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HomeMy WebLinkAbout2003 09 09 Proposed Annual Budget - City of Friendswood Fiscal years 2003,2004,2005 i - PROPOSAL FOR AUDITING SERVICES CITY OF FRIENDSWOOD, TEXAS Fiscal Years Ending September 30, 2003, 2004, and 2005 Submitted September 9, 2003 by:' Robert Belt, CPA of Sandersen Knox & Belt,L.L.P. Certified Public Accountants 7887 Katy Freeway, Suite 190 Houston, Texas 77024 (713) 263-1123 (713) 263-1550 fax 7 1 --00000-- CONTENTS Page Letter of Transmittal and Executive Summary 1 Profile of Sandersen Knox&Belt, L.L.P. 3 Government Experience - 5 �4 Scope and Audit Approach 8 Exhibits and requested Appendix from RFP Proposed Engagement Letter • Exhibit 1 Peer Review Opinion Letter Exhibit 2 GASB Letter of Acknowledgment Exhibit 3 Resume— Robert Belt, CPA, Engagement Partner Exhibit 4 Proposer Guaranties Appendix B Proposer Warranties Appendix C } Schedule of Professional Fees and Expenses Appendix D { (separate sealed envelope) --00000-- • •• . Sanders en Knox 1 e L.L.P CerliEed PuhhcAccountants LETTER OF TRANSMITTAL AND EXECUTIVE SUMMARY September 9, 2003 To the Honorable Mayor, Members of City Council, and Management of the City of Friendswood,Texas: We appreciate the opportunity to present our firm, Sandersen Knox & Belt, L.L.P., and the professional services we can provide to the City of Friendswood, Texas (the "City"); Therefore, with great pride, we submit our proposal and how we distinguish ourselves from our peers. The overall strengths of our professional experience and services we offer are as follows: ✓ City Emphasis. Our firm's emphasis is auditing cities, and this segment represents the largest and fastest growing portion of our practice. We presently audit 17 cities in the Greater Houston area with populations up to 65,000. We are proud to have been entrusted by the City Councils of the cities of Sugar Land, Webster, Bellaire and Seabrook to provide their audit services, just to name a few. Our engagement partner has 14 years of experience auditing cities and has worked with over 50 municipalities and related entities. We are actively involved in city based organizations such as Texas Municipal League, Government Finance Officers Association, and Harris County Mayors' and Councils' Association. Accordingly, the City of Friendswood would be an excellent fit with our firm. ✓ Leading Officials Choose Us. The City of Friendswood would join a group of well-respected 7 government clients that have selected Sandersen Knox&Belt, L.L.P. as their auditors over our competitors. In August the board of the Gulf Coast Waste Disposal Authority, with a $46 million operating budget, determined we were best suited to audit their organization. Commissioners Court of Fort Bend County, one of the fastest growing counties in the State and an operation budget exceeding $100 million, reached the same conclusion when our firm was selected. Similarly, the board of directors of the Harris County Appraisal District(HCAD), the largest appraisal district in the State, which is accountable to over 400 taxing entities, recognized..our capabilities when we were awarded their audit contract. We also been chosen to audit complex grant programs for the Alabama-Coushatta Tribe of Texas, (one of only three Indian tribes in the state) which has over 27 federal grant programs annually. We also were I pleased that the Woodlands Joint Powers Agency, a consortium of 11 utility districts, engaged Sandersen Knox & Belt to audit their financial statements. In summary, the governing bodies of some of the largest governments within their classification have placed their trust in our firm, and we would be honored to be selected by the City of Friendswood. ✓ Audit Focus. Our firm's focus is providing traditional attestation function. While some firms provide management, EDP, and similar consulting services, we have taken the approach of • performing service directly related to our core service, auditing. With this single focus we can provide our clients assurance of receiving the best attestation service possible, and any. recommendations that come from the audit will truly be independent. 7887 Katy Freeway,Suite 190 Houston, Texas 77024 (713)263-1 123 voice (713)263-1550 fax 1 City of Friendswood,Texas Audit Proposal Transmittal Letter and Executive Summary ✓ We are local. Our approach is simple; by building a reputation of providing high quality professional service in the greater Houston area, there is no need to drive all over the state. The key benefit to the City is that it is essential to our success that the City is well pleased with our services. With this approach, we can attract and retain seasoned professionals that • appreciate quality of life and family. This will ensure that the City's staff does not have to train entry level auditors in city operations. Our senior auditor and manager assigned to the engagement, Lisa White, CPA and Julie St. Jean, CPA are residents of Friendswood and Clear Lake, respectively. Our Houston office is only minutes away should there ever be a meeting that could best be handled in privacy face to face. I ✓ HTE Audit Experience (accounting software used by the City). Our principals were involved in the first installations of HTE software in the area and have audited numerous cities that use the program. ✓ Experience with complex government operations. Our auditors have significant experience working with advanced municipal reporting structures including MUD annexations, component unit types such as 4A and 4B districts, special purpose taxing districts, and enterprise operations such as airports, golf courses, theme parks, and retail outlets. joint ventures of both public and private sector entities, issuance of substantial conduit debt obligations, post employment health benefits, and landfill closure and post closure care costs. ✓ GASB 34 and CAFR Awards We are actively involved in ensuring that our clients are fully prepared for GASB 34 as well as other new accounting pronouncements. We have gained a national perspective on implementation of the standards by attending the Governments Finance Officers Association's (GFOA) National Conferences in Chicago and Denver and will • continue to be involved at the national level. Our engagement manager has served as a member of the GFOA's special review committee, reviewing CAFRs from across the nation to determine their eligibility for the GFOA's certificate of achievement in excellence in financial reporting. We have already assisted a number of our clients in implementing GASB 34 and are continually improving and refining the implementation process. We our proud of our history of ensuring that our clients obtain the GFOA's prestigious award and would love the opportunity to assist the City with its long standing tradition of excellence in financial reporting. ✓ Value and Quality of Service. We do not have the high overhead of a Class A building, nor do we have to support an out of state national office or partners substantially devoted to managerial and marketing tasks. What we do have is a highly qualified staff with substantial experience auditing cities at very reasonable fees. We are big enough to get the job done at a price the taxpayers will appreciate. I am authorized to make binding representations for our firm and can be reached by phone at any of the numbers included within this proposal. This proposal is a firm and irrevocable offer for 90 days. Again, we appreciate the opportunity topresent our Firm and the services we canprovide the City. 9 � PP PP tY Sincerely, p441. Robert Belt, CPA, Partner • 2 PROFILE OF SANDERSEN KNOX & BELT Firm Profile The size and composition of our firm is unusual in light of our clientele and the services we provide them. Our core service is auditing governmental entities, primarily cities, in the.greater Houston area. Twelve of our fourteen team members are primarily dedicated to this effort. The amount and type of specialized engagements we perform for •governments are also disproportional to our competitors. 'Our in field experience level and focus of our staff in providing audit services to cities is unmatched, regardless of the size of our competitors. By focusing on our government core practice, we generally service the larger government in the area for their respective categories: Type Name Indicator of size County Fort Bend Top ten largest in state City Sugar Land Population of 65,000 Utility District Woodlands JTPA 11 MUD Joint Venture Appraisal District Harris Largest in State Tribal Government Alabama-Coushatta Largest in State Waste Disposal Authority Gulf Coast Largest in State The operating budgets of these governments are generally much larger than our competitors' clients in the same category type. We have accomplished this unique position by focusing on quality clients and employees rather than quantity. By focusing on our government core practice, we have been entrusted with the attestation needs of over 60 governmental entities, 17 of which are cities. A partial listing of which is included in the experience section of this proposal. • Area of service and offices Our Houston office provides attestation services exclusively to local governments and would be responsible for ensuring delivery of services for this engagement. Our philosophy with respect to providing audit services is to perform substantially all work on site at our client's office to enhance the communication process. In addition, to ensure �I our retention of quality personnel and low turn over of personnel performing your audit, we assign audit engagements to limit travel time to one hour. We do not accept audit engagements resulting in extended travel, which allows our personnel to return to their family each night. While this engagement will be assigned out of our Houston office, our engagement seniors live in Friendswood and Clear Lake. Prior Engagements with the City Our firm has not provided any services to the City of Friendswood during the past five years. Engagement Team Our audit team has extensive experience auditing cities, as more fully indicated in the experience'section of our proposal. Robert Belt, CPA will be designated as our partner in .charge of the engagement and will direct all activities within our firm, as well as be responsible for all communications between our firm and the City. Lisa White, CPA and Julie St. Jean will be the senior and manager assigned to the engagement and will work -J with the City on a daily basis. Again, the major differentiating factor with our peers is the significant experience and expertise of the onsite audit team. 3 PROFILE OF SANDERSEN KNOX & BELT Favorable Peer Review Sandersen Knox & Belt, L.L.P. is pleased to be a member of the AICPA Peer Review Program. We receive a peer review every three years. Our last peer review was in November 2001 and a copy of the unqualified report is an appendix to this proposal. The _1 peer review included specific review of a number of governmental engagements. Favorable Reviews by State Agencies We are pleased to report that during the past year that a number of grantor agencies have performed desk reviews of our work with no adverse findings. • • 4 -, GOVERNMENT EXPERIENCE Contact information for related clientele (partial listing) and various data related to the respective engagements are as follows: Partner in Telephone Client Scope of work Charge Hours Client Contact Number • City`audit engagements: City of Webster FS Audit,CAFR R. Belt 300 Terry Knudsen,Finance (281)316-4102 Director City of Bellaire FS Audit,CAFR R. Belt 280 Louise Richmond, (713)662-8222 Finance Director City of Seabrook FS Audit,CAFR R. Belt 250 Robert(Bo)McDaniel, (281)291 5688 City Manager City of Galena Park FS Audit,special R. Belt 200 John Cooper,City (713)672-2556 projects Manager City of Jacinto City FS Audit,special R. Belt 200 Jack Maner,City (713)674-8424 projects Manager City of Spring Valley FS Audit, R. Belt 100 Richard Rockenbaugh, (713)865-8308 City Administrator City of Shenandoah FS Audit R. Belt 140 Paul Fredrickson,City (281)298-5522 Administrator City of El Lago FS Audit R. Belt 50 Jill McCammon,City (281)326-1951 Secretary City of Taylor Lake FS Audit R. Belt 80 Natalie O'Neil,Mayor (281)326-2843 City of Hilshire Village FS Audit R. Belt 40 Claudia Bammel,City (713)973-1779 • Secretary Lakeview Police Dept. FS Audit R. Belt 50 Thomas Savage,Chief (281)326-1098 City of Sugar Land FS Audit,CAFR, G.Cox 500 Allen Bogard,City (281)275-2730 Single Audit Manager Other government audits: Alabama-Coushatta Tribe of FS&Single Audit, R. Belt 800 Donna Dickens,Finance (936)563-1151 Texas Fraud Officer Harris County Appraisal FS Audit,CAFR R. Belt 280 Billy Garton,Director of (713)957-4790 District Administration Polk Central Appraisal FS Audit R. Belt 40 Carolyn Allen,Chief (936)327-2461 District Appraiser Polk County FS Audit,CAFR, R. Belt 340 John Thompson,County(936)327-6813 Single Audit Judge San Jacinto County FS Audit,Single R. Belt .280 Bill Law,County Judge (936)653-4331 Audit 258th Judicial District FS Audit, R. Belt 80 Angela Eviret,Office (936)327-6872 Compliance Audit Manager Fort Bend County FS Audit,CAFR, G.Cox 700 Robert Ed Sturtavent, Single Audit County Auditor . The Woodland Joint Power FS Audit,TNRCC J. Knox 500 Chuck Henton (281)367-1271 Agency guidelines FS Audit-Financial Statement Audit CAFR-Certificate of Excellence in Financial Reporting Budget-Certifcate of Excellence in Budget Presentation 5 GOVERNMENT EXPERIENCE Partner in Charge Mr. Robert Belt, CPA, will serve as the partner in charge on this engagement and will conduct a significant portion of the fieldwork. He is a graduate of Stephen F. Austin State University where he received a Bachelor of Business Administration, majoring in. accounting, in 1988. Mr. Belt has over twelve years of public accounting experience working almost exclusively with governmental entities. He has earned the AICPA's Governmental Accounting and Auditing Certificate of Educational Achievement. Mr. Belt has also served as a member of the GFOA Special Review Committee for the Certificate of Achievement for Excellence in Financial Reporting and has reviewed reports from • governments across the country. Because of his extensive knowledge of municipal operations he is regularly engaged for projects outside of traditional accounting services. Most of these engagements entail determining the validity of allegations. Allegations have included items such as charges of racial disparity in arrest, underpayment of royalties, abuse of office, violation of travel polices, official misconduct, contract compliance, and fraud. Ouality Review Partner Mr. John B. Knox, Jr., CPA will assist on this engagement and will act as the quality review partner. He is a graduate of Texas A&M University, where he received a Bachelor f of Business Administration degree in Accounting in 1986. His fourteen years of experience include extensive involvement in governmental and other not-for-profit accounting and auditing. John was a peer review team captain performing quality reviews on other CPA firms providing governmental and not-for-profit auditing services. Prior to beginning his own practice in 1994, John worked from staff associate to manager • with two local firms with heavy concentrations in governmental auditing. Over his career, John has worked on or managed the audits of more than thirty cities (many of which required single audit), ten school districts (all of which required single audits) and numerous municipal utility districts, two mental health mental retardation centers and other special districts. John has provided extensive assistance in the preparation and review of Comprehensive Annual Financial Reports that have been awarded a Certificate of Achievement for Excellence in Financial Reporting by the GFOA and a Certificate of Excellence in Financial Reporting by ASBO. Alternate Partner Gregory S. Cox, CPA is a graduate of the University of Houston where he received a Bachelor of Business Administration degree in Accounting in 1992. Greg has eight years of accounting and auditing experience specializing in governmental, not-for-profits and homeowner associations. Greg's audit experience includes numerous audits of cities, school districts, counties and municipal utility districts. Greg has significant experience in the preparation of Comprehensive Annual Financial Reports receiving the Certificate of Achievement for Excellence in Financial Reporting from the GFOA and the performance of audits in accordance with the Single Audit Act. Greg will be available in a support role if needed. • GOVERNMENT EXPERIENCE Senior Accountants •Lisa White, CPA obtained her Bachelors of Business Administration from the University of Houston Clear Lake. She has experience auditing the Cities of Seabrook, Bellaire, Taylor Lake, El Lago, Jacinto City, Galena Park, Hilshire Village, Spring Valley, Lakeview Police Department, and Harris County Appraisal District. Prior to joining our firm she served as accountant for the City of Webster and has previous experience other CPA Firms Melisa R. (Missy) Chapman obtained her Bachelors of Business Administration from Stephen F. Austin State University in 1992. She has audited numerous governmental entities, including the City of Humble, City of Shenandoah, City of Goodrich, and the Alabama-Coushatta Tribe of Texas. Prior to joining our firm, she was the chief accountant for the Sam Rayburn Municipal Power Agency providing electrical services to the cities of Livingston, Liberty,Jasper, and Vinton, Louisiana. • Continuing Professional Education All staff receive forty hours annually of continuing professional education. Additionally, all staff undergo annual education and training as is required to ensure that they are knowledgeable of current governmental auditing requirements and that they are qualified to perform audits in accordance with the Single Audit Act of 1996 and the U. S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement. Schedules detailing fulfillment of these requirements are available on request. • • • • 7 - SCOPE AND AUDIT APPROACH --- Proposed scope and schedule A more detailed account of our understanding of the proposed scope of services including � the related technical language may be found in the attached draft engagement letter. The engagement letter is a standard letter used throughout the industry to formalize the understanding of the audit services to be performed. We are fully committed to providing the services requested within the request for proposal as indicated by our �' guarantees. Audit segmentation • 1 Our proposed segmentation of the audit, which corresponds to our audit program, and tentative estimated time budget (a) by level of staff, is as follows: --r C1 L L CCA U L ii.. ._ R 4 Audit Segment rn cnn E n. i— General and planning* - - 5 20 12 37 Minutes,contracts,ordinances,and laws - - 9 25 4 38 Cash and investments - - - 5 4 9 Revenues, receivables,and receipts - - 12 15 6 33 Expenditures for goods and services,and accounts --, payable. - - 30 12 6 48 . Payroll and related liabilities - - 12 4 4 20 Inventories - - - 1 - 1 Property,equipment,and capital expenditures - - 2 12 1 15 Debt Service and Debt Service funds .- - - 8 8 16 Fund equities - - - 4 2 6 Grant and Federal Awards - - 16 15 15 46 Insurance and self-insurance 4 4 Reporting and disclosures - - 9 65 43 117 Total Hours - - 95 190 105 390 Percentage of Total 0% 0% 24% 49% 27% 100% *Entry level staff accountants are not used by our firm. *Includes audit planning, supervision, and review. Planning includes such matters as obtaining an understanding of the internal control structure,documenting,and considering audit risk,determining materiality levels and considering the relationship of planning materiality to tolerable misstatements, and Single Audit Act considerations. Supervision and review includes utilization of standard and specific checklists as well as our in house quality review of all governmental engagements by our quality review partner under professional guidelines. • Audit Approach • Our audit approach for the respective segments and staffing level will be dependent on our risk assessment obtained at the planning stage of the engagement. The primary factors related to our risk model will be the City's internal control, complexity of transactions, and size and volume of transactions. • 1 9 • SCOPE AND AUDIT APPROACH Sampling • Sampling will be used primarily in connection with testing of expenditures, and the size of the respective samples will be dependent on a number of factors, principally our risk assessment and the population size. Our procedures related to balance sheet accounts will generally be 100%verification of the account balance. EDP - Computer Aided Audit Techniques and Tools(CAATS) We will utilize the latest data extraction and manipulation software techniques to test the City's internal control. Data extracted from the City's accounting program will be • analyzed using predefined criteria. Analytical Tools and Techniques We will employ a variety of analytical techniques. The most commonly used technique will involve reviewing general ledger account balances to prior year and budget as dollar and percentage variances. For select account balances we will look at month-to-month variations in activity. We will also review related accounts to internal City data and external databases maintained by our firm for abnormal trends. Understanding of the City's internal control Our understanding of the City's internal control will be obtained by reviewing available documents, such as policy and procedures manuals, organizational charts, and flow charts. In addition, we will also review the results of internal audit work performed, if any, such as surprise cash counts. We will also interview staff in selected areas and will work with staff in completing a formal internal control questionnaire tailored to a city government. Independence { Our firm is independent of the City under the rules established by the State Board of Public Accountancy. In addition, we are not aware of any relationships, financial or otherwise, between our firm and/or firm members and the City's staff and/or board members that would be noteworthy. Commitment to accounting and auditing cities • Our firm is fully committed to serving the attestation needs of city governments and providing related services. We are actively involved in city based organizations such as the Gulf Coast Chapter of the GFOA, TML and Harris County Mayors' and Councils' Association. In addition to performing the traditional auditor role, we also take an active interest in helping our clients fulfill their mission. This involves keeping our clients abreast of •accounting and auditing pronouncements and regulations that directly impacts them and providing options for implementation. For example, based on our guidance, all of our larger governments have already addressed the fixed asset portion of GASB 34. 10 Sanders en Knox Re t P LL. . B • c ;6edPu caccounrath Engagement Letter September 9, 2003 Honorable Mayor and Members of City Council City of Friendswood 910 South Friendswood Drive Friendswood,TX 77546 We are pleased to confirm our understanding of the services we are to provide City of Friendswood, Texas (the "City") for the years ended December 31, 2003, 2004, and 2005. We will audit the financial statements of the City as of and for the years ended December 31, 2003, 2004, and 2005. We understand that the financial statements will be presented in accordance with the financial reporting model described in GASB Statement No. 34. The document we submit to you will include the following additional information that will be subjected to the auditing procedures applied in our audit of the basic financial statements: 1. Schedule of expenditures of federal awards 2. Combining and individual fund financial statements The document will also include the transmittal letter, management discussion and analysis, other supplementary information, statistical and other miscellaneous information that will not be subject to the auditing procedures applied in our audit of the financial statements, and for which our accountants'report will disclaim an opinion. As part of the audit we will prepare a draft of your financial statements and related notes. In accordance with Government Auditing Standards (revised), you will be required to review and approve those financial statements prior to their issuance and have a responsibility to be in a position in fact and appearance to make an informed judgment on those financial statements. Further you are required to designate a qualified management-level individual to be responsible and accountable for overseeing our services. 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. • 7887 Katy Freeway,Suite 190 Houston, Texas 77024 (713)263-1 123 voice (713)2G3-1550 fax City of Friendswood,Texas • Page 2 of 6 Audit Objectives The objective of our audit is the expression of an opinion as to whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the 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 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 for the information and use of the audit committee, management, 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 U.S. generally accepted auditing standards; 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 Circular A-133, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the financial statements or the Single Audit compliance opinion is 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 an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. You are aware of the limitations of audit procedures regarding the detection of fraud and the possible effect on the financial statements (including misappropriation of cash or other assets). We have offered to perform, as a separate engagement, extended procedures specifically designed to detect fraud and you have declined to engage us to do so at this time. Management Responsibilities Management is responsible for establishing and maintaining internal control and for compliance with the provisions of contracts, agreements, and grants. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of the controls. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition,that transactions are executed in accordance with management's authorizations and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that federal award programs are managed in compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, including the schedule of expenditures of federal awards, but the responsibility for the financial statements remains with you. That responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting and compliance, the selection and application of accounting principles, and the safeguarding of assets. Management is responsible for adjusting the financial statements to correct material City of Friendswood,Texas Page 3 of 6 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. • Management is 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 government involving. (a) management, (b) employees who have significant roles in internal control, and (c) others where the fraud could have a material effect on the financial statements. You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud affecting the government received in communications from employees, former employees, regulators, or others. In addition, you are responsible for identifying and ensuring that the entity complies with applicable laws and regulations. ti 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. The summary schedule of prior audit findings should be available for our review on December 1st. 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. 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 errors, fraudulent financial reporting, misappropriation of assets, or violations of laws or governmental regulations that are attributable to the entity or to acts by management or employees acting on behalf of the entity. As required by the Single Audit Act Amendments of 1996 and OMB Circular A-133, our audit will include test of transactions related to major federal award programs for compliance with applicable laws and regulations and the provisions of contracts and grant agreements. 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 or noncompliance 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 or major programs. However, we will inform you of any material errors and any fraudulent financial reporting or misappropriation of assets that comes 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 matters that might arise during 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, 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 also require certain written representations from you about the financial statements and related matters. Audit Procedures—Internal Controls In planning and performing our audit, we will consider the internal control sufficient to plan the audit in order to determine the nature, timing, and extent of our auditing procedures for the purpose of expressing our opinions on the City's financial statements and on its compliance with requirements applicable to major programs. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk.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. Tests of controls relative to the City of Friendswood,Texas Page 4 of 6 financial statements are required only if control risk is assessed below the maximum level. 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 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 program. However, our tests will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to OMB Circular A-133. An audit is not designed to provide assurance on internal control or to identify reportable conditions. However, 1 we will inform the governing body or audit committee of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the entity's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. We will also inform you of any nonreportable conditions or other matters involving internal control, if any, as required by OMB Circular A-133. Audit Procedures—Compliance Our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. 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 of contracts and agreements, including grant agreements. However, the objective of those procedures 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 the 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 those procedures will be to express an'opinion on the City's compliance with requirements applicable to 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 invoices selected by us for testing. At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection P Form that summarizes our audit findings. We will provide copies of our reports to City Council; however, 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 a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, 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. At the conclusion of the engagement, we will provide information to management as to where the reporting packages should be submitted and the number to submit. The workpapers for this engagement are the property of Sandersen Knox & Belt, LLP and constitute confidential information. However, we may be requested to make certain workpapers available to the Cognizant or Grantor Agency pursuant to authority given to it by law or regulation. If requested, access to such workpapers will be Cityof Friendswood,Texas Page 5 of 6 provided under the supervision of Sandersen Knox & Belt, LLP personnel. Furthermore, upon request, we may provide photocopies of selected workpapers to the Cognizant or Grantor Agency. The Cognizant or Grantor Agency may intend, or decide, to distribute the photocopies or information contained therein to others, including other governmental agencies. 7 The workpapers for this engagement will be retained for a minimum of three years after the date the auditors' report is issued or for any additional period requested by the Cognizant Agency, Oversight Agency for Audit, or Pass-through Entity. 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 workpapers. We expect to begin our audit on approximately December 1st and to issue our reports no later than February 9th. Fees for our services are based on the actual time spent at our standard hourly rates, plus travel and other out- of-pocket costs such as report production, typing, postage, etc. Our standard hourly rates vary according to the degree of responsibility involved and the experience level of the personnel assigned to your audit. The time estimates used to project our fees are based on anticipated cooperation from your personnel and management fulfilling its responsibility. Our time budget for this engagement does not include addressing matters related to management's responsibilities, such as modifications to the City's financial information, additional procedures related to alleged noncompliance with laws and regulations and similar improprieties, the City's lack of preparation for the audit, and similar matters. Such time requirements have not been included in the estimate and would be billed in addition to the fees quoted at our standard hourly rates and actual costs incurred, including legal consultations, if necessary. We will notify the appropriate party when such conditions are encountered, such as identifying schedules not prepared, out-of-balance accounts, alleged violations, etc. When possible, we will provide management with options for alleviating the condition. If it appears the item will not be addressed by the City, we may perform procedures to address incidental matters to facilitate timely completion of the audit. To the extent possible, we will obtain approval before performing additional work for matters considered significant to the original proposed fee. Due to the nature of our work, such approval may not always be possible, i.e., we may be legally compelled by subpoena or similar request to expend additional time and incur other expenses to handle matters arising from this engagement. As customary in the industry the price quoted is an estimate. In accordance with rules of the State Board of Public Accountancy we cannot be bound to provide the audit for the amount estimated. However, in practice we honor our fee quotes, unless adverse conditions, such as those described above, are encountered. Our fee estimate for the audit of the City's basic financial statements for the years ended September 30, 2003, 2004, and 2005 is (removed per request of the RFP—engagement letter to be reprinted). Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. In accordance with our firm policies, work may be suspended if your account becomes 30 days or more overdue and may not be resumed until your account is paid in full. If we elect to terminate our services for nonpayment, our engagement will be deemed to have been completed upon written notification of termination, even if we have not completed our report. You will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket costs through the date of termination. Government Auditing Standards require that we provide you with a copy of our most recent quality control review report. Our 2001 peer review report accompanies this letter. Any client certified public accountant involved with assisting us shall not be prohibited from disclosure of information required to be made available by the standards of the public accounting profession in reporting on the examination of financial statements. Management understands and provides permissions to staff certificate or registration holders as required under the Rules of Professional Conduct, Texas Administrative Code, Title 22, Part 22, Chapter 501, Subchapter C, Section 501.75. City of Friendswood,Texas Page 6 of 6 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. Very truly yours, Rae-- Robert°geeja--- Belt, CPA RESPONSE: This letter correctly sets forth the understanding of City of Friendswood,Texas. • By: Title: Date: • • 1 BUFFINGTON & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 770 SOUTH POST OAK LANE, SUITE 600 HOUSTON,TEXAS 77056 (713) 961-3939 FAx(713) 622-6158 November 20, 2001 1 To the Partners Sandersen, Knox &Belt, L.L.P. Sugar Land, Texas We have reviewed the system of quality control for the accounting and auditing practice of Sandersen, Knox & Belt, L.L.P. (the firm) in effect for the year ended May 31, 2001. A system of quality control encompasses the firm's organizational structure and the poli- cies adopted and procedures established to provide it with reasonable assurance of con- - forming with professional standards. The elements of quality control are described in the Statements on Quality Control Standards issued by the American Institute of Certified Public Accountants (AICPA). The design of the system and compliance with it are the responsibility of the firm. Our responsibility is to express an opinion on the design of the system, and the firm's compliance with the system based on our review Our review was conducted in accordance with standards established by the Peer Review Board of the AICPA. In performing our review,we obtained an understanding of the sys- tem of quality control for the firm's accounting and auditing practice. In addition, we tested compliance with the firm's quality control policies and procedures to the extent we considered appropriate. These tests covered the application of the firm's policies and pro- cedures on selected engagements. Because our review was based on selective tests, it would not necessarily disclose all weaknesses in the system of quality control or all in- stances of lack of compliance with it. Because there are inherent limitations in the effectiveness of any system of quality con- trol, departures from the system may occur and not be detected. Also, projection of any evaluation of a system of quality control to future periods is subject to the risk that the j system of quality control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. In our opinion, the system of quality control for the accounting and auditing practice of -_! Sandersen, Knox & Belt, L.L.P. in effect for the year ended May 31, 2001, has been de- signed to meet the requirements of the quality control standards for an accounting and auditing practice established by the AICPA, and was complied with during the year then ended to provide the firm with reasonable assurance of complying with professional stan- dards. se 104- 4.7) BUF G ON& COMPANY, iC. MEMBER PRIVATE COMPANIES PRACTICE SECTION OF THE AMERICAN INSTITUTE OF CPA's APR-15-2003 10:32 SRNDERSEN KNOX BELT P.02 GOVERNMENTAL ACCOUNTING STANDARDS BOARD 401 Merritt 7, P.O. Box 5116,Norwalk,Connecticut 06958-8119/203-847-0700.ext.200 rIGASB Fax: 203-849-9714 TOM L.ALLEN Chairman April 10,2003 • Mr.David G.Wallace,Mayor City of Sugar Land P.O.Box 110 Sugar Land,TX 77487-0110 Dear Mayor Wallace: We recently received a copy of the City of Sugar Land.comprehensive annual financial report for the fiscal year ended September 30,2002.'Your city's early implementation of GASB Statement No.34,Basic Financial Statements—and Management's Discussion and Analysis-,for State and Local Governments, is commendable and I want to recognize your efforts. . As you know,the Governmental Accounting Standards Board(GASB) seeks to improve financial reporting in a number of ways. The GASB-believes that implementafion of Statement 34 results in improvements in reporting cost-of-services information and the overall financial position of the government to taxpayers,governing boards,and other financial statement users. Therefore,we encourage early implementation so that this information will be available to those users on a more timely basis. We are extremely pleased,and impressed,by your city's ability to prepare the new financial statements in such a timely fashion. I was particularly impressed with the city's reporting of all of its infrastructure well in advance of the required date for reporting existing infrastructure. Your early implementation is a tribute to your controller Dianne P. Stanford;assistant controller William Pena;accounting manager Alka Shah;and your auditors Sdersen Knox.,. Belt,L.L P.,for their expertise and assistance to the city. I also want to commend you And the city's governing body for supporting the efforts to provide your citizens and other financial statement users with a more comprehensive reporting of the city's financial operations in advance of the effective date of the standard. It is my hope that these users of your financial statements will recognize your efforts. I am sending a certificate to your finance department to display in recognition of their early- implementation efforts. - APR-15-2003 10:32 SANDERSEN KNOX BELT P.03 Mr. David G. Wallace,Mayor April 10,2003 Page Two I have provided a copy of this letter and other information on Statement 34 to your local newspaper in hopes that their recognition of your efforts will encourage other governments to provide this improved financial reporting to their citizens and other financial statement users as quickly as possible. Congratulations for a job well done. Sine ely, Tom L.Allen cc: Dianne F. Stanford William Pena. Atka Shah _Sandersen Knox&Belt,L.L.P. Fort Bend Sun ?la/letussfs34loc-waiiace-city of sugar landdoc. TOTAL P.03