HomeMy WebLinkAboutItem 06.dDate January 17, 2012 8 Item No.
Audit Engagement Agreement with Malloy, Montague, Karnowski, Radosevich & Co. P.A.
Proposed Action
Staff recommends adoption of the following motion: Move to approve Audit Engagement
Agreement with Malloy, Montague, Karnowski, Radosevich & Co. P.A. (MMKR & Co.)
Overview
In 2006, the City of Lakeville staff took Requests for Proposals for auditing services. Of the six
firms from which proposals were received, MMKR & Co. submitted the low bid. The City
Council approved a three year Audit Engagement Agreement with MMKR on November 6, 2006.
On September 8, 2009, the City Council renewed the Audit Services Agreement with MMKR for
fiscal years 2009 through 2011.
The firm has provided excellent audit services for each of the past three years. MMKR has a
well trained and professional staff that provides high quality audit services. They are highly
respected for their financial summary reports submitted in conjunction with the audits and
presentations to governing bodies.
MMKR is respectfully requesting Council approval of the Audit Engagement Agreement for
fiscal year ended December 31, 2011. The Agreement delineates the scope of the audit.
Primary issues to Consider
• Cost. The cost of the audit is $30,300.
Supporting Information
• Audit engagement letter
Finance Director
Financial Impact: $ 30,300 Budgeted: Yes Source: General /Liquor /Utility Funds
Related Documents (CIP, ERP, etc.):
Notes:
January 4, 2012
To the City Council of the City of Lakeville
20195 Holyoke Avenue
Lakeville, MN 55044 -0957
Dear Councilmembers:
We are pleased to confirm our understanding of the services we are to provide the City of Lakeville (the
City) for the year ended December 31, 2011. We will audit the financial statements of governmental
activities, the business -type activities, each major fund, and the aggregate remaining fund information,
which collectively comprise the City's basic financial statements as of and for the year ended
December 31, 2011. Accounting standards generally accepted in the United States of America provide
for certain required supplementary information (RSI), such as Management's Discussion and Analysis
(MD &A), to supplement the City's basic financial statements. Such information, although not a part of
the basic financial statements, is required by the Governmental Accounting Standards Board (GASB) who
considers it to be an essential part of financial reporting for placing the basic financial statements in an
appropriate operational, economic, or historical context. As part of our engagement, we will apply certain
limited procedures to the City's RSI in accordance with auditing standards generally accepted in the
United States of America. These limited procedures will consist of inquiries of management regarding
the methods of preparing the information and comparing the information for consistency with
management's responses to our inquiries, the basic financial statements, and other knowledge we
obtained during our audit of the basic financial statements. We will not express an opinion or provide any
assurance on the information because the limited procedures do not provide us with sufficient evidence to
express an opinion or provide any assurance. The following RSI is required by accounting principles
generally accepted in the United States of America and will be subjected to certain limited procedures,
but will not be audited:
1. Management's Discussion and Analysis
2. Budgetary comparison schedules for the General Fund and major special revenue funds
3. GASB required other post - employment benefits information
We have also been engaged to report on supplementary information other than RSI that accompanies the
City's financial statements. We will subject the following supplementary information to the auditing
procedures applied in our audit of the financial statements and certain additional procedures, including
comparing and reconciling such information directly to the underlying accounting and other records used
to prepare the financial statements or to the financial statements themselves, and other additional
procedures in accordance with auditing standards generally accepted in the United States of America and
will provide an opinion on it in relation to the financial statements as a whole:
1. Combining and individual fund statements and schedules
2. Other supplemental information
Malloy, Montague, Karnowski, Radosevich & Co., P.A.
5353 Wayzata Boulevard • Suite 410 • Minneapolis, MN 55416 • Telephone: 952 -545 -0424 • Telefax: 952 -545 -0569 • www.mmkr.eom
City of Lakeville Page 2
January 4, 2012
The following other information accompanying the financial statements will not be subjected to the
auditing procedures applied in our audit of the financial statements, and for which our auditor's report
will not provide an opinion or any assurance:
1 _ I trnriuntory sectinn
2. Statistical tables
We will perform the required State Legal Compliance Audit conducted in accordance with auditing
standards generally accepted in the United States of America and the provisions of the Legal Compliance
Audit Guide, promulgated by the State Auditor pursuant to Minnesota Statute § 6.65 and will include such
tests of the accounting records and other procedures we consider necessary to enable us to conclude that
for the items tested, the City has complied with the material terms and conditions of applicable legal
provisions.
We will also prepare a management report for the City Council and administration. This report will
communicate such things as our concerns regarding accounting procedures or policies brought to our
attention during our audit, along with recommendations for improvements. The report will also contain
certain financial comparisons and analysis, and other information of interest.
Our services will not include an audit in accordance with the Single Audit Act Amendments of 1996 and
the U.S. Office of Management and Budget Circular A -133, which would only be required if the City
expended $500,000 or more in federal assistance funds during the year. If the City is required to have a
single audit of federal assistance funds, this engagement letter would need to be modified.
Audit Objectives
The objective of our audit is the expression of opinions as to whether your basic financial statements are
fairly presented, in all material respects, in conformity with accounting principles generally accepted in
the United States of America and to report on the fairness of the supplementary information referred to in
the second paragraph when considered in relation to the financial statements taken as a whole. Our audit
will be conducted in accordance with auditing standards generally accepted in the United States of
America and the standards for financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States, and will include tests of the accounting records of the City and
other procedures we consider necessary to enable us to express such opinions. If our opinions on the
financial statements are 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 opinions, we
may decline to express opinions or to issue a report as a result of this engagement.
We will also provide a report (that does not include an opinion) on 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 as required by
Government Auditing Standards. The report on internal control and compliance will include a statement
that the report is intended solely for the information and use of management, the body or individuals
charged with governance, others within the City, and specific legislative or regulatory bodies and is not
intended to be, and should not be, used by anyone other than these specified parties. If during our audit
we become aware that the City is subject to an audit requirement that is not encompassed in the terms of
this engagement, we will communicate to management and those charged with governance that an audit
in accordance with auditing standards generally accepted in the United States of America and the
standards for financial audits contained in Government Auditing Standards may not satisfy the relevant
legal, regulatory, or contractual requirements.
City of Lakeville
January 4, 2012
Management Responsibilities
Page 3
Management is responsible for the basic financial statements and all accompanying information as well as
all representations contained therein. We understand that the City will be responsible for preparing the
.initial draft of the financial SiateiTieiitS, note$, and suppuiiing sGhcdiiic9. `v`v'e undei'stdiid that the C will
also be responsible for typing, formatting, printing, and binding the financial statements. Prior to
issuance of the final audit report, we shall review the management report, internal control letters, and any
other required compliance reports with the City's management.
Management is responsible for establishing and maintaining effective internal controls, including
monitoring ongoing activities, to help ensure that appropriate goals and objectives are met. You are also
responsible for the selection and application of accounting principles; and for the fair presentation in the
financial statements of the respective financial position of the governmental activities, the business -type
activities, each major fund, and the aggregate remaining fund information of the City and the respective
changes in financial position and cash flows, where applicable, in conformity with accounting principles
generally accepted in the United States of America.
Management is also responsible for making all financial records and related information available to us
and for ensuring that management and financial information is reliable and properly recorded. Your
responsibilities include 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 aggregate, to the financial statements taken as a whole.
You are responsible for the design and implementation of programs and controls to prevent and detect
fraud, and for informing us about all known or suspected fraud affecting the City involving
(1) management, (2) employees who have significant roles in internal control, and (3) others where the
fraud or illegal acts could have a material effect on the financial statements. Your responsibilities include
informing us of your knowledge of any allegations of fraud or suspected fraud affecting the Cit received
in communications from employees, former employees, grantors, regulators, or others. In addition, you
are responsible for identifying and ensuring that the City complies with applicable laws, regulations,
contracts, agreements, and grants for taking timely and appropriate steps to remedy any fraud, illegal acts,
violations of contracts or grant agreements, or abuse that we may report. You are responsible for the
preparation of the supplementary information in conformity with accounting principles generally accepted
in the United States of America. You agree to include our report on the supplementary information in any
document that contains and indicates that we have reported on the supplementary information. You also
agree to include the audited financial statements with any presentation of the supplementary information
that includes our report thereon or make the audited financial statements readily available to users of the
supplementary information no later than the date the supplementary information is issued with our report
thereon.
Management is responsible for establishing and maintaining a process for tracking the status of audit
findings and recommendations. Management is also responsible for identifying for us previous financial
audits, attestation engagements, performance audits or other studies related to the objectives discussed in
the Audit Objectives section of this letter. This responsibility includes relaying to us corrective actions
taken to address significant findings and recommendations resulting from those audits, attestation
engagements, performance audits, or other studies. You are also responsible for providing management's
views on our current findings, conclusions, and recommendations, as well as your planned corrective
actions, for the report, and for the timing and format for providing that information.
City of Lakeville
January 4, 2012
Audit Procedures — General
Page 4
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 TC be tested. We Will plan and per viii The audit to obtain reasonable, rather than
absolute assurance about whether the financial statements are free of material misstatement, whether from
(1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or
governmental regulations that are attributable to the City or to acts by management or employees acting
on behalf of the City. Because the determination of abuse is subjective, Government Auditing Standards
do not expect auditors to provide reasonable assurance of detecting abuse.
Because an audit is designed to provide reasonable, but not absolute assurance and because we will not
perform a detailed examination of all transactions, there is a risk that material misstatements may exist
and not be detected by us. in addition, an audit is not designed to detect immaterial misstatements or
vinlatinns of laws nr gnyernmental regulations that dp rant ha.., - dir..cT and material effect --- the 01
financial statements. However, we will inform you of any material errors and any fraudulent financial
reporting or misappropriation of assets that come to our attention. We will also inform you of any
violations of laws or governmental regulations that come to our attention, unless clearly inconsequential.
Our responsibility as auditors is limited to the period covered by our audit and does not extend to 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, funding
sources, 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 require certain written representations from you about the financial statements and related
matters.
Audit Procedures — Internal Controls
Our audit will include obtaining an understanding of the City and its environment, including internal
control, sufficient to assess the risks of material misstatement of the financial statements and to design the
nature, timing, and extent of further audit procedures. 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 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 financial
statements. 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.
An audit is not designed to provide assurance on internal control or to identify significant deficiencies.
However, during the audit, we will communicate to management and those charged with governance
internal control related matters that are required to be communicated under AICPA professional standards
and Government Auditing Standards.
City of Lakeville
January 4, 2012
Audit Procedures — Compliance
Page 5
As part of obtaining reasonable assurance about whether the financial statements are free of material
misstatement, we will perform tests of the City's compliance with applicable laws and regulations and the
nro-visions applicatiie laws, regulations, contracts however, the objective of our
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audit 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.
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 documents selected by us for testing.
The assistance to be supplied by your personnel, including the preparation of schedules and analysis of
nennnnts, typing all inch nr nther confirmations we roquagt, nn i Inonting any invoices selected by us for
testing, will be discussed and coordinated with you.
We will provide conies of our reports to the City; however, management is responsible for distribution of
the reports and the financial statements. Unless restricted by law or regulation, or containing privileged
and confidential information, copies of our reports are to be made available for public inspection.
The audit documentation for this engagement is the property of Malloy, Montague, Karnowski,
Radosevich & Co., P.A. (MMKR) and constitutes confidential information. However, pursuant to
authority given by law or regulation, we may be requested to make certain audit documentation available
to a regulatory agency pursuant to authority given to it by law or regulation. We will notify you of any
such request. If requested, access to such audit documentation will be provided under the supervision of
MMKR personnel. Furthermore, upon request, we may provide copies of selected audit documentation to
the regulatory agency. The regulatory agency may intend, or decide, to distribute the copies or
information contained therein to others, including other governmental agencies.
The audit documentation for this engagement will be retained for a minimum of five years after the report
release date or for any additional period requested by the regulatory agency. If we are aware that a
federal awarding agency or auditee is contesting an audit finding, we will contact the party(ies) contesting
the audit finding for guidance prior to destroying the audit documentation.
William J. Lauer, CPA is the engagement partner and is responsible for supervising the engagement and
signing the report. Our fees for these services will be based on the actual time spent at our standard
hourly rates. We will also bill you for travel and other out-of-pocket costs such as report production,
typing, and postage. Our standard hourly rates vary according to the degree of responsibility involved
and the experience level of the personnel assigned to your audit. Our invoices for these fees will be
rendered each month as work progresses and are payable upon presentation. Unless additional work is
requested, or circumstances require additional work, we estimate that the basic audit fees will be $30,300.
These fees are based on anticipated cooperation from your personnel and the assumption that unexpected
circumstances will not be encountered during the audit. If we find that additional audit procedures are
required, or if additional services are requested by the City, those services will be billed at our standard
hourly rates. Additional audit procedures might be required for certain accounting issues or events, such
as new contractual agreements, transactions and legal requirements of new bond issues, new funds, major
capital projects, new tax increment districts, if there is an indication of misappropriation or misuse of
public funds, or if significant difficulties are encountered due to the lack of accounting records,
incomplete records, or turnover in the City's staff.
City of Lakeville Page 6
January 4, 2012
With regard to the electronic dissemination of audited financial statements, including financial statements
published electronically on your Internet website, you understand that electronic sites are a means to
distribute information and, therefore, we are not required to read the information contained in these sites
or to consider the consistency of other information in the electronic site with the original document.
If you intend to publish or otherwise reproduce the financial statements, such as in a bond statement, and
make reference to our firm name, you agree to provide us with printers' proofs or masters for our review
and approval before printing. You also agree to provide us with a copy of the final reproduced material
for our approval before it is distributed.
Government Auditing Standards require that we provide you with a copy of our most recent external peer
review report and any letter of comment, and any subsequent peer review reports and letters of comment
received during the period of the contract. Our most recent peer review accompanies this letter.
We app ° ^'ate - cpporta.., to be of se. vice to the Clay and belleVe th13 IeLlG aA.MaLAty JUllI1LLallLQb
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 the enclosed copy and return it to us.
Sincerely,
MALLOY, MONTAGUE, KARNOWSKI, RADOSEVICH & CO., P.A.
c —.._.. , � ___--
William J. Lauer,, A
Principal
WJL:kch
Response:
This letter correctly sets forth the understanding of the City of Lakeville.
By:
Title:
Date:
B ,r r .E {[[ ¢ . R OSE -, A SSO C IATES , . .
4�i ' i C Y
System Review Report
To the Principals of Malloy, Montague, Karnowski, Radosevich and Co., P.A.
and the Peer Review Committee of the Minnesota Society of CPAs
We have reviewed the system of quality control for the accounting and auditing practice of Malloy, Montague,
Karnowski, Radosevich and Co., P.A. (the firm) in effect for the year ended May 31, 2010. Our peer review was
conducted in accordance with the Standards for Performing and Reporting on Peer Reviews established by the
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system of quality control and complying with it to provide the firm with reasonable assurance of performing and
reporting in conformity with applicable professional standards in all material respects. Our responsibility is to
express an opinion on the design of the system of quality control and the firm's compliance therewith based on
our review. The nature, objectives, scope, limitations of, and the procedures performed in a System Review are
described in the standards at www.aicpa.org /prsummary
As required by the standards, engagements selected for review included engagements performed under
Government Auditing Standards and an audit of an employee benefit plan.
In our opinion, the system of quality control for the accounting and auditing practice of Malloy, Montague,
Karnowski, Radosevich and Co., P.A. in effect for the year ended May 31, 2010, has been suitably designed and
complied with to provide the firm with reasonable assurance of performing and reporting in conformity with
applicable professional standards in all material respects. Firms can receive a rating of pass, pass with
deficiency(ies) or fail. Malloy, Montague, Karnowski, Radosevich and Co., P.A. has received a peer review rating of
pass.
jl.a�(it-PiL� 9", sc,
KERBER, ROSE & ASSOCIATES, S.C.
September 23, 2010
Members of the American and Wisconsin Institutes of Certified Public Accountants
www.kerberrose.com