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1 - Report on Internal Controls City of Otsego Wright County, Minnesota Schedule of Expenditures of Federal Awards and Reports on Compliance with Government Auditing Standards, Uniform Guidance, and Legal Compliance December 31, 2020 City of Otsego Table of Contents Schedule of Expenditures of Federal Awards 1 Notes to the Schedule of Expenditures of Federal Awards 2 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 3 Report on Compliance for each Major Federal Program and on Internal Control over Compliance Required by the Uniform Guidance 5 Schedule of Findings and Questioned Costs 8 Minnesota Legal Compliance 11 City of Otsego Schedule of Expenditures of Federal Awards For the Year Ended December 31, 2020 Federal CFDA Number Expenditures Department of Treasury Passed through Minnesota Management and Budget: COVID - Coronavirus Relief Fund 21.019 1,305,119$ Election Assistance Commission Passed through Wright County COVID - Election Security Grants 90.404 2,862 Environmental Protection Agency Passed through Minnesota Public Facility Authority: Capitalization Loans for Clean Water State Revolving Funds 66.458 9,438,936 Total federal expenditures 10,746,917$ 1 Federal Grantor/Pass-Through Grantor/Grant Program Title 2 City of Otsego Notes to Schedule of Expenditures of Federal Awards NOTE 1 – BASIS OF PRESENTATION The accompanying Schedule of Expenditures of Federal Awards includes the federal grant activity of the City of Otsego, Minnesota and is presented on the accrual basis of accounting. The information in this Schedule is presented in accordance with the requirements of the Uniform Guidance. Therefore, some amounts presented in this Schedule may differ from amounts presented in, or used in, the preparation of the regulatory basis financial statements. NOTE 2 – PASS-THROUGH GRANT NUMBERS All pass-through entities listed above use the same CFDA numbers as the federal grantors to identify these grants and have not assigned any additional identifying numbers. NOTE 3 – INDIRECT COST RATE The City did not elect to use the 10 percent de minimis indirect cost rate, as allowed under the Uniform Guidance. NOTE 4 – PRIOR YEAR GRANT EXPENDITURES The State of Minnesota Public Facilities Authority awarded $9,438,936 of funding to the City under Federal CFDA Number 66.458 for the year ended December 31, 2020 and allowed the City to apply prior year expenditures towards the grant. The amount of prior year expenditures included in the Schedule of Expenditures of Federal Awards on the previous page was $1,194,873. 3 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards Honorable Mayor and Members of the City Council City of Otsego Otsego, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Otsego, Minnesota as of and for the year ended December 31, 2020, and the related notes to financial statements, which collectively comprise the City's basic financial statements and have issued our report thereon dated May 24, 2021. Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the City's internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. We did identify a certain deficiency in internal control, described in the accompanying Schedule of Findings and Questioned Costs that we consider to be a significant deficiency as audit finding 2020-001. 4 Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. City's Response to Findings The City's response to the findings identified in our audit are described in the accompanying Schedule of Findings and Questioned Costs. The City's responses were not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City's internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's internal control and compliance. Accordingly, this communication is not suitable for any other purpose. St. Cloud, Minnesota May 24, 2021 5 Report on Compliance for each Major Federal Program and Report on Internal Control over Compliance In Accordance With the Uniform Guidance Independent Auditor's Report Honorable Mayor and Members of the City Council City of Otsego Otsego, Minnesota Report on Compliance for Each Major Federal Program We have audited the City's compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the City's major federal programs for the year ended December 31, 2020. The City's major federal programs are identified in the summary of auditor's results section of the accompanying Schedule of Findings and Questioned Costs. Management's Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor's Responsibility Our responsibility is to express an opinion on compliance for each of the City's major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the City's compliance. Opinion on Each Major Federal Program In our opinion, the City complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended December 31, 2020. 6 Report on Internal Control over Compliance Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City's internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. 7 Report on Schedule of Expenditures of Federal Awards Required by the Uniform Guidance We have audited the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Otsego, Minnesota as of and for the year ended December 31, 2020, and the related notes to financial statements, which collectively comprise the City's basic financial statements. We issued our report thereon dated May 24, 2021, which contained unmodified opinions on those financial statements. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) and is also not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. St. Cloud, Minnesota May 24, 2021 8 City of Otsego Schedule of Findings and Questioned Costs SECTION I – SUMMARY OF AUDITOR'S RESULTS Financial Statements Type of auditor's report issued: We issued an unmodified opinion on the fair presentation of the financial statements of the governmental activities, business-type activities, each major fund, and the aggregate remaining fund information in accordance with accounting principles generally accepted in the United States of America (GAAP). Internal control over financial reporting: • Material weakness(es) identified? No • Significant deficiency(ies) identified? Yes, Audit Finding 2020-001 Noncompliance material to financial statements noted? No Federal Awards Type of auditor's report issued on compliance for major programs: Unmodified Internal control over major programs: • Material weakness(es) identified? No • Significant deficiency(ies) identified? No Any audit findings disclosed that are required to be reported in accordance with 2 CFR 200.516(a)? No Identification of Major Programs CFDA No.: 21.019 Name of Federal Program or Cluster: COVID – Coronavirus Relief Fund CFDA No.: 66.458 Name of Federal Program or Cluster: Capitalization Loans for Clean Water State Revolving Funds Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low risk auditee? No 9 City of Otsego Schedule of Findings and Questioned Costs SECTION II – FINANCIAL STATEMENT FINDING Audit Finding 2020-001 Criteria: Internal control that supports the City's ability to initiate record, process and report financial data consistent with the assertions of management in the financial statements requires adequate segregation of accounting duties. Condition: The City had a lack of segregation of accounting duties due to a limited number of office employees. Adequate segregation of accounting duties is in place when the following four areas of a transaction have been separated: authorization, custody, recording, and reconciliation. Examples of functions within the City that demonstrate this lack of segregation of accounting duties include, but are not limited to, the following: • Cash Receipts – The Utility Billing Clerk and Accountant have access to initiate and record receipts. The Utility Billing Clerk is also responsible for depositing cash receipts. The Accountant is also involved in the reconciliation process and has full access to the general ledger. • Utility Billing Process – The Utility Billing Clerk is responsible for handling customer payments, depositing payments received. • Disbursements – Due to small staff the City allows access to other employees to perform disbursement related activities in order to fill in for normal roles and responsibilities in the absences of other staff. In the absence of the Accountant, the Utility Billing Clerk has access to record and cut checks and has access to blank checks. • Financial Reporting and Journal Entry Process – The Finance Director and Accountant have full access to the general ledger and can make adjustments without review during the monthly and year-end financial closing process. Context: This finding impacts the internal control for all significant accounting functions. Effect or Potential Effect: The lack of adequate segregation of accounting duties could adversely affect the City's ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. Cause: There are a limited number of office employees. Recommendation: Continue to review the accounting system, including changes that may occur. Implement segregation whenever practical. 10 City of Otsego Schedule of Findings and Questioned Costs SECTION II – FINANCIAL STATEMENT FINDING (CONTINUED) AUDIT FINDING 2020-001 (CONTINUED) Views of Responsible Officials and Planned Corrective Action: The City is aware of the limited segregation of duties as a result of our limited number of staffing. The City is committed to an environment with strong internal controls and is constantly evaluating the system and implementation of compensating controls when available. SECTION III – FEDERAL AWARD FINDINGS AND QUESTIONED COSTS There were no questioned costs. SECTION IV – PRIOR YEAR FINDINGS AND QUESTIONED COSTS None 11 Minnesota Legal Compliance Independent Auditor's Report Honorable Mayor and Members of the City Council City of Otsego Otsego, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the City of Otsego, Minnesota as of and for the year ended December 31, 2020, and the related notes to financial statements, and have issued our report thereon dated May 24, 2021. In connection with our audit, nothing came to our attention that caused us to believe that the City failed to comply with the provisions of the contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing sections of the Minnesota Legal Compliance Audit Guide for Cities, promulgated by the State Auditor pursuant to Minnesota Statutes § 6.65, insofar as they related to accounting matters. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City's noncompliance with the above referenced provisions, insofar as they related to accounting matters. The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. Accordingly, this communication is not suitable for any other purpose. St. Cloud, Minnesota May 24, 2021