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HomeMy WebLinkAbout2006 Audit Reports - HLBTR1 ~ Tautges Redpath, Ltd. Certified Public Accountants and Consu Cants AUDIT COMMITTEE LETTER To the Honorable Mayor and Members of the City Council City of Brooklyn Center, Minnesota We have audited the financial statements o~ the City of Brooklyn Center, Minnesota, for the year ended December 3 1, 2006, and have issued our report thereon dated May 14, 2007. Professional standards require that we provide you with the following information related to our audit. Our Responsibility under U.S. Generally Accepted Auditing Standards As stated in our engagement letter dated July 27, 200b, our responsibility, as described by professional standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance that the financial statements are free of material misstatement and are fairly presented in accordance with U.S. generally accepted accounting principles. Because an audit is designed to provide reasonable, but not absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us. As part of our audit, we considered the internal control of the City of Brooklyn Center, Minnesota. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. Signi#icant Accounting Policies Management is responsible for the selection and use of appropriate accounting policies. In accordance with the terms of our engagement letter, we will advise management about the appropriateness of accounting policies and their application. The significant accounting policies used by the City of Brooklyn Center, Minnesota are described in Note 1 to the financial statements. For 204b, the City of Brooklyn Center, Minnesota implemented GASB No. 44, related to the statistical section of the financial statements. We noted no transactions entered into by the City of Brooklyn Center, Minnesota during the year that were both significant and unusual, and of which, under professional standards, we are required to inform you, or transactions for which there is a lack of authoritative guidance or consensus. Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly 4810 White Bear Parkway White Bear Lake, Minnesota 55110 651 426 7000 651 4~6 5004 Fax www.hlbtr.cfam HLB Tautges Redpatf~, Ltd. is a member of . International, a world-wide organization of accounting firms and business advisors, City of Brooklyn Center, Minnesota Audit Committee Letter Page sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The mast sensitive estimates affecting the financial statements were as follows: • Depreciation expense. Management's estimate of depreciation expense is based on the estimated useful lives of assets. We evaluated the key factors and assumptions used to develop depreciation expense in determining that it is reasonable in relation to the financial statements taken as a whole. • Health insurance liability. Managements estimate of health insurance liability is based on eligible participants, estimated future health insurance premiums, and estimated retirement dates. we evaluated the key factors and assumptions used to develop health insurance liabilities in determining that it is reasonable in relation to the financial statements taken as a whole. • MCES liability. Management's estimate of the City's liability for a correction of City allocated flow is based on a present value of unbilled flows during a six year period from 2000 to 2005. we evaluated the key factars and assumptions used to develop the liability in determining that it is reasonable in relation to the financial statements taken as a whole. • Land held for resale. Management's estimate of this asset is based on net realizable value flower of cost or estimated sales price}. we evaluated the key factors in determining that it is reasonable in relation to the financial statements taken as a whole. Audit Adjustments For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements that, in our judgment, may not have been detected except through our auditing procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the City of Brooklyn Center, Minnesota's financial reporting process that is, cause future financial statements to be materially misstated}. we proposed, and management recorded the following adjustments: • Recorded a receivable in the amount of $93,811 for deposit with Hennepin County. • Recorded an adjustment to land held for resale in the amount of $208,000. • Recorded a payable in the amount of $580,465 for unbilled MCES flows. • Recorded a receivable in the amount of $39,784 relating to an environmental response grant. City of Brooklyn Center, Minnesota Audit Committee Letter Page 3 ~Ve also proposed, and management recorded, other adjustments that generally were for routine year-end accruals and for isolated errors. rn addition, management represented to us that passed adjustments are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Those passed adjustments are as follows: a. Not reporting an estimate allowance for uncollectible property taxes in the amount of $24,400. b. Not recording a deferred charge relating to band discounts x$171,000}. c. Unrecorded receivables in the amount of $107,070. d. The City maintains a perpetual inventory system related to liquor inventory. Audit test counts indicate inventory is overstated by approximately $2,000. Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a matter, whether or not resolved to our satisfaction, concerning a financial accounting, reporting, ar auditing matter that could be significant to the financial statements or the auditor's report. we are pleased to report that no such disagreements arose during the course of our audit. Consultations with ether Independent Accountants Zn some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. ff a consultation involves application of an accounting principle to the government unit's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Issues Discussed Prior to Retention of Independent Auditors we generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City of Brooklyn Center, Minnesota's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Difficulties Encountered in Performing the Audit we encountered no difficulties in dealing with management in performing our audit. City of Brooklyn Center, Minnesota Audit Committee Letter Page 4 G~os~nq This information is intended solely for the information and use of those who have responsibility for oversight of financial reporting process and management of the City of Brooklyn Center, Minnesota and is not intended to be and should not be used by anyone other than these specified parties. HLB TAUTGES REDPATH, LTD. White Bear Lake, Minnesota May 14, 2007 ~ Tautges Redpath. Ltd. Certified Public Accountants and Consultants REPORT ON COMPLIANCE WITH MINNESOTA LEGAL COMPLIANCE AUDIT GUIDE FOR LOCAL GOVERNMENT To the Honorable Mayor and Members of the City Council City of Brooklyn Center, Minnesota We have audited the financial statements of the City of Brooklyn Center, Minnesota, as of and for the year ended December 31, 2046, and have issued our report thereon dated May 14, 2407. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the provisions of the 1Vlinnesota Legal Compliance Audit Guide far Local Gavernmen~ promulgated by the State Auditor pursuant to Minnesota Statutes Section 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures we considered necessary in the circumstances. The Nlinneso~a Legal Compliance Audit Guide for Local Government covers seven main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment f nancing. Our study included all of the listed categories. The results of our tests indicate that for the items tested, the City of Brooklyn Center, Minnesota complied with the material terms and conditions of applicable legal provisions. This report is intended solely for the information and use of the City of Brooklyn Center, Minnesota's City council and management and is not intended to be and should not be used by anyone other than these specified parties. / r HLB Tautges Redpath, Ltd. White Bear Lake, Minnesota May 14, 2047 4810 White Bear Parkway White Bear Fake, Minnesota 55110 651 426 7000 651 426 5004 Fax www.hlbtr.com HLB Tautges Redpath, Ltd. is a member of ~ International, a world-wide organization of accounting firms and business advisors, i ~ Tautges Redpath, Ltd. Certified Public Accountants and Consultants REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE wITH G~ VERNMENT A UDI2~ING STANDARDS To the Honorable Mayor and Members of the City Council City of Brooklyn Center, Minnesota we have audited the financial statements of the governmental activities, the business-type activities, each mayor fund, and the aggregate remaining fund information of the City of Brooklyn Center, Minnesota as of and for the year ended December 3 1, 2006, which collectively comprise the City of Brooklyn Center, Minnesota's basic financial statements and have issued our report thereon dated May 14, 2007. we conducted our audit in accordance with 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. Internai control fiver Financiai Reporting In planning and performing our audit, we considered the City of Brooklyn Center, Minnesota's internal control over financial reporting as a basis for designing our auditing procedures 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 of Brooklyn Center, Minnesota's internal control over financial reporting. Accordingly, we do not express an opinion of the effectiveness of the City of Brooklyn Center, Minnesota's internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies. A control deficiency 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 misstatements on a timely basis. A significant def ciency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to initiate, authorize, record, process, or report financial data reliably in accordance with 48101Nhite Bear Parkway 1Nhite Bear Lake, Minnesota 55110 651 426 7000 651 426 5004 Fax www.hl~tr.cam HLB Tautges Redpaih, Ltd, is a member of ~ International, a world-wide organization of accounting firms and business advisors. Report on Internal Control over Financial Reporting and an Compliance and ether Matters Page 2 generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity's financial statements that is more than inconsequential will not be prevented or detected by the entity's internal control over financial reporting. we consider the deficiencies described in the accompanying schedule of f ndings and responses as items 2006-1 through 2006-6 to be significant deficiencies in internal control aver financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity's Internal control. fur consideration of the internal control over financial reporting was for the limited purpose described in the ffirst paragraph of this section and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses. However, we believe that none of the significant deficiencies described above are material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City of Brooklyn Center, Minnesota's financial statements are free of 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 that are required to be reported under Government Auditing Standards. we also noted certain additional matters that we reported to management of the City of Brooklyn Center, Minnesota in a separate letter dated May ~4, 2007. The City of Brooklyn Center, Minnesota's response to the findings identified in our audit are described in the accompanying schedule of findings and responses. we did not audit the City of Brooklyn Center, Minnesota's response and, accordingly, we express no opinion on it. Report on Internal Control over Financial Reporting and on Compliance and ether Matters Page 3 This report is intended solely for the information and use of the City of Brooklyn Center, Minnesota's City Council and management and is not intended to be, and should not be, used by anyone other than these specified parties. ~ f HLB TAUTGES REDPATH, LTD. 'White Bear Lake, Minnesota May l4, 2007 CXTY 4F BROOKLYN CENTER, M~NNES4TA Schedule of Findings and Responses For The Year Ended December 31, X006 ZOOG-1 Approval of Journal Entries Criteria: The design of an entity's internal control system should include appropriate safeguards so that misstatements due to error or fraud are detected in a timely manner. Condition: Journal entries are prepared and recorded to update the general ledger. The entries are made for items such as recording depreciation, interfund transfers and adjustments that may result from bank reconciliations. The preparation and recording of journal entries is not subject to a review and approval process. Cause: The City has not established procedures regarding review and approval of journal entries. effect: By not having such controls, there is an increased risk that errors may occur and not be detected by City management. Recommendation: we recommend the City strengthen internal controls by establishing a review and approval process, such as review and approval of journal entries that exceed a pre-determined dollar threshold. Views of Responsible ~~cials: A partial solution to this situation has been implemented with the monthly approval of electronic disbursements. However, review of entries related to bank reconciliations, monthly reporting of enterprise funds, interfund transfers and exchanges has not yet been implemented. Even though there is not currently concern about the level of trust and confidence in those staff preparing and entering such transactions a protective procedure will be implemented to improve the structure of internal controls in this area. CITY ~F BROOKLYN CENTER, MINNE54TA Schedule of Findings and Responses For The Year Ended December 3 1, z0o6 2006-2 Approval o~ Utility Billing Adjustments Criteria: The design of an entity's internal control system should include appropriate safeguards so that misstatements due to error or fraud are prevented or detected in a timely manner. Condition: Each month adjustments to utility accounts are made. These adjustments are for a variety of reasons such as abating penalties, correcting usage and other items. The utility clerk has authority to make these adjustments. A record of these adjustments is maintained in an adjustment book. However, the adjustments are not reviewed and approved. Car~se: The City has not established procedures regarding review and approval of utility billing adjustments. Effect: By not having such controls there is an increased risk that errors may occur and not be detected by City management. Recommendation: We recommend the City strengthen controls by establishing procedures to provide for periodic review and approval of adjustments to customer accounts, such as requiring approval for adjustments that exceed apre-determined dollar threshold. Views of Responsible fficials: While there are no concerns with the level of trust and confidence in staff performing this function, management understands the internal control concern being raised by the auditors. Management will develop and implement a system of approval for utility account adjustments with defined parameters for maximum adjustment allowed without further approval. CITY IMF BRIa~KLYN CENTER, MINNESOTA Schedule of Findings and Responses For The Year Ended December 31, 200b 2006-3 Determination of Water Consumption Criteria: The design of an entity's internal control system should include appropriate safeguards so that misstatements due to error or fraud are prevented or detected in a timely manner. Condition: The quarterly water billing for residential customers is based on consumption. The City's method of obtaining consumption is from meter readings by the customer. There is na procedure requiring periodic verification of residential meter readings. Without periodic verification, there is a potential of under reported usage to occur and not be detected in a timely manner. Cause: The City has not established procedures regarding periodic verification of residential meter readings. Effect: By not having such controls, there is an increased risk that errors may occur and not be detected by City management. Recommendation: We recommend the City strengthen controls by establishing procedures to periodically verify residential meter readings. Views of Responsible a~cials: The City Council recently approved the solicitation of engineering services for development of an automated meter reading system plan. While this condition will overlap some additional future financial reporting periods the process of remedying this condition is underway and will clearly and conclusively address this concern. CITY IMF BROOKLYN CENTER, MINNESOTA Schedule of Findings and Responses For The Year Ended December 31, 200 Zoo6-4 Liquor Inventory Adjustments Criteria: The design of an entity's internal control system should include appropriate safeguards so that misstatements due to error or fraud are prevented or detected in a timely manner. Condition: The City maintains a perpetual inventory of its liquor store inventory. Periodically, City staff performs test counts of the actual inventory on hand and compare these counts to the perpetual inventory records. During 2006, these test counts resulted in a negative adjustment to inventory of $21,35b for Stare # l . Cause: Unknown. Effect: By not having such controls there is an increased risk that errors may occur and not be detected by management. Recommendation: ~Ve recommend strengthening procedures by considering the following: 1. Have employees from Store #2 perform test counts at Store #1 and have employees from Store #1 perform test counts at Store #2. 2. Not allowing vendors l distributors to leave until a manager can verify all product invoiced has been delivered. Have a manager do this procedure for everything delivered instead of a part-time employee. 3. Consider requiring the stores to track breakage separately from other adjustments. 4. Perform counts more frequently, which could possibly reduce errors or large adjustments. Have a different employee double check any items that don't match the inventory system. Be more attentive when splitting i 2wpacks into b-packs or transferring inventory from one store to another. Views of ~4esponsible ~~ciars: The first step that must be taken is to remedy the "Unknown" cause of this problem. There is a system in place to address concerns such as the one raised here but it is clearly not operating correctly. Management will observe the operation of the system and address the concerns during the 2007 fiscal year. . I CITY ~F BR~~KLYN CENTER, MINNESOTA Schedule of Findings and Responses For The Year Ended December 3 1, 2046 200b-5 Financial Statement Corrections Criteria: SAS 112 specifies that a correction of any magnitude that could occur and not be detected by the City's controls be considered a significant deficiency in internal control. Condition: During the course of our audit, audit staff detected that corrections relating to due from other governments, Iand held for resale, and accounts payable. Cause: ~n our viewpoint, the guidance provided by SAS 112 regarding financial statement corrections combined with the complexity of governmental accounting will result in most local governments receiving a finding in this regard. Effect: There is an increased risk that financial statement misstatements may occur. Recommendation: we recommend the following: 1. V~ith regard to due from other governments, we recommend the finance department coordinate with other departments to determine the status of grants. 2. with regard to accounts payable, we recommend the finance department inquire of other departments regarding the existence of commitments and contingencies. 'dews of Responsible ~fficiats and Corrective Action Plan: rt is clear that SAS 112 changes the nature of the relationship between auditor and client. while past relations have been of a nature that allows for sharing information to assure correct presentation of financial statements SAS 112 declares that oversights in draft statements reviewed by auditors will be viewed as inadequate accounting process rather than checks and balances of a working relationship. with this new relationship now clearly defined it will be incumbent on City staff to implement procedures such as those suggested above to eliminate oversights in draft statements. Careful review of City Council minutes by staff in relation to the preparation of the draft statements will also assist in discovery of potential miscommunications between departments which must be corrected by staff prior to the preparation of draft f nancial statements. CITY OF BROOKLYN CENTER, MINNESOTA Schedule of Findings and Responses For The Year Ended December 3 1, 206 2006-6 Documenting Approval For Use of Paid Time Off for Department Heads Criteria: The design of an entity's internal control system should include appropriate safeguards so that misstatements due to error or fraud are prevented or detected in a timely manner. Condition: The City's current practice requires employee time reports to be reviewed and . approved by certain designated staff. Time reports of Department Heads are not required to be reviewed and approved. However, the City's current practice includes department head request and City Manager approval of vacation via e-mail. Cause: The City has not established procedures regarding review and approval of department . head's time reports. Effect: The City's liability for severance pay is based on accumulated unused vacation and sick leave hours. By not having such controls, there is an increased risk that errors may occur in the accrual of vacation and sick leave and not be detected by City management. Recommendation: ~Ve recommend the internal controls relating to the documentation of the use of vacation and sick leave be strengthened by having the City Manager "cc" the payroll clerk when approving requests for paid time off. views of Responsibre Officials: The informal process established by current procedure will be formalized to assure submission of documentation of vacation time used. This does not, however, address the possibility of time having been taken and not correctly reported. The only remedy for such a situation is to develop an approval process for timesheets of Department Heads similar to that of other employees with the City Manager approving timesheets as required. Staff will examine this concern during the 2007 fiscal year.