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HomeMy WebLinkAboutItem 06.jLakeville October 1, 2012 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.) Approval of the Audit Engagement Agreement will result in MMKR providing the audit services for the next three years. 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 initial and subsequent three year Audit Engagement Agreements with MMKR. MMKR has submitted a proposed Audit Engagement Agreement for fiscal years 2012 through 2014. 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. Primary Issues to Consider • Term of the audit engagement. Approval of audit engagement letter with MMKR & Co. P.A. will be for fiscal years 2012 through 2014 for a cost of $30,900, $31,500 and $32,150 for each of the respective years. The preliminary 2013 and 2014 budgets provide adequate appropriates for the proposed audit for the coming years. Supporting Information • Audit ment letter Dennis Feller, Fin an e Director Financial Impact: $ 30,900 (2012) Budgeted: Yes Source: General /Liquor /Utility Funds Related Documents (CIP, ERP, etc.): Notes: PRINCIPALS Thomas M. Momzpue, CPA Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA August 2, 2012 Mr. Dennis Feller Finance Director City of Lakeville 20195 Holyoke Avenue Lakeville, MN 55044 -0957 Dear Mr. Fe tier: Enclosed are two copies of an engagement letter that contains a proposed audit fee for each of the next three fiscal years (2012 through 2014), and which explains and confirms the basic services we expect to perform in conjunction with these audits. Also enclosed is a copy of our most recent peer review report. We understand and appreciate the financial constraints our city clients are under in the current economy, and are dedicated to providing the highest quality audit services at a cost - effective price. When compared to our billings for the City of Lakeville's 2011 audit, the proposed base audit fees included in this letter represent annual increases of approximately 2 percent. These increases the proposed fees represent an estimated discount of 20 percent from our standard rates. Assuming the proposed fee estimates are acceptable, and the letter adequately describes those services you desire, please sign both copies, return one copy to our office, and keep the other copy for your files. Please do not hesitate to contact me if you believe the letter should be modified or if you have any questions. Sincerely, M J LLOY, MONTAGUE, KARNOWSKI, RADOSEVICH & CO., P.A. William J. Lauer, CPA Principal WJL:Imb Enclosures 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.com August 2, 2012 To the City Council of the City of Lakeville 20195 Holyoke Avenue Lakeville, MN 55044 We are pleased to confirm our understanding of the services we are to provide the City of Lakeville (the City) for the years ended December 31, 2012, 2013, and 2014. We will audit the financial statements of the 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 years ended December 31, 2012, 2013, and 2014. 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 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. MD &A 2. Budgetary comparison schedules for the General Fund and major special revenue funds 3. Governmental Accounting Standards Board - required pension or other post - employment benefits information (as needed) 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.com City of Lakeville page 2 August 2, 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 our auditor's report will not provide an opinion or any assurance On that other inforuation: L Introductory section 2. Statistical tables We will perform the required State Legal Compliance Audit conducted annually 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 terns 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 (OMB) Circular A -133, which are required if the City expended $500,000 or more in federal assistance funds during any fiscal year. If the City is required to have a single audit of federal assistance funds, a modified engagement letter will be necessary. 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 above when considered in relation to the financial statements 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 (unmodified), we will 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 the provisions of laws, regulations, contracts, and 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 August 2, 2012 Management Responsibilities page 3 Management is responsible for the basic financial statements and all accompanying information as well as all representations contained therein. The City will be responsible for preparing the initial drafts of the financial statements, notes, and supporting schedules. The City will also be responsible for typing, formatting, printing, and binding the financial statements. prior to issuance of the final audit reports, we shall review our opinions, internal control letters, management report, and any other required state or federal compliance reports with the City's management. Management is responsible for establishing and maintaining effective internal controls, including evaluating and monitoring ongoing activities, to help ensure that appropriate goals and objectives are met; 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 is reliable and financial information is reliable and properly recorded_ You are also responsible for providing us with (1) access to all information of which you are aware that is relevant to the preparation and fair presentation of the financial statements, (2) additional information that we may request for the purpose of the audit, and (3) unrestricted access to persons within the government from whom we determine it necessary to obtain audit evidence. Your responsibilities include adjusting the financial statements to correct material misstatements and for confirming to us in the written 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 City 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 fix the preparation ofthe 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. Your responsibilities include acknowledging to us in the written representation letter that (I) you are responsible for presentation of the supplementary information in accordance with accounting principles generally accepted in the United States of America; (2) that you believe the supplementary information, including its form and content, is fairly presented in accordance with accounting principles generally accepted in the United States of America, (3) that the methods of measurement or presentation have not changed from those used in the prior period (or, if they have changed, the reasons for such changes); and (4) you have disclosed to its any significant assumptions or interpretations underlying the measurement or presentation of the supplementary information. City of Lakeville Page 4 August 2, 2012 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 endings, conclusions, and recommendations, as well as your planned corrective actions, for the report, and for the timing and format for providing that information. 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. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 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 of the inherent limitations of an audit, combined with the inherent limitations of internal control, 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, even though the audit is properly planned and performed in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct and material effect on the financial statements. However, we will inform the appropriate level of management of any material errors or any fraudulent financial reporting or misappropriation of assets that come to our attention. We will also inform the appropriate level of management 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 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. City of Lakeville August 2, 2012 Audit Procedures — Internal Controls Page 5 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 SMndards. An audit is not designed to provide assurance on internal control or to identify significant deficiencies or material weaknesses. 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. Audit Procedures — Compliance 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 the provisions of applicable laws, regulations, contracts, agreements, and grants. However, the objective of our 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 The assistance to be supplied by your personnel, including the preparation of schedules and analysis of accounts, typing all cash or other confirmations we request, and locating any invoices selected by us for testing, will be discussed and coordinated with you. We will provide copies 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 these engagements 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 the state of Minnesota or its designee, a federal agency providing direct or indirect funding, or the U.S. Government Accountability Office for purposes of a quality review of the audit, to resolve audit findings, or to carry out oversight responsibilities. 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 aforementioned parties. "These parties may intend, or decide, to distribute the copies or information contained therein to others, including other governmental agencies. The audit documentation for these engagements will be retained for a minimum of five years after tine repot release or for any additional period requested by a regulatory agency. If we are aware that a federal awarding agency or auditee is contesting all audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the audit documentation. City of Lakeville Page 6 August 2, 2012 We expect to begin our audits shortly after the end of each fiscal year and to issue our reports no later than the following June 30. William J. Lauer, CPA is the engagement partner and is responsible for supervising the engagement and signing the reports or authorizing another individual to sign them. 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. We estimate our fees for these services to be as follows: Year Ended. December 31. Amount 2012 $ 30,900 2013 $ 31,500 2014 $ 32,150 These fees are based on anticipated cooperation ftom 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, new accounting and auditing standards, 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. With regard to the electronic dissemination of audited financial statements, including financial statements published electronically on your Internet website, VOL] 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. Please be aware that e -mail is not a secure method of transmitting data. It can be intercepted, read, and possibly changed. Due to the large volmne of e -mails sent daily, the likelihood of someone intercepting Your e -mail is relatively small, but it does exist. We will communicate with you via e -mail, if you are willing to accept this risk. If you intend to publish or otherwise reproduce the financial statements, such as in a bond statement, and make reference to our firm name, Vol] 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.Stamkircfs 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. City of Lakeville August 2, 2012 Page 7 We appreciate the opportunity to be of service to the City 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 the enclosed copy and return it to us. Sincerely, MALLOY, MONTAGUE, KARNOWSKI, RADOSEVICI I & CO., P.A. 61j'�U. d , ( � L � William.. Lauer, CPA Principal WJL:Imb Response: This letter correctly sets forth the understanding of the City of Lakeville. By: Title: Date: R OSE & ASSOCIATE T,_ r 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 Peer Review Board of the American Institute of Certified Public Accountants. The firm is responsible for designing a 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. K -&C- / ,� /�4�,J;C KERBER, ROSE & ASSOCIATES, S.C. September 23, 2010 Members of the American and Wisconsin Institutes of Certified Public Accountants www.kerberrose.com