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HomeMy WebLinkAbout2003 09 09 Proposed Annual Budget - City of Friendswood Proffesional Audit services it - `-$D • woo I 7 �%� •-+� i1u 'G� 1 1. ' _ CITY OF FRIENDSWOOD, TEXAS FORMAL PROPOSAL for PROFESSIONAL AUDIT SERVICES Presented by AITLA NullALairson CERTIFIED PUBLIC ACCOUNTANTS PROFESSIONAL CORPORATION 11 Greenway Plaza,Suite 1515 • Houston,Texas 77046 Telephone:(713)621-1515 Fax:(713)621-1570 contact person Christopher L.Breaux,CPA Tom Pedersen;CPA Date Submitted:September 9,2003 1 b TABLE OF CONTENTS Page Transmittal Letter 1 Technical Proposal Management Component 2 Summary of Qualifications 3 Staff Qualifications,Experience and Credentials 5 Continuing Professional Education 9 References 10 Technical Component 12 GASB Statement No.34 Overview 13 Scope and Audit Approach 14 Task/Activity Plan 23 Timing and Planning Schedule 24 City and Finn Responsibilities 25 Appendixes 26 A-Peer Review Report 27 B-Proposers Guaranties 28 C-Proposer Warranties - 29 D-Sample Reports 30 Sealed Dollar Cost Bid(under separate cover) Estimated Fees 1 11 Greenway Plaza,Suite 1515 Null A Larson 2117 Post Office Street Houston,TX 77046 Galveston,TX 77550 { (713)621-1515 CERTIFIED PUBUCACCOUNTANTS (409)762-8380 Fax:(713)621-1570 PROFESSIONAL CORPORATION Fax:(409)762-1749 } June 5, 2003 i Mr.Roger Roecker Director of Administrative Services City of Friendswood,Texas We are pleased to submit our proposal to provide professional auditing services for City of Friendswood as detailed in the City's Request for Proposals dated August 2003. The overall strength of services we offer can be stated as follows: ✓ Significant governmental audit expertise. Our Firm has been conducting municipal audits for over thirty years. We currently serve as auditors for over 75 governmental entities. Our partners have been recognized for their expertise and have conducted seminars on various governmental accounting, auditing and financial reporting topics for the Texas Society of CPA's, other CPA firms, the Texas Association of School Business Officials, and the Government Finance Officers Association of Texas. V Null Lairson, P.C. is committed to performing the requested services in a timely manner to provide the City Council with sound and objective financial information and advice. This proposal is a firm and irrevocable offer for 90 days. ✓ Null Lairson,P.C. is committed to providing continuity in staff. We appreciate the opportunity to serve the City and look forward to meeting.with you and discussing further our audit philosophy, approach, and methodology. Sincerely, Re 6v6( ,?4,t,i...sf)ti • Null-Lairson,P.C. MEMBERS:AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CPA ASSOCIATES INTERNATIONAL,INC.WITH ASSOCIATED OFFICES IN PRINCIPAL U.S.AND INTERNATIONAL CITIES 1 , ,J• MANAGEMENT COMPONENT _JA _J MEMBERS:AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS CPA ASSOCIATES INTERNATIONAL,INC.WITH ASSOCIATED OFFICES IN PRINCIPAL U.S.AND INTERNATIONAL CITIES SUMMARY OF QUALIFICATIONS Null Lairson, P.C. is composed of approximately 45 professional auditors, financial management consultants, accountants, and support staff committed to the philosophy of providing quality and timely services to our municipal clients. The firm's primary emphasis in providing services is to ) assist clients in achieving the utmost success in reaching their goals. Providing services since the early 1970's,Null Lairson,P.C. serves municipalities, school districts, and other governmental clients throughout the Texas Gulf Coast from offices in Houston, Sugar Land, and Galveston customary services expected of a progressive and proactive accounting firm. The firm's strengths are based on past and ongoing success in helping clients accomplish their individual and organizational goals and objectives. Null Lairson, P.C. recognizes the inevitability of change. Our relationship with a client naturally begins with services aimed at current circumstances, but it is imperative to monitor changes that dictate adjustment to future plans. Therefore, we remain knowledgeable about the objectives of our clients at all times. To accomplish this, we provide skilled and experienced personnel to assist in client matters. We also understand the importance of providing continuity in the assignment of staff to client work. As part of our dedication to the state and local government industry, our firm maintains associate { memberships in the Government Finance Officers Association, the Texas Municipal League, and the American Institute and Texas Society of Certified Public Accountants. Through these affiliations, we are able to access tremendous resources that allow us to serve our governmental and }'} non-profit clients at the highest levels. Null Lairson,P.C. will strive to be a valued member of the City's financial management team. We plan on assigning firm members for involvement with the City who possess strong abilities in those disciplines most valuable to you. The firm is adequately staffed with professional and support personnel to provide all necessary services and to maintain personalized involvement with each client. Each client is actively encouraged to call on us at any time the need arises. We are accessible when you need us. In the References Section,we have included a partial listing of clients for your review. As a member of CPA Associates International, a worldwide association of quality-oriented accounting firms;our firm has completed an association peer review performed by members of the group in accordance with the AICPA's Private Companies Practice Section requirements. This peer review covered the year ended December 31, 2001 and resulted in an unqualified opinion and included a review of specific governmental engagements. We have attached our most recent peer review report for you review. We perform our internal inspections annually as required by program requirements. Independence Null Lairson,P.C. is independent of the City of Friendswood and all component unit as defined by both generally accepted auditing standards and U.S. General Accounting Office's Government Auditing Standards, 1994 Revision, (the "Yellow Book). 3 SUMMARY OF QUALIFICATIONS (continued) Professional Relationships with the City The firm been engaged to perform independent audits for the City in the past five years. License to Practice in Texas Null Lairson, P.C. and all key professional staff are properly registered/licensed to practice public accounting in the State of Texas. The firm has not been notified of any disciplinary action being taken or pending against it in the past three years with state regulatory bodies or professional organizations. Desk and Field Reviews As a firm heavily involved in providing professional auditing and consulting services to a wide variety of governmental and nonprofit entities, our reports and workpapers are always subject to } review by both state and federal desk and field reviews. We have been successful in the past at receiving non-adverse desk and field reviews by stressing quality reviews and open and proactive communications with regulatory cognizant agents/agencies. Insurance Coverage We certify that the Firm carries professional liability and other appropriate insurance in excess of the City's requirements as a normal course of business. If selected, the firm will provide a certificate of insurance attesting to that coverage. j 4 STAFF QUALIFICATIONS, EXPERIENCE AND CREDENTIALS Null Lairson, P.C. is comprised of approximately 45 staff members, including partners, professionals, and support personnel. We feel this staffing level allows our firm to provide a wide variety of specialized services on a personal basis. We have included brief resumes of key personnel that we anticipate will be involved in providing the City with professional services. Additionally we will have senior and staff accountants assigned to the engagement as necessary. All of our staff have appropriate experience and educational backgrounds and complete a minimum of twenty to forty hours of continuing education related to governmental auditing, accounting, and reporting annually. This annual training is designed to be in accordance with U.S. General Accounting Office's Government Auditing Standards issued by the Comptroller General of the United States (the "Yellow Book"). Our staff members come from a variety of different backgrounds. We strive for diversity in our staff in our hiring practices. The quality of staff involved with our clients is ensured through the heavy involvement of management personnel in all phases of the engagement,including key fieldwork areas. { 5 Christopher L. Breaux, CPA Principal -Audit Services Christopher Breaux is a graduate of Texas A. & M University where he received a Bachelor of Business Administration in accounting in 1984. He has been licensed as a certified public accountant since 1987 and has been in public practice in the greater Houston area for over fifteen years. Mr. Breaux's experience includes providing auditing and consulting services to municipalities, school districts, counties, and special districts as well as a variety of non-profit and private sector clients. A large percentage of these clients are recipients of both federal and state funding and/or are subject to specific regulatory reporting requirements. As a principal in the audit services area, he is responsible for interfacing with clients and cognizant agencies as well as developing and implementing audit procedures to conform to applicable professional, state, and federal standards. Mr. Breaux 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. He has been awarded the Certificate of Educational Achievement in Governmental Accounting and Auditing by the AICPA. He has also been involved in providing advisory services to municipal clients in the areas of workflow studies, computer systems and programming, financial compliance systems and reporting, program compliance, and other finance-related legal compliance areas. Professionally, Mr. Breaux is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. He is active in both the Gulf Coast Finance Officers Association and the Government Finance Officers Association of Texas additionally he serves as a research committee member for the Texas Association of School Business Officials as an associate member. Mr. Breaux serves on the national committee for Government Services for CPA Associate, International and is the Chairman of the Houston Chapter of the Texas Society of Certified Public Accountants Government Auditing and Accounting Committee. He has provided certification training for government finance personnel and is involved in developing training on government auditing standards. 6 Charles G. Yaple, CPA Principal-Audit Services Charles Yaple is a graduate of Baylor University where he received a Bachelor of Business Administration in accounting in 1979 and has been licensed as a certified public accountant in Texas since 1981. Mr. Yaple has been in public accounting for over twenty years, and with Null-Lairson,P.C. for over twenty years. As a principal in the firm, he oversees and coordinates the firm's audit practice. Mr. Yaple has primary responsibility for the firm's major governmental audits which include audit, review and preparation of General Purpose Financial Statements, Comprehensive Annual Financial Reports receiving the GFOA/ASBO reporting excellence awards, and/or special financial compliance reports (including Single Audit Act). He has managed and performed a variety of special engagements for the firm's clients, including management advisory services, system design and 1 acquisition consulting and other financial related services. Mr. Yaple's experience includes governmental, corporate,non-profit, I and school district auditing and accounting. He has been awarded 1 the Certificate of Educational Achievement in Governmental Accounting and Auditing by the American Institute of Certified Public Accountants. He is also a member of the Government Finance Officers Association (GFOA) and is on the GFOA Special Review Committee involved with reviewing Comprehensive Annual Financial Reports nationally. Mr. Yaple has written articles for government industry publications. He has served as Chairman of the Governmental Services Committee for CPA Associates - 1 International, Inc., an international association of CPA firms. Mr. Yaple has provided workshop sessions and other information sessions for the Texas Association of Counties, the local GFOA affiliate, and for the Texas Association of School Business Officials (TASBO) and other governmental and industry associations and public accounting firms. Mr. Yaple is a member of the American Institute of Certified Public Accountants, the Texas Society of Certified Public Accountants and the American Management Association. 7 Tom Pedersen, CPA Senior Manager-Audit Services Tom Pedersen is a graduate of Stephen F. Austin State University, where he received a Bachelor of Business Administration in accounting in 1976. He has been licensed as a Certified Public Accountant since 1980 and has been in public practice in the Houston / Galveston area for over fifteen years. Mr. Pedersen spent ten years of his career working for the City of Texas City, where he held the title of Director of Finance/City Secretary. He is a recent addition to the firm and brings with him a "hands on" perspective. During his ten years with Texas City, Mr. Pedersen directed all accounting and business activities including banking, investments, general insurance, health and welfare benefits, accounting policy development, cash management, utility billing, general ledger, accounts payable, accounts receivable, payroll, purchasing, tax billing, street assessments, and management information systems. Mr. Pedersen was responsible for preparation and management of a multi-million dollar city budget and developing sound a financial plan for the City. He is familiar with the day to day operations of running a fmance department to include managing the city's $25 million investment portfolio, preparing monthly forecast for revenue and expenditures and developing monthly departmental performance measures. Additionally, • Mr. Pedersen directed the selection, installation, and implementation of the city's administrative software, developed real-world financial management policies, prepared prospectus for bond sales and implemented a centralized purchasing system. Mr. Pedersen's experience includes providing auditing and consulting services to municipalities, school districts, counties, and special districts as well as a variety of non-profit and private sector clients. He 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. Mr. Pedersen has been awarded the Certificate of Educational Achievement in Governmental Accounting and Auditing by the AICPA. Mr. Pedersen is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants 8 Ij1 CONTINUING PROFESSIONAL EDUCATION The following is a table of continuing education courses topics that the proposed audit team has participated and/or served as instructors in the past three years. Topics 3 _. Breaux Yap le. fy Pedersen;v Governmental Quality Control X X OMB A133 & SAS82 X X X Governmental Accounting,Reporting, and Auditing X X X Generally Accepted and Governmental Auditing Standards X X X Report Writing X X Ethics X X X Arbitrage Rebate and Compliance Update. X X Governmental Accounting Standards Board Update X X X GASB 34 Reporting Model—Theory and Practical Implementation Issues X X X SAS 99 New audit related fraud standards X X X Null Lairson is a registered sponsor of continuing education for the Texas State Board of Public Accountancy. As such,we can coordinate and/or provide quality continuing professional education for our clients and staff. Because of the diverse background of our personnel and practice areas,we can provide a wide range of educational assistance to client personnel as well as specific training in municipal accounting issues tailored to local governments' unique needs. 9 _.s REFERENCES As previously noted, our firm has broad experience in providing the services requested by the City of Friendswood. Our audit partners and managers have collectively over 90 years of experience in providing services to governments. Our audit team includes staff accountants, as necessary, with Y y experience and training in governmental (and specifically, City) accounting, auditing, and consulting. We have included a listing of some of our area clients for your review. Null Lairson, P.C. has provided core audit services and/or various forms of consulting services ranging from entity-wide organizational structure studies to detailed help in compiling basic financial data. This listing of clients is for the use of the City only in evaluating our proposal and is not to be used for any other purpose and is not to be distributed to anyone outside those persons involved in the selection of auditors for the City. Additional references are available if desired. f °'x Lenathof Audit e '.,Population, z P Contact and�Consultina Audit t Estimate*•:" .. M s, Position. Phone Services ;:sF Hours_: Deer Park 30,372 Mr Glenn Windsor 281.478.7225 Three years 450 Galveston 65,577 Mr. Steven LeBlanc 409.797.3525 One year 840 —� City Manager La Porte 33,575 Ms.Cynthia Alexander 281.471.5070 Over five years. 375 Director of Finance League City 47,404 Ms.Monica Kohlenberg, 281.338.4803 Three years 610 CPA Director of Finance Rosenberg 33,132 Ms.Lynda Eiche,CPA. 281.344.3302 Over five years 320 Director of Finance *Texas Data Center Population Estimates January I,2000 } 10 REFERENCES Selected Municipal and Other Governmental Clients: Municipalities City of Alvin City of Morgan's Point City of Bellaire City of Seabrook City of Deer Park City of Stafford City of Dickinson City of Sugar Land City of Galena Park City of West University City of Houston City of Wharton City of Friendswood Taylor Lake Village City of Jacinto City Harris County City of Meadows Fort Bend County City of Missouri City Galveston County School Districts Alief ISD Hitchcock ISD Alvin ISD Katy ISD Conroe ISD La Porte ISD Fort Bend ISD Lamar Consolidated ISD Galena Park ISD Stafford MSD Municipal Utility Districts Fort Bend W.C.I.D.No. 2 Malcomson Road U.D. Quail Valley U.D. Treasure Island M.U.D. Thunderbird U.D. Woodlands Utility Districts(9 MUD's) Cimmarron M.U.D. First Colony Levee Improvement City West Harris County M.U.D.#2 Brazoria Drainage District Harris County M.U.D. #18 Harris County M.U.D. #58 Other Governmental Entities Greater Greenspoint Management District Pearland Economic Development Town Center Improvement District Corporation Harris County Improvement District No. 1 Galveston County Health District Katy TIRZ Shadow Creek TIRZ City of Galveston Employees Retirement Galveston Property Finance Corporation Plan for Police Galveston Housing Finance Corporation Galveston Wharves 11 I _ J:. f TECHNICAL COMPONENT 12 GASB STATEMENT NO. 34 OVERVIEW The Governmental Accounting Standards Board (GASB) has adopted Statement of Financial Accounting Standards No. 34, the most drastic and far reaching change to the basic financial y statements of state and local governments in decades. These changes that will take affect for the City of Friendswood for the fiscal year beginning October 1, 2002. This statement establishes new financial reporting requirements for state and local governments throughout the United States. When implemented, it will create new information and will restructure much of the information that governments have presented in the past. GASB developed these new requirements to make annual reports more comprehensive and easier to understand and use. Our firm has taken a proactive approach with clients to get ready for this significant change in external financial reporting. Our partners are currently holding routine continuing education sessions for all government industry sectors covering GASB 34. These education sessions are being held locally and on a statewide basis. Some of the more significant aspects of the new reporting standard are discussed below. We would be available to the City during the transition period for the. new reporting requirements in whatever manner considered appropriate for your organization. y . Significant aspects of the new reporting standard: Management's discussion and analysis (MD&A). MD&A should introduce the basic financial A statements and provide an analytical overview of the government's financial activities. Although it is RSI,governments are required to present MD&A before the basic financial statements. Basic financial statements.The basic financial statements should include: Government-wide financial statements, consisting of a statement of net assets and a statement of activities. Prepared using the economic resources measurement focus and the accrual basis of accounting, these statements should report all of the assets, liabilities,revenues, expenses; and gains and losses of the city. Fiduciary activities, whose resources are not available to finance the city's programs, should be excluded from the government-wide statements. Fund fmancial statements consist of a series of statements that focus on information about the city's major governmental and enterprise funds (if any), including its blended component units. Fund financial statements also should report information about a city's fiduciary funds and component units that are fiduciary in nature. Governmental fund financial statements should continue to be prepared using the current financial resources measurement focus and the modified accrual basis of accounting.Proprietary fund financial statements (including financial data for internal service funds) and fiduciary fund financial statements (including financial data = for fiduciary funds and similar component units) should be prepared using the economic resources measurement focus and the accrual basis of accounting. Required supplementary information (RSI). In addition to MD&A, this Statement requires budgetary comparison schedules to be presented as RSI along with other types of data as required by previous GASB pronouncements. 13 SCOPE AND AUDIT APPROACH We understand the unique organizational structure and operating environment under which Texas Municipalities operate and have developed programs of procedures designed specifically for these engagements. Our audit approach is described as follows: Segmentation of Audit and Staffing Plans 1 Our auditing and consulting service approach includes the most current techniques available. In addition to the heavy involvement of our partners and managers, our staff will also be familiar with ti the City's operating environment due to their ongoing involvement with other municipal clients. Our goal in providing a quality audit experience is to assure a seamless audit approach with continuity of staff from the earliest planning .stages through fieldwork to report issuance exit conferences. This approach is achieved through the application of our thorough understanding of the environment and heavy involvement in all phases by management personnel. A brief overview of the different phases or segments of our audit process is as follows: The Planning Phase Prior to any fieldwork being performed, strategic planning sessions are held both internally and with the City's staff to identify key audit and operational issues, establish communications with critical firm, City staff, and relevant third parties, as well as determining timing and individual responsibility schedules. Fieldwork Our audit programs for City of Friendswood will include procedures related to review and evaluation of internal administrative and accounting control, determination of compliance with finance related legal issues,the evaluation of errors and fraud, statistical sampling and analytical __J procedures designed to determine reasonableness of costs that can lead toward evaluating efficiency and effectiveness in administrative operations. Throughout the fieldwork process, our partners and staff remain in constant contact and communication with City management personnel. When questions or concerns arise in the course of our work,we take steps to assure ourselves that critical information is passed on to the proper level of management through weekly meetings and discussions. Report Issuance and Closure - Report issuance and exit conferences of an audit are often the most critical portions because it is in this phase that most external communications are discussed. Although we would be assisting City management in preparing the comprehensive annual financial report, this report is ultimately the responsibility of City management { 14 SCOPE AND AUDIT APPROACH (continued) Report Issuance and Closure(continued) - The results of our audit will be reviewed with the appropriate level of management,to including the City Council and executive levels of staff, prior to the issuance of a report on internal controls and compliance matters or management letter. This review of findings and proposed recommendations with management often leads to a plan of action for the City management to make any needed improvements in a manner that is not only theoretically but practically sound. We find this method of exiting on the audit process brings the most value to the City: Level of Staff The level of staffing commitment to complete this engagement segmented by audit phase is as follows: Audit Segment Report ,r --� Issuance s 1 a and `x Staff Levee Planning Fieldwork Closure: Total' Partners 20 40 20 80 Managers 12 88 45 145 Staff 12 128 10 150 Totals 44 256 75 375 Sample Sizes and Audit Sampling In the course of an audit, we will apply sampling techniques in our substantive testing of account balances and transaction classes if the application of such techniques is deemed more effective and efficient. Audit sampling can be defined as the application of an audit procedure to less than 100 percent of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class. Additional uses of sampling can be found in our tests of controls and compliance with laws and regulations. The sample sizes and the extent of the use of samples depends on various factors including population size and the inherent risks associated with the account, transaction class, controls, or compliance features. In the planning and fieldwork stages of the audit, we will thoroughly discuss the population sizes, and the risk factors associated with significant financial statement accounts with appropriate financial management personnel. These discussions will include a methodology for selecting a sample as well as an approach for gathering the sample that will be the least intrusive to ongoing financial operations of the City. 15 -'` SCOPE AND AUDIT APPROACH (continued) Extent of use of EDP Software in the engagement -1 As noted earlier, our auditing and consulting service approach includes the most current techniques available in the field. We utilize fully integrated software for trial balances, audit workpapers, and reporting functions. We will request that City staff electronically download certain data from the City's financial management information system for evaluation during the planning and fieldwork phases of the audit. Our approach to this area is designed to be non-invasive and to reduce the amount of time spent by both our staff and City employees. Computer based techniques are used by our staff only when considered more.efficient than traditional methods. We believe this approach is consistent with providing the quality services for which we strive. Tests of Compliance with Laws and Regulations. This is a type of audit test that is used to determine general statutory compliance and when the City receives funds from government agencies for services provided to eligible recipients. The purpose of tests of compliance with laws and regulations is to determine whether there have been instances of noncompliance that may have a material effect on the financial statements or to provide a basis of reporting on the City's compliance with such laws and regulations. As a result, tests of compliance with laws and regulations are substantive tests accomplished by examining supporting documentation. In a Single Audit, this type of audit test is frequently.applied using audit sampling. We will select a sample of revenue or expenditure transactions and inspect supporting documentation to determine compliance with relevant laws and regulations; e.g., we would select a sample of expenditures charged to a federal or state award program and inspects documentation to determine whether expenditures were for activities allowed. We find the most efficient approach is usually to conduct these tests simultaneously with substantive tests of transactions; e.g., concurrently with selecting samples of cash receipts or disbursements to test recording accuracy. Identification of Potential Audit Problems As noted earlier, our approach to difficult audit issues is immediate communication at the appropriate level of management to include the City Council and administration. We propose scheduled quarterly meetings with the City's management personnel to stay abreast with issues that the City is facing. We also welcome calls from staff during the year or question items as part of our service commitment. 16 SCOPE AND AUDIT APPROACH (continued) Type and Extent of Analytical Procedures to be Used in the Engagement The firm uses analytical procedures in audit planning to: • Enhance our understanding of the City's operations and the transactions and events that have occurred since the last audit date. • Identify areas that may represent specific risks relevant to the audit. Comparisons of account balances between accounting periods are made and ratio and trend analysis performed to improve our understanding of the client and its operations and may identify critical audit areas. For instance, comparing general and special revenue fund expenditures by function and revenue by source for the past five years provides an understanding of the City's operations and may identify a revenue source that requires increased attention in the current audit. Our preliminary analytical procedures for a City will include, as a minimum, a comparison of current account balances in the working trial balance to similar amounts in the prior annual period's financial statements and the current period's budget. However, we feel a thoughtful consideration of expected relationships among account balances and periods by our experienced auditors is far more important than a mechanical comparison. We will not only consider these relationships but compare these based on our knowledge and experience about the similar governmental entities and their operations. In some cases, analytical procedures can be more effective or efficient than tests of details for achieving particular substantive testing objectives. Normally, analytical procedures call attention to unexpected relationships in financial statement balances. This can be an efficient means of identifying potential misstatements or misclassifications. The appropriate mixture of analytical procedures and tests of details is a matter of the auditor's professional judgment concerning the expected efficiency and effectiveness of analytical procedures in identifying potential misstatements. J Analytical procedures may be used to identify individually significant items or to otherwise identify populations that need to be sampled. In the payroll area, an effective analytical test is to compare current expenditures to the prior period actual and current budget by department and relate to the number of employees by department. In this manner, the auditor may eliminate the need to sample or reduce the population of payroll expenditures considered necessary to sample by confining sampling to departments with significant fluctuations. Analytical procedures are also applied as an overall review of the financial information in the final stage of the audit. These procedures are designed to assist our staff in assessing the propriety of conclusions reached and in the evaluation of the overall financial statement presentation. While the selected procedures will vary on the circumstances, they will always focus on overall relationships within the financial statements and consider the following matters: • The adequacy of evidence gathered in response to unusual or unexpected balances identified by analytical procedures applied in the planning stage of the audit. • Unusual or unexpected balances or relationships not previously identified. 17 4 SCOPE AND AUDIT APPROACH (continued) Determining Laws and Regulations That will be Subject to Audit Test Work We will design our audit to provide reasonable assurance that the City's financial statements are free of material misstatements resulting from violations of laws and regulations that have a direct and material effect on the determination of financial statement amounts. From the planning phase of the audit, we will seek to obtain an understanding of the possible effects of such laws and -J regulations on the City's financial statements. In the course of the audit we will consider performing some or all of the following procedures: • Consider knowledge about such laws and regulations obtained in prior years' audits. • Discuss such laws and regulations with the chief financial officer,legal counsel, or grant administrators. • Obtain written representation from management concerning the completeness of management's identification of such laws and regulations. • Review grant and loan agreements. • Review minutes of meetings of the City Council for the enactment of new ordinances or policies. • Read pertinent statutes,regulations, and charter provisions and excerpt significant items for the permanent file section of the workpapers • If any legal requirements require clarification,we will request a written interpretation from the City's legal counsel. Examples of the types of laws and regulations that have a direct and material effect on the determination of amounts in a City's financial statements follow: Public Funds Investment Act. We will consider the governmental unit's compliance with legal and policy provisions for deposits and investments. _J Procurement. Competitive bidding laws apply to the procurement process. Appropriations.Expenditures should not exceed authorized limits. Legal authority for transactions. Transactions should be properly authorized at execution. Establishment of funds. The funds of a local governmental unit may be established by state constitutional provisions or statutes,or by local charters, ordinances, and governing body orders. Budgetary reporting. The general purpose financial statements should present an aggregation of the appropriated budgets, as amended, compared to actual results of operations in accordance with State Laws local budget provisions. Restrictions on expenditures. The proceeds of certain governmental revenues are restricted by law as to the purposes for which they may be expended. Taxing and debt limitations. Governmental units may be subject to laws and regulations that place limits on taxing authority, place ceiling limitations and other issuance criteria on debt, or place limits on the use of debt proceeds. 18 SCOPE AND AUDIT APPROACH (continued) Financial Audit Engagement- General Scope Considerations We feel that the independent auditing firm should be totally responsive to the client's governing body. We will work closely with the audit committee and management in addressing the scope of the audit, the overall audit philosophy, and our observations and recommendations relating to the City's financial operations. We understand the scope of the work requested by the City includes an audit of its general purpose financial statements in accordance with generally accepted auditing standards, as well as Government Auditing Standards, (Yellow Book) issued by the Comptroller General of the United States, and the provisions of the Office of Management and Budget(OMB) Circular A-133,Audits of State and Local Governments Generally accepted government auditing standards are composed of generally accepted auditing standards and additional standards for financial audits contained in the Yellow Book.. Our audit will be conducted in accordance with the above mentioned standards and will include tests of the accounting records of the City of Friendswood and other procedures we consider necessary to enable us to express an unqualified opinion that the general purpose financial statements are fairly presented in all material respects, in conformity with generally accepted accounting principles. The general scope of our work will include: { • A.Evaluation of Internal Control Structure The administration of City of Friendswood is responsible for establishing and maintaining an internal control structure. The objectives of an internal control structure are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorizations and recorded properly to permit the preparation of general purpose financial statements in accordance with generally accepted accounting principles. In planning and performing our audit we will consider the internal control structure in order to determine our auditing procedures for the purpose of expressing our opinion on City of Friendswood's general purpose financial statements and not to provide assurance on the internal control structure. We will obtain an understanding of the design of the relevant policies and procedures for the significant areas of the audit and whether they have been placed in operation, and we will assess control risk. Test of controls may be performed to test the effectiveness of certain policies and procedures which we consider relevant to preventing and detecting errors and irregularities which are material to the general purpose financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters which have a direct and material effect on the general purpose financial statements. Our tests, if performed, will be less in scope than would be necessary to render an opinion on the internal control structure policies and procedures and, accordingly,no opinion will be expressed. 19 SCOPE AND AUDIT APPROACH (continued) We will inform the City of any matters involving internal control structure and its operations ___ 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 structure which, 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 general purpose financial statements. - Compliance with laws, regulations, contracts and grant agreements applicable to City of Friendswood, is the responsibility of management. As part of obtaining reasonable assurance about whether the general purpose financial statements are free of material misstatement, we will perform tests of the City's compliance with certain provisions of laws, regulations, contracts, and grants. However, the objective of our audit will not be to provide an opinion on overall compliance with such provisions, and we will not express such an opinion. B. Substantive test work on account balances 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 confirmations of receivables, cash, notes and certain other assets and liabilities by correspondence with selected individuals, creditors and financial institutions. Areas which would be covered in our tests would include material accounts in the general ledger such as, cash, investments, receivables, taxes, proprietary fund revenues, fixed assets, accounts payable, payroll, liabilities, fund balances, and various other revenue and expenditure accounts. We will also request written representations from your attorneys as part of the scope of the work. At the conclusion of our audit, we will also request certain written representations from the City about the financial statements and related matters. Our 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. Also, we will plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. However, because of the concept of reasonable assurance and because we will not perform a detailed examination of all transactions, there is a risk that material errors, t irregularities, or illegal acts, including fraud or defalcations, may exist and not be detected by J us. We will inform you, however of any matters of that nature which come to our attention, unless they are clearly inconsequential. Additional work requested or performed related to errors, irregularities or illegal acts would be above the scope of the audit and would be subject to further discussions with management. 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. { _J 20 SCOPE AND AUDIT APPROACH (continued) As part of the audit process we understand that you will provide us with the basic information, such as working trial balances, after final closing entries have been made, along with closing files and journal entries, schedules, adjustments and general ledger printouts which would be --J required to perform the audit. We also understand that you are responsible for the accuracy and completeness of that information. If the information is not complete or accurate we will make arrangements for you to correct the information or make arrangements for us to provide additional accounting services to assist you at an agreed-upon rate. This would occur if the City needed assistance in closing the books, preparing standard journal entries or preparing reconciliation or schedules,which should be prepared before the audit is started. We are anticipating that City employees will type all cash and other confirmations, locate supporting documentation such as invoices, deposits and other supporting documentation for items selected by us for testing. Account analysis schedules such as the reconciliation bank statements, investments schedules, fixed asset and depreciation schedules, listing of accounts payable at year end, etc. will be prepared by the City. C. Preparation of Comprehensive Annual Financial Report We will prepare the CAFR from information provided and we will advise you about appropriate accounting principles and their application. You will provide information for us to prepare the required supplemental schedules. The accompanying transmittal letter and footnotes will be prepared by City personnel and integrated into our reporting package. Although we will assist you in preparing the financial statements, the responsibility for the financial statements remains f with the City. The responsibility includes the maintenance of adequate records and related internal control structure policies and procedures, the selection and application of accounting principles, and the safeguarding of assets. D.Quarterly Audit Committee Meetings. As part of our annual commitment to the City, senior level firm personnel will be available to meet with the City audit committee and or management team (at the City's discretion) on a quarterly basis to discuss financial reporting and audit matters. It is our policy to make our partners and managers available throughout the year to both the City Council and the management team. J 21 SCOPE AND AUDIT APPROACH (continued) E. Single Audit Procedures and Reporting If required under the federal or state single audit acts, we will audit the City's general purpose financial statements in accordance with generally accepted auditing standards as well as Government Auditing Standards, (Yellow Book) issued by the Comptroller General of the United States, and the provisions of the Office of Management and Budget(OMB) Circular A- -) 133, Audits of State and Local Governments. Generally accepted government. auditing standards are composed of generally accepted auditing standards and additional standards for financial audits contained in the Yellow Book. We would contemplate receiving specific direction as to City and firm staff involvement in planning sessions with the City's management prior to beginning our work. { No extended services will be performed unless they are specifically authorized by an amendment to the contractual agreement between the City and our firm. As discussed in earlier sections, Null-Lairson, P.C. has a great deal of experience in performing these types of professional services and we look forward to discussing in greater detail the anticipated scope of the engagement with the audit selection committee and/or any appropriate member of the City's administrative staff. J 22 1 • TASK / ACTIVITY PLAN J F j J _ 1 23 TIMING AND PLANNING The following is a sample of the type of timing and planning schedules we would establish after working closely with the City's administrative staff to formulate and complete the specific timing requirements detailed in the City's request for proposals. Example Timing and Planning Schedule Year ending September 30, 2003 September Audit Coordinators for City and Firm Named and mutually agreed upon. September/ Pre-audit meeting with City management and audit committee concerning timing, J. October scope and any additional considerations. Year-end closing planning and timing meeting with Null-Lairson and City finance personnel. October Interim work- System understanding and documentation with specific emphasis on issues raised by audit committee and management, Test work on expenditures, payroll, Single Audit work, reading of minutes, legal expenses J review preparation of confirmations for year end, investments compliance, update systems memos and internal controls questionnaires, check on single audit issues, discussion of schedules to be prepared by City or Null-Lairson. November Progress meeting with Null-Lairson and management personnel to discuss status of audit and to discuss scope,timing and other considerations-Review status of interim work. J November City personnel complete confirmations and notify either Firm Audit Coordinator to pick up for Null-Lairson to mail. j November Status meeting with Null-Lairson and City personnel to discuss year end Status. December City Personnel forward to Null-Lairson;preliminary trial balance and other reports as agreed upon in planning meetings. December Entrance Conference with Director of Finance.Null-Lairson begins year-end audit fieldwork. January Null-Lairson completes year-end field work January Null Lairson to have completed first draft of CAFR. January Exit conference with finance personnel to discuss CAFR, Single Audit reports, findings and recommendations. February Meeting with Mayor to discuss CAFR, Single Audit reports, findings and recommendations. February Presentation of CAFR, Single Audit reports, findings and recommendations at Audit Committee meeting February Copies of CAFR, Single Audit reports,findings and recommendations delivered and presented to City Council. J 24 CITY AND FIRM RESPONSIBILITIES Example Listing of City and Firm Responsibilities September 30, 2003 f r City of Fr►endswoo Null d � � L-a�r�onti I. Reporting A. Comprehensive Annual Financial Report X 1. Introductory Section X 2. Financial Section X 3. Independent Auditors' Report X 4. Statistical Section X B. Federal and State Single Audit Supplemental Reports X 1. Independent Auditors' Reports (3) X 2. Schedules of Findings and questioned costs X 3. Views of Responsible Officials X 4. Schedule of Expenditures of Federal and State Awards X II. Overall A. Maintenance of General Ledger and original books of Record X B. Preparation of Reconciliation reports to document general ledger control accounts X ( C. Annual closing entries X D. Retrieval of supporting documents for audit purposes X { 25 j • • • APPENDIXES • • j 26 APPENDIX A C:1 First National Bank Building 400 Pine Street,Suite 600 Abilene,Texas 79601-5128 Office(915)672-4000 FAX(915)672-7049 Davis,Kinard &Co.,P.C. 1-800-588-2525 Certified Public Accountants http://www.dkcpa.com To the Shareholders of Null Lairson,P.C. and the SEC Practice Section Peer Review Committee We have reviewed the system of quality control for the accounting and auditing practice of Null Lairson,P.C.(the firm)in effect for the year ended December 31,2001. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide'it with reasonable assurance of complying 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(the AICPA). The design of the system,and compliance with it,are the responsibilities of the firm. In addition, the firm has agreed to comply with the membership requirements of the SEC Practice Section of the AICPA Division for CPA Firms(the Section). Our responsibility is to express an opinion on the design of the system,and the firm's compliance with that system and the Section's membership requirements based on our review. i Our review was conducted in accordance with standards established by the Peer Review Committee of the Section and included procedures to plan and perform the review that are summarized in the attached description of the peer review process. Our review would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it or with the membership requirements of the Section since it was based on selective tests. Because there are inherent limitations in the effectiveness of any system of quality control,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 system of quality control may become inadequate because of changes in conditions, or that the degree of conipliance with the policies or procedures may deteriorate. In our opinion,the system of quality control for the accounting and auditing practice of Null Lairson, P.C.in effect for the year ended December 31,2001,has been designed 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 standards. Also, in our opinion, the firm complied during that year with the membership requirements of the Section in all material respects. As is customary in a peer review,we are issuing a letter under this date that sets forth comments relating to certain policies and procedures or compliance with them. The matters described in the letter were not considered to be of sufficient significance to affect the opinion expressed in this report. DAVIS,KINARD& CO.,P.C. Abilene,Texas May 31,2002 i 27 APPENDIX B PROPOSERS GUARANTIES 1. The Proposer certifies it can and will provide and make available, at a minimum, all services set forth in Section II,Nature of Services Required. Signature of Official: Name(typed): Christopher L. Breaux Title: Principal - Audit Services Firm: Null Lairson, P.C. Date: September 5, 2003 j 28 APPENDIX C PROPOSER WARRANTIES A. Proposer warrants that it is willing and able to comply with State of Texas laws with respect to foreign(non-state of Texas) corporations. B. Proposer warrants that it is willing and able to obtain an errors and omissions insurance policy providing a prudent amount of coverage for the willful or negligent acts or omissions of any officers, employees or agents thereof. C. Proposer warrants that it will not delegate or subcontract its responsibilities under an agreement without the express prior written permission of the City. D. Proposer warrants that it is willing and able to meet required dates and report deadlines. E. Proposer warrants that all information provided by it in connection with this proposal is true and accurate. Signature of Official:,` Name(typed): Christopher L. Breaux Title: Principal - Audit Services Firm: • Null Lairson, P.C. Date: September 5, 2003 1 29 APPENDIX D SAMPLE REPORTS Sample Management Letter—Following is a sample report on internal controls or "management letter" which is typical of our approach in providing solution driven comments for improving operations. Please note that such a report is the result of in-depth meetings and dialogue with the parties affected and management to determine that the findings or comments. are factual and relevant. Because users outside of the City's management and finance department often read these reports, for each internal control comment provided we strive to provide the following: ✓ A clear definition of the condition along with necessary background information ✓ Criteria(authority or"best practices")by which the condition is being measured ✓ The effect of the condition on the internal control structure ✓ Realistic recommendations for improvements Sample Comprehensive Annual Financial Report (CAFR) — Because of the bulk of a typical CAFR, a sample CAFR has not been included in this document. The City is in possession of their 2002 CAFR prepared by our staff. Additional samples can be made available upon request. j } 30 IlL Null'Lairson CERTIFIED PUBLIC ACCOUNTANTS PROFESSIONAL CORPORATION Independent Auditors'Report on Compliance and on internal Control Over Financial Reporting Rased on an Audit of General Purpose Financial Statements To the Honorable Mayor and members of City Council City of Our Town,Texas In planning and performing our audit of the general purpose financial statements of City of Our Town, Texas (the "City") as of and for the year ended September 30, 20XX, we considered the City's internal control over financial reporting to determine in our auditing procedures for the purpose of expressing our opinion on the financial statements and of o provide assurance on the internal control over fmancial reporting. However, we noted ce= ma ers involving the internal control over financial reporting and its operation that -. consikr t• be reportable conditions. Reportable conditions involve matters coming to our atte on relatii.,0,significant deficiencies in the design or operation of the internal control o +ciii report' th.t, in our judgment, could adversely effect the City's ability to record, om v. .ze, • t rep+ financial statements. Reportable conditions relating to number' f • fi ' d as.e ;,r ds maintenance, and reconciliation of account balances alk.4 esc :1• • 1 10 acc e , p• i Schedule of Findings and Recommendations. ag°, A material weakriess,„''N,cond F to.. in •MIS lie i si o •r operation of one or more of the internal control components oes of r:s ..to a el:I,\Tel V°.w level the risk that misstatements in amounts that would be mate in rela n +gym . the in•t;cial statement being audited may occur and not be detected within a timt4Wiio 41 by ees in the normal course of performing their assigned functions. Our considers n )6f internal control that might be reportable conditions and, accordingly,would no nec:cs• F' disclose all reportable conditions that are also considered to be a material weaknesses. ` = er, we do not believe any of he reportable conditions described above is a material weakness. This report is intended solely for the information and use of the audit committee, management, others within the organization and City Council and is not intended to be and should not be used by anyone other than these specified parties. - a { yr Houston,Texas January 12,20XY 11 Greenway Plaza,Suite 1515.Houston,TX 77046•(713)621-1515.Fax:(713)621-1570 2117 Post Office Street•Galveston,TX 77550•(409)762-8380•Fax:(409)762-1749 — a MEMBERS:AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS, CPA ASSOCIATES INTERNATIONAL,INC.WITH ASSOCIATED OFFICES IN PRINCIPAL U.S.AND INTERNATIONAL CITIES q - Findings Related to Internal Controls.-Financial Statements Comment XX-1 Historically,the City has maintained multiple separate water and Number of Funds wastewater funds that are combined into a single enterprise fund for reporting purposes. These funds which track different components of both water and wastewater activities is apparently a remnant of less sophisticated technology and account code structures which is complex and inefficient.. Criteria The Governmental Accounting Standards Board's (GASB) Summary Statement of Principles of Accounting and Reporting, states that governmental units should establish and maintain those funds required by law and sound financial administration. Only the minimum number of funds consistent with legal and operating requirements should be established,however,because unnecessary funds result in inflexibility,undue complexity, and inefficient financial administration. Effect The effect of maintaining this additional fund is a lack of efficiency in transaction processing and financial reporting. Recommendation We recommend the City finance department: Consolidate the various water and wastewater funds. Account for the water and wastewater activities using the J available account code structure currently in place. J Comment XX-2 Monthly No evidence of complete monthly reconciliations of various Reconciliation Processes balance sheet and operating statement accounts was noted during the audit of the City's 20XX financial statements. _1 Criteria Internal controls should be in place to assure liquid and short-term assets of the City are safeguarded from loss or improper use, and balances reported in the City's financial statements reflect actual amounts. Effect The effect of not reconciling these various balance sheet and operating statement accounts is the likelihood losses or errors could occur and not be detected by employees in the normal course of their duties. Recommendations We recommend City personnel implement the following actions relative to the following balance sheet and operating accounts: Comment XX-2 Monthly Pooled Cash — Monthly procedures should include not only a Reconciliation Processes reconciliation of pooled cash from bank balances to general (cont') ledger account balances but should also include a reconciliation Recommendations of pooled cash equity accounts from the pooled cash clearing fund to amounts recorded in the individual operating funds of the City. Findings Related to Internal Controls Financial Statements feu Accounts Receivable (Water and Sewer) — Water and sewer general ledger control accounts should be reconciled to the aged receivable subsidiary ledger on a monthly basis. Municipal Court Revenues and Bonds — General ledger control accounts related to court revenues and bonds . should be reconciled to reports generated from the court operations reporting system on a monthly basis. • Payroll Costs and Liabilities — Quarterly payroll tax reports and monthly retirement and insurance (health) filings should be ti reconciled on a quarterly/monthly basis. Permit Revenues — Monthly permit reports given to council should be reconciled with actual permits issued and general ledger control accounts on a monthly basis. Key attributes of the reconciliations described above include: Documentation - written or printed. reconciliation reports showing at a minimum totals from the reconciled document (bank statements, receivable listings, court reports, etc) and the corresponding general ledger account balances. Approval - Departmental management should review and approve the reconciliations on a monthly basis. Action — Appropriate steps should be taken to correct any is differences between the reconciled documents.and the general ledger control accounts (typically this would include posting journal entries or correcting reconciled documents). -1 - 1 ,General Management.Comments ` Comment XX-3 The City's finance department has not established a formal Monthly Closing Procedures system of monthly closing procedures and timelines. Such a and Timelines system would provide staff and management with clear indicators for evaluating personnel and system workloads and capabilities. Recommendation We recommend the city finance department establish a formal system of monthly closing procedures to include: • A description of procedures to be performed on a monthly basis • Personnel unit (by position) responsible for completing the procedures. • Standards for (example of) documentation of procedures expected. • Timelines for the completion of each activity. • Management (by position) responsibility for review and approval of documentation.