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2008 - City Single Audit Fed awardsCITY OF ROSEMEAD Rosemead, California Single Audit Report on Federal Awards Year ended June 30, 2008 CITY OF ROSEMEAD Single Audit Report on Federal Awards Year ended June 30, 2008 TABLE OF CONTENTS Page Report on Compliance and Other Matters and on Internal Control over Financial Reporting Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 1 Report on Compliance with Requirements Applicable to Each Major Program, Internal Control over Compliance and on the Schedule of Expenditures of Federal Awards in Accordance with OMB Circular A -133 3 Schedule of Expenditures of Federal Awards 5 Notes to the Schedule of Expenditures of Federal Awards 6 Schedule of Findings and Questioned Costs 7 Summary Schedule of Prior Audit Findings 13 Mayer Huffman [AcCan €i P.C. An Independent CPA Firm Conrad Government Services Division 2301 Dupont Drive, Suite 200 Irvine, California 92612 949 - 474 -2020 ph 949 - 263 -5520 fx www.mhm- pc.com Honorable Mayor and City Council City of Rosemead Rosemead, California REPORT ON COMPLIANCE AND OTHER MATTERS AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS We have audited the financial statements of the governmental activities and each major fund and the aggregate remaining fund information of the City of Rosemead, California, (the City) as of and for the year ended June 30, 2008, which collectively comprise the City's basic financial statements and have issued our report thereon dated January 23, 2009. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Compliance and Other Matters As part of obtaining reasonable assurance about whether the City's financial statements are free of 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 material instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Internal Control Over Financial Reporting In planning and performing our audit, we considered the City's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but nor for the purpose of expressing an opinion on the effectiveness of the City's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over financial reporting. A control deficiency 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 misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the City's ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the City's financial statements that is more than inconsequential will not be prevented or detected by the City's internal control. The matters described in the accompanying Schedule of Findings and Questioned Costs conform to this definition. Honorable Mayor and City Council City of Rosemead Page Two A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the City's internal control. Our consideration of the internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily disclose all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. The City's written responses to the significant deficiencies identified in our audit have not been subjected to the audit procedures applied in the audit of financial statements and, accordingly, we express no opinion on them. This report is intended solely for the information and use of the City Council, management and federal awarding agencies and pass - through entities, and is not intended to be, and should not be, used by anyone other than those specified parties. Irvine, California January 23, 2009 Mayer Hoffman rAcCann PC. An Independent CPA Firm Conrad Government Services Division 2301 Dupont Drive, Suite 200 Irvine, California 92612 949- 474 -2020 ph 949 - 263 -5520 fx www.mhm-pc.com Honorable Mayor and Members of the City Council City of Rosemead Rosemead, California REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM, INTERNAL CONTROL OVER COMPLIANCE AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS IN ACCORDANCE WITH OMB CIRCULAR A -133 Compliance We have audited the compliance of the City of Rosemead, California, (the City) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) CircularA -933 Compliance Supplement that are applicable to its major federal programs for the year ended June 30, 2008. The City's major federal programs are identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts and grants applicable to its major federal programs are the responsibility of the City's management. Our responsibility is to express an opinion on the City's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States and OMB Circular A -133, Audits of States, Local Governments, and Non- Profit Organizations. Those standards and OMB Circular A -133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the City's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on the City's compliance with those requirements. In our opinion, the City complied, in all material respects, with the requirements referred to above that are applicable to its major federal programs for the year ended June 30, 2008. Internal Control Over Compliance The management of the City is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts and grants applicable to federal programs. In planning and performing our audit, we considered the City's 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 Honorable Mayor and Members of the City Council City of Rosemead Page Two expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the City's internal control over compliance. A control deficiency in an entity's internal control over compliance 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 noncompliance with a type of compliance requirement of a federal program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the City's ability to administer a federal program such that there is more than a remote likelihood that noncompliance with a type of compliance requirement of a federal program that is more than inconsequential will not be prevented or detected by the City's internal control. A material weakness is a significant deficiency, .or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected by the City's internal control. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in the City's internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. Schedule of Federal Awards We have audited the basic financial statements of the governmental activities, each major fund and the aggregate remaining fund information of the City as of and for the year ended June 30, 2008, which collectively comprise the City's basic financial statements, and have issued our report thereon dated January 23, 2009. Our audit was performed for the purpose of forming our opinions on the financial statements that collectively comprise the City's basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis in accordance with the requirements of OMB Circular A -133 and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic financial statements taken as a whole. This report is intended solely for the information of the City Council, management, federal awarding agencies and pass - through entities and is not intended to be and should not be used by anyone other than these specified parties. - Irvine, California January 23, 2009, except for the schedule of expenditures of federal awards, as to which the date is February 27, 2009. CITY OF ROSEMEAD Schedule of Expenditures of Federal Awards Year ended June 30, 2008 Federal Federal Grantor /Pass- through CFDA Federal Grantor /Program Title Number Expenditures U.S. Department of Housing and Urban Development Direct Programs: Community Development Block Grants 14.218 $ 1,121,536 HOME 14.239 1,447,380 U.S. Department of Transportation Pass - through State Department of Transportation: Highway Planning and Construction 20.205 6,421,942 Total Federal Awards Expended $ 8,990,858 * Denotes a Major Program CFDA = Catalog of Federal Domestic Assistance See accompanying notes to the schedule of expenditures of federal awards 5 Year ended June 30, 2008 (1) Summary of Significant Accounting Policies Applicable to the Schedule of Federal Awards (a) Scope of Presentation The accompanying schedule presents only the expenditures incurred by the City of Rosemead that are reimbursable by agencies providing federal assistance. For the purposes of this schedule, federal financial assistance includes both federal financial assistance received directly from a federal agency, as well as federal funds received indirectly from a non - federal agency or other organization. Only the portion of program expenditures reimbursable with such federal funds are reported in the accompanying schedule. Program expenditures in excess of the maximum federal reimbursement authorized or the portion of the program expenditures that were funded with state, local or other non - federal funds are excluded from the accompanying schedule. (b) Basis of Accounting The expenditures included in the accompanying schedule were reported on the modified accrual basis of accounting. Under the modified accrual basis of accounting, expenditures are recognized when the agency becomes obligated for payment as a result of the receipt of the related goods and services. Expenditures reported include any property or equipment acquisitions incurred under the federal program. (c) Subrecipient Expenditures Payments to subrecipients totaled $194,864 for the Community Development Block Grant for the fiscal year ended June 30, 2008. CITY OF ROSEMEAD Schedule of Findings and Questioned Costs Year ended June 30, 2008 (A) Summary of Auditors' Results 1. An unqualified report was issued by the auditors on the financial statements of the auditee. 2. There were no material weaknesses in internal control over financial reporting. There were six significant deficiencies in internal control over financial reporting that we described as items 08 -1, 08 -2, 08 -3, 08 -4, 08 -5, and 08 -6. 3. The audit disclosed no noncompliance which is material to the financial statements of the auditee. 4. There were no significant deficiencies or material weaknesses in internal control over the major program of the auditee. 5. An unqualified opinion was issued by the auditors on compliance for major programs. 6. The audit disclosed no audit finding that is required to be reported under paragraph .510(a) of OMB Circ0lar A -133. 7. The major programs of the auditee were U.S. Department of Housing and Urban Development, HOME, CFDA No. 14.239 and U.S. Department of Transportation, Highway Planning and Construction, CFDA No. 20.205. 8. The dollar threshold used to distinguish Type A and Type B programs was $500,000. 9. The auditee qualified as a low risk auditee, as defined by OMB Circular A -133, paragraph .530, for the year ended June 30, 2008 for the purpose of determining major programs. (B) Findings Related to the Financial Statements which are _Required to be Reported in Accordance with GAGAS (08 -1) Controls over Bank Reconciliation Although individual bank account activity had been reconciled during the year, the City had not comprehensively reconciled all bank and investment accounts to the total cash and investment balances per the accounting records during the year. 7 CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) (B) Findings Related to the Financial_ Statements which are Required to be Reported in Accordance with GALAS, (Continued) (08 -1) Controls over Bank Reconciliation, (Continued) The following are examples of reconciliation errors noted during the audit: The payroll system mistakenly recorded an adjustment to cash in the amount of $329,259. This erroneous system generated error would have been recognized during a comprehensive bank reconciliation process. Total cash and investments recorded in the general ledger did not agree to total cash and investments held by each financial institution. The variance amounted to $100,247, which primarily related to errors in prior years that were never corrected. Sound internal controls dictate that the individual in charge of reconciling the cash and investment portfolio to the general ledger ensure that all cash and investment activities (i.e., cash receipts, disbursements, purchases, sales, transfers, interest earnings, etc.) have been accurately and timely recorded in the general ledger. This procedure should be done soon after month end in order to efficiently detect and resolve any discrepancies or unauthorized transactions that might occur. Recommendation We recommend that the City reconcile all cash and investment activity to the general ledger on a regular monthly basis. In addition, an individual other than the preparer should review the bank reconciliation to ensure that cash and investments were properly reconciled. Management's Corrective Actions Planned Cash and investments have always been reconciled each month. Two additional steps will now be implemented: 1) Total cash and investments will be reconciled not only to the general ledger cash clearing account but also to individual funds. 2) Supervisory staff will review and approve the bank reconciliations each month. (08 -2) Establishment of System Access Rights In accordance with the implementation of the new audit risk assessment standards, we modified our approach to testing accounting system access controls. During our procedures, we noted that all finance personnel have the ability to perform the following functions: • Establish vendors and process invoices for payment • Make changes to the payroll master file (adding and deleting employees, making pay rate changes, etc.) • Process payroll • Electronically transfer funds from the City's checking account CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) (S) _ Findings Related to the Financial Statements which are Reguired to be Reported in Accordance with GAGAS, (Continued) (08 -2) Establishment of System Access Rights, (Continued) Recommendation We recommend that the City restrict key accounting system processes to a minimum number of individuals. Each individual in the Finance Department should have different access rights depending on their accounting duties. Management's Corrective Actions Planned Access rights are currently being defined based on job duties. being paid to assigning access rights based on internal controls For example, check printing access will be assigned to one access to a different person. (08 -3)_ Controls over Cash Disbursement Particular attention is as well as job duties. person and data input During the fiscal year, the Accounting Technician and the Finance Assistant had access to blank check stock, had the ability to add and change vendors, process invoices for payment, and were responsible for confirming discrepancies with the bank. This combination of duties and computer system access rights theoretically allowed these individuals the capability to input a fictitious vendor, create an invoice, and process a disbursement without detection. Recommendation After year end, upon consultation with the external auditors, the blank check stock is now kept secured and in the custody of another individual independent of the cash disbursement process. That individual maintains the blank check stock and only releases checks to accounts payable personnel upon request. However, that person should provide to the accounts payable personnel only the exact number of checks that are authorized for each check run. That individual could receive a warrant register that was approved and signed by the Finance Director which documents the exact number of checks that were authorized for payment. Alternatively, the check log could be provided to the Accounting Manager so that during the bank reconciliation process the range of checks issued per the check log could be compared to the final warrant register that was reviewed and approved by the Finance Director and to the actual checks that cleared the bank. CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) B Findincts Related to the Financial Statements which are Required to be Reported in Accordance with GAGAS, (Continued) (08 -3) Controls over Cash Disbursement, (Continued) Management's Corrective Actions Planned A tenant of internal control is that the cost of the control should not be greater than the benefit of the control. Accordingly, if just the exact number of checks is given to the accounts payable team member for printing and something is slightly off in the printing of the checks, an entire batch of checks may need to be reprinted. Reprinting the checks is costly and time consuming; the cost of the internal control is then greater than the benefit of the recommended control. The City's blank checks have a control number on the back of the check. Listing the check control number in the blank check log is a more cost- effective means of preventing theft of blank check stock. (08 -4) Competitive Bidding Process We randomly selected 25 cash disbursements for testing. We noted that 1 out of the 25 disbursements selected for testing related to a contract that was awarded without a formal competitive bid, which is required by the Rosemead Municipal Code Section 3.24.100 for procurements greater than $15,000. The code states that the "purchases of supplies, services, equipment and the sale of personal property shall be by bid procedures pursuant to Sections 3.24.100 and 3.24.110. Bidding shall be dispensed with only when an emergency requires that an order be placed with the nearest available source or supply, when the amount involved is less than one hundred dollars ($100.00) or when the commodity can be obtained from only one vendor." Recommendation We recommend that the City follow its competitive bidding policies. Management's Corrective Actions Planned With the adoption of an updated purchasing policy, the City Manager, the Assistant City Manager and Finance Department team members have been educating all team members about purchasing policies and monitoring compliance with the policy. 08 -5 Controls over Misstatements Reflected in the Financial Statements An important element of internal control is that management's review of the financial statements be highly effective to detect misstatements reflected in the year end financial statements. While this review currently contributes to the objectives of the financial reporting process, this review does not rise to the level necessary to detect misstatements associated with some of the more complex and technical elements reflected in the financial statements. 10 CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) (B) Findings to the Statements which are Required to be Reported in Accordance with GALAS, (Continued) 08 -5) Controls over Misstatements Reflected in the Financial Statements, (Continued) Currently, the audit firm is relied upon to prevent or detect misstatements in the year end financial statements. Auditing standards require that client systems be effective without reliance upon the audit process. This is because a key role of the auditor is to evaluate the effectiveness of the client's financial reporting control systems. The audit firm cannot be a part of the client's internal control system that is evaluated during the audit process. Recommendation In order to enhance management's review of the financial statements, we recommend that additional training be provided to raise the comfort level and effectiveness of staff with respect to their review of the year end financial statements. Ultimately, it should be the City's goal to prepare the financial statements. Management's Corrective Actions Planned Staff is reviewing interim financial statements each month and correcting misstatements as they are detected. Staff is also attending conferences and training seminars to stay abreast of current technical matters. 08 -6 Adjustments Detected by the Audit Process Paragraph 19 of the Statement on Auditing Standards No. 112 requires that the auditor include in the report of significant control deficiencies any material adjustments detected by the audit process. For the year ended June 30, 2008, material adjustments detected by the audit process were as follows: • Reversal of an entry that mistakenly recorded the lease payment and city services provided to Rosemead Housing Development Corporation twice. • To reclassify the amount transferred to the Low and Moderate Income Housing Fund that was in excess of the housing set -aside requirement as a reduction on the advance between the Low and Moderate Income Housing Fund and the Redevelopment Capital Projects Fund. • To record a transfer from the Low and Moderate Income Housing Fund to the Redevelopment Capital Projects Fund in order to eliminate any remaining monies owed that related to funding previously provided for the Senior Citizen Housing construction project. • Adjustments to correct cash and investments. • Recording an entry to properly accrue deferred revenue. 11 CITY OF ROSEMEAD Schedule of Findings and Questioned Costs (Continued) B) Findinas Related to the Financial Statements which are Reauired to be Reported in Accordance with GALAS, (Continued) (08- 6) Adjustments Detected by the Audit Process, (Continued) Management's Corrective Actions Planned Staff has already started monthly reviews of the general ledger. The monthly reviews will eliminate the need for most if not all adjusting entries by the auditors. (C) Findings and Questioned Costs for Federal Awards as Defined in Paragraph .510(x) of OMB Circular A -133 There are no auditors' findings to be reported in accordance with OMB Circular.A -133. 12 CITY OF ROSEMEAD Summary Schedule of Prior Audit Findings Year ended June 30, 2008 The following is the status of prior audit findings for the year ended June 30, 2007: -1) Controls over Cash Disbursement Partially resolved. Current status has been described in the accompanying Schedule of Findings and Questioned Costs as item 08 -3. (07 -2) Controls over Cash Receipts Resolved. (07 -3) Excessive Bank Accounts Resolved. (07 -4) Preparation of Treasurer's Report Resolved. (07 -5) Timeliness of Recording Transactions Partially resolved. Current status has been described in the accompanying Schedule of Findings and Questioned Costs as item 08 -1. (07 -6) Client Controls over Misstatements Reflected in Financial Statements Matter was not resolved and therefore was repeated as a current year finding. See accompanying Schedule of Findings and Questioned Costs as item 08 -5. (07 -7) Adjustments Detected by Audit Process Matter was not resolved and therefore was repeated as a current year finding. See accompanying Schedule of Findings and Questioned Costs as item 08 -6. 13