CC 2015-01-13_08c Accept Comprehensive Annual Financial ReportMEMORANDUM
TO: CITY COUNCIL
FROM: DEBORAH MALICOAT, DIRECTOR OF ADMINISTRATIVE SERVICES¥
BY: RYAN CORNELL, ACCOUNTING SUPERVISOR ~
SUBJECT: CONSIDERATION OF ACCEPTANCE OF THE COMPREHENSIVE
ANNUAL FINANCIAL REPORT
DATE: JANUARY 13, 2015
RECOMMENDATION:
It is recommended that the City Council receive and file the Comprehensive Annual
Financial Report (CAFR) for the fiscal year ended June 30, 2014.
IMPACT ON FINANCIAL AND PERSONNEL RESOURCES:
There 'is no financial impact from this action.
BACKGROUND:
On April 22, 2014, the City Council awarded an agreement for consultant services to Moss,
Levy & Hartzheim, LLP to audit the City's financial records for the fiscal year ended June
30, 2014. Audit services are retained for two reasons: first, to have an independent review
of internal control; and secondly, to ensure that the resulting financial reports fairly
represent the financial position of the City.
ANALYSIS QF ISSUES:
Generally accepted accounting principles (GAAP) provide the criteria for judging whether a
financial report is fairly presented. In defining the minimum standard of acceptable basic
financial reporting for state and local governments, GAAP mandate a complete set of basic
financial statements, including accompanying note disclosures, as well as the presentation
of certain required supplementary information in connection with the basic financial
statements. GAAP encourages government agencies to present this information within the
broader framework of a CAFR.
The CAFR is a more detailed financial report beyond just the basic financial statements. It
is made up of three basic sections:
• The introductory section: provides general information of the City which includes
the letter of transmittal, list of principal officials, and organizational chart.
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JANUARY 13, 2015
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• The financial section: provides the overall financial information of the City which
includes the r~port of the independent auditor, management's discussion and
analysis (a narrative of the City finances), the basic financial statements,
required supplementary information and other supplementary schedules and
statements.
• The statistical section: provides a broad range of operational, economic, and
historical data that provides , a context for assessing the City's economic
condition. This section provides information about the City's general financial
trends, revenue capacity, debt capacity, economic and demographic trends, and
operating information.
The auditors conducted testing of internal controls in June of 2014. The procedures for
receiving and disbursing cash, the accounting methodology used to record transactions,
the separation of duties to avert collusion, and asset securities were reviewed. As a result
of this testing, there was one internal control issues/events noted.
• In some instances, when the City receives payments for the Children in Motion
program, the Recreation Services Department batches multiple payments
received as one receipt. This batching process creates the inability to trace one
individual payment to the bank deposit. Administrative Services staff will work
with the Recreation Departments to create an additional report which will itemize
all payments received. For further detail, see Attachment No. 2, Independent
Auditors' Report on Internal Control over Financial Reporting and on Compliance
and Other Matters Based on an Audit of Financial Statements Performed in
Accordance with "Government Auditing Standards."
In October of 2014, an audit was conducted on net position of the City at June 30, 2014.
Documentation in support of the assets, liabilities, and fund balance of all the funds in the
City were examined and verified. This process assures an impartial review and
substantiation of the City's net position. The result of this review is the City's CAFR.
The City's CAFR is in compliance with newly effective Government Accounting Standards
Board (GASB) pronouncements. The implementation of GASB Statement No. 65 is the
only new accounting pronouncement that had an impact on the City's financial statements.
GASB Statement No. 65 reclassifies some amounts previously reported as unearned
revenue as deferred inflows of resources. More information is available in Note 1,
subsection N of the Notes to the Basic Financial Statements on pages B-44 to B-45.
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As presented in the CAFR, the City's combined net position at June 30, 2014 increased by
3% to $91.8 million as follows:
Variance % Change
FYE 2014 FYE 2013 CY to PY CY to PY
Assets:
Current and other assets 27, 174,570 24,944,287 2,230,283 9%
Capital assets, net 75,413,760 75,216,839 196,921 <1%
Total assets 102,588,330 100, 161, 126 2,427,204 2%
Liabilities:
Long-term liabilities 9, 151,050 9,359,820 (208,770) -2%
Other liabilities 1,600,650 1,936,539 {335,889} -17%
Total liabilities 10,751,700 11,296,359 {544,659} -5%
Net Position:
Net investment in capital assets 72,353,944 72,341,886 12,058 <1%
Restricted 8,777,469 7,374,485 1,402,984 19%
Unrestricted 10,705,217 9,148,396 1,556,821 17%
Total net position 91,836,630 88,864,767 2,971,863 3%
For financial reporting purposes, the Local Sales Tax Fund is combined with the General
Fund. The combined funds, as shown in the table below, reports revenues and other
financing sources of $16.8 million, expenditures of $13.7 million, and transfers out of $2.0
million. This resulted in an increase to the fund balance of $1.1 million.
The General Fund's total fund balance is $5.0 million or 38% of expenditures (including
transfers out). However, some fund balances are considered nonspendable because it is
held as inventory ($8,518) or reflects prepaid items ($48,420). Additionally, $1.1 million is
designated for completing capital projects or meeting other commitments in the future. Of
the remaining $3.9 million fund balance, the City has committed $2.7 million to reserve for
economic stabilization.
Beginning Fund Balance, 7/1/13
Revenues and other financing
sources
Expenditures
Transfers Out
Net Change in Fund Balance
General Fund
3,761,044
14,755,547
(13,426, 771)
1,328,776
Local Sales
Tax Fund
1,897,349
2,079,242
(246,678)
{2,044,406}
(211,842)
Total
5,658,393
16,834,789
( 13, 673,449)
{2,044,406}
1, 116,934
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Local Sales
General Fund Tax Fund Total
Fund Balance:
Nonspendable 56,938 56,938
Committed for capital projects 1,486,938 1,486,938
Committed for economic
stabilization (reserves) 2,719,699 2,719,699
Assigned 1, 158,301 198,569 1,356,870
Unassigned 1, 154,882 1, 154,882
Ending Fund Balance, 6/30/14 5,089,820 1,685,507 6,775,327
Auditors may issue three different types of opinions at the conclusion of an audit; an
unqualified, qualified, or adverse opinion. An unqualified opinion assures the reader that
the information presented in the CAFR fairly represents the financial position of the City. A
qualified opinion states that the information is fairly presented except for a particular issue.
An adverse opinion indicates that the agency has major accounting and/or internal control
issues and no reliance may be placed on the financial statements. The Administrative
Services Department staff is proud to report that for the fiscal year ended June 30, 2014,
the City of Arroyo Grande received an unqualified opinion.
ALTERNATIVES:
The following alternatives are provided for City Council consideration:
-Approve staff recommendations and receive and file the Comprehensive Annual
Financial Report;
Do not approve staff recommendations;
Modify staff recommendations and approve;
Provide direction to staff.
ADVANTAGES:
By receiving and filing the Comprehensive Annual Financial Report, the City will be
accepting the auditors' unqualified opinion. As mentioned above, an unqualified opinion
assures the reader that the information presented in the CAFR fairly represents the
financial position of the City.
DISADVANTAGES:
There are no disadvantages in relation to the recommended action.
ENVIRONMENTAL REVIEW:
No environmental review is required for this item.
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ACCEPTANCE OF THE COMPREHENSIVE ANNUAL FINANCIAL REPORT
JANUARY 13, 2015
PAGES
PUBLIC NOTIFICATION AND COMMENTS:
The Agenda was posted in front of City Hall on Thursday, January 8, 2015. The Agenda
and report were posted on the City's website on Friday, January 9, 2015. No public
comments were received.
Attachments:
1) Comprehensive Annual Financial Report (on file in the Administrative Services
and Legislative and Information Services Departments for public review, as well
as on the City's website at www.arroyogrande.org)
2) Independent Auditors' Report on Internal Control over Financial Reporting and
on Compliance and Other Matters Based on an Audit of Financial Statements
Performed in Accordance with Government Auditing Standards.
Item 8.c. - Page 5
ATTACHMENT 1
Comprehensive Annual Financial Report (on file in the Administrative Services
and Legislative and Information Services Departments for public review, as well
as on the City's website at www.arroyogrande.org)
Item 8.c. - Page 6
.1\hit MOSS, LEVY HARTZHEIM UP
PARTNERS 2400 PROFESSIONAL PARKWAY, STE 205
RONALD A LEVY, CPA SANTA MARIA, CA 93455
CRAIG A HARTZHEIM, CPA TEL: 805.925.2579
HADLEY Y HUI, CPA FAX: 805.925.2147
vvww.mIhcpas.com
INDEPENDENT AUDITORS' REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER
MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS
PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS
City Council of the City of Arroyo Grande
Arroyo Grande, California
We have audited, in accordance with the auditing standards generally accepted in the United States of America and the
standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of
the United States, the financial statements of the governmental activities, the business-type activities, each major fund, and
the aggregate remaining fund information of City of Arroyo Grande (the City), as of and for the fiscal year ended June 30,
2014, and the related notes to the financial statements, which collectively comprise the City's basic financial statements,
and have issued our report thereon dated November 13, 2014.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the City's internal control over financial
reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of
expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness
of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control.
A deficiency in internal control exists when the design or operation of a control does not allow management or employees,
in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely
basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a
reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected
and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control
that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not
designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given
these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material
weaknesses. However, material weaknesses may exist that have not been identified. We did identify a deficiency in
internal control, described in the accompanying schedule of findings and questions costs that we consider to be a
significant deficiency, see Finding 2014-1.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the City's financial statements are free from material
misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant
agreements, noncompliance with which could have a direct and material effect on the determination of financial statement
amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and
accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other
matters that are required to be reported under Government Auditing Standards.
1
OFFICES: BEVERLY HILLS • CULVER CITY • SANTA MARIA
MEMBER AMERICAN INSTITUTE OF CPAs • CALIFORNIA SOCIETY OF MUNICIPAL FINANCE OFFICERS • CALIFORNIA ASSOCIATION OF SCHOOL BUSINESS OFFICIALS
CERTIFIED PUBLIC ACCOUNTANTS
ATTACHMENT 2
Item 8.c. - Page 7
City of Arroyo Grande's Response to Findings
City of Arroyo Grande's response to the findings identified in our audit described in the accompanying schedule of
findings and questioned costs. City of Arroyo Grande's response was not subjected to the auditing procedures applied in
the audit of the financial statements and, accordingly, we express no opinion on it.
Purpose of this Report
The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of
that testing, and not to provide an opinion on the effectiveness of the City's internal control or on compliance. This report
is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City's
internal control and compliance. Accordingly, this communication is not suitable for any other purpose.
w/o-id, ZAy. fii-/a-agiw:it, La
Santa Maria, California
November 13, 2014
2
Item 8.c. - Page 8
City of Arroyo Grande
Findings and Recommendations
June 30, 2014
FINDING 2014-1
CASH RECEIPTS
30000
Criteria:
Adequate internal control procedures for cash receipt transactions require the collection and retention of sufficient
documentation to allow for recalculation of any receipt. In addition, to ensure the correct accounting for cash received, the
City should retain the ability to trace a receipt from the time it is billed and/or collected to the time it is deposited into the
City's bank account and vice-versa.
Condition:
Receipts tested in the Recreation Department's Children in Motion program did not have adequate documentation to trace
receipts received to the daily deposit.
Effect:
The lack of supporting documentation for cash receipts prohibited verification that all cash received was deposited into the
local bank account and accounted for appropriately in the general ledger.
Cause:
In some circumstances, when the City receives payments for the Children in Motion program, the Recreation Department
"batches" multiple payments received as one receipt into the cash register system. This batching process creates the
inability to trace one individual payment to the bank deposit.
Recommendation:
Obtain and retain supporting documentation that provides what payments are included in each bank deposit for programs in
order to reconcile cash receipts to cash deposited in the bank to protect against a misappropriation of cash that may go
undetected.
Corrective Action Plan:
The City will update its internal control procedures to include and produce an additional report(s) so that the Children in
Motion program receipt collection can continue to utilize batch processing. This additional report will itemize the
payments received (i.e. payee, amount, etc.).
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