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2008 Monticello Auditor's Special Purpose Reportft CITY f� CITY OF MONTICELLO WRIGHT COUNTY, MINNESOTA Special Purpose Audit Reports Year Ended December 31, 2008 CITY OF MONTICELLO Special Purpose Audit Reports Year Ended December 31, 2008 Table of Contents Page Independent Auditor's Report on Internal Control 1_2 Independent Auditor's Report on Compliance With Minnesota State Laws and Regulations 3 Schedule of Findings and Responses 4_7 INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL City Council and Residents City of Monticello, Minnesota We have audited the financial statements of the governmental activities, the business -type activities each h'p , major fund, and the aggregate remaining fund information of the City of Monticello, Minnesota (the City) ' as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements, and have issued our report thereon dated INSERT DATE. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 opinion on the financial statements, but not 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. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and would not necessarily identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. However, as discussed below, we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies. 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 accounting principles generally accepted in the United States of America 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. We consider the deficiencies described in the accompanying Schedule of Findings and Responses as items 2008-1, 2008-2, 2008-3, and 2008-4 to be significant deficiencies in internal control over financial reporting. 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. (continued) -1- Our consideration of the internal control over financial reporting was for the limited purpose described previously and would not necessarily identify all deficiencies in the internal control that might be significant deficiencies and, accordingly, would not necessarily disclose all significant deficiencies that are also considered to be material weaknesses. However, we believe the significant deficiencies described previously as items 2008-1 and 2008-2 to be material weaknesses. The City's responses to the findings identified in our audit are described in the accompanying Schedule of Findings and Responses. We did not audit the City's responses and, accordingly, we express no opinion on them. Closing This report is intended solely for the information and use of the City Council, management of the City, and the state of Minnesota and is not intended to be, and should not be, used by anyone other than these specified parties. INSERT DATE -2- INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH MINNESOTA STATE LAWS AND REGULATIONS City Council and Residents City of Monticello, Minnesota We have audited the financial statements of the governmental activities the - g busmess type activities, each major fund, and the aggregate remaining fund information of the City of Monticello, Minnesota (the City) as of and for the year ended December 31, 2008, which collectively comprise the City's basic financial statements, and have issued our report thereon dated INSERT DATE. ' We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the provisions of the Minnesota Legal Compliance Audit Guide for Local Governments, promulgated by the State Auditor pursuant to Minnesota Statute § 6.65. Accordingly, the audit included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. The Minnesota Legal Compliance Audit Guide for Local Governments covers seven main categories of compliance to be tested: contracting and bidding, deposits and investments, conflicts of interest, public indebtedness, claims and disbursements, miscellaneous provisions, and tax increment financing. Our study included all of the listed categories. The results of our tests indicate that, for the items tested, the City complied with the material terms and conditions of applicable legal provisions, except as noted in the Schedule of Findings and Responses. This report is intended solely for the information and use of the City Council, management of the City, ty and the state of Minnesota and is not intended to be, and should not be, used by anyone other than these specified parties. INSERT DATE -3- CITY OF MONTICELLO Schedule of Findings and Responses Year Ended December 31, 2008 This schedule summarizes findings and responses relating to internal control and compliance with Minnesota Statutes and other matters. The auditor, Malloy, Montague, Karnowski, Radosevich & Co., P.A. (MMKR), is responsible for providing the information under the headings "Criteria," "Condition," "Cause," "Effect," and "Recommendation." The City of Monticello, Minnesota (the City) is responsible for providing the information under the heading "Management's Response." A. FINDINGS — INTERNAL CONTROL OVER FINANCIAL REPORTING 2008-1 AUDIT ADJUSTING JOURNAL ENTRIES Criteria — Management is responsible for establishing and maintaining effective internal controls. These controls include the responsibility for preparation, or oversight of the preparation, of the financial statements in accordance with accounting principles generally accepted in the United States of America. Condition — During our audit procedures, we proposed audit adjustments to investment activity and escrow account activity that were considered material to the financial statements that had not been recorded properly in accordance with accounting principles generally accepted in the United States of America that were not initially identified by the City prior to our audit procedures detecting the misstatements. Auditing standards consider the identification by the auditor of a material misstatement in the financial statements prepared by the City that was not initially identified by the City to be a material weakness in the related internal controls. Cause — This was an oversight by city personnel. Effect — The financial information prepared by the City contained a misstatement, which misreported net assets and fund balances related to the fair value of investments and bond issue related escrow activity. Recommendation — We recommend that the City take the necessary steps to review procedures and internal controls to ensure that all material balances are properly reported by the City prior to the audit procedures taking place. Management's Response — There is no disagreement with the audit finding. The City will review account balance adjustment procedures to fairly state the financial statements prior to the start of the annual audit to ensure proper financial presentation. In the future, more than one individual will review and reconcile investment records to assure proper reporting. Fiscal 2008 was unique in that the City had many investments redeemed early on the last day of the year due to high interest rates creating deposits in transit. Also, due to the computer conversion less staff time was available to verify work. 2008-2 PRIOR PERIOD ADJUSTMENT Criteria — Internal control over financial reporting. -4- CITY OF MONTICELLO Schedule of Findings and Responses (continued) Year Ended December 31, 2008 A. FINDINGS — INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) 2008-2 PRIOR PERIOD ADJUSTMENT (CONTINUED) Condition — During the year ended December 31, 2008, the City recorded prior period adjustments to more accurately reflect the capital assets and land held for resale in the City. These adjustments reflected a decline in fund balance in the amount of $653,661 in governmental funds, a decline in net assets of $2,970,368 in enterprise funds, and an increase in government -wide net assets in government activities of $7,607,756. Cause — This was caused by accounting errors in prior periods. Effect — The financial statements issued for the previous periods contained a misstatement, which misreported net assets reported in the City's financial statements by the value of the misreported capital assets and land held for resale. Recommendation — We recommend that the City review its controls over the identification and recording of the capital assets and land held for resale to ensure they are recorded correctly in the future. Management's Response — There is no disagreement with the audit finding. The City will continue to review and improve its procedures to assure all capital assets are properly recorded in the future. Many of the prior period adjustments were due to a change in audit firms, new staff, and inadequate documentation of prior asset records. Much of this has been corrected by current staff which has resulted in these prior period adjustments. 2008-3 INADEQUATE DOCUMENTATION OF THE COMPONENTS OF INTERNAL CONTROLS Criteria — New auditing and reporting standards specify that inadequate documentation of the components of internal controls are considered a significant deficiency in the design of internal controls. Condition — The City has verbally described to us the policies and procedures regarding various internal control procedures at the City. However, these policies and procedures are not in writing and, therefore, a finding exists. This is the case because implied or verbal policies and procedures are subject to greater variation of meaning and the likelihood of misinterpretation increases when a policy is not written. Cause — This was an oversight by city personnel. Effect — The City's internal controls are subject to greater variation of meaning and the likelihood of misinterpretation increases when a policy is not written. Recommendation — We recommend the City establish written internal control policies and procedures for the City's internal control processes. Management's Response — There is no disagreement with the audit finding. The new software system has altered many of our procedures. As the new processes become defined internal control procedures will be documented as staff time permits. -5- 1 CITY OF MONTICELLO Schedule of Findings and Responses (continued) Year Ended December 31, 2008 A. FINDINGS — INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED 2008-4 DEFICIENCIES IN THE ENTITY -LEVEL COMPONENTS OF INTERNAL CONTROLS Criteria — Management is responsible for establishing and maintaining effective internal controls including entity -level controls (control environment, risk assessment, information and communication, and monitoring) and for the fair presentation in the financial statements in accordance with accounting principles generally accepted in the United States of America. Condition — New auditing and reporting standards specify that we report deficiencies in the design of the entity -level controls of the City's internal controls. As part of our audit, we noted the City has not adequately designed the general controls over the information technology (IT) system in the City. These controls are intended to assure that the IT system of the City is able to provide complete and accurate information consistent with the financial reporting objectives and current needs of the City. Cause — This was an oversight by city personnel. Effect — The City is more susceptible to misstatement due to information technology. Recommendation — We recommend that the City develop and maintain internal controls over the IT functions of the City, including assessment of risk in the system, information and communication parameters, and a monitoring process. These internal controls would include the development of policies and procedures for the authorized access to documents, records, and computer programs. It would include establishing procedures for approving changes to IT applications or data programs. A good internal control system would also address and evaluate access to applications, potential loss of data, backup systems for critical data and programs, adequacy of data, disaster recovery/contingency planning, and specific application controls over accounting software. Management's Response — There is no disagreement with the audit finding. The City's staff was and is aware of this deficiency. The staff has developed a plan to move its computer servers offsite to the Fibernet Monticello headend building once the fiber optic network is operating. In addition, the new software has more security built into the system to limit the staff's ability to change or modify records. These two steps will address many of the deficiencies. In addition, the staff will continue to look for ways to monitor and improve IT security. 1 B. FINDINGS — MINNESOTA LEGAL COMPLIANCE AUDIT 2008-5 CONTRACT LANGUAGE — PAYMENT OF SUBCONTRACTORS Criteria — Minnesota Statute § 574.26 Condition — City contracts must require the prime contractor to pay any subcontractor within 10 days of the prime contractor's receipt of payment from the City. This requirement was not included in all contracts entered into during the year by the City. -6- CITY OF MONTICELLO Schedule of Findings and Responses (continued) Year Ended December 31, 2008 B. FINDINGS — MINNESOTA LEGAL COMPLIANCE AUDIT (CONTINUED 2008-5 CONTRACT LANGUAGE — PAYMENT OF SUBCONTRACTORS (CONTINUED) Recommendation — We recommend that the City include this required language in all future contracts. Management's Response — There is no disagreement with the audit finding. The City will incorporate this required language in all future contracts. 2008-6 LACK OF CAPITAL IMPROVEMENT BUDGET AND PARKS AND OPEN SPACE PLAN Criteria — Minnesota Statute § 462.358. Condition — Minnesota Statute § 462.358 requires that if the City requires a cash fee in lieu of dedication of buildable land for parks, recreation facilities, trails, wetlands, or open space, then the City must adopt a capital improvement budget and have a parks and open space plan or a parks, trails, and open space component in its comprehensive plan. The City did not adopt a capital improvement budget, have a parks and open space plan, or have a parks, trails, and open space component in its comprehensive plan during 2008. Recommendation — We recommend that the City adopt a capital improvement budget, have a parks and open space plan, and have a parks, trails, and open space component in its comprehensive plan in the future. Management's Response — There is no disagreement with the audit finding. The City does have a parks, trails, and open space component in its comprehensive plan that was adopted in 2008. However, it references having an approved parks, trails, and open space plan. The staff has developed a capital improvement plan and budget and has revised the fee ordinance related to park dedication fees charged to meet Minnesota Statute 462.358, but has not yet presented to the City Council for final approval. de