HomeMy WebLinkAbout01-20-04 Regular Meeting
MINUTES OF THE REGULAR MEETING
OF THE LA PORTE AUDIT COMMITTEE
JANUARY 20, 2004
These minutes were transcribed from the audiotape; the conversations are
summarized to bring clarity to them in a written format.
1. Call to Order
The meeting was called to order by Chairperson Chuck Engelken at 5:05 p.m.
Members of Committee Present: Chairperson Chuck Engelken, Committee Members Howard Ebow,
Peter Griffiths and Barry Beasley
Member of Committee Absent: James Warren
Members of City Council Present: None
Members of Citv Executive Staff and City Employees Present: City Manager Debra Feazelle, Assistant
City Manger John Joerns, Assistant City Manager Cynthia Alexander, Assistant Finance Director Michael
Dolby, Tax Manager Kathy Powell, Budget/Investment Officer Shelley Wolny, City Secretary Martha
Gillett, Assistant City Secretary Sharon Harris, Accounting Coordinator Lorie Doughty and Senior
Financial Services Technician Paula Bradstreet
Others Present: None
2. Committee to consider approval or other action of the Minutes of the Regular meeting of La Porte Audit
Committee held on October 27, 2003
Motion was made by Chairperson Chuck Engelken to approve the minutes as presented. A second by
Committee Member Howard Ebow
Ayes:
Nays: None
Abstain
3. Discuss Items:
A. Tax Manager Kathy Powell presented a renewal contract for the collection of delinquent taxes from
Perdue, Brandon, Fielder, Collins & Mott with the City of La Porte. Committee Member Ebow made
the motion to approve the recommendation by staff and second by Committee Member Beasley.
B. ~ Tax Manager Kathy Powell presented a contract for the collection of mowing, demolition & graffiti
removal assessments. Committee Member Ebow made the motion to approve the recommendation by
staff and second by Committee Member Beasley.
C. City Council Travel Ordinance was reviewed and discussed. It was decided that it would be brought
back to the committee at the next meeting.
•
•
4. Committee to consider approval or other action of recommendations of tax resale property as presented by
Tax Manager Kathy Powell. Committee Member Ebow made the motion to approve the recommendation
by staff and second by Committee Member Beasley.
5. Assistant City Manager Cynthia Alexander presented and reviewed the First Quarter (2004) Report of
Credit Card Expenditures to the committee
6. Budget/Investment Officer Shelley Wolny presented and discussed the First quarter (FY 2004) investment
portfolio to the committee.
7. Committee Comments
Adjournment
There being no further business to come before the Committee, the meeting was adjourned at 7:00 p.m.
C~`
2
r:
Memorandum
Date: March 2, 2004
To: Debra B. Feazelle, City Manager
C: Cynthia Alexander, Assistant City Manager
From: Michael Dolby, Assistant Finance Director
Subject: Monthly Financial Report
January 31, 2004
The following financial reports~are provided to outline the performance of the major operating funds
of the City and are used to highlight significant changes and/or fluctuations in operations:
• Financial Analysis ~ ~~
• Summary Statement of Revenues, Expenditures
and Changes in Fund Balances:
General Fund
Utility Fund
La Porte Area Water Authority Fund
Golf Course Fund
Sylvan Beach Fund
Airport Fund .
• Monthly Financial Summaries
• Revenue Charts
+ Capital Improvement Projects
• Investment Portfolio Overview
Please note that the financial data presented includes all related fund activities for all
functions/programs of each fund (i.e. debt service, capital improvements). Also, the roll forward
from the prior year is still pending and therefore data related to that process is not reflected in the
financial reports (i.e. encumbrances from prior year).
I hope this information is useful in evaluating the current financial status of the City. Should you
have any questions, comments, and/or need additional information please let me know.
. MAR 1()1~(i4
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FINANCIAL ANALYSIS
For the Four Months Ended January 31, 2004
33% of Year Lapsed
GENERAL FUN®
Revenue
Total General Fund revenue of $16.3M for the first four months of the year was 67% of budget and
approximately $2K (.02%) higher than last year, excluding interfund operating transfers. We have
received a significant portion of our budgeted revenue at this point since property tax and industrial
payments revenues are due February 1 ~'. The most significant changes in revenue are explained
below with the top five General Fund revenue accounts representing 98% of the total.
General Fund AAajor Revenue Sources
FY 2004 Actual vs Budget
10,000,000
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Ad Valorem Industrial Sales Tax Franchise Fees -
Payments Fees Services
DActual 7,219,473 6,782,508 564,925 505,126 863,864
^Budget 8,805,771 7,179,487 1,859,760 1,605,000 2,969,398
General Fund BlAajor Revenue Sources
FY 2003 vs 2004 Actual
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Ad Valorem Industrial Sales Tax Franchise `Fees -
Payments Fees Services
02003 6,863,670 7,223,060 570,740 523,083 671,253
^2004 7,219,473 6,782,508 564,925 505,126 863,864
Page 1
•
Ad Valorem Taxes -Property taxes increased $355,803 (5%) compared to last year due to an
increase in residential value and collection of taxes. As of January 31St, we received 82% of
budgeted revenue.
Industrial Payments - As of January 31St, we received 94% of budgeted revenue and a decrease of
$441 K (6%) from the prior year. This year's revenue decrease is directly attributed to lower property
values resulting from the aging of the industrial district plants.
Sales Tax -Sales Tax revenue to date was 30% of budget and $6K less than the prior year due to
economic downturn.
Franchise Fees -The City received approximately $18K (3%) less in Franchise Fees from the prior
year. Revenue received was 31 % of budget.
Fees for Services -Revenue of $864K for services provided was 29% of budget and $193K (29%)
higher than last year. The most significant increases were attributable to street and alley closing, tax
billing fees, and mowing and demolition fees.
Expenditures
Total expenditures for the General fund were $7.2M, which was 30% of budget and approximately
$585K (7.5%) lower than the prior year. Overall, expenditures will increase because depreciation
expense is not recorded until year end and therefore not included in the interim financial statements.
ENTERPRISE (PROPRIETARI~ FUNDS
Revenue
Total revenue for all Proprietary funds of $2.4M for the year represents 30% of budget and was
approximately $9K (0.4%) lower than last year. Utility fund revenues were down $38K (2%) from the
prior year, the La Porte Area Water Authority revenue is down $12K (5%) compared to last year, Golf
Course revenue was up $28K (8%) from last year, Sylvan Beach revenue was up $10K (19%) and
the Airport revenue was up $3K (33%) from the prior year. Significant revenue fluctuations are
explained below.
Enterprise Funds Revenue
FY 2004 Actual vs Budget
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Utility Fund LPAWA Golf Course Sylvan Beach Airport Fund
DActual 1,785,888 217,680 372,331 60,537 10,909
®Budget 5,801,746 1,071,024 1,183,342 171,420 32,728
Page 2
•
Enterprise Funds Revenue
FY 2003 vs 2004 Actual
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Sylvan
Utility Fund LPAWA Golf Course Airport Fund
Beach
X2003 1,823,719 229,250 344,669 50,757 8,182
®2004 1,785,888 217,680 372,331 60,537 10,909
Utility Fund
Water and Sewer Revenue - As of January 31St we received 31% percent of budgeted revenue.
Water and Sewer Revenue was down $38K (2%) from the prior year. This is primarily due to
revenues received last year for administrative fees related to the sale of water outside the city limits.
Operating expenses for the Utility Fund amounted to $1.7M (24%) of budget.
La Porte Area Water Authority Fund
As of January 31St we received water revenue of $217,680 which represents 20% of budgeted
revenue and was $12K (5%) lower than the prior year. Operating expenses totaled $208K (21%) of
budget.
Golf Course Fund
As of January 31St we received 31 % percent of budgeted revenue. Golf Course revenue was up
$28K (8%) from last year as a result of increasing our prices for green fees. Operating expenses
totaled $332K (27%) of budget.
Sylvan Beach Fund
As of January 31St we received 35% of budgeted revenue. Sylvan Beach revenue was up
approximately $10K (19%) from the prior year. Expenses for Sylvan Beach amounted to $88K
(42%) of budget. The primary reason for this overage is due to the capital improvements project of
repairing and painting Sylvan Beach exterior.
Airport Fund
As of January 31St we received 33% of budgeted revenue. Airport revenue was up $3K (33%) from
last year. Operating expenses totaled $2K (4%) of budget.
Page 3
CITY OF LA PORTE, TEXAS
General Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the four months ended January 31, 2004 with Comparative Data for the Prior Year
33% of year lapsed
(Unaudited)
Current Year Prior Year
REVENUES
Property taxes
Franchise taxes
Sales taxes
Industrial payments
Other taxes
Licenses and permits
Fines and forfeits
Charges for services
Intergovernmental
Interest
Miscellaneous
Total revenues
EXPENDITURES
General Government:
Administration '
Finance
Planning & Engineering
Public Safety:
Fire
Police
Public Works:
Public Works Administration
Streets
Health and Sanitation:
Solidwaste
Culture and Recreation
Parks and Recreation
Total expenditures
Excess (defiaency) of revenues over
expenditures
OTHER FINANCING SOURCES (USES)
Actual Percent of
Budget Year to Date Variance Budget
$ 8,805,771 $ 7,219,473 $ (1,586,298) 81.99%
1,605,000 505,126 (1,099,874) 31.47%
1,859,760 564,925 (1,294,835) 30.38%
7,179,487 6,782,508 (396,979) 94.47%
35,000 16,834 (18,166) 48.10%
569,769 114,542 (455,227) 20.10%
653,950 167,667 (486,283) 25.64%
2,969,398 863,864 (2,105,534) 29.09%
350,000 44,444 (305,556) ~ 12.70°k
226,770 - . (226,770) 0.00%
30,000 .31,281 ~ 1,281 104.27%
24,284,905 16,310,664 (7,974,241) 67.16%
2,234,427 614,600 1,619,827 27.51 %
2,175,925 622,962 1,552,963 28.63%
1,436,761 415;899 1,020,862 28.95%
3,313,012 995;135 2,317,877 30.04%
7,570,253 2,356,466 5,213,787 31.13%
340,318 101,787 238,531 29.91%
2,156,867 627,233 1,529,634 29.08%
1,772,709 523,737 1,248,972 29.54%
3,458,884 969,425 2,489,459 28.03%
24,459,156 7,227,244 17,231,912 29.55%
(174,251) 9,083,420 9,257,671
Transfers in 383,243 127,748 (255,495) 33.33%
Transfers out ~ ~ (862,766) (287,589) (575,177) 33.33°~
Total other finanang sources (uses) (479,523) (159,841) (830,672) 33.33%
Net change in fund balances (653,774) 8,923,579. 8,426,999
Fund balances-beginning 6,842,024 6,842,024 ~ -
Fund balances-tending $ 6,188,250 $ 15,765,603` $ 8,426,999
' Includes Admin, HR, MC, Purch, MIS, City Secr, Legal and City Counal.
Actual Percent of
Year to Date Budget
$ 6,863,670 82.25%
523,083 ~ 30.15%
570,740 31.71 %
7,223,060 97.09%
17,181 39.96%
58,383 29.95%
219,943 39.07%
671,253 31.08%
51,431 12.81 %
34,828 9.49%
74,089 227.97%
16,307,661 70.65%
731,357 29.10%
974,691 28.10%
394,002 28.44%
1,057,671 30.46%
2,333,452 ~ 31.87%
124,955 32.68%
656,420 29.13%
559,496 ~ 29.60%
980,803 28.00%
7,812,847 29.83%
8,494,814 .
433,607
33.33%
0.00%
433,607
8,928,421
7,127,919
$ 16,056,340
33.33%
Page 4
u
CITY OF LA PORTE, TEXAS
Utility Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the four months ended January 31, 2004 with Comparative Data for the Prior Year
33% of year lapsed
(Unaudited)
Current Year
Actual Percent of
Budget Year to Date Variance Budget
Operating Revenues:
User fees
Operating expenses:
Personal services
Supplies
Other services and charges
Total operating expenses
Operating income
Nonoperating revenues (expenses):
Interest income
Debt Service Principal and Interest
Income before contributions and transfers
Transfers in
Transfers out
Change in net assets
Net assets -beginning of the year
Net assets -end of the year
$ 5,801,746 $ 1,785,888 $ (4,015,858) 30.78%
2,351,546 699,474 1,652,072 29.75%
188,354 64,772 123,582 34.39%
4,757,211 972,272 3,784,939 20.44%
7,297,111 1,736,518 5,560,593 23.80%
(1,495,365) 49,370 1,544,735
84,860 - (84,860) 0.00°k
(651,293) - 651,293 0.00%
(2,061,798) 49,370 2,111,168
1,250,000 416,666 (833,334) 33.33%
(1,680,033) (560,011) 1,120,022 33.33%
(2,491,831) (93,975) 2,397,856
22,539,882 22,539,882 -
$ 20,048,051 $ 22,445,907 $ 2,397,856
Prior Year
Actual Percent of
Year to Date Budget
$ 1,823,719 37.33%
714,358 29.98%
58,464 34.15%
754,018 17.17%
1,526,840 21.99%
296,879
89,912 48.19%
- 0.00°k
386,791
822,197 42.78%
(466,667) 33.33%
742,321
22,858,890
$ 23,601,211
Page 5
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CITY OF LA PORTE, TEXAS
La Porte Area Water Authority Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the four months ended January 31, 2004 with Comparative Data for the Prior Year
33% of year lapsed
(Unaudited)
Current Year
Actual Percent of
Budget Year to Date Variance Budget
Operating Revenues:
User fees $ 1,071,024 $ 217,680 $ (853,344) 20.32%
Operating expenses:
Supplies 300 - 300 0.00%
Other services and charges 1,001,074 207,937 793,137 20.77%
Total operating expenses 1,001,374 207,937 793,437 20.77%
Operating income 69,650 9,743 (59,907)
Nonoperating revenues (expenses):
Interest income 24,290 - (24,290) 0.00%
Debt Service Billings 780,306 ~ 195,076 (585,230) 25.00%
Debt Service Principal and Interest (780,306) - 780,306 0.00%
Contingency (15,000) - 15,000 0.00%
Income before contributions and transfers 78,940 204,819 125,879
Transfers in - - - 0.00%
Transfers out (54,650) (18,217) 36,433 33.33%
Change in net assets 24,290 186,602 162,312
Net assets -beginning of the year 5,103,893 5,103,893 -
Net assets -end of the year $ 5,128,183 $ 5,290,495 $ 162,312
Prior Year
Actual Percent of
Year to Date Budget
$ 229,250 20.51
3 1.00%
240,808 22.62%
240,811 22.61
(11,561)
37,495 33.27%
195,756 25.00%
- 0.00%
- 0.00%
221,690
- 0.00%
(16,940) 33.33%
204,750
5,202,615
$ 5,407,365
Page 6
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i
CITY OF LA PORTE, TEXAS
Golf Course Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the four months ended January 31, 2004 with Comparative Data for the Prior Year
33% of year lapsed
(Unaudited)
Current Year
Actual Percent of
Budget Year to Date Variance Budget
Operating Revenues:
User fees $ 1,183,342 $ 372,331 $ (811,011) 31.46%
Operating expenses:
Personal services 809,386 237,179 572,207 29.30%
Supplies 140,200 39,220 100,980 27.97%
Other services and charges 295,226 55,812 239,414 18.90°
Total operating expenses 1,244,812 332,211 912,601 26.69%
Operating income (61,470) 40,120 101,590
Nonoperating revenues (expenses):
Interest income 2,290 - (2,290) 0.00%
Income before contributions and transfers (59,180) 40,120 99,300
Transfers in 35,000 11,667 (23,333) 33.33%
Transfers out (36,644) (12,215) 24,429 33.33%
Change in net assets (60,824) 39,572 100,396
Net assets -beginning of the year 3,397,760 3,397,760 -
Net assets -end of the year $ 3,336,936 $ 3,437,332 $ 100,396
Prior Year
Actual Percent of
Year to Date Budget
$ 344,669 31.03%
246,941 30.32%
32,194 24.98%
52,854 20.90%
331,989 27.76%
12,680
- 0.00°k
12,680
11,667 33.33%
- 0.00%
24,347
3,696,516
$ 3,720,863
Page 7
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CITY OF LA PORTE, TEXAS
Sylvan Beach Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the four months ended January 31, 2004 with Comparative Data for the Prior Year
33% of year lapsed
(Unaudited)
Operating Revenues:
User fees
Operating expenses:
Personal services
Supplies
Other services and charges
Total operating expenses
Operating income
Nonoperating revenues (expenses):
Interest income
Income before contributions and transfers
Transfers in
Transfers out
Change in net assets
Net assets -beginning of the year
Net assets -end of the year
Current Year
Actual Pecent of
Budget Year to Date Variance Budget
$ 171,420 $ 60,537 $ (110,883) 35.32%
142,810 38,203 104,607 26.75%
6,200 1,437 4,763 23.18%
60,072 48,214 11,858 80.26%
209,082 87,854 121,228 42.02%
(37,662) (27,317) 10,345
3,300 - (3,300) 0.00%
(34,362) (27,317) 7,045
20,000 6,667 (13,333) 33.34%
(4,605). (1,535) 3,070 33.33%
(18,967) (22,185) (3,218)
232,364 232,364 -
$ 213,397 $ 210,179 $ (3,218)
Prior Year
Actual Percent of
Year to Date Budget
$ 50,757 30.30%
41,533 29.32%
1,431 21.12%
11,386 16.80%
54,350 25.14%
(3,593)
- 0.00%
(3,593)
6,667 33.34%
- 0.00%
3,074
251,649
$ 254,723
Page 8
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n
CITY OF LA PORTE, TEXAS
Airport Fund
Statement of Revenues, Expenditures and Changes in Fund Balances
For the four months ended January 31, 2004 with Comparative Data for the Prior Year
33% of year lapsed
(Unaudited)
Current Year
Actual Percent of
Budget Year to Date Variance Budget
Operating Revenues:
User fees $ 32,728 $ 10,909 $ (21,819) 33.33%
Operating expenses:
Other services and charges 60,100 2,376 57,724 3.95°k
Total operating expenses 60,100 2,376 57,724 3.95%
Operating income (27,372) .8,533 35,905
Nonoperating revenues (expenses):
Interest income 5,280 - (5,280) 0.00%
Income before contributions and transfers (22,092) 8,533 30,625
Transfers in - - - 0.00%
Transfers out (1,073) (358) 715 33.36%
Change in net assets (23,165) 8,175 31,340
Net assets -beginning of the year 2,587,975 2,587,975 -
Netassets -end of the year $ 2,564,810 $ 2,596,150 $ 31,340
Prior Year
Actual Percent of
Year to Date Budget
$ 8,182 25.00%
10,959 21.21°k
10,959 21.21
(2,777) 14.66%
386 4.06%
(2,391)
- 0.00%
- 0.00%
(2,391)
2,702,084
$ 2,699,693
Page 9
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CITY OF LA PORTE, TEXAS
Monthly Financial Summary Report
Through January 31 for Fiscal Years 2004 and 2003
General Fund
Annual Actual Percent of
Revenue Source Fiscal Year Budget Year to Date Budget
Property Taxes 2004 $ 8,805,771 $ 7,219,473 81.99%
2003 8,345,350 6,863,670 82.25%
Industrial Payments 2004 7,179,487 6,782,508 94.47%
2003 7,439,337 7,223,060 ~ 97.09%
Charges for Services 2004 2,969,398 863,864 29.09%
2003 2,159,700 671,253 31.08%
Franchise Fees 2004 1,605,000 505,126 31.47%
2003 1,735,000 523,083 30.15%
Sales Tax ~ 2004 1,859,760 564,925 30.38%
2003 1,800,000 570,740 31.71
Page 10
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CITY OF LA PORTE, TEXAS
Monthly Financial Summary Report
Through January 31 for Fiscal Years 2004 and 2003
General Fund
Annual Actual Percent of
Expenditures Fiscal Year Budget Year to Date Budget
General Government:
Administration 2004 $ 2,234,427 $ 614,600 27.51
2003 2,544,013 731,357 28.75%
Finance 2004 3,038,691 910,551 29.97%
2003 3,409,520 974,691 28.59%
Planning & Engineering 2004 1,436,761 415,899 28.95%
'2003 1,385,458 394,002 28.44%
Public Safety:
Fire 2004 3,313,012 995,135 30.04%
2003 3,486,686 1,057,671 30.33%
Police 2004 7,570,253 2,356,466 31.13%
2003 7,324,514 2,333,452 31.86%
Public Works:
Public Works Administration 2004 340,318 101,787 29.91
2003 382,342 124,955 32.68%
Streets 2004 2,156,867 ~ 627,233 ~ 29.08%
2003 .2,253,216 656,420 29.13%
Health and Sanitation:
Solidwaste 2004 1,772,709 523,737 29.54%
2003 1,890,126 559,496 29.60%
Culture and Recreation:
Parks and Recreation 2004 3,458,884 969,425 28.03%
2003 3,585,169 980,803 27.36%
Page 11
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Monthly Property Tax Collections
. January
FY 2002-03 vs FY 2003-04
5,000,000
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
02002-03
02003-04
. Monthly Industrial Payments Collections
January
FY 2002-03 vs FY 2003-04
~,oo0 000
s,o
5,0
4,0
3,0
2,0
1,0
(1,0
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232,849 323,458 2,043,575 4,819,591 - - - - - - -
Page 12
Monthly Charges for Services
January
FY2002-03 vs FY 2003-04
Oct Nov Dec Jan Feb Mar Apr
2002-03 112,509 180,598 201,935 702,854 84,292 168,837 82,848
2003-04 42,088 282,160 231,098 211,388 - ~ - -
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. Monthly Sales Tax Collections
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82003-04 138,780 171,185 132,716 128,079 - - - - - - -
Page 13
~,
00,000
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p2003.p4 26,201 459,612 10 37,060 - - - - - -
Page 14
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Page 16
•
Portfolio Composition and Value
as of January 31, 2004 100.00%
80.00%
Par Book Market Days to
Value Value Value Maturity 60.00%
Investment Pools 33,597,121 33,597,121 33,597,121 1
Agrncies 6,000,000 6,000,000 6,013,130 658 40.00%
Total 39,597,121 39,597,121 39,610,251 100 20.00%
0.00%
lnvesbrtalt Pools Agencies
84.85% 15.15%
®Jan-04 SJuI-03 -~-Jan-03
Investment Maturity Schedule
as of Janaary 31, 2004 2~ >T '
BOOk 1-S years ~'l'-d•''.:-`:::
Valne Percent •• ..'. ;~~~`~"'s' 9 :`~r i~~:
D-3 momhs 33,597,121 84.85%
Yrr-. ~, . ,~. -
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9-12 months - 0.00% :,.. ~,
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1-2 years 4.000.1100 10.10% . . .~_
'
2 or more years 2,000,OOD 5.05% a.
Total 39,597,121
e 100.00% - - - -
Portfolio Performance
for the mouth otJanuary 2004
Weighted 2.00% .
Portfolio Beocbmark Average
Yield
Yield•
Maturity 1.6095
Pooled Fords 1.27% 1.76% 3.28 months 1.20%
Bond Funds 1.02% 0.90% 1 day
0.61195
Total 1.14% 133% 3.08 months
° 0.4D%
•1'be led funds benchmark is based on the
Poo a month eld
ven8e IYYi of a 2- err Tress
Ye ~'• 0'~
Pooled Funds Hoed Funds ` Tool
The bond fiords benchmark yield is based an the average monthly yield of a 3-month Treasury. '
The total is based on weighted avenge monthly benchmark yields. OPOrifolio Yield ^ Benchmark Yiell• .
Portfolio Earnings
for months ended Janaary 31, 2004
' 250.000
Budaet Acmal Percent 200.000
General 226,770 58,619 25.85%
Enterprise 61,400 15,229 24.80% 150.000
Internal Service 56,950 14,092 24.75% 100.000
Total 345,120 87,940 25.48% 50.000
- Ga~eral Enterprise Imernal Servta
. OBudgd ^Apual
WAM -Pooled Funds
8
7
.
6
5
4
F.
3 ~{ rz
J
:: ~~ T
i
2 '_.
,~
t. Y.~
~ •+.
Nov-03 L>eF03 Jan-04
Yield Ctuve
sso96
a.oox
2.5096
2.0096
t 5096
t.o0%
0.50%
0.00%
3 m0 BIIIO t yr 2yr Syr
-f-NOV-03 °+t-Dw03 -III-Jan•04
Avenge for January
% of funds invested in: 2004 2003
Securities & Pools 97.87% 93.84%
BaOk Depository 2.13% 6.16%
Total %of fiords invested 100.00% 100.00%
Dperaung Aceount Balance S 860,971 S 2,734,139
Page 17
/~-L
Null~Lairson
CERTIFIEd 1)UBLIC ACCOtlNTM~TS
1'KOFESSIORI,91. CCNU~ORA710N
February 17, 2004
To the Audit Committee
City of La Porte, Texas
We have audited the financial statements of City of La Porte (City) for the yeaz ended September 30, 2003,
and have issued our report thereon dated February 17, 2004. Professional standards require that we provide
you with the following information related to our audit.
Our Responsibility under U.S. Generally Accepted Auditing Standards and OMB Circular A-133
As stated in our engagement letter dated June 18, 2003, our responsibility, as described by professional
standards, is to plan and perform our audit to obtain reasonable, but not absolute, assurance about whether
the financial statements aze free of material misstatement and aze fairly presented in accordance with U.S.
generally accepted accounting standazds. Because an audit is designed to provide reasonable, but not
absolute assurance and because we did not perform a detailed examination of all transactions, there is a risk
that material misstatements may exist and not be detected by us.
In planning and performing our audit, we considered City's internal control over financial reporting in order
to determine our auditing procedures for the purpose of expressing our opinion on the financial statements
and not to provide assurance on the internal control over financial reporting. We also considered internal
control over compliance with requirements that could have a direct and material effect on a major federal
program in order to determine our auditing procedures for the purpose of expressing our opinion on
compliance and to test and report on internal control over compliance in accordance with OMB Circulaz A-
133.
As part of obtaining reasonable assurance about whether City's financial statements aze free of material
misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and
grants, 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. Also, in accordance with OMB Circulaz A-133, we examined, on a test basis, evidence
about City's compliance with the types of compliance requirements described in the U.S. Office of
Management and Budget (OMB) Circular A-133 Compliance Supplement applicable to each of its major
federal and state programs for the purpose of expressing an opinion on City's compliance with those
requirements. While our audit provides a reasonable basis for our opinion, it does not provide a legal
determination on City's compliance with those requirements.
For purposes of using the audited financial statements in other documents, such as an official statement for a
bond offering, our responsibility for other information in these other documents containing City's financial
statements and report does not extend beyond the financial information identified in our report. In addition,
we do not have an obligation to perform any procedures to corroborate other information contained in these
documents. We have not performed procedures related to the inclusion of these financial statements and
report in these documents, if any.
1 I Greem~~ay Plaza, Suite 1515 • Houston, TX 77046 • (71.i) 621-1515 • Fax: (7l_i) 621-1570
2117 Post Office Street • Galveston; TX 775aU • (409) 7G''-5,80 • Fax: (409) 762-1749
~~fE1iHF;RS~ AMHRTC..av I!~TITL`f E Cif CL•RT7FIGf.) Pi.`HI.TI: ACCOC+,ti"i'.ahTC, TP_XAC Sf)CIiiTY OF f. GRTJf1CD PLRt.JC. ACCU(!;~TA\TS,
I:PA A~SOCf.4TL'S i\'ITiR~AT141A1.. IBC. W'rrH A~SUCI.ATLD dPI•l(..i?.S IN PRttiC1PA1. t: 5. Ah°Il 1\*rf•.RA`ATIptiAI. CiTIGS
Significant Accounting Policies
Management has the responsibility for selection and use of appropriate accounting policies. In accordance
with the terms of our engagement letter, we will advise management about the appropriateness of accounting
policies and their application. The significant accounting policies used by City aze described in Note 1 to the
financial statements. During the 2003 fiscal yeaz the City adopted the provisions of Government Accounting
Standards Board Statement No. 34 Basic Financial Statements-and Management's Discussion and Analysis-
for State and Local Governments. Adopted in June 1999, GASB 34 introduced a new financial reporting
model. The Statement integrates the traditional focus of government fund financial statements, relating to
fiscal accountability and the modified accrual basis of accounting, with new forms of reporting to meet users'
needs for longer-term financial information, and to ensure that the operational accountability objective of
governments is fulfilled. We noted no transactions entered into by City during the yeaz that were both
significant and unusual, and of which, under professional standazds, we aze required to inform you, or
transactions for which there is a lack of authoritative guidance or consensus.
Accounting Estimates
Accounting estimates are an integral part of the financial statements prepazed by management and aze based
on management's knowledge and experience about past and current events and assumptions about future
events. Certain accounting estimates aze particularly sensitive because of their significance to the financial
statements and because of the possibility that future events affecting them may differ significantly from those
expected. Significant estimates affecting the financial statements included uncollectible amounts of
receivables, depreciation on capital assets, accrued compensated absences, and incurred but not reported
health claims. We evaluated the key factors and assumptions used to develop these estimates in determining
that they aze reasonable in relation to the financial statements taken as a whole.
Audit Adjustments
For purposes of this letter, professional standazds define an audit adjustment as a proposed correction of the
financial statements that, in our judgment, may not have been detected except through our auditing
procedures. An audit adjustment may or may not indicate matters that could have a significant effect on the
City`s financial reporting process (that is, cause future financial statements to be materially misstated). In our
judgment, the adjustments we proposed, which were all recorded by City, either individually or in the
aggregate, indicate matters that could have a significant effect on the City's financial reporting process. We
have attached all of the adjustments and reclassifications that we proposed, including the adjustments to
reflect full accrual financial reports in accordance with GASB 34, for your review. We have also attached
entries proposed and posted by the City staff during audit fieldwork.
Disagreements with Management
For purposes of this letter, professional standazds define a disagreement with management as a matter,
whether or not resolved to our satisfaction, concerning a financial accounting, reporting, or auditing matter
that could be significant to the fmancial statements or the auditors' report. We are pleased to report that no
such disagreements arose during the course of our audit.
1 1 Greem+ay Plaza, Suite 1515 • Houston, TX 77046 • (713) G21-1515 • Fax: (71.>) 621-1570
2117 Post Office Street • Galveston, TX 77550 • (409} 762-8380 • Fax: (409) 763-1749
l1E~IHiRS~ AMERTI'AY I~CTITti fE U~f CGRT(FIfiT) YVBt.TI' ACCOI.ihT.4ti'1:5, TFXAC UCIETY UP f.TRTiP(P_D PL7ii,If, ACCULI~TA YTS,
CPA AS50C'IATES i~'RRYATIUYAi.. IYC. WITH ASS6fiATED UPPICES N PRIYCIPAi, U.S. AtiT) fY7T:R~tiATIU\AI_ f, ITffiS
•
Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similaz to obtaining a "second opinion" on certain situations. If a consultation involves application
of an accounting principle to City's financial statements or a determination of the type of auditors' opinion
that may be expressed on those statements, our professional standazds require the consulting accountant to
check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no
such consultations with other accountants.
Issues Discussed Prior to Retention oflndependentAuditor
We generally discuss a vaziety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the City's auditors. However, these discussions
occurred in the normal course of our professional relationship and our responses were not a condition to our
retention.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing our audit. All filings
have been made in accordance with appropriate timelines.
The information is in this letter is intended solely for the use of the Audit Committee, City Council and
management of City and is not intended to be and should not be used by anyone other than these specified
parties.
Sincerely,
~„~(a~:~,,ac
I I Greenway Plaza, Suite 1515 • Houston, TX 77046 • (713) G? i-1515 • Fax: (713) 6? I-1570
2117 Post Office Street a Galveston, TX 77550 • {409) 7G2-8380 • 'Tax: (409) 762-1749
~iGbltitiR$~ AA~tfiRiCA` f\gTITt,Rr OF CL•RTIF91iD P[.~HLA' nCCft1.7\T.4tiR'S, TF..XAg SOC1iiTl' QT CLRl7Ft[?ll PLT4ilf.. nCfl)I.r,~T.4 LTG,
CPA .1SSUC`i.4'rt:S ltTl'GRNATIOnAI.. INC. W']TH 1cSpCfATfitJ bFIICP.S IW PRI\l:IPr11. l;.S. AST) I\*iT•.RTrelTlbtiAL f, ITIGS
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal Entries Proposed by Null-Lairson
Account Description Debit
Adjusting Journal Entries JE # 1
CLIENT ENTRY. To accrue ambulance calls not billed and to
adjust accounts receivable to actual
001-0000-114-40-00 OTHER /EMS CONTRACT BILLING
001-0000-114-40-00 OTHER /EMS CONTRACT BILLING
001-0000-114-44-00 OTHER /EMS PATIENT
001-0000-114-45-00 OTHER /ALLOW FOR UNCOLLECT-EMS
001-0000-213-34-00 DEFERRED REVENUES /EMS
001-0000-114-44-00 OTHER /EMS PATIENT
001-0000-114-45-00 OTHER /ALLOW FOR UNCOLLECT-EMS
001-0000-213-34-00 DEFERRED REVENUES /EMS
001-0000-213-34-00 DEFERRED REVENUES /EMS
001-0000-213-34-00 DEFERRED REVENUES /EMS
001-0000-213-34-00 DEFERRED REVENUES /EMS
001-0000-408-01-20 EMS PATIENT REVENUE
Total
Adjusting Journal Entries JE # 2
CLIENT ENTRY. Year end adjustment for sport activity
001-0000-408-02-22 SPECIAL~OLYMPICS (SPORT)
001-0000-202-06-09 PARKS & REC ESCROWS / S.P.O.R.T.
Total
Adjusting Journal Entries JE # 3
CLIENT ENTRY. To reclassify auditor expenses for fiscal year
2003
001-0000-101-01-00 POOLED CASH /POOLED CASH
039-9898-510-50-04 CONSULTING
001-6141-515-50-01 ACCOUNTING
039-0000-101-01-00 POOLED CASH /POOLED CASH
Total
Adjusting Journal Entries JE # 4
Memo entry only. To balance fund balance to previous years audit
001-0000-345-00-00
002-0000-345-00-00
003-0000-345-00-00
008-0000-345-00-00
00&0000-372-02-01
009-0000-345-00-00
010-0000-372-02-00
014-0000-345-00-00
015-0000-371-02-02
015-0000-483-01-00
ENCUMBRANCES /RESERVE FOR ENCU
ENCUMBRANCES /RESERVE FOR ENCU
ENCUMBRANCES !RESERVE FOR ENCU
ENCUMBRANCES /RESERVE FOR ENCU
UNRESERVED/UNDESIGNATED
ENCUMBRANCES /RESERVE FOR ENCU
RETAINED EARNINGS /UNRESERVED
ENCUMBRANCES /RESERVE FOR ENCU
UNRESERVED/UNDESIGNATED
INTEREST INCOME
275.00
4,481.00
60,352.00
1,051,365.00
7,893.00
1,124,366.00
Credit
907,055.00
24,141.00
275.00
4,481.00
36,211.00
144,310.00
7,893.00
1,124,366.00
824.00
824.00
824.00 824.00
5,000.00
5,000.00
5,000.00
5,000.00
10,000.00 10,000.00
38,358.00
867.00
21,600.00
1,821.00
8,982.00
99,957.00
1.00
3,230.00
115,821.00
2.00
•
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal EntNes Proposed by Null-Lairson
Account Description Debit Credit
016-0000-372-02-01 UNRESERVED /UNDESIGNATED 383,862.00
016-7075-533-40-02 MACHINERY/TOOLS/EQUIP 1,138.00
018-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCU 5,983.00
023-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCU 1,963.00
024-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCU 2,220.00
028-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCU 590.00
036-0000-371-02-02 UNRESERVED /UNDESIGNATED 1.00
037-0000-483-01-00 INTEREST INCOME 2.00
039-0000-371-02-02 UNRESERVED /UNDESIGNATED 1.00
040-0000-483-01-00 INTEREST INCOME 1.00
042-0000-349-00-00 ENCUMBRANCES / PRIOR YR RES FORE 1.00
001-0000-408-02-19 MISCELLANEOUS INCOME 21.00
002-0000-408-06-01 SALES 10.00
008-0000-483-01-00 INTEREST INCOME 3.00
008-0000-499-00-00 CAPITAL CONTRIBUTIONS 8,982.00
009-0000-483-01-00 INTEREST INCOME 2.00
016-0000-482-01-00 DEBT SERVICE BILLINGS 385,000.00
016-0000-483-01-00 INTEREST INCOME 1.00
023-0000-483-01-00 INTEREST INCOME 2.00
028-0000-410-01-00 MISCELLANEOUS REVENUE 3.00
037-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCUMBRANCES 2.00
039-0000-371-02-02 UNRESERVED /UNDESIGNATED 1.00
040-0000-371-01-02 RESERVED /DEBT SERVICE 1.00
041-0000-371-01-02 RESERVED /DEBT SERVICE 1.00
043-0000-483-01-00 INTEREST INCOME 1.00
Total 686,401.00 394,030.00
Adjusting Journal Entries JE # 6
CLIENT ENTRY. To reclassify cash & investments
001-0000-103-00-00 INVESTMENTS 1,534,529.00
002-0000-103-00-00 INVESTMENTS 649,770.00
003-0000-103-00-00 INVESTMENTS 499,159.00
004-0000-103-00-00 INVESTMENTS 328,289.00
005-0000-103-00-00 INVESTMENTS 280,143.00
007-0000-103-00-00 INVESTMENTS 375,453.00
008-0000-103-00-00 INVESTMENTS 39,998.00
009-0000-103-00-00 INMVESTMENTS 358,279.00
010-0000-103-00-00 INVESTMENTS 68,015.00
014-0000-103-00-00 INVESTMENTS 463,001.00
015-0000-103-00-00 INVESTMENTS 689,386.00
016-0000-103-00-00 INVESTMENTS 1,604,559.00
018-0000-103-00-00 INVESTMENTS 21,649.00
023-0000-103-00-00 INVESTMENTS 82,907.00
024-0000-103-00-00 INVESTMENTS 3,074.00
028-0000-103-00-00 INVESTMENTS 22,159.00
030-0000-103-00-00 INVESTMENTS 2,089.00
036-0000-103-00-00 INVESTMENTS 74,449.00
• •
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal Entries Proposed by Null-Lalrson
Account Description Debit Credit
037-0000-103-00-00 INVESTMENTS 131,978.00
038-0000-103-00-00 INVESTMENTS 428,243.00
039-0000-103-00-00 INVESTMENTS 27,170.00
040-0000-103-00-00 INVESTMENTS 289,658.00
041-0000-103-00-00 INVESTMENTS 55,402.00
042-0000-103-00-00 INVESTMENTS 1,159.00
043-0000-103-00-00 INVESTMENTS 3,653.00
001-0000-101-01-00 POOLED CASH /POOLED CASH 1,534,529.00
002-0000-101-01-00 POOLED CASH /POOLED CASH 649,770.00
003-0000-101-01-00 POOLED CASH /POOLED CASH 499,159.00
004-0000-101-01-00 POOLED CASH /POOLED CASH 328,289.00
005-0000-101-01-00 POOLED CASH /POOLED CASH 280,143.00
007-0000-101-01-00 POOLED CASH /POOLED CASH 375,453.00
008-0000-101-01-00 POOLED CASH /POOLED CASH 39,998.00
009-0000-101-01-00 POOLED CASH /POOLED CASH 358,279.00
010-0000-101-01-00 POOLED CASH /POOLED CASH 68,015.00
014-0000-101-01-00 POOLED CASH /POOLED CASH ~ 463,001.00
015-0000-101-01-00 POOLED CASH /POOLED CASH 689,386.00
016-0000-101-01-00 POOLED CASH /POOLED CASH 1,604,559.00
018-0000-101-01-00 POOLED CASH /POOLED CASH 21,649.00
023-0000-101-01-00 POOLED CASH /POOLED CASH 82,907.00
024-0000-101-01-00 POOLED CASH /POOLED CASH 3,074.00
028-0000-101-01-00 POOLED CASH /POOLED CASH 22,159.00
030-0000-101-01-00 POOLED CASH /POOLED CASH 2,089.00
036-0000-101-01-00 POOLED CASH /POOLED CASH 74,449.00
037-0000-101-01-00 POOLED CASH /POOLED CASH 131,978.00
038-0000-101-01-00 POOLED CASH /POOLED CASH 428,243.00
039-0000-101-01-00 POOLED CASH /POOLED CASH 27,170.00
040-0000-101-01-00 POOLED CASH /POOLED CASH 289,658.00
041-0000-101-01-00 POOLED CASH /POOLED CASH ~ 55,402.00
042-0000-101-01-00 POOLED CASH /POOLED CASH 1,159.00
043-0000-101-01-00 POOLED CASH /POOLED CASH 3,653.00
Total .8,034,171.00 8,034,171.00
Adjusting Journal Entries JE # 7
To correct court liabilities
001-0000-202-12-20 • MUNICIPAL COURT /TIME PAYMENT FEE 1,806.00
001-0000-202-12-25 MUNICIPAL COURT /CORRECTION MGM' 17.00
001-0000-202-12-26 MUNICIPAL COURT /STATE TRAFFIC FEi 5.00
001-6064-512-60-08 JURY FEES/COURT COSTS 5.00
001-6064-512-60-08 JURY FEES/COURT COSTS 17.00
001-6064-512-60-08 JURY FEES/COURT COSTS 1,806.00
Total .1,828.00 1,828.00
Adjusting Journal Entries JE # 8
Correct posting of court liabilities
• •
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal Entries Proposed by Null-Lairson
Account Description Debit Credit
001-0000-202-12-07 MUNICIPAL COURT / TABC ARREST FEE 78,594.00
001-0000-202-12-14 MUNICIPAL COURT /SECURITY FEE 71,886.00
001-0000-202-12-15 MUNICIPAL COURT /CITY MARSHAL TRA 1,087.00
001-0000-202-12-19 MUNICIPAL COURT /CHILD SAFETY 16,229.00
001-0000-202-12-21 MUNICIPAL COURT /TECHNOLOGY FEE 39,848.00
001-6064-512-20-93 COMPUTER EQUIPMENT 2,990.00
001-6064-512-50-07 OTHER PROFESSIONAL SERVIC 1,500.00
001-6064-512-80-23 TECHNOLOGY FEE EXPENSE 600.00
001-6064-512-80-23 TECHNOLOGY FEE EXPENSE 2,429.00
001-0000-407-10-00 LAW ENF OFF STAN & EDUC 1,087.00
001-0000-407-15-00 ARREST FEE ~ 78,594.00
001-0000-407-23-00 CHILD SAFETY 16,229.00
001-0000-407-27-00 BUILDING SECURITY FEES 71,886.00
001-0000-407-28-00 COURT TECHNOLOGY FEES 600.00
001-0000-407-28-00 COURT TECHNOLOGY FEES 1,500.00
001-0000-407-28-00 COURT TECHNOLOGY FEES 2,429.00
001-0000-407-28-00 COURT TECHNOLOGY FEES 2,990.00
001-0000-407-28-00 COURT TECHNOLOGY FEES 39,848.00
Total 215,163.00 215,163.00
Adjusting Journal Entries JE # 9
To record additional accounts payable
001-0000-202-06-12 PARKS & REC ESCROWS /PIER CLEARI~ 34.00
001-5050-522-70-01 ELECTRICAL 312.00
001-5051-522-70-01 ELECTRICAL 2,156.00
001-5059-522-70-01 ELECTRICAL 478.00
001-5252-521-70-01 ELECTRICAL 221.00
001-6060-510-70-01 ELECTRICAL 3,372.00
001-6146-515-70.01 ELECTRICAL 328.00
001-7070-530-70-01 ELECTRICAL 3,789.00
001-7071-531-70-01 ELECTRICAL 1,363.00
001-8080-552-70-01 ELECTRICAL 15,952.00
002-7084-533-70-01 ELECTRICAL 12,271.00
002-7086-532-70-01 ELECTRICAL 5,297.00
002-7087-532-70-01 ELECTRICAL 11,059.00
008-8083-551-70-01 ELECTRICAL 2,051.00
010-7077-531-70-01 ELECTRICAL 662.00
028-6048-551-70-01 ELECTRICAL 1,425.00
028-6049-551-70-01 ELECTRICAL 1,102.00
001-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 28,005.00
002-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 28,627.00
008-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 2,051.00
010-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 662.00
028-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 2,527.00
Total 61,872.00 61,872.00
Adjusting Journal Entries JE # 10
:7
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal Entries Proposed by Null-Lalrson
5,622.00
5,622.00
5,622.00 5,622.00
Account Description Debit Credit
Record additional accounts payable. Professional engineering
services July -Oct 18
043-9892-882-46-00 CONSTRUCTION PHASE SERVIC 9,800.00
043-9892-882-46-59 TESTING 2,143.00
043-9892-882-61-01 PERSONNEL COSTS (3RD PTY) 17,825.00
043-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 29,768.00
Total 29,768.00 29,768.00
Adjusting Journal Entries JE # 11
To record additional accounts payable -Waste Management
001-7072-532-60-09 LANDFILL CHARGES 7,117.00
002-7087-532-60-09 LANDFILL CHARGES 1,814.00
001-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 7,117.00
002-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 1,814.00
Total 8,931.00 8,931.00
Adjusting Journal Entries JE # 12
Reclassify and capitalize repair & maintenance expenditue
001-8080-552-80-21 MACH/T'OOLS & EQUIPMENT
001-5051-522-40-08 PUMPS/MOTORS
Total
Adjusting Journal Entries JE # 13
To reclassify maintenance agreements to the correct fiscal year
023-0000-130-00-00
023-0000-130-00-00
024-7074-534-40-01
023-6066-519-40-55
023-9902-580-40-55
024-7074-534-40-01
Total
PREPAID EXPENSES
PREPAID EXPENSES
OFFICE EQUIPMENT
COMPUTER SOFTWARE
COMPUTER SOFTWARE
OFFICE EQUIPMENT
Adjusting Journal Entries JE # 14
To reclassify posting of 10-03-03 payroll
•
15,798.00
42,177.00
5,606.00
63,581.00
42,177.00
15,798.00
5,606.00
63,581.00
001-0000-101-01-00 POOLED CASH /POOLED CASH 503,623.00
002-0000-101-01-00 POOLED CASH /POOLED CASH 68,303.00
008-0000-101-01-00 POOLED CASH /POOLED CASH 4,362.00
024-0000-101-01-00 POOLED CASH !POOLED CASH 18,328.00
028-0000-101-01-00 POOLED CASH /POOLED CASH 24,023.00
001-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 35,117.00
001-0000-202-01-02 ACCRUED PAYROLL /WAGES PAYABLE 468,506.00
002-0000-202-00-00 PAYABLES /ACCOUNTS PAYABLE 4,733.00
002-0000-202-01-02 ACCRUED PAYROLL /WAGES PAYABLE 63,570.00
•
Client:
Engagement:
Period Ending:
Workpaper:
Account
008-0000-202-00-00
008-0000-202-01-02
024-000x202-00-00
024-0000-202-01-02
028-oooa2o2-o0-00
028-0000-202-01-02
Total
City of La Porte
City of La Porte
9/30/2003
Adjusting Journal Entries Proposed by Null-Lairson
Description
Debit
•
PAYABLES /ACCOUNTS PAYABLE
ACCRUED PAYROLL /WAGES PAYABLE
PAYABLES /ACCOUNTS PAYABLE
ACCRUED PAYROLL /WAGES PAYABLE
PAYABLES/ACCOUNTS PAYABLE
ACCRUED PAYROLL /WAGES PAYABLE
618,639.00
Adjusting Journal Entries JE # 15
CLIENT ENTRY. To correct group 7534 for fund 9
Credit
304.00
4,058.00
1,272.00
17,056.00
1,s72.oo
22,351.00
618,639.00
009-0000-581-80-90 DEPRECIATION 14,000.00
009-000x522-80-80 EXPENSE RECLASSIFICATION 14,000.00
Total 14,000.00 14,000.00
Adjusting Journal Entries JE # 16
Record penalty and interest receivable and allowance for
uncollectible taxes
001-0000-111-01-00 PROPERTY TAXES /TAXES RECEIVABLE 576,884.00
001-0000-213-01-00 DEFERRED REVENUES /TAXES RECEIVI 119,048.00
004-000x111-01-00 PROPERTY TAXES /TAXES RECEIVABLE 135,406.00
004-0000-213-01-00 DEFERRED REVENUES /TAXES RECEIVE 27,944.00
001-000x111-01-01 ALLOWANCE FOR UNCOLLECTIBLE TAXES
001-0000-111-01-01 ALLOWANCE FOR UNCOLLECTIBLE TAXES
004-0000-111-01-01 ALLOWANCE FOR UNCOLLECTIBLE TAXES
004-000x111-01-01 ALLOWANCE FOR UNCOLLECTIBLE TAXES
Total 859,282.00
Adjusting Journal Entries JE # 17
Allocate underaccrued workers' comp premiums
001-0000-101-01-00 POOLED CASH /POOLED CASH 8,214.00
001-505x522-1x70 WORKERS COMPENSATION 316.00
001-5051-522-10-70 WORKERS COMPENSATION 2,413.00
001-5054-522-10-70 WORKERS COMPENSATION 115.00
001-5059-522-10-70 WORKERS COMPENSATION 2,499.00
001-5252-521-10-70 WORKERS COMPENSATION 927.00
001-5253-521-1x70 WORKERS COMPENSATION 7,459.00
001-5256-521-10-70 WORKERS COMPENSATION 3,042.00
001-5258-521-10-70 WORKERS COMPENSATION 1,834.00
001-6060-510-1x70 WORKERS COMPENSATION 976.00
001-6062-515-10-70 WORKERS COMPENSATION 326.00
001-6064-512-10-70 WORKERS COMPENSATION 650.00
001-6065-515-10-70 WORKERS COMPENSATION 485.00
001-6066-519-1x70 WORKERS COMPENSATION 567.00
001-6067-510-10-70 WORKERS COMPENSATION 489.00
001-6069-511-1x70 WORKERS COMPENSATION 14.00
001-6141-515-1x70 WORKERS COMPENSATION 1,178.00
319,382.00
376,550.00
74,966.00
88,384.00
859,282.00
•
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal Entries Proposed by Null-Lairson
Account Description Debit Credit
001-6145-515-10-70 WORKERS COMPENSATION 295.00
001-7070=530-10-70 WORKERS COMPENSATION 530.00
001-7071-531-10-70 WORKERS COMPENSATION 2,958.00
001-7072-532-10-70 WORKERS COMPENSATION 1,914.00
001-8080-552-10-70 WORKERS COMPENSATION 1,881.00
001-8081-551-10-70 WORKERS COMPENSATION 1,459.00
001-8082-551-10-70 WORKERS COMPENSATION 855.00
001-8089-550-10-70 WORKERS COMPENSATION 923.00
001-9090-519-10-70 WORKERS COMPENSATION 1,390.00
001-9092-524-10-70 ~ WORKERS COMPENSATION 972.00
002-6147-515-10-70 WORKERS COMPENSATION 978.00
002-7084-533-10-70 WORKERS COMPENSATION 666.00
002-7085-533-10-70 WORKERS COMPENSATION 1,134.00
002-7086-532-10-70 WORKERS COMPENSATION 1,148.00
002-7087-532-10-70 WORKERS COMPENSATION 946.00
008-8083-551-10-70 WORKERS COMPENSATION 283.00
024-7074-534-10-70 WORKERS COMPENSATION 1,368.00
028-6048-551-10-70 WORKERS COMPENSATION 660.00
028-6049-551-10-70 WORKERS COMPENSATION 1,031.00
001-0000-202-01-21 ACCRUED PAYROLL / TML-WORKERS COMPENSATION 44,681.00
002-0000-101-01-00 POOLED CASH /POOLED CASH 4,872.00
008-0000-101-01-00 POOLED CASH /POOLED CASH 283.00
024-0000-101-01-00 POOLED CASH /POOLED CASH 1,368.00
028-0000-101-01-00 POOLED CASH /POOLED CASH 1,691.00
Total 52,895.00 52,895.00
Adjusting Journal Entries JE # 18
To close miscellaneous over and short accounts
001-0000.202-13-01 FINANCE /OVER AND SHORT 6,500.00
001-0000-202-13-15 FINANCE /OVER PYMTS UTILITY BILL 19,642.00
001-0000-408-02-19 MISCELLANEOUS INCOME 26,142.00
Total 26,142.00 26,142.00
Adjusting Journal Entries JE # 19
To reclassify amounts in fund balance
001-0000-371-02-02 UNRESERVED /UNDESIGNATED 10,310.00
001-0000-371-02-02 UNRESERVED /UNDESIGNATED 161,760.00
015-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCU 43,618.00
037-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCU 1,384.00
042-0000-349-00-00 ENCUMBRANCES /PRIOR YR RES FORE 1,598.00
001-0000-345-00-00 ENCUMBRANCES /RESERVE FOR ENCUMBRANCES 161,760.00
001-0000-371-01-01 RESERVED /INVENTORY 10,310.00
015-0000-371-02-02 UNRESERVED! UNDESIGNATED 43,618.00
037-0000-371-02-02 UNRESERVED /UNDESIGNATED 1,384.00
042-0000-371-01-02 RESERVED /DEBT SERVICE 1,598.00
Total 218,670.00 218,670.00
•
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: Adjusting Journal Entries Proposed by Null-Lalrson
Account Description Debit
Adjusting Journal Entries JE # 20
To correct porting of receivables and deferred income
Credit
014-0000-114-33-00 OTHER /MISCELLANEOUS 1,420.00
014-0000-213-31-00 DEFERRED REVENUES /MISCELLANEOUS 1,420.00
Total 1,420.00 ~ 1,420.00
Adjusting Journal Entries JE # 25
Record due to/from LPAWA
001-0000-122-00-00 DUE TO LPAWA
016-0000-101-01-00 POOLED CASH /POOLED CASH
001-0000-101-01-00 POOLED CASH /POOLED CASH
016-0000-218-02-00 DUE FROM GENERAL FUND
Total
Adjusting Journal Entries JE # 28
To reclassify fund balance reserves
016-0000-372-02-01 UNRESERVED /UNDESIGNATED
016-0000-372-06-03 LPAWA /DEBT SERVICE
Total
Adjusting Journal Entries JE # 39
To reclassify fund balances for report purposes
002-0000-372-02-00
008-0000-372-02-01
010-0000-372-02-00
016-0000-372-02-01
028-0000-372-02-00
002-0000-351-00-00
008-0000-351-00-00
010-0000-351-00-00
016-0000-351-00-00
028-0000-351-00-00
Total
RETAINED EARNINGS /UNRESERVED
UNRESERVED/UNDESIGNATED
RETAINED EARNINGS /UNRESERVED
UNRESERVED/UNDESIGNATED
RETAINED EARNINGS /UNRESERVED
INVESTED IN CAPITAL ASSETS
INVESTED IN CAPITAL ASSETS
INVESTED IN CAPITAL ASSETS
INVESTED IN CAPITAL ASSETS
INVESTED IN CAPITAL ASSETS
902.00
902.00
902.00
902.00
1,804.00 1,804.00
839,891.00
839,891.00
839,891.00 839,891.00
16,986,793.00
122,248.00
2,220,101.00
3,305,375.00
3,475,259.00
26,109,778.00
•
16,986,793.00
122,248.00
2,220,101.00
3,305,375.00
3,475,259.00
2e,109,776.00
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: GASB 34 Enures Proposed by Null-Lairson
Account Description
GASB 34 Entries JE # 21
Reclassify current year's bond retirements
096-0000-152-00-00 AMT AVAIL FOR PMT OF LTD ! AMOUNT TO BE PROVIDED
096-0000-570-90-70 BOND PRINCIPAL RETIREMENT
Total
GASB 34 Entries JE # 22
Recassify current portion of bonds payable
096-0000-231-00-00 GENERAL LTD PAYABLE /GENERAL OBLIGATION BONDS
096-0000-232-00-00 GENERAL LTD PAYABLE /CERTIFICATE OF OBLIGATION
096-0000-212-00-00 CURRENT PORTION CERT OF OBLIGATION
096-0000-212-01-00 CURRENT PORTION BONDS PAYABLE
Total
GASB 34 Entries JE # 23
Recording Interest payable at year end
096-0000-152-00-00 AMT AVAIL FOR PMT OF LTD /AMOUNT TO BE PROVIDED
096-0000-212-02-00 INTEREST PAYABALE
096-0000-570-90-71 INTEREST EXPENSE
Total
GASB 34 Entries JE # 24
To allocate charges for services to functional expenses
999-0000-400-00-00
999-0000-510-00-00
999-0000-520-00-00
999-0000-530-00-00
999-0000-532-00-00
999-0000-552-00-00
Total
CHARGES FOR SERVICES
GENERAL GOVERNMENT
PUBLIC SAFETY
PUBLIC WORKS
HEALTH AND SANITATION
CULTURE AND RECREATION
GASB 34 Entries JE # 27
To allocate motor pool transactions & balances
999-0000-101-01-00
999-0000-103-00-00
999-0000-114-00-00
999-0000-120-00-00
sss-0ooo-lsa-oo-0o
999-0000-483-01-00
999-0000-510-00-UO
999-0000-520-00-00
999-0000-532-00-00
999-0000-552-00-00
999-0000-191-00-00
999-0000-202-00-00
sss-0ooo-217-00-00
CASH
INVESTMENTS
OTHER RECEIVABLES
INVENTORIES
FURNITURE 8 EQUIPMENT
LOSS ON SALE
GENERAL GOVERNMENT
PUBLIC SAFETY
HEALTH AND SANITATION
CULTURE AND RECREATION
ACCUMULATED DEPRECIATION
ACCOUNTS PAYABLE
SALARIES PAYABLE
Debit Credit
1,590,000.00
1,590,000.00
1,590,000.00 1,590,000.00
1,340,000.00
150,000.00
150,000.00
1,340,000.00
1,490,000.00 1,490,000.00
86,798.00
38,950.00
47,848.00
86,798.00 86,798.00
3,291,624.00
3,291,624.00
1,832,584.00
343,091.00
2,542.00
44,210.00
9,858,579.00
20,851.00
31,702.00
50,573.00
28,313.00
18,474.00
420,915.00
1,501,949.00
40,733.00
891,146.00
436,881.00
3,291,624.00
5,352,209.00
8,439.00
21,637.00
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: GASB 34 Entries Proposed by Null-Lairson
Account Description
999-0000-217-01-00 COMPENSATED ABSENCES PAYABLE
999-0000-371-00-00 UNRESTRICTED NET ASSETS
999-0000-410-00-00 INTEREST INCOME
Total
GASB 34 Entries JE # 28
To allocate technology fund transactions and balances
999-0000-101-01-00 CASH
999-0000-103-00-00 INVESTMENTS
999-0000.114-00-00 OTHER RECEIVABLES
999-0000-130-00-00 PREPAID EXPENSE
999-0000-184-00-00 FURNITURE & EQUIPMENT
999-0000-483-01-00 LOSS ON SALE
999-0000-510-00-00 GENERAL GOVERNMENT
999-0000-520-00-00 PUBLIC SAFETY
999-0000-532-00-00 HEALTH AND SANITATION
999-0000-552-00-00 CULTURE AND RECREATION
999-0000-191-00-00 ACCUMULATED DEPRECIATION
999-0000-202-00-00 ACCOUNTS PAYABLE
999-0000-371-00-00 UNRESTRICTED NET ASSETS
999-0000-410-00-00 INTEREST INCOME
Total
GASB 34 Entries JE # 29
To allocate health insurance fund transactions and balances
999-0000-101-01-00
999-0000-103-00-00
sss-0ooo-l la-0o-0o
999-0000-510-00-00
999-0000-520-00-00
999-0000-532-00-00
999-0000-552-00-00
sss-oooo-2oz-oo-0o
999-0000-371-00-00
999-0000-410-00-00
999-0000-480-01-00
Total
CASH
INVESTMENTS
OTHER RECEIVABLES
GENERAL GOVERNMENT
PUBLIC SAFETY
HEALTH AND SANITATION
CULTURE AND RECREATION
ACCOUNTS PAYABLE
UNRESTRICTED NET ASSETS
INTEREST INCOME
TRANSFERS IN
GASB 34 Entries JE # 30
To allocate grant revenues over functional expenses
999-0000-409-00-00 GRANT REVENUE
999-0000-510-01-00 GENERAL GOVT GRANTS
999-0000-520-01-00 PUBLIC SAFETY GRANTS
999-0000-552-01-00 CULTURE AND RECREATION GRANTS
Total
Debit Credit
104,895.00
6,518,342.00
25,397.00
12,030,919.00 12,030,919.00
374,546.00
78,743.00
583.00
57,975.00
1,076,024.00
234,287.00
3,658.00
4,872.00
97.00
769.00
1,831,554.00
2,104,001.00
439,796.00
3,258.00
120,209.00
127,011.00
20,572.00
57,244.00
2,872,091.00
480,037.00
480,037.00
787,464.00
45,448.00
993,569.00
5,073.00
1,831,554.00
17o,s2s.oo
1,421,200.00
29,962.00
1,250,000.00
2,872,091.00
177,125.00
251,995.00
50,917.00
480,037.00
GASB 34 Entries JE # 31
To reclassify deferred revenues
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9/30/2003
Workpaper: GASB 34 Entries Proposed by Null-Lairson
Account Description
999-0000-213-01-00
999-0000-401-01-00
999-0000-401-01-01
999-0000-371-00-00
999-0000-407-08-00
999-0000-408-01-04
999-0000-408-01-20
999-0000-408-01-22
999-0000-408-02-19
Total
DEFERRED REVENUES
TAX REVENUE
TAX REVENUE DSF
UNRESTRICTED NET ASSETS
MUNICIPAL COURT
SOLID WASTE
EMS
MOWING
MISC
GASB 34 Entries JE # 32
To record current year increase in compensated absences payable
999-0000-510-00-00
999-0000-520-00-00
999-0000-532-00-00
999-0000-552-00-00
999-0000-371-00-00
Total
GENERAL GOVERNMENT
PUBLIC SAFETY
HEALTH AND SANITATION
CULTURE AND RECREATION
UNRESTRICTED NET ASSETS
GASB 34 Entries JE # 33
Record infrastructure at beginning of year
095-0000-180-05-00 INFRASTRUCTURE /PUBLIC WORKS
095-0000-190-00-00 ACCUMULATED DEPRECIATION
095-0000-351-02-00 INVEST IN GEN FIXED ASSET /CAPITAL IMPROVEMENTS
Total
GASB 34 Entres JE # 34
Record accumulated depreciation at beginning of year
095-0000-351-02-00 INVEST IN GEN FIXED ASSET /CAPITAL IMPROVEMENTS
095-0000-190-00-00 ACCUMULATED DEPRECIATION
Total
GASB 34 Entries JE # 35
Record depreciation expense
095-0000-510-00-00
095-0000-520-00-00
095-0000-530-00-00
095-0000-552-00-00
095-0000-190-00-00
Total
DEPR GEN GOVERNMENT
DEPR PUBLIC SAFETY
DEPR PUBLIC WORKS
DEPR CULTURE 8 RECREATION
ACCUMULATED DEPRECIATION
GASB 34 Entries JE # 36
Correct posting of capital asset disposals
095-0000-190-00-00 ACCUMULATED DEPRECIATION
095-0000-351-02-00 INVEST IN GEN FIXED ASSET /CAPITAL IMPROVEMENTS
Total
Debit Credit
2,677,942.00
46,771.00
10,648.00
2,191,831.00
24,898.00
3,471.00
414,963.00
8,724.00
91,474.00
2,735,361.00 2,735,361.00
72,995.00
29,334.00
11,173.00
15,324.00
128,826.00
128,826.00 128,828.00
16,515,354.00
7,431,909.00
9,083,445.00
7 6,515,354.00 16,515,354.00
13,933,579.00
13,933,579.00
13,933,579.00 13,933,579.00
311,383.00
294,343.00
1,082,052.00
573,086.00
2,260,864.00
2,260,864.00 2,260,864.00
130,955.00
130,955.00
130,955.00 730,955.00
Client: City of La Porte
Engagement: City of La Porte
Period Ending: 9!30/2003
Workpaper: GASB 34 Entries Proposed by Null-Lairson
Account Description
GASB 34 Entries JE # 37
Reverse capital outlay additions
999-0000-371-00-00
999-0000-510-00-00
999-0000-510-00-00
999-0000-520-00-00
999-0000-530-00-00
999-0000-552-00-00
Total
UNRESTRICTED NET ASSETS
GENERAL GOVERNMENT
GENERAL GOVERNMENT
PUBLIC SAFETY
PUBLIC WORKS
CULTURE AND RECREATION
GASB 34 Entries JE # 38
Reclassify components of net assets
999-0000-371-01-01
999-0000-371-01-02
999-0000-351-00-00
999-0000-371-00-00
999-0000-371-02-02
Total
RESERVED FOR DEBT SERVICE
RESERVED FOR CAPITAL PROJECTS
INVESTED IN CAPITAL ASSETS
UNRESTRICTED NET ASSETS
RESERVED FOR OTHER PURPOSES
Debit Credit
2,621,267.00
2,621,267.00
62,644.00
405,960.00
399,621.00
1,440,328.00
312,714.00
2,621,267.00
1,253,421.00
7,315,092.00
4,965,816.00
3,570,816.00
31,881.00
8,568,513.00 8,568,513.00
SINGLE AUDITS
What is a "Single Audit"?
State and local governments frequently receive
substantial federal awards. Often, these awards
are provided by several different grantor agen-
cies. In the past, state and local governments
were subject to the separate audit requirements
of each individual grantor. As a result, a state or
local government sometimes found itself forced
to undergo several audits related to the federal
awards it had received for a single period. Such
multiple audits often resulted in a wasteful du-
plication of effort, with different audit teams ex-
amining and reexamining the same internal
controls. Moreover, such audits were subject to a
bewildering array of conflicting audit guidance
provided by different grantor agencies. The fed-
eral response to remedy this situation was the
Single Audit Act of 1984, which was amended in
1996.
Under the Single Audit Act, the multiple grant
audits of the past were replaced by a single audit
specifically designed to meet the needs of all fed-
eral grantor agencies. Individual grantors still
retain the right to have additional audit work
performed; however, any additional audit work
must be paid for by the grantor and must build
upon the Single Audit.
24 AN ELECTED OFFICIAL'S GUIDE
When are Single Audits required?
The Single Audit Act of 1984, as amended, ap-
plies to all governments that expend $300,000 or•
more per fiscal year in federal awards.2 For this
purpose, expenditures include transactions asso-
ciated with grants, cost reimbursement con-
tracts, cooperative agreements, and direct
appropriations. Expenditures also include:
• Amounts disbursed to subrecipients
(pass-through grants)
• The use of loan proceeds under loan and
loan-guarantee programst
• The receipt of property
• The receipt of surplus property
The receipt or use of program income
• The distribution or consumption of food com-
modities
• The disbursement of amounts entitling an en-
tity to an interest subsidy
• Insurance (during the award period).
Normally a Single Audit encompasses the entire
government. However, governments subject to
Single Audit have the option of obtaining a series
of audits for just those organizational units (e.g.,
departments or agencies) that expended or ad-
ministered federal awards during the fiscal period
under audit. Moreover, in certain circumstances,
governments with only one federal program have
ZThe OMB periodically reviews this amount for reasonableness.
It is expected that this amount will soon be raised to $500,000.
TO AUDITING 25
the option of procuring aprogram-specific audit
in place of a Single Audit. In practice, it typically
is more cost-effective to perform an entity-wide
audit.
I~ow do Yellow Book audits differ
from regular financial statement
audits?
The most visible difference between Yellow Book
audits and financial statement audits performed
solely in conformity with GARS is the auditor's
expanded reporting responsibility in a Yellow
Book audit. Under GAAS, the auditor prepares
only one auditor's report, which expresses an
opinion (or declines to express an opinion) on the
fair presentation of the financial statements. Un-
der the Yellow Book standards, this auditor's re-
port on the fair presentation of the financial
statements is supplemented by an additional re-
port on compliance and internal controls over fi-
nancial reporting. Both of these reports are
discussed in more detail in the portion of this
booklet devoted to auditor's reports.
Other differences between the Yellow Book and
GAAS are less visible. The Yellow Book stan-
dards of field work and reporting incorporate
and expand upon those set by GAAS. Just as im-
portant, the general standards of the Yellow
Book (including the critically important standard
on independence) replace those of GAAS alto-
gether in a Yellow Book audit.
26 AN ELECTED OFFICIAL'S GUIDE TO AUDITING
23
•
FELL®VV E®®KA~Jd~I7'S
What is a "Yellow Book audit"?
As explained earlier, the standards used for pri-
vate-sector auditing (i.e., GARS) often are sup-
plemented in the public sector by additional
standards set forth in the GAO's publication
Government Auditing Standards. Such engage-
ments are commonly referred to simply as Yellow
Book audits.
Yellow Book standards always apply to federally
mandated audits. Their use also is sometimes re-
quired by state law, even in the absence of fed-
eral funding.
22 AN ELECTED OFFICIAL'S GUIDE
What special standards govern
Single Audits?
Single Audits, like all federal audits, must be
performed in accordance with the GAO's Govern-
ment Auditing Standards (Yellow Book). In addi-
tion, Single Audits are subject to the requirements
of OMB Circular A-133, Audits of States, Local
Governments, and Non-Profit Organizations.
TO AUDITING 27
How do Single Audits differ from
regular financial statement audits?
Single Audits are subject to the GAO's Govern-
mentAuditing Standards (Yellow Book). There-
fore, the auditor's report on the fair presentation
of the financial statements must be accompanied
by a report on compliance and internal controls
over financial reporting.
Single Audits also place special testing and re-
porting responsibilities upon auditors in regard
to federal awards. First, in a Single Audit, the
auditor must determine and report whether the
legally required Schedule of Expenditures of
Federal Awards prepared by the government is
fairly presented in relation to the government's
basic financial statements. Second, the auditor
must test and report on compliance and internal
controls over compliance for federal awards pro-
grams. To meet this latter requirement, the au-
ditor must gain an understanding of internal
controls over compliance and then test those con-
trols for each major federal program. The result-
ing auditor's report must provide an opinion on
whether the government complied with laws,
regulations, and provisions of contracts or grant
agreements that could have a direct and mate-
rial effect on each major federal program.
More information on the auditor's special Single
Audit reporting responsibilities can be found in
the next section of this publication devoted to au-
ditor's reports.
2S AN ELECTED OFFICIAL'S GUIDE
What is a "lawyer's letter"?
GAAP require that the financial statements and
the notes to the financial statements reflect the
potential effects of pending litigation. Auditors,
however, do not ordinarily possess the legal ex-
pertise needed to assess the potential effects
of pending litigation. Therefore, auditors are
required by GAAS to obtain a letter from the
government's legal counsel to corroborate man-
agement's treatment of pending litigation in the
financial statements and in the notes to the fi-
nancial statements.
TO AUDITING 21
AUDITOR'S REPORTS
What is a "management
representation letter"?
What are the different types of
auditor's reports?
As noted earlier, management is ultimately re-
sponsible for the financial statements, regardless
of the degree of auditor involvement in their
preparation. Accordingly, auditors are required
by GAAS to obtain direct written acknowledge-
ment from management of this responsibility.
Auditors also need to obtain written assurance
from management that the financial statements
are, in fact, complete. These and other similar
assertions are contained in a formal document
known as the management representation letter.
The management representation letter also ad-
dresses anumber of specific events and situa-
tions that could have an effect upon the auditor's
evaluation of the fair presentation of the finan-
cial statements. For example, is management
aware of any possible violations of laws or regu-
lations? Are there any restrictions on cash bal-
ances? Are there any lines of credit or similar
arrangements?
The management representation letter generally
is dated as of the last day of the auditor's field-
work and signed by the chief executive officer,
the chief financial officer, and the chief account-
ing officer. In some instances, other government
officials also may be asked by the auditor to sign
the letter (e.g., budget officer, grants officer).
The management representation letter just de-
scribed should not be confused with the "man-
agement letter" used by auditors to report
various control weaknesses discovered in the
course of the audit to management. This latter
document is described in more detail in the sec-
tion of this booklet devoted to auditor's reports.
20 AN ELECTED OFFICIAL'S GUIDE
In the public sector, there are three commonly
encountered auditor's reports.
• The independent auditor's report on the fair
presentation of the financial statements (re-
quired for all financial audits)
• The independent auditor's report on compli-
ance and internal controls over financial re-
porting based on an audit of the financial
statements (required for all Yellow Book au-
dits, including Single Audits)
• The independent auditor's report on compli-
ance and internal controls over compliance ap-
plicable to each major federal award program
(required for Single Audits)
Furthermore, auditors performing Single Audits
are required to report on the fair presentation of
the Schedule of Expenditures of Federal Awards.
Auditors typically expand their report on the fair
presentation of the financial statements to meet
this requirement.
TO AUDITING 29
What is the independent auditor's
report on the financial statements?
The independent auditor's report on the financial
statements provides the auditor's opinion (or dis-
claimer of an opinion) on whether the financial
statements are fairly presented. This report has
at least three paragraphs. The first or introduc-
tory paragraph identifies the subject of the audit
and defines management's and the auditor's dif-
fering responsibilities (i.e., management is re-
sponsible for the financial statements, the
auditor is responsible for determining if those
statements are fairly presented). The second or
scope paragraph provides general information
concerning the auditing standards followed, as
well as the nature and limitations of a financial
statement audit. The third or opinion paragraph
sets forth the auditor's considered assessment of
whether the financial statements are fairly pre-
sented in accordance with GAAP.
The auditor's report on the fair presentation of
the financial statements also may contain addi-
tional paragraphs describing the auditor's re-
sponsibility for materials accompanying the
audited financial statements and clarifying any
special circumstances surrounding the auditor's
opinion (e.g., significant unresolved uncertain-
ties). In Yellow Book audits (including Single
Audits), readers also will be referred to related
reports on compliance and internal controls. Fur-
thermore, aspecial paragraph sometimes will be
inserted immediately preceding the opinion
paragraph to explain circumstances that pre-
cluded the auditor from issuing an unqualified
opinion (see next question).
3Q AN ELECTED OFFICIAL'S GUIDE
What is a "material weakness"?
Some reportable conditions are more serious
than others. Specifically, some reportable condi-
tions are of such magnitude that they could po-
tentially result in a material (i.e., significant)
misstatement of the financial statements. Re-
portable conditions of this type are known as
material weaknesses. One example of a potential
material weakness would be a government's fail-
ure to open monthly bank statements to recon-
cile the cash balances reported there to the cash
balances reported in the accounting records.
By definition, all material weaknesses are re-
portable conditions. Not all reportable condi-
tions, however, are material weaknesses.
Auditors generally distinguish reportable condi-
tions that are material weaknesses from those
that are not.
TO AUDITING 1~
* ~
What is a "reportable condition"?
The independent auditors typically perform ex-
tensive tests of controls as part of their effort to
obtain the evidence needed to support an opinion
on the fair presentation of the financial state-
ments. In the course of performing these tests,
auditors may become aware of significant defi-
ciencies in internal controls. GARS refer to such
deficiencies as reportable conditions and require
that auditors ensure that management is aware
of them.
What is an "unqualified opinion"
or "clean opinion"?
An unqualifced opinion or clean opinion is one in
which the independent auditor can state, with-
out reservation, that the financial statements
are fairly presented in all material respects in
conformity with generally accepted accounting
principles.3
Management also is free, when obtaining audit
services, to set its own broader criteria for re-
portable conditions. For example, if management
had experienced problems with the processing of
travel claims, it could choose to make travel
claim compliance a reportable condition. In that
event, the auditor would be required by GAAS to
communicate to management any instances of
noncompliance with travel regulations encoun-
tered in the course of the audit, along with any
other reportable conditions.
3Technically speaking, the auditor also may issue an
unqualified opinion in accordance with a comprehensive
basis of accounting other than GAAP (e.g., cash basis
accounting). In that case, the auditor's opinion would have to
explain that this basis of accounting was not in conformity
with GAAP.
YS AN ELECTED OFFICIAL'S GUIDE TO AUDITING 31
What is a "qualified opinion"?
A qualified opinion is one in which the auditor
expresses reservations about the fair presenta-
tion of the financial statements in conformity
with GAAP. One common reason that auditors
qualify their opinion on the financial statements
is that the government's underlying records may
not be sufficient to support some of the data con-
tained in the financial statements. In that case
the auditor would qualify the opinion by stating
that the financial statements are fairly pre-
sented except for the insufficiently supported
data in question.
e)G AN ELECTED OFFICIAL'S GUIDE
What is the relationship of a
government's framework of
anternal controls to the f nancial
statement audit?
An important advantage of a comprehensive
framework of internal controls is that it can re-
duce the amount of testing that would otherwise
be needed to support the independent auditor's
opinion on the fair presentation of financial
statements. Assume, for example, that a govern-
ment has poor internal controls over its receiv-
ables. In that case, the auditor would normally
need to perform extensive substantive (i.e., di-
rect) tests of receivables balances to support an
opinion on the fair presentation of the financial
statements. ~On the other hand, if the auditor can
obtain sufficient assurance that internal controls
over receivables are strong, the auditor may be
able to rely upon tests of controls to reduce signif-
icantly the amount of substantive testing that
might otherwise have been required.
TO AUDITING 17
•
• The segregation of incompatible dutiesl
• The periodic verification of the underlying
facts reflected in accounting records (e.g., the
physical inventory of capital assets)
• The regular analytical review of accounting
data (i.e., the systematic comparison of ac-
counting data to other data, both accounting
and non-accounting, to assess their reason-
ableness).
1Duties are incompatible if they permit an employee to both
commit and conceal an irregularity in the ordinary course of
that employee's duties.
What is a "disclaimer of opinion"?
As mentioned in the discussion on qualified opin-
ions, auditors sometimes do not have all of the
underlying documentation needed to support an
unqualified opinion on the fair presentation of
the financial statements. Beyond a certain point,
the amounts in question may be so material as to
make it impossible to render any opinion on all
or a significant portion of the financial state-
ments. In that case, the auditor issues a report
that disclaims an opinion on all or a portion of
the financial statements.
Z5 AN ELECTED OFFICIAL'S GUIDE
TO AUDITING
33
What is an "adverse opinion"?
An adverse opinion is one in which the auditor
states that the financial statements are not
fairly presented in conformity with GAAP (or
some other comprehensive basis of accounting).
The financial reporting model used by state and
local governments features a combination of gov-
ernment-wide financial statements and fund fi-
nancial statements. A financial report that left
out either the government-wide financial state-
ments or the fund financial statements would re-
ceive anadverse opinion. Likewise, a government's
failure to report general infrastructure assets in
the government-wide financial statements (after
the mandatory implementation date for retroac-
tive infrastructure reporting), if material, typi-
cally would result in an adverse opinion.
e74 AN ELECTED OFFICIAL'S GUIDE
What are internal controls?
Management is responsible for protecting the
government's assets and for ensuring the integ-
rity and comprehensiveness of the data collected
by the accounting system. Internal controls are
the practical means that management uses to
achieve these objectives.
A comprehensive framework of internal controls
must do all of the following:
o Produce a favorable control environment
o Ensure the ongoing assessment of risk
o Establish and maintain control-related policies
and procedures
o Facilitate communication
o Provide for monitoring the effectiveness of
control-related policies and procedures as well
as the resolution of potential problems identi-
fied by control-related procedures.
To be effective, control-related policies and proce-
dures, which are at the heart of a government's
framework of internal controls, must ensure all
of the following:
o The proper authorization of transactions
o The proper design of records
o The maintenance of security over assets and
records
o The periodic reconciliation of accounting re-
cords
TO AUDITING 15
What is the basis for judging
quantitative materiality?
In the private sector, quantitative materiality
normally is assessed in relation to the financial
statements taken as a whole. Auditors tradition-
ally have applied a much narrower focus when
assessing quantitative materiality for state and
local governments. In the case of the govern-
ment-wide fmancial statements, the assessment
of quantitative materiality is made separately
for governmental activities and business-type ac-
tivities. Likewise, in the fund financial state-
ments, the focus is on individual major
governmental funds and individual major enter-
prise funds.
Some governments desire that materiality also
be assessed separately for individual funds that
are not major governmental funds or major en-
terprise funds. This approach, known as
"full-scope" auditing, effectively lowers the mate-
riality threshold even further. Both the Govern-
ment Finance Officers Association (GFOA) and
the GASB are formally on record encouraging
governments to obtain full-scope audits. They be-
lieve that the benefits of full-scope auditing typi-
cally more than offset the additional costs. These
additional costs, however, have deterred many
governments from implementing this recommen-
dation.
14 AN ELECTED OFFICIAL'S GUIDE
What is the independent auditor's
report on compliance and internal
controls over financial reporting?
In an audit performed in accordance with Gov-
ernmentAuditing Standards (Yellow Book), au-
ditors are required to report on internal controls
tested as part of the financial statement audit.
In doing so, auditors must list any reportable
conditions that came to light as the result of
tests of controls, distinguishing those that are
material weaknesses from those that are not.
Auditors are not required, however, to render an
opinion on the overall design and operation of
the government's framework of internal controls.
Auditors also must report on compliance with
applicable laws and regulations. Once again, au-
ditors are not required to render an opinion on
whether the government complied with applica-
ble laws and regulations. They are required,
however, to report significant instances of non-
compliance discovered in the course of the finan-
cial statement audit.
As a practical matter, the report on compliance
and internal controls over financial reporting of-
ten refers readers to a separate set of findings
for information on specific reportable conditions
and specific instances ofnon-compliance re-
vealed in the course of the financial statement
audit.
TO AUDITING 35
What is the independent auditor's
report on compliance and internal
controls over compliance applicable
to each major federal award
program?
In a Single Audit, auditors are required to report
on their tests of internal controls over compli-
ance for major federal award programs, describ-
ing both the scope of testing and results. In
addition, the auditor is required to express an
opinion (or a disclaimer of opinion) on whether
the government complied with laws, regulations,
and provisions of contracts or grant agreements
that could have a direct and material effect on
each major federal award program.
As a practical matter, the report on compliance
and internal controls over compliance applicable
to each major federal award program often refers
readers to a separate set of findings for informa-
tion on specific control weaknesses and specific
instances of noncompliance disclosed by the
Single Audit.
What is "materiality"?
A potential error is considered to be material
(i.e., important, significant) to the financial
statements if it could have the effect of changing
a reader's impression of the government's fi-
nances. In making judgments concerning a po-
tential error's materiality, auditors consider both
its quantitative and qualitative impact.
The size alone of a potential error can make it
quantitatively material. For example, an auditor
is likely to consider a potential error that ex-
ceeds acertain percentage (e.g., 5 percent) of net
assets or revenues to be material based on size.
Another criterion of materiality is a potential er-
ror's qualitative impact. For instance, a potential
error that changed what would have been a defi-
cit into a surplus might be considered material,
regardless of size. Similarly, errors that affect
long-term trends also may be considered mate-
rial, even though relatively small. Assume, for
example, that fund balance had been increasing
steadily over afive-year period as a percentage
of current expenditures in the general fund. If an
error in the current year gave the impression
that this trend was continuing, when in fact fund
balance had slightly declined as a percentage of
current expenditures, the error might be consid-
ered material, regardless of size.
Many consider errors that reflect violations of fi-
nance-related legal or contractual provisions to
be qualitatively material by their very nature.
36 AN ELECTED OFFICIAL'S GUIDE TO AUDITING 13
• •
What degree of assurance do
auditors seek to provide?
The goal of the auditor is to obtain reasonable as-
surance, not absolute certainty, that the finan-
cial statements are fairly presented.
Consequently, auditors do not attempt to ensure
that all of the data contained in financial state-
ments are 100 percent accurate, but rather that
the financial statements are free from any mate-
rial misstatements. Accordingly, auditors typi-
cally do not attempt to examine individually
every transaction or event affecting a govern-
ment's financial statements. Instead, auditors
perform their work on a "test basis," much as
those conducting opinion surveys interview only
a random sample of those whose opinions they
are seeking to measure and report.
What is the independent auditor's
report on the Schedule of
Expenditures of Federal Awards?
Governments subject to a Single Audit are re-
quired to prepare a Schedule of Expenditures of
Federal Awards. This schedule, like the financial
statements, represents management's asser-
tions. While auditors are not required to audit
the schedule per se, they are required to express
an opinion on whether it is fairly presented in all
material respects in relation to the basic finan-
cial statements.
12 AN ELECTED OFFICIAL'S GUIDE
TO AUDITING
37
What are "findings"?
When audits-including Single Audits-are con-
ducted in accordance with the Government Au-
diting Standards (Yellow Book), reportable
conditions (including material weaknesses) and
instances of noncompliance with applicable laws
and regulations are presented in a special format
known as an audit finding.
Ideally, an audit finding is composed of the fol-
lowing four elements.
o Criterion /Criteria -the basis for identifying
that a condition is an internal control weak-
ness or an instance of noncompliance
e Condition -the internal control weakness or
instance of noncompliance identified by the
auditor
o Effect -the negative outcome that resulted or
could result from the condition
o Cause - an explanation of why the weakness
or instance of noncompliance occurred
Findings are often accompanied by a specific rec-
ommendation for corrective action and by man-
agement's response. In a Single Audit, a
government is required to prepare a schedule of
prior audit findings that presents the status of
corrective action on audit findings from previous
years.
How do auditors obtain the
information they need?
Auditors use a variety of methods to obtain the
evidence they need to determine whether a gov-
ernment's financial statements are fairly pre-
sented. Auditors inspect relevant documentation;
observe employee performance; inquire concern-
ing policies, procedures, transactions, and
events; confirm balances and transactions with
outside parties; and perform analytical proce-
dures to determine the reasonableness of trans-
actions and balances.
38 AN ELECTED OFFICIAL'S GUIDE TO AUDITING 11
•
How does the independent
auditor's responsibility for the
financial statements differ from
that of management?
The financial statements, from first to last, rep-
resent management's assertions concerning the
government's finances. The auditor's role is
strictly limited to providing users of the financial
statements with an independent basis for relying
upon management's assertions. Even when the
auditor plays a role in drafting the financial
statements, those statements remain the asser-
tions of management.
A simple analogy may be instructive. A will pre-
pared by an attorney on behalf of a client is pre-
sumed to represent the wishes of the client
rather than those of the attorney who prepared
the document. In the same way, financial state-
ments represent management's (not the inde-
pendent auditor's) assertions concerning the
government's finances, even if the auditor
drafted the financial statements.
1~ AN ELECTED OFFICIAL'S GUIDE
What are "questioned costs"?
When an expenditure under a federal grant does
not meet all of the grantor's requirements, the
recipient may have to refund the amount to the
federal government or accept an adjustment in
related future payments from the federal govern-
ment. Amounts that the auditor determines may
be subject to such a refund or adjustment are
known as questioned costs.
Sometimes, it is required that governments ob-
tain special grantor approval before incurring
certain types of expenditures. If the grant recipi-
ent fails to obtain such prior approval, the ex-
penditure may be questioned because it is
unapproved. Other expenditures are expressly
prohibited by grant requirements. If govern-
ments charge such expenditures to a grant, they
may be questioned because they are unallow-
able. Sometimes, governments incur allowable
expenditures in conjunction with a grant, but
fail to maintain proper documentation of these
expenditures. In that case, the cost may be
questioned as being undocumented. Finally, gov-
ernments are expected to demonstrate prudence
in their management of federal funds. Extrava-
gant expenditures, even if not undocumented or
unallowable per se, may still be questioned as be-
ing unreasonable (e.g., first-class airfare instead
of lowest available fare).
While not all findings result in questioned costs,
all questioned costs are connected with findings.
Questioned costs typically are reported in a
Schedule of Findings and Questioned Costs.
Also, if a questioned cost is, in fact, ultimately
rejected by a grantor, the amount is known as a
disallowed cost.
TO AUDITING 39
FINANCI
ST~47'EMENZ' ~1II~ITS
What is a "management letter"?
Auditors are required to communicate all report-
able conditions discovered in the course of a fi-
nancial statement audit to management. In a
GARS audit, this communication is accomplished
by means of a formal management letter. In con-
trast, in a Yellow Book audit (including a Single
Audit), this communication takes the form of one
or two separate auditor's reports on compliance
and internal controls and an accompanying
Schedule of Findings and Questioned Costs.
In some circumstances, an auditor may wish to
issue a management letter even in conjunction
with a Yellow Book audit. In that case, the man-
agement letter normally is restricted to items
considered too immaterial for inclusion in the
Schedule of Findings and Questioned Costs.4
Whenever a separate management letter is is-
sued, the Yellow Book requires that the auditor's
report on compliance and internal controls refer
to that letter.
It is important to distinguish the management
letter, as just described, from the management
representation letter, which was described ear-
lier.
4A management letter also may contain recommendations for
improving operations targeted at management.
What is a financial statement
audit?
The goal of the annual financial statement audit
is to assure users of a government's financial
statements that those statements are fairly
presented. In most cases, the fairness of the
presentation of a set of financial statements is
determined using a set of criteria known as gen-
erally accepted accounting principles (GAAP).
The most important source of GAAP for state
and local governments is the Governmental Ac-
counting Standards Board (GASB). Much of gov-
ernmental GAAP can be found in the GASB
publication Codification of Governmental Ac-
counting and Financial Reporting Standards,
which is updated annually.
4O AN ELECTED OFFICIAL'S GUIDE TO AUDITING 9
•
training, and provide tools and methodologies to
their clients (e.g., best practice guides, bench-
marking studies, internal control assessment
methodologies).
MANAGING THE
FINANCIAL
STATEMENT AUDIT
Who is responsible for selecting the
independent auditor?
Unless the independent auditor is statutorily ap-
pointed by some higher level of government (e.g.,
municipalities required to be audited by the
state auditor), the selection of the auditor is ulti-
mately the responsibility of a government's legis-
lative body. Often the legislative body delegates
this task to a smaller working group (e.g., fi-
nance committee) or an individual (e.g., finance
director). Ideally, the task should be assigned to
a specially selected audit committee. When the
responsibility for selecting the independent audi-
tor is delegated, the person(s) delegated typically
are expected to return to the legislative body
with a formal recommendation for its approval.
8 AN ELECTED OFFICIAL'S GUIDE TO AUDITING 41
How should the independent
auditor be selected?
The quality of auditors, like that of other profes-
sionals, can vary substantially from one practi-
tioner to another. Some audit firms perform high
quality audits of state and local governments,
while others lack the specialized experience and
expertise needed to successfully complete such
engagements. Therefore, it is critical that gov-
ernments select their auditors carefully to en-
sure that they obtain the high quality audits
they need.
A study by the General Accounting Office indi-
cates that there is a clear correlation between
the quality of a government's audit procurement
process and the quality of the audit it receives.5
According to that study, to avoid a substandard
audit a government's audit procurement process
should possess several characteristics.
First, governments should make sure that the
audit procurement process is open and competi-
tive. An open and competitive audit procurement
process is likely to encourage greater participa-
tion by high quality audit firms.
Second, a government should prepare a compre-
hensive request for proposals (RFP). A sound
RFP should obtain from proposers all of the in-
formation needed to evaluate their technical
qualifications to perform the audit. It also should
provide proposers with a detailed description of
the government, its specific audit needs, and the
government's audit procurement process.
SCPA Audit Quality: A Framework for Procuring Audit
Services (August 1987).
42 AN ELECTED OFFICIAL'S GUIDE
Are there limitations on the types of
services that independent auditors
can perform for their audit clients
without impairing their
independence?
Under GAGAS, there are two overarching princi-
ples governing the types of consulting or nonaudit
services that independent auditors may provide
to their audit clients:
o Auditors may not perform management func-
tions or make management decisions; and
o Auditors may not audit their own work or pro-
vide nonaudit services in situations where the
amounts or services involved are significant or
material to the subject matter of the audit.
Thus, for example, auditors may provide advice
on the design of an accounting system for an
audit client, but they may not actually design,
develop, or install the system, nor may they op-
erate or supervise the operation of the system.
Similarly, auditors may prepare draft financial
statements based on management's chart of
accounts and trial balance, but they may not
maintain the basic financial records or post
transactions. In the same way, auditors may
help management to assess the qualifications of
job applicants, but they may not recommend a
single individual for a single position, or conduct
an executive search or a recruiting program for
their audit clients.
Of course, auditors may provide advice on estab-
lishing internal controls and implementing audit
recommendations without jeopardizing their in-
dependence. Likewise, they are free to answer
their audit clients' technical questions, offer
TO AUDITING 7
•
to their independence. In addition, the internal
audit function must be organized in such a way
as to maximize the independence of the internal
auditors. Specifically, internal auditors must be
accountable to and report the results of their
work to the head or deputy head of the entity
under audit. In addition, they must be located
organizationally outside the staff or line manage-
ment function of the unit under audit. Some in-
ternal auditors maintain their independence by
reporting organizationally to the government's
elected governing body or its audit committee.
6 AN ELECTED OFFICIAL'S GUIDE
Third, the principal factor in selecting an auditor
should be the auditor's technical qualifications.
While fees are an important consideration, they
should not be allowed to dominate the auditor
selection process. A poor quality audit is no bar-
gain at any price.
Finally, it is essential that a government enter
into a written agreement with its auditor that
outlines the rights and responsibilities of both
parties. Often such contracts incorporate the
terms of the RFP by reference. Governments
should not rely solely on engagement letters fur-
nished by their auditors.
The GFOA offers a model RFP for the procure-
ment of audit services on computer diskette.
TO AUDITING 43
What other services may auditors
be requested to perform in
conjunction with an audit of the
financial statements?
In practice, auditors often provide a range of ser-
vices to their clients in conjunction with financial
statement audits. For example, they may take
responsibility for special-purpose reports fur-
nished to state agencies and grantors. Similarly,
auditors may agree to help a government to
achieve the GFOA's Certificate of Achievement
for Excellence in Financial Reporting.
These services, while important, are not part of
the basic audit engagement. Accordingly, govern-
ments desiring such services should be sure to
request them in their RFP for auditing services.
As noted earlier, the independence standard of
Government Auditing Standards (Yellow Book)
places limitations on the types of nonaudit ser-
vices that independent auditors may provide to
their clients.
44 AN ELECTED OFFICIAL'S GUIDE
What is auditor independence?
Auditors must maintain their independence if
their work is to be credible.
External auditors selected from private-sector
CPA firms must be free from both personal and
external impairments that could lead reasonable
third parties to question their independence. For
example, a potential auditor would be "person-
ally impaired" from performing the audit of a
government in which a spouse served as the fi-
nance director. Similarly, a potential auditor
would be "externally impaired" from performing
an audit if that auditor could not obtain free ac-
cess to all relevant records of the government.
Government auditors serving as external audi-
tors are subject to the same rules governing per-
sonal and external impairments as are private-
sector CPAs serving in the same capacity. In ad-
dition, government auditors must demonstrate
organizational independence. For example, a
government auditor appointed by the chief exec-
utive officer of the government and reporting to
that officer would not be considered to be organi-
zationally independent when conducting audits
of the executive branch. On the other hand, a
government auditor appointed by the legislative
body and reporting to that body would be consid-
ered organizationally independent when con-
ducting audits of the executive branch of the
same government. Similarly, a government audi-
tor selected in a general election would by virtue
of the election be considered organizationally in-
dependent.
Internal auditors also are required to maintain a
high degree of independence, though not so great
as that required for external auditors. Like their
external counterparts, internal auditors must be
free of both personal and external impairments
TO AUDITING 5
•
What standards are used to guide
the auditor?
What is the optimal duration for
an audit contract?
Financial statement audits are conducted in ac-
cordance with generally accepted auditing stan-
dards (GARS). These standards historically have
been established by the Auditing Standards
Board of the American Institute of Certified Pub-
lic Accountants (AICPA). In many cases, GARS
are supplemented by additional standards set
forth in the U.S. General Accounting Off`ice's
(GAO) publication Government Auditing Stan-
dards (also known as the "Yellow Book"). The
combination of GAAS and the Yellow Book stan-
dards is often referred to simply as "generally ac-
ceptedgovernment auditing standards" or
"GALAS."
For attestation engagements, the appropriate
guidelines are set by the AICPA's Attestation
Standards, which are supplemented by certain
additional standards for attestation engage-
ments set forth in the Yellow Book. When an at-
testation engagement is conducted in conformity
with both the AICPA's Attestation Standards
and the additional relevant Yellow Book stan-
dards it is said to have been performed in accor-
dance with GALAS.
In the case of performance audits, all of the rele-
vant standards are found in the Yellow Book and
are referred to as GALAS.
Failure of an external auditor to follow GAAS or
GALAS is a serious matter. Substandard audits
can result in disciplinary action against external
auditors, including revocation of the auditor's li-
cense to practice as a certified public accountant.
Such failure can also expose the auditor to signif-
icant legal liability.
4 AN ELECTED OFFICIAL'S GUIDE
Auditors are required to gain and document an
understanding of a government's framework of
internal controls as part of the audit planning
process. Understandably, this process is espe-
cially costly in the first year of an audit, because
the auditors are becoming acquainted with and
documenting the internal control structure for
the first time.
A multi-year audit contract has the advantage of
allowing auditors to recover these and similar
start-up costs over a longer period of time, and
so can lead to lower overall audit costs. Also,
multi-year audit contracts can help to create
valuable continuity in the audit process. Accord-
ingly, the GAO is on record recommending the
"entities should consider using multi-year agree-
ments, preferably of a five-year duration, due to
the potential cost savings and continuity benefits
over the long-term."s
Of course, governments must retain their right
to terminate such multi-year contracts should
the auditor's performance prove unsatisfactory.
CPA Audit Quality: A Framework for Procuring Audit
Services (August 1987), p. 28.
TO AUDITING 45
Should auditors be "rotated"?
Some argue that an effective way to enhance the
financial statement auditor's independence is to
require that the current audit firm be automati-
cally replaced at the end of its contract term by a
different audit firm. This practice is commonly
referred to as auditor rotation.
Mandatory auditor rotation can be effective only
if a government has access to a sufficient num-
ber of interested and qualified audit firms to
ensure adequate competition. Unfortunately,
governments sometimes have few audit firms
available with the specialized expertise and ex-
perience needed to perform effective public-
sector audits. In such circumstances, a rule re-
quiring mandatory auditor rotation could have
the practical effect of forcing a government to se-
lect aless qualified audit firm. Also, a policy re-
quiring the mandatory rotation of auditors may
significantly decrease the number of qualified
audit firms wishing to participate in the audit
procurement process.
For these reasons, governments are advised not
to institute a mandatory auditor rotation policy.
Instead, at the end of each audit-contract term
governments are encouraged to engage in a
full-scale, aggressive procurement process that
encourages competition from all qualified firms,
including the current auditors.
Who performs audits?
Auditors are often divided into two separate cat-
egories: external auditors and internal auditors.
External auditors must be independent, both in
fact and appearance, of the entities they audit.
In the public sector, external auditors typically
are drawn from one of two sources. Some are
members of private firms of certified public ac-
countants (CPAs). Others come from the ranks of
organizationally independent government audi-
tors (e.g., the office of the state auditor).
Internal auditors, on the other hand, are employ-
ees of the entities they audit and report to man-
agement. Ideally, internal auditors enjoy a high
degree of autonomy in their work and profes-
sional standards require that they strive for ob-
jectivity. All the same, they cannot be said to
exhibit the same degree of independence as do
external auditors. For this reason, the latter are
commonly referred to simply as independent au-
ditors.
External auditors are most commonly encoun-
tered in connection with the annual audit of a
government's financial statements. This role is
discussed in more detail in the section of this
publication devoted to Financial Statement Au-
dits.
4s AN ELECTED OFFICIAL'S GUIDE TO AUDITING 3
•
What are the different types of
audits?
In the public sector, audits are most often classi-
fied in one of three categories.
• Financial statement audits are designed to
provide users of financial reports with assur-
ance concerning their reliability.
• Attestation engagements are designed to pro-
vide assurance on matters other than financial
reports.
• Performance audits are designed to determine
whether government programs and activities
are meeting stated goals and objectives, and to
determine if governments are performing du-
ties in the most economic and efficient manner
possible.
As can be seen from these definitions, an attesta-
tion engagement and a performance audit are not
mutually exclusive, thereby producing a certain
degree of overlap between the two categories.
Generally, the term attestation engagement is
used when the work is performed by an auditor
who also performs financial statement audits.
Performance audits are sometimes referred to as
operational audits, although this term is more
common in the private sector than in the public
sector.
`~ AN ELECTED OFFICIAL'S GUIDE
What is an "audit committee"?
An audit committee is a group of individuals ap-
pointed by the legislative body and given respon-
sibility for overseeing audit procurement and
monitoring from the selection of the independent
auditor to the resolution of audit findings. The
audit committee also may play an important role
in providing direction and guidance to manage-
ment on issues involving all aspects of a govern-
ment's internal control framework, including the
internal audit function. Perhaps the single most
important role played by the audit committee is
that of a communications link -especially be-
tween the independent auditor and the legisla-
tive body. As such, the audit committee helps to
enhance the auditor's independence. In recogni-
tion of this fact, GARS specifically require that
auditors ensure that the audit committee (or its
equivalent) is informed of a number of important
matters that arise (or may arise) in connection
with an audit of the financial statements.
For some time, audit committees have played an
important role in the private sector. For exam-
ple, it is a requirement for listing on the New
York Stock Exchange that a company have an
audit committee composed ofnon-management
directors. In recent years, audit committees have
also become increasingly common in the public
sector. GFOA recommends that every govern-
ment, regardless of size, formally establish an
audit committee or its equivalent, by charter, en-
abling resolution, or other appropriate legal
means.'
The members of the audit committee collectively
should possess the expertise and experience in
Audit Committees (GFOA recommended practice, approved
1996).
TO AUDITING 47
accounting, auditing, and financial reporting
needed to understand and resolve issues raised
by the independent audit of the financial state-
ments. Amajority of the members of the audit
committee should be selected from outside of
management, and should include at least one
representative each from the executive and legis-
lative branches of the government. The audit
committee should be sufficiently large to ensure
that its members possess all of the skills needed
to realize the committee's objectives. At the same
time, it should be small enough to operate effi-
ciently. Therefore, as a general rule, GFOA rec-
ommends that an audit committee be composed
of no less than five and no more than seven
members.
In addition to periodic meetings, it is recom-
mended that the audit committee present annu-
ally to the governing board and management a
written report of how it has discharged its duties
and met its responsibilities. It is further recom-
mended that this report be made public.
48 AN ELECTED OFFICIAL'S GUIDE
~1~II)ITI1~lG ~~SI~'~
What is an audit?
An audit can be defined as the systematic exami-
nation of the assertions or actions of a third
party to evaluate conformance to some norm or
benchmark. In this broad sense, many different
types of audits are commonly encountered in the
public sector. Tax auditors, for example, scruti-
nize the returns of taxpayers for compliance with
applicable laws and regulations. Fraud auditors
investigate indications of possible irregularities.
Similarly, government employees often perform
preaudits of vendor payments to ensure that
there is proper documentation and approval be-
fore payment is made.
While all of these and many other activities can
properly be described as audits, this booklet will
direct its attention more narrowly on those au-
dits conducted in accordance with certain nation-
ally recognized standards.
1
The next section is devoted to the role govern-
ment officials need to play in managing the fi-
nancial statement audit. This role extends all the
way from the procurement of audit services to
the monitoring of auditor performance. This sec-
tion also deals with the issue of the length of au-
dit contracts and auditor rotation, as well as the
role and function of the audit committee.
Performance auditing, internal auditing, and f -
nancial integrity legislation are the subject of the
remaining three sections of this booklet.
Auditing terms and acronyms are explained the
first time that they appear in the text. Also, a
glossary of all of the auditing terms and acro-
nyms used in the text can be found at the back of
the booklet.
xii
PERFORMANCE
AUDITING
What is "performance auditing"?
In a performance audit, the auditor seeks an-
swers to one or both of the following questions.
• Is management performing its duties economi-
cally and efficiently?
• Are programs achieving their intended pur-
pose?
The term operational auditing is also often ap-
plied to performance auditing, although the term
operational auditing is more common in the pri-
vate sector than in the public sector.
TO AUDITING
49
IliT7'I~®D ~IC7'I®1V
How does performance auditing
differ from a financial statement
audit?
Performance auditing shares many of its goals
and techniques with a financial statement audit.
Nonetheless, there are some very important dif-
ferences between the two types of auditing.
The scope of the typical financial statement au-
dit encompasses all of the transactions and
events affecting a government's financial state-
ments. Performance audits, on the other hand,
are typically much more narrowly focused, often
on a single program, department, or activity.
Financial statement audits also enjoy the benefit
of widely accepted criteria (i.e., GAAP) that de-
fine fair presentation. There are no such similarly
widely accepted standards of what constitutes eff~-
cient or effective performance. Accordingly, an
important part of the performance auditor's task
is to develop persuasive criteria of efficiency and
effectiveness to apply to each audit engagement.
Finally, the financial statement auditor's role is
limited to commenting on the financial report,
which is a management document. The entire re-
port connected with a performance audit, on the
other hand, is a auditor document.
5O AN ELECTED OFFICIAL'S GUIDE
Auditing plays an important role in public-sector
finance. Indeed, it is essential to the credibility
of state and local government financial report-
ing. Nonetheless, many key individuals, includ-
ing both elected officials and management, often
lack even a basic understanding of the goals and
techniques of auditing in the public sector. The
purpose of this booklet is to aid those without
specialized expertise to gain a practical under-
standing of what auditors do and how they do it.
This booklet is divided into several separate sec-
tions. The first section deals with auditing~ba-
sics, and briefly reviews the different types of au-
ditors and audits, as well as the standards used
by auditors in performing their work.
The second section is devoted specifically to the
annual financial statement audit. Among other
matters, this section deals with the important
concepts of reasonable assurance and material-
ity, as well as with the role of a government's
framework of internal controls in a financial
statement audit. This section also describes cer-
tain letters required by auditors from manage-
ment and legal counsel.
The following two sections expand upon the fi-
nancial statement audit section by dealing with
two particular types of financial statement audit
- the Yellow Book audit and, more narrowly, the
Single Audit.
The fifth section is devoted to the various types
of auditor reporting associated with different
types of financial statement audit engagements.
The discussion goes beyond auditor's reports,
strictly speaking, to address issues such as find-
ings, management letters, and questioned costs.
xi
•
edition has been thoroughly updated to reflect all
of these important changes.
I gratefully acknowledge the contribution of Ste-
ven A. Solomon, Senior Manager, KPMG LLP;
Barbara K. White, Assistant Director for Special
Projects, Office of the Comptroller of the Trea-
sury, State of Tennessee; and Jon A. Wise, Direc-
tor of Professional Practice, Michigan Office of
the Auditor General, for their invaluable assis-
tance in reviewing the manuscript and offering
suggestions for improvement. It is also my plea-
sure to thank Rebecca Russum and other mem-
bers of the staff of the GFOA who worked with
the manuscript at various stages of production.
Stephen J. Gauthier
August 2002
IN7'EI~NAL 14 ZII~IZ'ING
What is the role of the internal
auditor?
Internal auditors work directly for management,
at some level, and are primarily responsible for
helping management to fulfill its duties as effec-
tively and efficiently as possible. Typically inter-
nal auditors play an important role in helping
management to ensure that internal controls are
well designed, properly implemented, and ade-
quately maintained.
GFOA recommends that every government con-
sider the feasibility of establishing a formal in-
ternal audit function.8 As a rule, a formal
internal audit function is particularly valuable
for those activities involving a high degree of risk
(e.g., complex accounting systems, contracts with
outside parties, a rapidly changing environ-
ment).
The internal audit function should be estab-
lished formally by charter, enabling resolution,
or other appropriate legal means. All reports of
internal auditors, as well as the annual internal
audit work plan, should be made available to the
government's audit committee or its equivalent.
BEstablishing an Internal Audit Function (GFOA
recommended practice, approved 1997).
TO AUDITING 51
How does the role of the internal
auditor differ from that of the
independent auditor of the
financial statements?
The role of the internal auditor differs from that
of the independent auditor of the financial state-
ments in a number of ways. The internal auditor
works for and reports to management. Accord-
ingly, the internal auditor's primary concern is
to help management perform more efficiently
and effectively. The independent auditors of the
financial statements, on the other hand, are not
employees of the entities they audit. While the
independent auditors undoubtedly can help man-
agement to perform better, their primary pur-
pose is to provide assurance to parties outside
the government (e.g., rating agencies).
52 AN ELECTED OFFICIAL'S GUIDE
The annual financial statement audit has always
been something of a mystery for many elected of-
ficials and citizens. Nonetheless, if governments
are to be sure of obtaining the quality audits
they need, government officials must first obtain
a basic understanding of the audit process.
The purpose of this publication is to provide
elected officials, management, and other
nonaudit professionals with practical informa-
tion concerning the audit process for state and
local governments. Throughout, a simple ques-
tion-and-answer format has been followed. This
format is designed both to highlight the critical
points discussed in the text and to furnish busy
elected officials easy access to needed informa-
tion.
The first edition of this publication was released
in 1992. Since that time, there have been several
important developments affecting public-sector
auditing, including the 1996 Amendments to the
Single Audit Act, the release of Office of Manage-
ment and Budget Circular A-133, Audits of
States, Local Governments, and Non-Profit Orga-
nizations, and the publication by the American
Institute of Certified Public Accountants of
Statement of Position 98-3, Audits of States, Lo-
cal Governments, and Not-for-Profit Organiza-
tions Receiving Federal Awards. Likewise, the
General Accounting Office's Government Au-
diting Standards ("Yellow Book") has been re-
vised. Furthermore, public-sector auditing will
now take place in the context of the new govern-
mental financial reporting model established by
the Governmental Accounting Standards Board's
Statement No. 34, Basic Financial State-
ments~nd Management's Discussion and Anal-
ysis for State and Local Governments. This new
ix
•
What is the relationship between
the internal auditor and the
independent auditor of the
financial statements?
The internal auditor may help the work of the in-
dependent auditor of the financial statements in
one of two ways. First, the independent auditor
may be able to rely upon the internal auditor's
work to limit the amount of study and testing
that would otherwise have been necessary to
form an opinion on the fair presentation of the fi-
nancial statements. Second, the internal auditor
may, under the independent auditor's supervi-
sion, help to perform portions of the financial
statement audit. For example, internal auditors
may assist in the annual physical inventory of
supplies, or in preparing and reconciling confir-
mation requests.
Several factors can help to maximize the benefits
to be drawn from collaboration between the in-
ternal auditor and the independent auditor of
the financial statements. First, independent au-
ditors may be in a better position to rely upon
the work of internal auditors if they are in-
formed of the internal auditor's annual work
plan and kept abreast of progress made to date
on that plan. Second, if the independent auditor
plans to use the services of internal auditors in
conducting portions of the financial statement
audit, there should be a clear prior understand-
ing concerning the amount of staff time and the
level of internal audit staff to be devoted to that
effort, as well as the types of tasks that would be
appropriate.
TO AUDITING 53
• •
~"I1~T~CI~ I1~~'~GI~I ~.'
~~~I~I~47'I®1~
What is "financial integrity
legislation"?
In 1982, the federal government passed the Fed-
eral Manager's Financial Integrity Act. The pur-
pose of this Act was to make federal managers
more aware of their responsibility for sound in-
ternal controls. A number of states have followed
the federal lead by passing their own financial
integrity legislation. Model legislation also has
been introduced at the local government level.9
In most cases, financial integrity legislation re-
quires agency managers to report on the status
of the internal controls of their agency. This in-
cludes reporting on areas of deficiency and offer-
ing recommendations to address those deficiencies.
Under the Federal Manager's Financial Integrity
Act, annual reports of agency heads are publicly
available through request to OMB.
sThis model legislation has been prepared by the National
Association of Local Government Auditors.
®~lCs W ®1L -~JLy
Auditing plays a critical role in public finance.
Indeed, auditing is essential to the credibility of
accounting and financial reporting by state and
local governments. Recently, the highly publi-
cized failure of the Enron Corporation and simi-
lar high-profile business failures have served to
underscore the importance of auditing. Yet, de-
spite its importance, auditing frequently is not
well understood by those outside the auditing
profession.
This publication is designed to provide elected of-
ficials and others with clear and practical an-
swers to the most commonly asked questions
about auditing in the public sector. The publica-
tion not only provides a simple explanation of
key auditing concepts and terms in language
that is readily understandable to the layperson,
but it also dispels many misconceptions about
auditing frequently encountered in practice. This
second edition has been thoroughly revised to re-
flect developments affecting public-sector audit-
ing that have occurred since the publication was
first released in 1992.
As governments start a new century, the need to
maintain public confidence in the reliability of
published financial data remains as great as
ever. It is our hope that this basic introduction to
auditing in the public sector will help elected of-
ficials to achieve this goal by playing a more in-
formed and active role in the audit process.
The Government Finance Officers Association
(GFOA) wishes to thank Stephen Gauthier, the
Director of the GFOA's Technical Services Cen-
ter, for writing this publication. We hope that
this booklet, along with others in the Elected Of-
ficial's Series, will provide needed guidance to
elected officials seeking to improve the financial
management of their governments.
Jeffrey L. Esser
Executive Director
Government Finance Officers Association
August 2002
54 AN ELECTED OFFICIAL'S GUIDE
vii
• •
GLOSSARY
ADVERSE OPIl~TION. An opinion in which the
independent auditor states that financial state-
ments are not fairly presented.
AICPA. American Institute of Certified Public
Accountants.
AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS. Professional associ-
ation of certified public accountants that sponsors
the Auditing Standards Board, which historically
has set both generally accepted auditing stan-
dards and attestation standards.
ASB. Auditing Standards Board.
ATTESTATION ENGAGEMENT. Engage-
ments performed by financial statement auditors
that are designed to provide assurance on mat-
ters other than financial reports.
ATTESTATION STANDARDS. Standards es-
tablished by the Auditing Standards Board to
guide financial statement auditors in the conduct
of attestation engagements.
AUDIT. The systematic examination of the as-
sertions or actions of a third party to evaluate
conformance to some norm or benchmark.
AUDIT CONIlVIITTEE. A group of individuals
appointed by the legislative body and given re-
sponsibility for overseeing all aspects of audit
procurement and monitoring.
AUDITING STANDARDS BOARD. A group
sponsored by the American Institute of Certified
Public Accountants that historically has estab-
TO AUDITING 55
lished generally accepted auditing standards and
attestation standards.
AUDITOR'S REPORTS. In the context of fi-
nancial auditing, the documents issued by the in-
dependent auditor to 1) render an opinion on the
fair presentation of the financial statements
(GARS and GAGAS), 2) report on compliance
and internal controls over financial reporting
(GAGAS), and 3) report on compliance and inter-
nal controls over compliance over federal awards
(Single Audit).
CLEAN OPINION. An audit opinion in which
the independent auditor states, without reserva-
tion, that financial statements are fairly pre-
sented in all material respects (synonym:
unqualified opinion).
CO1dIPREHENSIVE FRAMEWORK OF
INTERNAL CONTROLS. A system of internal
controls designed to 1) produce a favorable con-
trol environment, 2) ensure the ongoing assess-
ment ofrisk, 3) establish and maintain control-
related policies and procedures, 4) facilitate com-
munication, and 5) provide for monitoring the
effectiveness of control-related policies and pro-
cedures as well as the resolution of potential
problems identified by control-related proce-
dures.
DISALLOWED COSTS. Grant-related charges
that the grantor has determined to be ineligible
for payment because the charges do not meet all
of the grantor's requirements.
DISCLAIMER OF OPINION. An audit opinion
stating that the independent auditor is unable to
render an opinion on the fair presentation of all
or a portion of the financial statements.
EXTERNAL AUDITORS. Auditors who are in-
dependent, both in fact and appearance, of the
entities they audit (synonym: independent audi-
tors).
FINANCIAL STATEMENT AUDITS. Audits
designed to provide users of financial statements
with assurance concerning their reliability.
51 INTERNAL AUDITING
What is the role of the internal auditor?
How does the role of the internal auditor
differ from that of the independent
auditor of the financial statements?
What is the relationship between the
internal auditor and the independent
auditor of the financial statements?
54 FINANCIAL INTEGRITY LEGISLATION
What is financial integrity legislation?
55 GLOSSARY
S6 AN ELECTED OFFICIAL'S GUIDE
24 SINGLE AUDITS
What is a Single Audit?
When are Single Audits required?
What special standards govern Single
Audits?
How do Single Audits differ from regular
financial statement audits?
29 AUDITOR'S REPORTS
What are the different types of auditor's
reports?
What is the independent auditor's report
on the financial statements?
What is an unqualified opinion or clean
opinion?
What is a qualified opinion?
What is a disclaimer of opinion?
What is an adverse opinion?
What is the independent auditor's report
on compliance and internal controls over
financial reporting?
What is the independent auditor's report
on compliance and internal controls over
compliance applicable to each major
federal award program?
What is the independent auditor's report
on the Schedule of Expenditures of
Federal Awards?
What are findings?
What are questioned costs?
What is a management letter?
41 MANAGING THE FINANCIAL
STATEMENT AUDIT
Who is responsible for selecting the
independent auditor?
How should the independent auditor be
selected?
What other services may auditors be
requested to perform in conjunction with
an audit of the financial statements?
What is the optimal duration for an audit
contract?
Should auditors be "rotated"?
What is an audit committee?
49 PERFORMANCE AUDITING
What is performance auditing?
How does performance auditing differ
from a financial statement audit?
au
FINANCIAL INTEGRITY LEGISLATION.
Legislation that requires managers to conduct
reviews of their agency's internal controls.
FINDING. An internal control weakness or in-
stance of noncompliance reported in conjunction
with an audit performed in conformity with gen-
erally accepted government auditing standards
(i.e., "Yellow Book"). Findings normally comprise
four elements - criterion/criteria, condition, ef-
fect, and cause.
GAAP. Generally accepted accounting princi-
ples.
GAAS. Generally accepted auditing standards.
GAGAS. Generally accepted government audit-
ing standards.
GAO. U.S. General Accounting Office.
GASB. Governmental Accounting Standards
Board.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. Criteria normally used by audi-
tors to determine if financial statements are
fairly presented. Generally accepted accounting
principles for state and local governments are es-
tablished by the Governmental Accounting Stan-
dards Board
GENERALLY ACCEPTED AUDITING
STANDARDS. Standards for the conduct of a
financial audit that historically have been estab-
lished by the Auditing Standards Board of the
American Institute of Certified Public Accoun-
tants.
GENERALLY ACCEPTED GOVERNMENT
AUDITING STANDARDS. Standards for the
conduct of audits established by the U.S. Gen-
eral Accounting Office's publication Government
Auditing Standards, also known as the "Yellow
Book." Generally accepted government auditing
standards for financial audits incorporate the
field work and reporting standards of generally
accepted auditing standards.
TO AUDITING J~7
GOVERNMENT AUDITING STANDARDS.
A publication of the U.S. General Accounting Of-
fice, often known simply as the "Yellow Book,"
that sets generally accepted government audit-
ing standards.
INDEPENDENT AUDITOR. An external audi-
tor (typically in the contest of a financial state-
ment audit).
INTERNAL AUDITORS. Auditors who work
directly for management, at some level, and are
primarily responsible for helping management to
fulfill its duties as effectively and efficiently as
possible.
INTERNAL CONTROL FRAMEWORK. In
the context of a financial statement audit, the
policies and procedures that management uses to
protect assets and ensure the integrity and com-
prehensiveness of the data collected by the ac-
counting system.
LAWYER'S LETTER. A letter obtained by the
auditor from a government's legal counsel to cor-
roborate management's treatment of pending lit-
igation in the financial statements and in the
notes to the financial statements.
MANAGEMENT LETTER. A letter from the
auditor to management describing reportable
conditions, including material weaknesses, dis-
closed during the financial statement audit. It
also may contain recommendations to manage-
ment on how to improve operations.
MANAGEMENT REPRESENTATION
LETTER. A letter obtained by the auditor from
management acknowledging management's re-
sponsibility for the financial statements and as-
serting that the information they contain is
complete.
MATERIALITY. The quantitative or qualitative
characteristic of a potential error in the financial
statements that could cause it to have the effect
of changing a reader's assessment of the govern-
ment's finances.
SS AN ELECTED OFFICIAL'S GUIDE
C'®1~TTEN~'~'
vii Foreword
ix Preface
xi Introduction
AUDITING BASICS
What is an audit?
What are the different types of audits?
Who performs audits?
What standards are used to guide the
auditor?
What is auditor independence?
Are there limitations on the types of
services that independent auditors can
perform for their audit clients without
impairing their independence?
FINANCIAL STATEMENT AUDITS
What is a financial statement audit?
How does the independent auditor's
responsibility for the financial
statements differ from that of
management?
How do auditors obtain the information
they need?
What degree of assurance do auditors
seek to provide?
What is materiality?
What is the basis for judging quantitative
materiality?
What are internal controls?
What is the relationship of a
government's framework of internal
controls to the financial statement
audit?
What is a reportable condition?
What is a material weakness?
What is a management representation
letter?
What is a lawyer's letter?
22 YELLOW BOOK AUDITS
What is a Yellow Book audit?
How do Yellow Book audits differ from
regular financial statement audits?
iii
MATERIAL WEAI~TESS. A reportable condi-
tion that may result in an error that could have
the effect of changing a reader's assessment of
the government's finances.
Copyright 2002 by the
Government Finance Officers Association
of the United States and Canada
203 North LaSalle Street
Suite 2700
Chicago, Illinois 60601-1210
ISBN 0-89125-261-4
Library of Congress Control Number 2002107251
All rights reserved.
Printed in the United States of America.
NONAUDIT SERVICES. Consulting services
performed by the independent auditor.
OMB. U.S. Office of Management and Budget.
OPERATIONAL AUDITS. Aprivate-sector
term used to describe performance audits.
PERFORMANCE AUDITS. Audits designed to
determine whether government programs and
activities are meeting stated goals and objec-
tives, and to determine if governments are per-
forming their duties in the most economic and
efficient manner possible.
QUALIFIED OPINION. An opinion in which
the independent auditor expresses reservations
about the fair presentation of financial state-
ments.
QUALITATIVE MATERIALITx. The charac-
teristic of a potential error in the financial state-
ments that could cause it to have the effect of
changing a reader's assessment of the govern-
ment's finances regardless of the size of the er-
ror.
QUANTITATIVE MATERIALITY. The charac-
teristic of a potential error in the financial state-
ments that could cause it to have the effect of
changing a reader's assessment of the govern-
ment's finances because of its size.
QUESTIONED COSTS. Grant-related charges
that an auditor has determined could be disal-
lowed by the grantor because the charges do not
meet all of the grantor's requirements.
REASONABLE ASSURANCE. The notion that
a financial audit is designed to determine only
whether financial statements are free of material
misstatement.
TO AUDITING 59
REPORTABLE CONDITION. A significant de-
ficiency in internal controls discovered by the au-
ditor in the course of a financial statement audit.
RFP. Request for proposals (for auditing ser-
vices).
SEGREGATION OF DUTIES. An internal con-
trol procedure whereby no one individual is
placed in the position of being able to both com-
mit and conceal an irregularity.
SINGLE AUDIT. Under the Single Audit Act of
1984 (as amended in 1996), an audit that is spe-
cifically designed to meet the needs of all federal
grantor agencies. Single Audits must be per-
formed in accordance with both Government Au-
diting Standards (i.e., generally accepted
government auditing standards or simply the
"Yellow Book") and the provisions of the U.S. Of-
fice of Management and Budget's Circular A-133,
Audits of States, Local Governments, and
Non-Profit Organizations
SUBSTANTIVE TESTS. Direct tests by the in-
dependent auditor of amounts reported in the fi-
nancial statements.
TESTS OF CONTROLS. Tests by the inde-
pendent auditor of the internal controls used to
ensure the reliability of amounts reported in the
financial statements. Tests of controls provide
indirect support for the amounts reported in the
financial statements and may thereby reduce the
amount of substantive testing that might other-
wise have been necessary.
UNQUALIFIED OPYNION. An audit opinion
in which the independent auditor states, without
reservation, that financial statements are fairly
presented in all material respects (synonym:
clean opinion).
YELLOW BOOK. An informal name commonly
applied to the U.S. General Accounting Office's
publication Government Auditing Standards,
which establishes generally accepted govern-
ment auditing standards.
i
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AUDI'T~N~
~y Stephen J. Gauthier
Government Finance
Officers Association
6O AN ELECTED OFFICIAL'S GUIDE