HomeMy WebLinkAbout03.e. Receive Memorandum of Internal Control and Required Communications from Maze & AssociatesCentral Contra Costa Sanitary District % •
' BOARD OF DIRECTORS •
POSITION PAPER
Board Meeting Date: December 4, 2014
Subject. ACCEPT THE AUDITOR'S MEMORANDUM ON INTERNAL CONTROL
AND REQUIRED COMMUNICATIONS FOR THE .FISCAL YEAR ENDED
JUNE 30, 2014
Submitted By. Initiating Dept. /Div.:
Thea Vassallo, CPA, CMA Administration Department
Finance Manager
REVIEWED AND RECOMMENDED FOR BOARD ACTION:
Roger S. Bailey
General Manager
ISSUE: The audited financial statements for the Fiscal Year (FY) ended June 30, 2014
were reviewed with the Board on November 6, 2014. The memorandum on internal
control and required communication for the FY ended June 30, 2014 was unavailable at
that time. Therefore, they are being submitted to the Board at this meeting.
RECOMMENDATION: Accept the memorandum on internal control and required
communications prepared by Maze & Associates.
FINANCIAL IMPACTS: None.
ALTERNATIVES /CONSIDERATIONS: None.
BACKGROUND: The firm of Maze & Associates completed its examination of the
District's financial statements for the FY ended June 30, 2014 and submitted the
audited financial statements to the Board on November 6, 2014. The independent
auditor's report for the FY ending June 30, 2014 and 2013 expresses an unqualified
(clean) opinion.
In the performance of their examination of the financial statements, the auditors
evaluate the District's internal accounting controls related to the financial statements in
compliance with laws, regulations, and the provisions or grant agreements,
noncompliance with which could have a material effect on the financial statements as
required by Government Auditing Standards. Based on their observations during the
course of the examination, the auditors advise District management of any significant
deficiencies or material misstatements and any recommendations to improve the
system of internal accounting controls. See attached "Memorandum on Internal Control
and Required Communications" for the current year recommendations and
management's responses to the prior year significant deficiencies.
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Memo on Internal Control and Required Communications 12 -04 -14 (Vassallo).doc Page 1 of 2
POSITION PAPER
Board Meeting Date: December 4, 2014
subject: ACCEPT THE AUDITOR'S MEMORANDUM ON INTERNAL CONTROL
AND REQUIRED COMMUNICATIONS FOR THE FISCAL YEAR ENDED
JUNE 30, 2014
COMMITTEE RECOMMENDATION: The memorandum on internal control and
required communication was reviewed by the Finance Committee on November 24,
2014. See Attachment 1.
RECOMMENDED BOARD ACTION: Accept the memorandum on internal control and
required communication for the FY ended June 30, 2014.
Attached Supporting Document:
1. Memorandum on Internal Control and Required Communications for the Year Ended June 30, 2014
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Memo on Internal Control and Required Communications 12 -04 -14 (Vassallo).doc
ATTACHMENT
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CENTRAL CONTRA COSTA SANITARY DISTRICT
MEMORANDUM ON INTERNAL CONTROL
AND
REQUIRED COMMUNICATIONS
For the Year Ended June 30, 2014
Table of Contents
Page
Memorandum on Internal Control .................................................................... ............................... 1
Schedule of Other Matters ........................................................................ ............................... 3
Schedule of Current Status of Prior Year Other Matterrs ......................... ............................... 7
Required Communications ................................................................................. ............................... 9
SignificantAudit Findings ........................................................................... ............................... 9
AccountingPolicies .................................................................................. ............................... 9
Unusual Transactions, Controversial or Emerging Areas ...................... ............................... 9
Estimates................................................................................................... ............................... 9
Disclosures.............................................................................................. ............................... 10
Difficulties Encountered in Performing the Audit ............................... ............................... 10
Corrected and Uncorrected Misstatements ........................................... ............................... 10
Disagreements with Management ......................................................... ............................... 10
Management Representations ................................................................ ............................... 10
Management Consultations with Other Independent Accountants ..... ............................... 10
Other Audit Findings or Issues .............................................................. ............................... 11
Other Information Presented in the Financial Statements .................. ............................... 11
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[)/, M ACZTE
MEMORANDUM ON INTERNAL CONTROL
To the Board of Directors
Central Contra Costa Sanitary District
Martinez, California
We have audited the financial statements of the Central Contra Costa Sanitary District (District) for the year
ended June 30, 2014, and have issued our report thereon dated September 18, 2014. In planning and performing
our audit of the financial statements of the District as of and for the year ended June 30, 2014, in accordance
with auditing standards generally accepted in the United States of America, we considered the District's internal
control over financial reporting (internal control) as a basis for designing our auditing 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 District's internal control. Accordingly, we
do not express an opinion on the effectiveness of the District'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 District'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 and was not
designed to identify all deficiencies in internal control that might be significant deficiencies or material
weaknesses and, therefore, there can be no assurance that all such deficiencies have been identified. In addition,
because of inherent limitations in internal control, including the possibility of management override of controls,
misstatements due to error or fraud may occur and not be detected by such controls. Given these limitations,
during our audit we did not identify any deficiencies in internal control that we consider to be a material
weakness. However, material weaknesses may exist that have not been identified.
Included in the Schedule of Other Matters are recommendations not meeting the above definitions that we
believe to be of potential benefit to the District.
The District's written responses included in this report have not been subjected to the audit procedures applied
in the audit of the financial statements and, accordingly, we express no opinion on them.
This communication is intended solely for the information and use of management, Board of Directors, others
within the organization, and agencies and pass - through entities requiring compliance with Government Auditing
Standards, and is not intended to be and should not be used by anyone other than these specified parties.
I
Pleasant Hill, California
September 18, 2014
Accountancy Corporation
3478 Buskirk Avenue, Suite 215
Pleasant Hill, CA 94523
T 925.930.0902
F 925.930.0135
E maze@mazeassociates.com
w mazeassociates.com
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CENTRAL CONTRA COSTA SANITARY DISTRICT
SCHEDULE OF OTHER MATTERS
FOR THE YEAR ENDED JUNE 30, 2014
2014 -01: UPCOMING GASB
There are a number of new accounting and financial reporting pronouncements that have been issued by the
Governmental Accounting Standards Board, the authoritative standard setting body in the United States. We
have included the one that will have an impact on the District's financial statements, effective in fiscal year
ending June 30, 2015, to keep you informed about these developments on a proactive basis.
The following pronouncement is effective in fiscal year 2014/15:
GASB 68 - Accounting and Financial Reportine for Pensions (an amendment of GASB 271
This Statement will have a material impact on the District's financial statement. The primary objective of this
Statement is to improve accounting and financial reporting by state and local governments for pensions.
This Statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources,
and deferred inflows of resources, and expense /expenditures. For defined benefit pensions, this Statement
identifies the methods and assumptions that should be used to project benefit payments, discount projected
benefit payments to their actuarial present value, and attribute that present value to periods of employee service.
Note disclosure and required supplementary information requirements about pensions also are addressed.
Distinctions are made regarding the particular requirements for employers based on the number of employers
whose employees are provided with pensions through the pension plan and whether pension obligations and
pension plan assets are shared.
The following are the major impacts:
• This Statement requires the liability of employers and nonemployer contributing entities to employees
for defined benefit pensions (net pension liability) to be measured as the portion of the present value of
projected benefit payments to be provided through the pension plan to current active and inactive
employees that is attributed to those employees' past periods of service (total pension liability, less the
amount of the pension plan's fiduciary net position.
• Actuarial valuations of the total pension liability are required to be performed at least every two years,
with more frequent valuations encouraged. If a valuation is not performed as of the measurement date,
the total pension liability is required to be based on update procedures to roll forward amounts from an
earlier actuarial valuation (performed as of a date no more than 30 months and 1 day prior to the
employer's most recent year -end).
• The actuarial present value of projected benefit payments is required to be attributed to periods of
employee service using the entry age actuarial cost method with each period's service cost determined
as a level percentage of pay. The actuarial present value is required to be attributed for each employee
individually, from the period when the employee first accrues pensions through the period when the
employee retires.
CENTRAL CONTRA COSTA SANITARY DISTRICT
SCHEDULE OF OTHER MATTERS
FOR THE YEAR ENDED JUNE 30, 2014
GASB 68 - Accounting and Financial Reporting for Pensions (an amendment of GASB 27) (Continued)
Cost - Sharing Employers
o Government -wide and accrual basis of accounting financial statements: A cost - sharing
employer that does not have a special funding situation is required to recognize a liability for its
proportionate share of the net pension liability (of all employers for benefits provided through
the pension plan�the collective net pension liability. An employer's proportion is required to
be determined on a basis that is consistent with the manner in which contributions to the
pension plan are determined, and consideration should be given to separate rates, if any, related
to separate portions of the collective net pension liability. The use of the employer's projected
long -term contribution effort as compared to the total projected long -term contribution effort of
all employers as the basis for determining an employer's proportion is encouraged.
o A cost - sharing employer is required to recognize pension expense and report deferred outflows
of resources and deferred inflows of resources related to pensions for its proportionate shares of
collective pension expense and collective deferred outflows of resources and deferred inflows of
resources related to pensions.
o In addition, the effects of (1) a change in the employer's proportion of the collective net pension
liability and (2) differences during the measurement period between the employer's
contributions and its proportionate share of the total of contributions from employers included
in the collective net pension liability are required to be determined. These effects are required to
be recognized in the employer's pension expense in a systematic and rational manner over a
closed period equal to the average of the expected remaining service lives of all employees that
are provided with pensions through the pension plan (active employees and inactive
employees). The portions of the effects not recognized in the employer's pension expense are
required to be reported as deferred outflows of resources or deferred inflows of resources
related to pensions. Employer contributions to the pension plan subsequent to the measurement
date of the collective net pension liability also are required to be reported as deferred outflows
of resources related to pensions.
o In governmental fund financial statements, the cost - sharing employer's proportionate share of
the collective net pension liability is required to be recognized to the extent the liability is
normally expected to be liquidated with expendable available financial resources. Pension
expenditures should be recognized equal to the total of (1) amounts paid by the employer to the
pension plan and (2) the change between the beginning and ending balances of amounts
normally expected to be liquidated with expendable available financial resources.
4
CENTRAL CONTRA COSTA SANITARY DISTRICT
SCHEDULE OF OTHER MATTERS
FOR THE YEAR ENDED JUNE 30, 2014
GASB 68 - Accounting and Financial Reporting for Pensions (an amendment of GASB 27) (Continued)
o Notes to financial statements of cost - sharing employers include descriptive information about
the pension plans through which the pensions are provided. Cost - sharing employers should
identify the discount rate and assumptions made in the measurement of their proportionate
shares of net pension liabilities, similar to the disclosures about those items that should be made
by single and agent employers. Cost - sharing employers, like single and agent employers, also
should disclose information about how their contributions to the pension plan are determined.
o This Statement requires cost - sharing employers to present in required supplementary
information 10 -year schedules containing (1) the net pension liability and certain related ratios
and (2) if applicable, information about statutorily or contractually required contributions,
contributions to the pension plan, and related ratios.
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CENTRAL CONTRA COSTA SANITARY DISTRICT
SCHEDULE OF CURRENT STATUS OF PRIOR YEAR OTHER MATTERS
FOR THE YEAR ENDED JUNE 30, 2014
2013 -01 Inventory — Procedures and Reconciliations
We did not enter into an audit contract with the District until July 2, 2013, and therefore, we were not
able to participate in or observe the annual physical inventory count that occurred on June 30, 2013. We
did, however, review the policies and procedures related to inventory, as well as the results of an
internal review performed by accounting staff. While all of the findings in the internal report should be
addressed, we wanted to focus on a few of the key issues that are of particular concern.
In reviewing that counters are signing and entering counts on count sheets, the internal review noted 17
instances in which the count sheet line items had been left blank. The internal review also noted that 6
out of 36 samples did not include exception reports. In order to be able to rely on the inventory counts,
the counter must sign off on all count sheets and make notations when there are discrepancies, and never
leave blanks; also, there must always be an exception report, or at least a notation that there were no
exceptions.
The Materials Services Cycle Count Inventory Procedures currently state that a monetary threshold of
negative $500 will be resolved by the supervisor. Shortages that exceed $500 must be reviewed and
signed by the Purchasing Manager and or the Director of Administration. The internal review found an
instance where a negative adjustment exceeding the $500 threshold was not approved or signed off by
the Purchasing Manager. It is important that all procedures are followed and the Purchasing Manager is
paying close attention to inventory adjustments. We agree with the recommendations made in the
internal audit to have + or - $500 adjustments be approved by the Purchasing Manager because it
provides for better separation of duties, thereby, increasing internal controls.
We also noted a recommendation was made to install additional security cameras in the warehouse.
Due to the nature of the assets being protected, which exceed $2 million in value as of June 30, 2013,
we concur with this recommendation.
We understand the District has not reviewed its obsolete inventory in two to three years, and therefore,
the value on the financial statements may be overstated as a result. We also understand the District has
budgeted for an outside party to conduct an evaluation of the inventory and warehouse procedures. We
recommend the District contract with an outside party to complete this evaluation, and in the meantime,
District staff outside of the inventory process should perform sample counts on a rotational basis. This
would provide better inventory controls as it would provide a separation of duties of warehouse
personnel (i.e. staff responsible for operating, recording, and maintaining the warehouse will not be the
same staff responsible for inventory taking).
Current Status:
As a result of the fiscal year 2013 audit finding the District contracted with an independent inventory
auditing service to perform a comprehensive physical inventory of the District's central warehouse.
After receiving the final count from the independent inventory firm the District adjusted the inventory
value carried on the District's balance sheet down $4,033 to $1,861,525 or .002 %. The count accuracy
rate was 95.1% which exceeded industry standards. Patrick Callan of Maze and Associates, the
District's independent audit firm, observed a portion of this inventory count and also performed his own
sample physical inventory count at this time as well.
CENTRAL CONTRA COSTA SANITARY DISTRICT
SCHEDULE OF CURRENT STATUS OF PRIOR YEAR OTHER MATTERS
FOR THE YEAR ENDED JUNE 30, 2014
2013 -01 Inventory — Procedures and Reconciliations (Continued)
District staff also performed an examination of obsolete items being carried as inventory on the
District's books and records. This examination resulted in the identification of $52,759 in items deemed
obsolete which were written off. District staff has put a process in place to regularly examine inventory
stock to identify obsolete items.
During District inventory cycle counts, the previous practice had been to leave count sheet line items
blank when staff was unsure where items were located, didn't understand the unit of measure, or any
other question that would impact their ability to count the line item. District warehouse staff is now
instructed not to leave any count sheet line item blank. Instead, they are instructed to write in the reason
they are unable to count the line item as opposed to leaving it blank. In either instance, these items have
always been further researched.
One negative adjustment of ($522.54) in FY 12 -13, resulting from a cycle count, did not have the
Purchasing Manager's signature as required. Extra attention will be given to ensure that the Purchasing
Manager signs off on all adjustments that require her signature. Going forward, the Purchasing
Manager's signature will be required for shortages that exceed $500.
District Executive Management reviewed the recommendation to install additional security cameras in
the warehouse. The warehouse currently has a security camera that monitors the entrance /front counter
area of the warehouse. At this time, it has been determined that there is not a need to install additional
security cameras in the warehouse.
JV ► M ACZTE
REQUIRED COMMU1vICATIONS
To the Board of Directors
Central Contra Costa Sanitary District
Martinez, California
We have audited the basic financial statements of the Central Contra Costa Sanitary District (District) for
the year ended June 30, 2014. Professional standards require that we communicate to you the following
information related to our audit under generally accepted auditing standards.
Significant Audit Findings
Accounting Policies
Management is responsible for the selection and use of appropriate accounting policies. The significant
accounting policies used by the District are included in Note 1 to the financial statements. No new
accounting policies were adopted and the application of existing policies was not changed during the year.
The following Government Accounting Standards Board (GASB) pronouncements became effective, but
did not have a material effect on the financial statements:
GASB 65 — Items Previously Reported as Assets and Liabilities
GASB 67 — Financial Reporting for Pension Plans — an amendment of GASB Statement No. 25
GASB 70 — Accounting and Financial Reporting for Nonexchgae Financial Guarantees
Unusual Transactions, Controversial or Emerging Areas
We noted no transactions entered into by District during the year for which there is a lack of authoritative
guidance or consensus. All significant transactions have been recognized in the financial statements in the
proper period.
Estimates
Accounting estimates are an integral part of the financial statements prepared by management and are
based on management's current judgments. Those judgments are normally based on knowledge and
experience about past and current events and assumptions about future events. Certain accounting
estimates are 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. The most
sensitive estimates affecting the District's financial statements are depreciation, claims liability and
actuarial estimates for other post - employment benefits.
Accountancy Corporation
3478 Buskirk Avenue, Suite 215
Pleasant Hill. CA 94523
0
T 925.930.0902
F 925.930.0135
F maze@mazeassociates.com
w mazeassociates.com
Management's estimate of depreciation is based on the estimated useful lives of the capital assets, and its
estimate of claims is based on the District Attorney's estimates of current and potential litigation, as well
as actuary studies provided for the District as of June 30, 2014. We evaluated the key factors and
assumptions used to develop the depreciation expense, claims liability and reviewed the current actuary
study and determined that they are reasonable in relation to the basic financial statements taken as a
whole. The value of the assets, liability and assumptions used to determine annual required contributions
for other post - employment benefits is determined by an actuary study provided to the District as of June
30, 2013.
Disclosures
The financial statement disclosures are neutral, consistent, and clear.
Difficulties Encountered in Performing the Audit
We encountered no significant difficulties in dealing with management in performing and completing our
audit.
Corrected and Uncorrected Misstatements
Professional standards require us to accumulate all known and likely misstatements identified during the
audit, other than those that are clearly trivial, and communicate them to the appropriate level of
management. Management has corrected all/certain such misstatements. In addition, none of the
misstatements detected as a result of audit procedures and corrected by management were material, either
individually or in the aggregate, to each opinion unit's financial statements taken as a whole.
Disagreements with Management
For purposes of this letter, a disagreement with management is a financial accounting, reporting, or
auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial
statements or the auditor's report. We are pleased to report that no such disagreements arose during the
course of our audit.
Management Representations
We have requested certain representations from management that are included in a management
representation letter dated September 18, 2014.
Management Consultations with Other Independent Accountants
In some cases, management may decide to consult with other accountants about auditing and accounting
matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves
application of an accounting principle to the governmental unit's financial statements or a determination
of the type of auditor's opinion that may be expressed on those statements, our professional standards
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.
10
Other Audit Findings or Issues
We generally discuss a variety of matters, including the application of accounting principles and auditing
standards, with management each year prior to retention as the governmental unit's auditors. However,
these discussions occurred in the normal course of our professional relationship and our responses were
not a condition to our retention.
Other Information Accompanying the Financial Statements
With respect to the supplementary information accompanying the financial statements, we made certain
inquiries of management and evaluated the form, content, and methods of preparing the information to
determine that the information complies with accounting principles generally accepted in the United
States of America, the method of preparing it has not changed from the prior period, and the information
is appropriate and complete in relation to our audit of the financial statements. We compared and
reconciled the supplementary information to the underlying accounting records used to prepare the
financial statements or to the financial statements themselves.
With respect to the required supplementary information accompanying the financial statements, we
applied certain limited procedures to the required supplementary information in accordance with auditing
standards generally accepted in the United States of America, which consisted of inquiries of management
about the methods of preparing the information and comparing the information for consistency with
management's responses to our inquiries, the basic financial statements, and other knowledge we obtained
during our audit of the basic financial statements. We did not express an opinion nor provide any assurance
on the information because the limited procedures do not provide us with sufficient evidence to express an
opinion or provide any assurance.
The Introductory and Statistical Sections included as part of the Comprehensive Annual Financial Report
have not been subjected to the auditing procedures applied in the audit of the basic financial statements and,
accordingly, we did not express an opinion nor provide any assurance on them.
This information is intended solely for the use of the Board of Directors and management and is not
intended to be, and should not be, used by anyone other than these specified parties.
Pleasant Hill, California
September 18, 2014
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