank statements also
be included in the cash balance and maintain the appropriate oversight of the bank reconciliation and
journal entry processes. While the city may have certain accounts reconciled, the reconciliation should
include all accounts.
2016-002: Long-Term Debt Reconciliation
In performing our audit procedures, it was noted that the City did not properly defease the 2007 Series A
Taxable Tax Allocation Bonds and the 2008 Series B Housing Tax Allocation Bonds resulting from the
issuance of the 2015 A& B Subordinate Tax Allocation Refunding Bonds. We noted the City also did not
set up a deferred charge in relation to the issuance of the refunding bonds.
In performing our audit procedures, we noted the City did not properly calculate the deferred charge in
relation to the issuance of the 2015 Water System Refunding Revenue Bonds.
Recommendation: The design of internal control should be improved upon to include a formalized
procedure to properly record and calculate all applicable items related to the issuance of refunding bonds.
2016-003: Capital Assets Reconciliation
In performing our audit procedures, it was noted the City did not properly capitalize $432,630 related to
prior period capital costs. This resulted in a prior period restatement recorded in the governmental activities
of the government-wide statements.
In performing our audit procedures, it was noted the City did not properly capitalize $983,299 related to
current year capital costs.
Recommendation: The design of internal control should be improved upon to ensure the Finance
Department is adequately communicating with other departments in regards to the status of various capital
projects and capital purchases. The Finance Department should be communicating with various
departments, and tracking and properly recording this activity on an ongoing basis.
2016-004: Inventory Reconciliation
In performing our audit procedures, it was noted the City did not properly update its inventory listing with
two of three discrepancies noted and communicated during our inventory observation on June 30, 2016.
The discrepancies were not significant, however, the failure to record the adjustments suggests a lack of
oversight on the maintenance of the inventory listing.
Recommendation: The design of internal control should be improved upon to ensure management is
properly noting and adjusting inventory accounts for any discrepancies noted during the inventory counts.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City’s financial statements are free from
material misstatement, we performed tests of its compliance with certain provisions of laws, regulations,
contracts, and grant agreements, noncompliance with which could have a direct and material effect on the
determination of financial statement amounts. However, providing an opinion on compliance with those
provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The
results of our tests disclosed no instances of noncompliance or other matters that are required to be
reported under Government Auditing Standards.
To the Honorable Mayor and Members of the City Council
City of Azusa, California
City’s Response to Findings
The City’s response to the findings identified in our audit was not subjected to the auditing procedures
applied in the audit of the financial statements and, accordingly, we express no opinion on it. See attached
Corrective Action Plan for city’s responses to findings noted above.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance
and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control
or on compliance. This report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering the City’s internal control and compliance. Accordingly,
this communication is not suitable for any other purpose.
Brea, California
December 28, 2016
Corrective Action Plan 6-30-16 Continued
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City of Azusa
Corrective Action Plan
Independent Auditors’ Report on Internal Control Report
June 30, 2016
Finding No. 2016-001: Cash and Investments Reconciliation
Corrective Action Plan
We acknowledge reconciliation of cash has been an ongoing concern of the City’s auditors. In
2015, the City refinanced bonds that necessitated the establishment of escrow accounts to fund
future debt service payments for the portion(s) of the bonds ineligible for early defeasance. Due
to the complexity of the refinancings, the City recorded the funds held in escrow in its general
ledger when posting the refinancing entries in error.
City Finance Staff has worked with LSL to correct the refinance postings in the general ledger
and is now aware of how to calculate the various entries needed to properly record similar future
refinancings in the general ledger.
Finding No. 2016-002: Long-Term Debt Reconciliation
Corrective Action Plan
This finding directly impacted the findings related to reconciliation of cash and investments.
City Finance Staff has worked with LSL to correct the refinance postings in the general ledger
and is now aware of how to calculate the various entries needed to properly record similar future
refinancings in the general ledger.
Finding No. 2016-003: Capital Assets Reconciliation
Corrective Action Plan
We agree with this finding. Reconciliation of Capital Assets needs to be refined. Some capital
related costs were recorded to non-capital accounts and therefore not picked up in the capital
Corrective Action Plan 6-30-16 Continued
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assets reconciliation process. City Finance Staff will incorporate into its capital asset
reconciliation a review of non-capital accounts to ensure all capital related items are properly and
timely capitalized.
Finding No. 2016-004: Inventory Reconciliation
Corrective Action Plan
We agree with this finding; however, City Finance Management was unaware such requests were
made. While the fiscal impact is less than $100, adjustments requested by the auditors should
have been recorded. City Finance Management has discussed this finding with applicable staff
and has stressed the importance of communication of audit request with management and the
importance of following through with such requests.