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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 1 | Page 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 2 | Page 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.