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HomeMy WebLinkAbout06-28-2007 Audit Committee MinutesOR\~DO. D.;2I.. r7 Minutes AUDIT COMMITTEE MEETING City of Orange - WeimerRoom Thursday, June 28, 2007 3:00 p.m.ATTENDEES: AUDIT COMMITTEE Voting Members)Present David E. Sundstrom CPA, Chair John W. Sibley, City Manager Jeanne Arehart CPA, Internal Audit Mgr.Dwight Nakata, CPA David Piper, CPA CITY STAFF Richard Jacobs, Finance Director David Christian, CPA, Assistant Finance Director Pascal Saghbini, Accounting Manager OTHER Carolyn Cavecche, Mayor EXTERNAL AUDITORS Ken AI-Imam, CPA, Partner - Mayer Hoffman McCann P.C.1. Call to Order: Chairman David Sundstrom called the meeting to order at 3 :06 p.m.2. Approval of Minutes of December 19,2006: Minutes approved as read.3. Status of2006-07 Financial Audit: Ken AI- Imam The planning phase of the audit is underway. There are two major auditing standards that affect this year's audit, one being SAS 103 which affects audit documentation and requires the work papers to stand on their own without oral commentary from the preparer. Previously, the audit opinion was dated the last day of fieldwork but now that date is being moved to the date when sufficient audit evidence has been obtained to support the audit opinion. The financial statements must have been approved by both the audit firm and the client. This increases the amount of audit work because there are certain things that we have to do after the balance sheet date through the date of our audit opinion. This extends the period of time over which we have to review minutes of the City Council. If the attorney letter is not dated within a week or two of the audit opinion date, we have to contact the attorney's office and get an update as to whether matters have changed. We review subsequent period accounting system reports to see if there are significant subsequent events that we should have been informed about. We would need enough evidence to support the audit opinion and that means that major items need to have been resolved and documented. Part of that includes acceptance of the draft by both the audit team quality control procedures and the client.SAS 112 deals with communication to the City Council in an audit process and from the standpoint of internal controls. It expands the information we have to report to the City Council with respect to internal control matters. The old rule required reporting conditions that adversely affected financial statement assertions. The new rules criteria is that the matter must deal with issues that are more than inconsequential and have a probability of occurrence of at least more than remote. We plan on providing a very balanced document to the City Council that would identify in very clear terms what the condition was and what the circumstances are in context to the situation. After each finding, management would provide a commentary about their evaluation of that condition, whether or not you have plans to correct the item, or if the cost would exceed the benefits of correcting the matter. That would give City Council the information in their oversight capacity to make an appropriate decision about which matters should be corrected and which matters shouldn't be. These matters will be discussed initially with the Audit Committee in our meetings and the Audit Committee, of course, will play into discretion on these matters as well. SAS 114 doesn't take effect until next year. The Auditing Standards Board wants more communication between the audit firm and the City Council and Audit Committee. If after evaluating the Audit Committee's communication with City Council and concluding that the Audit Committee is effective in reporting to City Council matters that are appropriate for City Council's purview, then we don't have to meet with, and report to both bodies. Under SAS 61, we've been required to report to audit committees. The items to be communicated are responsibilities of the auditor. In that context, we would explain that management is responsible for the accounting records and the financial statements, and the auditor is responsible for doing enough testing to provide reasonable assurance that the financial statements are free of material misstatement. SAS 114 is also very clear that the auditor has a lot of discretion about whether or not these matters are communicated in writing or orally. In many cases, where there is an audit committee, we're going to want to meet with the audit committee in person and may, in certain cases, supplement that with a written communication that can be passed on to City Council. Something completely new is the planned scope and timing of the audit. SAS 114 encourages that this information be communicated early in the planning phase of the audit process. Significant findings from the audit need to be in writing. SAS 112 requires that significant deficiencies have to be communicated in writing. There would not be a requirement to submit these matters in writing or verbally to Council. But that's up to the discretion of this committee. As Council members may attend the meetings, information can be given as a consent item. My interpretation of SAS 114 is that would not be a requirement as the two bodies overlap. If there was something unusual or significant that was being addressed in the audit approach, it should be communicated to City Council. There are estimates that are inherent in the accounting process, and discretion with respect to the accounting practices and methods that are used. In certain cases, local governments have some options. Those in governance, the Audit Committee, and where appropriate, City Council, need to be assured and know about the decisions that were made in selecting accounting practices for the City of Orange where you, in fact, have a choice. The only thing that is new is the plan, scope and timing of the audit, and, of course the consideration of whether or not the City Council is being adequately informed about matters that would come out of this communication process. I would expect that in most cases the matters that we would talk about would not warrant the attention and action of City Council, however, that's a determination we'd all make together. In September we plan on performing the year-end procedures. Items to be communicated by SAS 114 are the significant financial statement risks that we have identified in our risk assessment and how we plan on responding to them. One significant risk is that in a multi-fund environment, we're very concerned that expenditures are charged to the appropriate fund. We will do a random sample of cash disbursements. One of the important attributes of that random sample is for us to evaluate, based on supporting documentation, whether each transaction in that sample was charged to the appropriate fund. We plan on addressing interfund transfer risks by identifying the fund that receives the transfer and identifying a sufficient level of eligible expenditures to support the amount of the transfer. A third area of audit risk is investment compliance. We plan on identifying redevelopment agency compliance,specifically, the State mandated areas of compliance testing, grant compliance, ( which will be addressed in conjunction with the single audit procedures) and debt covenant compliance. We'll be making sure that your debt service reserves are at the appropriate level, that debt proceeds have been expended for the appropriate projects and that you' ve complied with significant debt covenance such as rate covenants. We plan on thoroughly documenting internal controls to ensure that the appropriate factors are called into play on deciding which infrastructure projects to capitalize or expense. Finance management asked us to take a look at your e-care on-line utility payment system. There is some inherent risk associated with that because it's internet based. Brenda Piazza from our San Diego office is the IT expert for Mayer Hoffman McCann and she will perform an in-depth IT assessment. We plan on taking a look at internal audit risk assessment and identifying whether or not the risk assessment that you have identified for your scope of work has identified risks that are relevant to our audit process. Our audit process is focused on financial statement assertion and material amounts that mayor may not be misstated in the financial statements. We plan on doing our regular audit approach,confirming cash and investments, analytically testing revenues and expenses, making sure that material receivables have agreement to subsequent collection, confirming long-term debt and looking at the support for cash disbursements after the balance sheet date to see if there are items that should have been included to our audit. Due to increased standards, the written communication will be more lengthy.4. Status of 2006-07 Audit Plan: Jeanne Arehart Every couple of years Diehl Evans reviews the Waste Management agreement to ensure they are in compliance. A couple of minor issues that were discovered included getting the City's written approval to use sub-contractors. They're also charging a late fee for their commercial billings, which somehow didn't get into the agreement. We charge a late fee for the residential so it's reasonable they charge a late fee. The City Attorney prefers not to re-open the agreement for that. However, if something should come up where we open up that agreement, we'll make sure it is included. David Sundstrom asked if the Council has to approve that fee? Jeanne Arehart responded that the City Attorney said in his opinion, no. The Council approved charging a late fee on the residential side, which we bill.The second item is a review of our cell tower agreements. Providers are allowed to put cell towers on some of our buildings and we charge rent. The issue is we have not had one person overseeing the agreements. We have one vendor who hasn't paid us any money and we're in the process of following up on that. One of my recommendations is that policies and procedures be written for cell tower agreements compliance oversight. I have also been reviewing our meeting room policies as we have new meeting rooms at the new Main Library. A review of the hazardous materials disclosure and underground storage tank permits is also underway. I will be beginning a permits shortly. Regarding massage services, we have an ordinance that restricts the percentage of massage services that certain types of business are allowed to do. We restrict it to 25% but monitoring is difficult. The Fire facilities fee rate increase went to Council and was approved. 5. 2007-08 Audit Plan: Jeanne Arehart Underway are the two fire audits, the massage audit and the meeting room rental audit. A few years ago, we had an FLSA audit done and there were a number of recommendations from that. I plan on following up, making sure we're now on board with compliance.I'm also completing the normal cash drawer and petty cash audits. I will look at the educational expenses and medical maintenance reimbursement programs. A big project is reviewing the overall grant administration process in the city. We will begin to put procedures and policies in place to ensure that we're complying with all grants and that we're billing for reimbursement on all grants in a timely manner. I will look at Community Services Department internal procedures for construction management,including determining what the budget is and what the procedures are throughout the whole process. The next item is reviewing our procedures relating to reimbursable projects. It's our "550 Fund" where we charge expenses and revenues related to cooperative projects between the County or another city and there are reimbursements involved. We also have a computer loan program for City employees where the City sets aside a couple of hundred thousand dollars that they will loan out to employees to purchase computer equipment and the employee pays it back over time with no interest.Also, a review of City procedures for tracking our computer inventory will begin. We will also be contracting out TOT audits.6. Draft Report to City Council: David Sundstrom The draft was fine "as is" and would be presented at the Council meeting on July 24.7. Public Comment: There was no public comment.8. Adjournment: The meeting was adjourned at 4:10 p. m.