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HomeMy WebLinkAboutItem 06.i• Date January 19, 2010 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 Enga eg ment Agreement with Malloy, Montagne, Karnowski, Radosevich & Co. P.A. (MMKR & Co.) Overview On September 9, 2009, the City Council approved an Audit Engagement Agreement with Malloy, Montague, Kamowski, Radosevich & Co. P.A. (MMKR & Co.). Subsequent to approval of the Agreement, the City has been awarded federal economic stimulus grants. The Federal Single Audit Act requires that nonfederal entities that expend $500,000 or more a year in federal awards have a single or program -specific audit in accordance with the provisions of the Act's audit requirements. As such, Malloy, Montague, Karnowski, Radosevich & Co. P.A. (MMKR & Co.) has resubmitted the Audit Engagement Agreement which expands the scope of the audit to include the Single Audit provisions. With the exception of the Single Audit provisions, all other terms and conditions of the Audit Engagement Agreement remain unchanged. The cost of the Single Audit provisions is expected to be approximately $2,500 - $3,000. .Primary Issues to Consider (responses on attached pages) • Financing Federal Single Audit • What is the Single Audit Act? Supporting Information • - udit engagemen letter Dennis Feller, inane Director Financial Impact: $ $2,500-$3,000 Budgeted: No Source: Various benefitted Funds Related Documents (CIP, ERP, etc.): Notes: Primary Issues to Consider • Financing Federal Single Audit. The cost of the single audit will be financed from the fund primarily responsible for the accounting of the financial activities related to the federal grant. The largest expenditure in 2009 was for the reconstruction of Holyoke/Highview Avenue from 202nd Street to Dodd Boulevard; the 2009 Single Audit will therefore be financed from the Public Works Reserve Fund. The City will receive grants in 2010 related to energy upgrades in various city facilities such as the Arts Center HVAC; the 2010 Single Audit will therefore be financed from the Building Fund. • What is the Single Audit Act? The Single Audit Act requires that nonfederal entities that expend $500,000 or more a year in federal awards have a single or program -specific audit in accordance with the provisions of the Act's audit requirements. Auditors of recipients of federal awards are required to: • Plan and conduct the audit in accordance with GAAS (generally accepted auditing standards) and GAGAS (generally accepted government auditing standards). • Determine if the organization -wide and federal awards financial statements are presented fairly in accordance with GAAS and GAGAS. • Determine if Schedule of Expenditures of Federal Awards is presented fairly in relation to the organization's financial statements as a whole. • Perform tests that demonstrate an understanding of the recipient's internal controls in order to support a "low assessed risk" for major programs. • Determine that the recipient has complied with laws, regulations, and grant agreements through review and testing procedures. • Follow up on the status of previous audit findings. The auditor's report may be in the form of either combined or separate reports. The auditor's report will state that the audit was conducted in accordance with OMB Circular A-133 and include the following: • An opinion (or disclaimer of opinion) about whether the financial statements and schedules of expenditures are fairly presented in accordance with GAAP. • Report on the status of internal controls relative to the financial statements and major programs. • Compliance report that describes the degree to which the recipient has complied with laws, regulations, and the terms and conditions of the federal assistance awards. • Schedule of findings and questioned costs. • List of major programs using the required risk-based methodology. PRINCIPALS Kenneth W. Malloy, CPA Thomas M. Montague, CPA MMKR Thomas A. Karnowski, CPA Paul A. Radosevich, CPA C E RT I F I E D PUBLIC William J. Lauer, CPA ACCOUNTANTS James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA January 8, 2010 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, 2009. This letter updates and amends our original engagement letter, dated July 13, 2009, to include a Single Audit of the City's federal awards expenditures. 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 year ended December 31, 2009. 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 accompany the City's basic financial statements. As part of our engagement, we will apply certain limited procedures to the City's RSI. These limited procedures will consist principally of inquires of management regarding the methods of measurement and presentation, which management is responsible for affirming to us in its representation letter. Unless we encounter problems with the presentation of the RSI or with procedures relating to it, we will disclaim an opinion on it. 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. Governmental Accounting Standards Board required other post -employment benefits information (as needed) Supplementary information other than RSI also accompanies the City's basic financial statements. We will subject the following supplementary information to the auditing procedures applied in our audit of the basic financial statements and will provide an opinion on it in relation to the basic financial statements: 1. Schedule of Expenditures of Federal Awards 2. Combining and individual fund statements and schedules 3. Other supplemental information The following additional information accompanying the basic 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 disclaim an opinion: 1. Introductory section 2. Statistical tables 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 January 8, 2010 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. 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 additional information referred to in the first paragraph when considered in relation to the basic financial statements taken as a whole. The objective also includes reporting 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 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 the U.S. Office of Management and Budget (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 solely for the information and use of management, the body or individuals charged with governance, others within the entity, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass-through entities and is not intended to be, and should not be, used by anyone other than these specified parties. Our audit will be conducted in accordance with auditing standards generally accepted in the United States of America established by the Auditing Standards Board (United States); the standards for financial audits 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 OMB Circular A-133, and other procedures we consider necessary to enable us to express such opinions and to render the required reports. If our opinions on the financial statements or the Single Audit compliance opinions 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. City of Lakeville January 8, 2010 Management Responsibilities Page 3 Management is responsible for the basic financial statements and all accompanying information as well as all representations contained therein. Management is also responsible for preparation of the Schedule of Expenditures of Federal Awards in accordance with the requirements of OMB Circular A-133. We understand that the City will be responsible for preparing the initial draft of the financial statements, notes, and supporting schedules. We understand that the City will 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 state or federal compliance reports with the City's management. Management is responsible for establishing and maintaining effective internal controls, including internal controls over compliance and for 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; 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; and for federal award program compliance with applicable laws and regulations and the provisions of contracts and grant agreements. 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 also include identifying significant vendor relationships in which the vendor has responsibility for program compliance and for the accuracy and completeness of that information. Management's 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 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. 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. Management is responsible for establishing and maintaining of a process for tracking the status of audit findings and recommendations. Management is also responsible for identifying for us previous audits or other engagements or 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 or other engagements or 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 reports, and for the timing and format for providing that information. City of Lakeville January 8, 2010 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 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 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 does 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 violations of laws or governmental regulations that do not have a direct and material effect on the 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. We will 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 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. As required by OMB Circular A-133, we will perform tests of controls over compliance 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 programs. However, our tests will be less in scope than would be necessary to render and opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to OMB Circular A-133. City of Lakeville Page 5 January 8, 2010 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, Government Auditing Standards, and OMB Circular A-133. 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 applicable laws and regulations and the provisions 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. OMB 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 tests of transactions and other 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 the City's major programs. The purpose of these procedures will be to express an opinion on the City's compliance with requirements applicable to each of its 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 documents selected by us for testing. 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. At the conclusion of the engagement, we will complete the appropriate sections of the Data Collection Form that summarizes our audit findings. 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, auditors' reports, and corrective action plan) along with the Data Collection Form to the federal audit clearinghouse. We will coordinate with you the electronic submission and certification. If applicable, we will provide copies of our report for you to include with the reporting package you will submit 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 the cognizant or oversight agency for audits. City of Lakeville Page 6 January 8, 2010 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 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 carryout 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 this engagement will be retained for a minimum of five years after the report release or for any additional period requested by the regulatory 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 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. We estimate our fees for these services to be $28,500 for the City audit, plus $2,50043,000 for the Single Audit of Federal Awards Expenditures. 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. 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 and letter of comment accompanies this letter. City of Lakeville January 8, 2010 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, RADOSEVICH & CO., P.A. William J. Lauer, CP Principal WJL:kch Response: This letter correctly sets forth the understanding of the City of Lakeville. By: Title: Date: