ITEM 3.9 Approve Audit Engagement LetterOtkzo
MINNESOTA
DEPARTMENT INFORMATION
Request for
City Council Action
ORIGINATING DEPARTMENT:
REQUESTOR:
MEETING DATE:
Administration
Dan Jordet, ASD
22 January 2015
PRESENTER(s):
REVIEWED BY:
ITEM #:
Consent Agenda
Lori Johnson, CA
3.9 Approve Audit Engagement
of audit and procedures, expectations of City management and officials and the base fee of $ 25,600.
It is recommended that the Mayor be authorized to sign the document on behalf of the City of Otsego.
Letter
AGENDA ITEM DETAILS
RECOMMENDATION:
It is recommended that the City Council approve by motion and authorize signature of a letter engaging
KDV to audit the City's annual financial statements for the fiscal year ended December 31, 2014.
ARE YOU SEEKING APPROVAL OF A CONTRACT?
IS A PUBLIC HEARING REQUIRED?
No
No
BACKGROUND/JUSTIFICATION:
Following a proposal process in the fall of 2013, KDV was chosen as the City's financial statement
auditor. It is customary each year to sign an agreement called a Letter of Engagement outlining the
expectations of both parties in the extent and conduct of the audit process and the resulting reports
from the auditor to the City Council. The attached Letter of Engagement outlines KDV's proposed scope
of audit and procedures, expectations of City management and officials and the base fee of $ 25,600.
It is recommended that the Mayor be authorized to sign the document on behalf of the City of Otsego.
SUPPORTING DOCUMENTS: X ATTACHED ❑ NONE
2014 Letter of Engagement for Audit Services
POSSIBLE MOTION
Please word motion as you would like it to appear in the minutes.
Moved that the City of Otsego accept the terms and conditions of the 2014 Audit Letter of Engagement
with KDV and authorize the Mayor to execute the Letter on behalf of the City.
BUDGET INFORMATION
FUNDING: BUDGETED: X YES
General Fund - $ 30,000 ❑ NO
ACTION TAKEN
D APPROVED AS REQUESTED D DENIED D TABLED ❑ OTHER (List changes)
COMMENTS:
Dear Mr. Jordet:
We are pleased to confirm our understanding of the services we are to provide to the City
of Otsego, Minnesota, (the "City") for the year ended December 31, 2014. We will audit
the financial statements of the governmental activities, the business -type activities, the
aggregate discretely presented component units, each major fund and the aggregate
remaining fund information, including the related notes to the financial statements, which
collectively comprise the City's basic financial statements as of and for the year ended
December 31, 2014. Accounting standards generally accepted in the United States of
America provide for certain required supplementary information (RSI), such as
Management's Discussion and Analysis (MD&A), to supplement the City's basic
financial statements. Such information, although not a part of the basic financial
statements is required by the Governmental Accounting Standards Board who considers
it to be an essential part of financial reporting for placing the basic financial statements in
an appropriate operational, economic or historical context. As part of our engagement,
we will apply certain limited procedures to the City's RSI in accordance with auditing
standards generally accepted in the United States of America. These limited procedures
will consist of inquiries of management regarding the methods of preparing the
information and comparing the information for consistency with management's responses
to our inquiries, the basic financial statements and other knowledge we obtained during
our audit of the basic financial statements. We will not express an opinion or provide any
assurance on the information because the limited procedures do not provide us with
sufficient evidence to express an opinion or provide any assurance. The following RSI is
required by accounting principles generally accepted in the United States of America and
will be subjected to certain limited procedures, but will not be audited.
1. Management's Discussion and Analysis
2. Schedule of Funding Progress — Other Post Employment Benefits
We have also been engaged to report on supplementary information other than RSI that
accompanies the City's financial statements. We will subject the following
supplementary information to the auditing procedures applied in our audit of the financial
statements and certain additional procedures, including comparing and reconciling such
information directly to the underlying accounting and other records used to prepare the
financial statements or to the financial statements themselves, and other additional
procedures in accordance with auditing standards generally accepted in the United States
www.kdv.eom
Minneapolis
January 5 2015
3800 American Blvd W.
,
Suite 1000
Minneapolis, MN 55431
T (952) 563 6800
F (952) 563 6801
The Honorable Mayor, City Council and Management
St. cloud
Cit of Otsego Y g
St. St. Park Ave S.
Cloud, MN 56301
c/o Dan Jordet
T (320) 2517010
13400 90th Street NE
F (320)2511784
Otsego, MN 55330
Dear Mr. Jordet:
We are pleased to confirm our understanding of the services we are to provide to the City
of Otsego, Minnesota, (the "City") for the year ended December 31, 2014. We will audit
the financial statements of the governmental activities, the business -type activities, the
aggregate discretely presented component units, each major fund and the aggregate
remaining fund information, including the related notes to the financial statements, which
collectively comprise the City's basic financial statements as of and for the year ended
December 31, 2014. Accounting standards generally accepted in the United States of
America provide for certain required supplementary information (RSI), such as
Management's Discussion and Analysis (MD&A), to supplement the City's basic
financial statements. Such information, although not a part of the basic financial
statements is required by the Governmental Accounting Standards Board who considers
it to be an essential part of financial reporting for placing the basic financial statements in
an appropriate operational, economic or historical context. As part of our engagement,
we will apply certain limited procedures to the City's RSI in accordance with auditing
standards generally accepted in the United States of America. These limited procedures
will consist of inquiries of management regarding the methods of preparing the
information and comparing the information for consistency with management's responses
to our inquiries, the basic financial statements and other knowledge we obtained during
our audit of the basic financial statements. We will not express an opinion or provide any
assurance on the information because the limited procedures do not provide us with
sufficient evidence to express an opinion or provide any assurance. The following RSI is
required by accounting principles generally accepted in the United States of America and
will be subjected to certain limited procedures, but will not be audited.
1. Management's Discussion and Analysis
2. Schedule of Funding Progress — Other Post Employment Benefits
We have also been engaged to report on supplementary information other than RSI that
accompanies the City's financial statements. We will subject the following
supplementary information to the auditing procedures applied in our audit of the financial
statements and certain additional procedures, including comparing and reconciling such
information directly to the underlying accounting and other records used to prepare the
financial statements or to the financial statements themselves, and other additional
procedures in accordance with auditing standards generally accepted in the United States
www.kdv.eom
of America and we will provide an opinion on it in relation to the financial statements as
a whole:
1. Combining and Individual Fund Financial Statements
2. Supplemental Schedules
The following other information accompanying the financial statements will not be
subjected to the auditing procedures applied in our audit of the financial statements, and
our auditor's report will not provide an opinion or any assurance on that other
information.
1. Introductory Section of Comprehensive Annual Financial Report
2. Statistical Section of Comprehensive Annual Financial Report
Audit Objectives
The objective of our audit is the expression of opinions as to whether your financial
statements are fairly presented, in all material respects, in conformity with accounting
principles generally accepted in the United States of America and to report on the fairness
of the supplementary information referred to in the second paragraph when considered in
relation to the financial statements as a whole. Our audit will be conducted in accordance
with auditing standards generally accepted in the United States of America and the
standards for financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States, and will include tests of the accounting records
of the City and other procedures we consider necessary to enable us to express such
opinions. We will issue a written report upon completion of our audit of the City's
financial statements. We cannot provide assurance that unmodified opinions will be
expressed. Circumstances may arise in which it is necessary for us to modify our
opinions or add emphasis -of -matter or other -matter paragraphs. If our opinions on the
financial statements are other than unmodified, we will discuss the reasons with you in
advance. If, for any reason, we are unable to complete the audit or are unable to form or
have not formed opinions, we may decline to express opinions or issue reports, or may
withdraw from this engagement.
We will also provide a report (that does not include an opinion) on internal control
related to the financial statements and compliance with the provisions of laws,
regulations, contracts, and grant agreements, noncompliance with which could have a
material effect on the financial statements as required by Government Auditing
Standards. The report on internal control and on compliance and other matters will
include a paragraph that states (1) that the purpose of the report is solely to describe the
scope of 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 on compliance,
and (2) that the report is an integral part of an audit performed in accordance with
GovernmentAuditing Standards in considering the City's internal control and
compliance. The paragraph will also state that the report is not suitable for any other
purpose. If during our audit we become aware that the City is subject to an audit
requirement that is not encompassed in the terms of this engagement, we will
communicate to management and those charged with governance that an audit in
accordance with U.S. generally accepted auditing standards and the standards for
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financial audits contained in Gover nrnent Auditing Standards may not satisfy the relevant
legal, regulatory or contractual requirements.
Management Responsibilities
Management is responsible for the financial statements and all accompanying
information as well as all representations contained therein. As part of the audit, we will
assist with preparation of your financial statements and related notes. These nonaudit
services do not constitute an audit under Governnient Auditing Standards and such
services will not be conducted in accordance with Govern7nent Auditing Standards. You
agree to assume all management responsibilities relating to the financial statements and
related notes and any other nonaudit services we provide. You will be required to
acknowledge in the management representation letter our assistance with preparation of
the financial statements and related notes and that you have reviewed and approved the
financial statements and related notes prior to their issuance and have accepted
responsibility for them. Further you agree to oversee the nonaudit services by
designating an individual, who possesses suitable skill, knowledge, or experience;
evaluate the adequacy and results of those services; and accept responsibility for them.
Management is responsible for establishing and maintaining effective internal controls,
including evaluating and monitoring ongoing activities, to help ensure that appropriate
goals and objectives are met, following laws and regulations; and ensuring that
management is reliable and financial information is reliable and properly reported.
Management is also responsible for implementing systems designed to achieve
compliance with applicable laws, regulations, contracts, and grant agreements. You are
also responsible for the selection and application of accounting principles, for the
preparation and fair presentation of the financial statements in conformity with
accounting principles generally accepted in the United States of America, and for
compliance with applicable laws and regulations and the provisions of contracts and grant
agreements
Management is also responsible for making all financial records and related information
available to us and for the accuracy and completeness of that information. You are also
responsible for providing us with (1) access to all information of which you are aware
that is relevant to the preparation and fair presentation of the financial statements, (2)
additional information that we may request for the purpose of the audit, and (3)
unrestricted access to persons within the government from whom we determine it
necessary to obtain audit evidence.
Your responsibilities include adjusting the financial statements to correct material
misstatements and for confirming to us in the written representation letter that the effects
of any uncorrected misstatements aggregated by us during the current engagement and
pertaining to the latest period presented are immaterial, both individually and in the
aggregate, to the financial statements taken as a whole.
You are responsible for the design and implementation of programs and controls to
prevent and detect fraud, and for informing us about all known or suspected fraud
affecting the government involving (1) management, (2) employees who have significant
roles in internal control, and (3) others where the fraud could have a material effect on
the financial statements. Your responsibilities include informing us of your knowledge of
any allegations of fraud or suspected fraud affecting the government received in
communications from employees, former employees, grantors, regulators, or others. In
addition, you are responsible for identifying and ensuring that the government complies
with applicable laws, regulations, contracts, agreements, and grants and for taking timely
and appropriate steps to remedy fraud and noncompliance with provisions of laws,
regulations, contracts and grant agreements, or abuse that we report.
You are responsible for the preparation of the supplementary information in conformity
with U.S. generally accepted accounting principles. You agree to include our report on
the supplementary information in any document that contains and indicates that we have
reported on the supplementary information. You also agree to include the audited
financial statements with any presentation of the supplementary information that includes
our report thereon OR make the audited financial statements readily available to users of
the supplementary information no later than the date the supplementary information is
issued with our report thereon. Your responsibilities include acknowledging to us in the
written representation letter that (1) you are responsible for presentation of the
supplementary information in accordance with GAAP; (2) you believe the supplementary
information, including its form and content, is fairly presented in accordance with GAAP;
(3) the methods of measurement or presentation have not changed from those used in the
prior period (or, if they have changed, the reasons for such changes); and (4) you have
disclosed to us any significant assumptions or interpretations underlying the measurement
or presentation of the supplementary information.
Management is responsible for establishing and maintaining a process for tracking the
status of audit findings and recommendations. Management is also responsible for
identifying for us previous financial audits, attestation engagements, performance audits
or other studies related to the objectives discussed in the Audit Objectives section of this
letter. This responsibility includes relaying to us corrective actions taken to address
significant findings and recommendations resulting from those audits, attestation
engagements, performance audits, or other studies. You are also responsible for providing
management's views on our current findings, conclusions, and recommendations, as well
as your planned corrective actions, for the report, and for the timing and format for
providing that information.
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. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements. We will plan and perform
the audit to obtain reasonable rather than absolute assurance about whether the financial
statements are free of material misstatement, whether from (1) errors, (2) fraudulent
financial reporting, (3) misappropriation of assets or (4) violations of laws or
governmental regulations that are attributable to the City or to acts by management or
employees acting on behalf of the City. Because the determination of abuse is subjective,
Government Auditing Standards do not expect auditors to provide reasonable assurance
of detecting abuse.
Because of the inherent limitations of an audit, combined with the inherent limitations of
internal control, and because we will not perform a detailed examination of all
transactions, there is a risk that material misstatements may exist and not be detected by
us, even though the audit is properly planned and performed in accordance with U.S.
S
generally accepted auditing standards and Government Auditing Standards. In addition,
an audit is not designed to detect immaterial misstatements or violations of laws or
governmental regulations that do not have a direct and material effect on the financial
statements. However, we will inform the appropriate level of management of any
material errors, any fraudulent financial reporting or misappropriation of assets that come
to our attention. We will also inform the appropriate level of management of any
violations of laws or governmental regulations that come to our attention, unless clearly
inconsequential, and of any material abuse that comes to our attention. Our responsibility
as auditors is limited to the period covered by our audit and does not extend to later
periods for which we are not engaged as auditors.
Our procedures will include tests of documentary evidence supporting the transactions
recorded in the accounts, and may include tests of the physical existence of inventories,
and direct confirmation of receivables and certain other assets and liabilities by
correspondence with selected individuals, funding sources, creditors and financial
institutions. We will request written representations from your attorneys as part of the
engagement, and they may bill you for responding to this inquiry. At the conclusion of
our audit, we will require certain written representations from you about your
responsibilities for the financial statements; compliance with laws, regulations, contracts,
and grant agreements; and other responsibilities required by generally accepted auditing
standards in the United States of America.
Audit Procedures — Internal Control
Our audit will include obtaining an understanding of the City and its environment,
including internal control, sufficient to assess the risks of material misstatement of the
financial statements and to design the nature, timing and extent of further audit
procedures. Tests of controls may be performed to test the effectiveness of certain
controls that we consider relevant to preventing and detecting errors and fraud that are
material to the financial statements and to preventing and detecting misstatements
resulting from illegal acts and other noncompliance matters that have a direct and
material effect on the financial statements. Our tests, if performed, will be less in scope
than would be necessary to render an opinion on internal control and, accordingly, no
opinion will be expressed in our report on internal control issued pursuant to Government
Auditing Standards.
An audit is not designed to provide assurance on internal control or to identify significant
deficiencies or material weaknesses. However, during the audit, we will communicate to
management and those charged with governance internal control related matters that are
required to be communicated under AICPA professional standards and Government
Auditing Standards.
Audit Procedures — Compliance
As part of obtaining reasonable assurance about whether the financial statements are free
of material misstatement, we will perform tests of the City's compliance with the
provisions of applicable laws, regulations, contracts, agreements and grants.
However, the objective of our audit will not be to provide an opinion on overall
compliance and we will not express such an opinion in our report on compliance issued
pursuant to Government Auditing Standards.
Engagement Administration, Fees and Other
We may from time to time, and depending on the circumstances, use third -party service
providers in serving your account. We may share confidential information about you
with these service providers, but remain committed to maintaining the confidentiality and
security of your information. Accordingly, we maintain internal policies, procedures and
safeguards to protect the confidentiality of your personal information. In addition, we
will secure confidentiality agreements with all service providers to maintain the
confidentiality of your information and we will take reasonable precautions to determine
that they have appropriate procedures in place to prevent the unauthorized release of your
confidential information to others. In the event that we are unable to secure an
appropriate confidentiality agreement, you will be asked to provide your consent prior to
the sharing of your confidential information with the third -party service provider.
Furthermore, we will remain responsible for the work provided by any such third -party
service providers.
We understand that your employees will prepare all cash or other confirmations we
request and will locate any documents selected by us for testing.
We will provide copies of our reports to the City; however, management is responsible
for distribution of the reports and the financial statements. Unless restricted by law or
regulation, or containing privileged and confidential information, copies of our reports
are to be made available for public inspection.
The audit documentation for this engagement is the property of Kern, DeWenter, Viere,
Ltd. and constitutes confidential information. However, subject to applicable laws and
regulations audit documentation and appropriate individuals, will be made available upon
request and in a timely manner to oversight, regulatory or state agencies, their designee, a
federal agency providing direct or indirect funding, or the U.S. Government
Accountability Office for purposes of a quality review of the audit to resolve audit
findings, or to carry out oversight responsibilities. We will notify you of any such
request. If requested, access to such audit documentation will be provided under the
supervision of Kern, DeWenter, Viere, Ltd's personnel. Furthermore, upon request, we
may provide copies of selected audit documentation to the aforementioned parties. These
parties may intend, or decide, to distribute the copies or information contained therein to
others, including other governmental agencies.
The audit documentation for this engagement will be retained for a minimum of five
years after the report release date or for any additional period requested by the oversight,
regulatory or state agencies. If we are aware that a federal awarding agency, pass-
through entity or auditee is contesting an audit finding, we will contact the party (ies)
contesting the audit finding for guidance prior to destroying the audit documentation.
Nancy Schulzetenberg is the engagement partner and is responsible for supervising the
engagement and signing the reports or authorizing another individual to sign them.
Our fees for these services will be $ 25,600. The fee estimate is based on anticipated
cooperation from your personnel and the assumption that unexpected circumstances will
not be encountered during the audit. If significant additional time is necessary, we will
discuss it with you and arrive at a new fee estimate before we incur the additional costs.
Our invoices for these fees will be rendered each month as work progresses and are
2
payable on presentation. In accordance with our firm policies, work may be suspended if
your account becomes 60 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. A service charge of 1% per month, which is an annual
rate of 12%, will be added to all accounts unpaid 30 days after billing date. If collection
action is necessary, expenses and reasonable attorney's fees will be added to the amount
due.
If you intend to publish or otherwise reproduce the financial statements and make
reference to our Firm name, you agree to provide us with printers' proofs or masters for
our review and approval before printing. You also agree to provide us with a copy of the
final reproduced material for our approval before it is distributed. Additionally, if you
include our report or a reference to our Firm name in an electronic format, you agree to
provide the complete electronic communication using or referring to our name to us for
our review and approval prior to distribution.
During the course of our engagement, we will request information, and explanations from
management regarding the City's operations, internal controls, future plans, specific
transactions and accounting systems and procedures. At the conclusion of our
engagement we will require, as a precondition to the issuance of our report, that
management provide certain representations in a written representation letter. The
procedures we will perform in our engagement and the conclusions we reach as a basis
for our report will be heavily influenced by the written and oral representations that we
receive from management. Accordingly, false representations could cause us to expend
unnecessary efforts or could cause a material error or a fraud to go undetected by our
procedures. In view of the foregoing, you agree that we shall not be responsible for any
misstatements in the City's financial statements that we may fail to detect as a result of
false or misleading representations that are made to us by management.
Any disputes between us that arise under this agreement, or for a breach of this
agreement or that arise out of any other services performed by us for you, must be
submitted to nonbinding mediation before either of us can start a lawsuit against the
other. To conduct mediation, each of us shall designate a representative with authority to
fully resolve any and all disputes, and those representatives shall meet and attempt to
negotiate a resolution of the dispute. If that effort fails, then a competent and impartial
third party acceptable to each side shall be appointed to hold and conduct a nonbinding
mediation proceeding. You and we will equally share in the expenses of the mediator
and each of us will pay for our own attorney's fees, if any. No lawsuit or legal process
shall be commenced until at least 60 days after the mediator's first meeting with the
parties.
The nature of our engagement makes it inherently difficult, with the passage of time, to
present evidence in a lawsuit that fully and fairly establishes the facts underlying any
dispute that may arise between us.
We both agree that notwithstanding any statute of limitation that might otherwise apply
to a claim or dispute, including one arising out of this agreement or the services
performed under this agreement, or for breach of contract, fraud or misrepresentation, a
lawsuit must be commenced within twenty-four (24) months after the date of our report.
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This twenty-four (24) month period applies and starts to run on the date of each report,
even if we continue to perform services in later periods and even if you or we have not
become aware of the existence of a claim or the basis for a possible claim. In the event
that a claim or dispute is not asserted at least sixty (60) days before the expiration of this
twenty-four (24) month period, then the period of limitation shall be extended by sixty
(60) days, to allow the parties to conduct non-binding mediation.
Our role is strictly limited to the engagement described in this letter, and we offer no
assurance as to the results or ultimate outcomes of this engagement or of any decisions
that you may make based upon our communications with or our reports to you. Your
City will be solely responsible for making all decisions concerning the contents of our
communications and reports, for the adoption of any plans and for implementing any
plans you may develop, including any that we may discuss with you.
You agree that it is appropriate to limit the liability of Kern, DeWenter, Viere, Ltd., its
shareholders, directors, officers, employees and agents and that this limitation of
remedies provision is governed by the laws of Minnesota, without giving effect to choice
of law principles.
You further agree that you will not hold us liable for any claim, cost or damage, whether
based on warranty, tort, contract or other law, arising from or related to this agreement,
the services provided under this agreement, the work product, or for any plans, actions or
results of this engagement, except to the extent authorized by this agreement. In no event
shall we be liable to you for any indirect, special, incidental, consequential, punitive or
exemplary damages, or for loss of profits or loss of goodwill, costs or attorney's fees.
The exclusive remedy available to you shall be the right to pursue claims for actual
damages that are directly caused by acts or omissions that are breaches by us of our
duties under this agreement.
Government Auditing Standards require that we provide you with a copy of our most
recent external peer review report and any letter of comment, and any subsequent peer
review reports and letters of comment received during the period of the contract. Our
2014 peer review report accompanies this letter.
We appreciate the opportunity to be of service to the City, and believe this letter
accurately summarizes the significant terms of our engagement. If you have any
questions, please let us know. If you agree with the terms of our engagement as
described in this letter, please sign the enclosed copy and return it to us.
Sincerely,
KERN, DEWEN��TE��R, VIERS, LTD.
Nancy Schetenberg
Certified Public Accountant
RESPONSE:
This letter correctly sets forth the understanding of the City of Otsego, Minnesota.
By:
Title:
Date:
65