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ITEM 3.8 City of Otsego - 2016 Compliance ReportsCity of Otsego Wright County, Minnesota Reports on Internal Control and Compliance with Government Auditing Standards and Legal Compliance December 31, 2016 (Am be r g an CPAS j ;ADVISORS City of Otsego Table of Contents 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 Report on Legal Compliance 3 Schedule of Findings and Responses on Internal Control 4 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 maj or fund and the aggregate remaining fund information of the City of Otsego, Minnesota as of and for the year ended December 31, 2016, 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, 2017. 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. Our consideration of internal control was for the limited purpose described in the preceding paragraph 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. However, as described in the accompanying Schedule of Findings and Responses on Legal Compliance and Internal Control, we identified a certain deficiency in internal control that we consider to be a material weakness and certain deficiency in internal control that we consider to be a significant deficiency. BerganKDV, Ltd. bergankdv.com B81:1 fore] 3 Internal Control over Financial Reporting (Continued) 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. We consider the deficiency described in the accompanying Schedule of Findings and Responses on Legal Compliance and Internal Control as audit finding 2016-001 to be material weaknesses. 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. We consider the deficiency described in the accompanying Schedule of Findings and Responses on Legal Compliance and Internal Control as audit finding 2014-001 to be a significant deficiency. 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 Responses on Legal Compliance and Internal 'Control. The City's responses were not subjectedto 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 Cityls internal control and compliance. Accordingly, this communication is not suitable for any other purpose. A --^ St. Cloud, Minnesota May 24, 2017 2 I1' ! mill1 Report on 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, 2016, and the related notes to financial statements, and have issued our report thereon dated May 24, 2017. The Minnesota Legal Compliance Audit Guide for Cities, promulgated by the State Auditor pursuant to Minnesota Statutes § 6.65, contains seven categories of compliance to be tested, contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our audit considered all of the listed categories, except we did not test for compliance with the provisions for tax increment financing because the City does not have any current tax increment activity. In connection with our audit, nothing came to our attention that caused us to believe that the City of Otsego failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Cities. 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. This report is intended solely for the information and use of those charged with governance and management of City and the State Auditor and is not intended to be, and should not be, used by anyone other than these specified parties. St. Cloud, Minnesota May 24, 2017 BerganKDV, Ltd. bergankdv.com City of Otsego Schedule of Findings and Responses on Internal Control CURRENT YEAR INTERNAL CONTROL FINDING: Material Weakness: Audit Finding 2016-001— Material Audit Adjustment During the course of our engagement,, we proposed a material audit adjustment that would not have been identified as a result of the City's existing internal control system and, therefore, could have resulted in a material misstatement of the City's financial statements. The material misstatement detected as a result of audit procedures was corrected by management. City's Response: The City will review the internal control process over the year-end closing process to ensure there are no adjustments needed. 0 City of Otsego Schedule of Findings and Responses on Internal Control CURRENT AND PRIOR YEAR INTERNAL CONTROL FINDING: Significant Deficiency: Audit Finding 2014-001— Lack of Segregation of Accounting Duties 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, and recording adjustments to accounts. • 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. The Accountant has access to record & cut checks, access to blank checks, can enter manual adjustments to the general ledger and is involved in the reconciliation of cash. • 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 yearend financial closing process. City's Response: The City will remain aware of this situation and will continually monitor internal control, including changes that occur.