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.
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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.
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St. Cloud, Minnesota
May 24, 2017
2
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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
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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.