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2007 Monticello Auditor's Special Purpose Report1 1 1 CITY OF MONTICELLO WRIGHT COUNTY, MINNESOTA Special Purpose Audit Reports Year Ended December 31, 2007 CITY OF MONTICELLO Special Purpose Audit Reports Year Ended December 31, 2007 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 4-9 ' CERTIFIED A C C O U N' INDEPENDENT AUDITOR' S REPORT ON INTERNAL CONTROL City Council and Residents City of Monticello, Minnesota PRINCIPALS Kenneth W. Malloy, CPA Thomas M. Montague, CPA Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA We have audited the financial statements of the governmental activities, business-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, 2007, which collectively comprise the City's basic financial statements, and have issued our report thereon dated June 17, 2008. 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 2007-1, 2007-2, 2007-3, 2007-4, 2007-5, 2007-6, 2007-7, and 2007-8 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- ' Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard Suite 410 Minneapolis, MN 55416 Telephone: 952-545-0424 Telefax: 952-545-0569 www.mmkr.com 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 2007-1, 2007-2, 2007-3, 2007-4, 2007-5, and 2007-6 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. /~a Ilo y ~ ~an-f-a c~. ~~~ ~La ~~o ws,~., ~aolesR~l, ~ 1~ Co.~ ~/~- June 17, 2008 C ' CERTIFIED PUBLIC ACCOUNTANT S i INDEPENDENT AUDITOR' S REPORT ON COMPLIANCE WITH MINNESOTA STATE LAWS AND REGULATIONS PRINCIPALS Kenneth W. Malloy, CPA Thomas M. Montague, CPA Thomas A. Karnowski, CPA Paul A. Radosevich, CPA William J. Lauer, CPA James H. Eichten, CPA Aaron J. Nielsen, CPA Victoria L. Holinka, CPA City Council and Residents City of Monticello, Minnesota We have audited the financial statements of the governmental activities, the business-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, 2007, which collectively comprise the City's basic financial statements, and have issued our report thereon dated June 17, 2008. ' 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. 1 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, and the state of Minnesota and is not intended to be, and should not be, used by anyone other than these specified parties. ~o ll~y /-'Ion f a ~Q ~arv-+dul5~,~ ~adds?.r/.'cG~ ~ Co, ~Q, ~ ~ ~ ~ ' June 17, 2008 n ~ , ' Malloy, Montague, Karnowski, Radosevich & Co., P.A. 5353 Wayzata Boulevard Suite 410 Minneapolis, MN 55416 Telephone: 952-545-0424 Telefax: 952-545-0569 www.mmkr.com CITY OF MONTICELLO Schedule of Findings and Responses Year Ended December 31, 2007 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 "Finding" and "Recommendation." The City of Monticello, Minnesota (the City) is responsible for providing the information under the heading "Management Response." A. FINDINGS -INTERNAL CONTROL OVER FINANCIAL REPORTING 2007-1 SEGREGATION OF DUTIES Finding - Generally, a system of internal control contemp}ates a segregation of duties such that no individual has responsibility to execute a transaction, have physical access to the related assets, and have responsibility or authority to record the transaction. The City does not have proper segregation of duties due to the size of the City's staff. This lack of ideal segregation of duties subjects the City to a higher risk that errors or fraud could occur and not be detected in a timely manner. This limited segregation of duties exists in most of the City's transaction cycles including utility billing, accounts payable, cash receipts, payroll, and investments. Recommendation -This condition is common to organizations of your size. We recommend the City segregate duties as best it can within the limits of the staff available. Any modifications in internal controls in this area should be viewed from acost/benefit perspective. Management Response -There is no disagreement with the audit finding. The City reviews and makes improvements to its internal control structure on an ongoing basis and attempts to maximize the segregation of duties in all areas within the limits of the staff available. However, the City does not consider it cost beneficial at this time to increase the size of its staff in order to further segregate accounting functions. 2007-2 AUDIT ADJUSTING JOURNAL ENTRIES Finding -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. During our audit procedures, we discovered numerous items 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. 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. -4- CITY OF MONTICELLO Schedule of Findings and Responses (continued) , Year Ended December 31, 2007 A. FINDINGS -INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) ' 2007-2 AUDIT ADJUSTING JOURNAL ENTRIES (CONTINUED) Management Response -There is no disagreement with the audit finding. The City recorded ' the audit adjustment recommended upon discussion and review of the supporting documentation. The City will review and improve procedures and internal controls in place to ensure that all material balances are recorded in accordance with accounting principles generally accepted in the ' United States of America. 2007-3 ACCOUNT RECONCILIATIONS ' Finding -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. During our audit we noted several areas where the City was not adequately performing , accounting and reconciling procedures. The following is a list of these areas: • The City's capital asset system for tracking and maintaining detailed cost basis ' information and depreciation expense records was not being reconciled to the general ledger controls accounts. • The City's records of capital asset construction in process was not being reconciled to project records periodically. This information is also not being accumulated periodically ' and recorded as a permanent capital asset at the closeout of each project. • Investment records and related interest revenue was not being reconciled to the general ledger control accounts on a monthly basis. ' • Special assessments receivable and property taxes receivable were not being reconciled to the records of the county, who is the fiscal agent for the collection of these items. • Bond discounts, premiums, and accrued interest on bond calculations were not being , accounted for by the City and the City was relying on the prior auditor to record and reconcile these items. Recommendation - We recommend the City improve controls over the processing and ' reconciling of accounting transactions in these areas. We also recommend the internal controls in this area include a review of these processes by an appropriate level of management. Management Response -There is no disagreement with the audit finding. The City has ' instituted a more detailed checklist of account reconciliation steps to avoid similar findings in the future. , CITY OF MONTICELLO Schedule of Findings and Responses (continued} Year Ended December 31, 2007 A. FINDINGS -INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) 2007-4 PREPARATION OF FINANCIAL STATEMENTS Finding -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. Other than the Management's Discussion and Analysis, the City had our firm prepare the accompanying annual financial report. Like many similarly sized organizations, the City requested assistance from us with the drafting of the annual financial statements and related notes. Although this is common practice and may be the most practical and cost effective method to complete this task, the fact that the City does not perform sufficient procedures to detect if there were misstatements or omissions of disclosures in the annual financial statements is considered a deficiency. Recommendation - We understand the City has hired new personnel with a background in financial reporting. This individual will provide the oversight to the preparation of the financial report in the future in an effort to eliminate this finding. Management Response -There is no disagreement with the audit finding. The City reviews and makes necessary changes to the draft of the annual financial statements, which is prepared and produced by its independent auditing firm. 2007-5 DEFICIENCIES IN ENTITY-LEVEL INTERNAL CONTROLS Finding -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. New auditing and reporting standards specify that we report deficiencies in the design of the entity-level controls of the City's internal controls. While we were able to review and observe many controls in place to ensure proper reporting of financial information, we observed situations where the monitoring of the flaw of financial activity could be improved so that they occur on a more timely basis to ensure proper financial statement reporting. These situations included the absence of an internal control process to report deficiencies in internal control to management on a timely basis, absence of sufficient expertise in selecting and applying accounting principles, lack of certain financial statement calculations performed by the City, and inadequate design of internal control over various accounts or processes. We also noted that the governing body and members of management are not receiving periodic financial information including budget to actual financial data for the purpose of providing the adequate monitoring over financial controls and financial results. -6- CITY OF MONTICELLO Schedule of Findings and Responses (continued) Year Ended December 31, 2007 A. FINDINGS -INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) ' 2007-5 DEFICIENCIES IN ENTITY-LEVEL INTERNAL CONTROLS (CONTINUED) Recommendation - We recommend that the City review procedures and controls in place and ' incorporate a process where the four components of entity-level internal controls (including monitoring) are considered for the entity as a whole and for the various financial reporting cycles. We recommend these changes as a proactive measure to prevent and detect misstatements, whether caused by error or fraud, in financial reporting versus an approach that reacts once a problem has occurred. Management Response -There is no disagreement with the audit finding. The City will ' consider the recommendation and work to improve the entity-level internal control structure in all areas. 2007-6 COMMUNITY CENTER RECEIPT RECONCILIATION Finding -During our audit we noted that daily cash receipts were not reconciled to the community center's cash register tape. Currently, the community center staff counts all cash , drawers and prepare deposits which are then deposited in the cash register at the finance department without matching to the cash register tapes used to record individual transactions. ' Recommendation - We recommend the City segregate duties over the processing of the community center's transactions. The City should consider having an employee (other than the person who recorded receipts and prepared the deposit) verify that the cash register tapes equal the amount deposited and the amounts recorded in the system. Also, the City should consider adding apoint-of--sale computer system that tracks/records receipts as received. This would eliminate the need for the superintendent to manually record all transactions the following day. ' Management Response -There is no disagreement with the audit finding. The City is in the process of further segregating point-of--sale and deposit duties at the community center to satisfy these internal control recommendations. ' 2007-7 INADEQUATE DOCUMENTATION OF THE COMPONENTS OF INTERNAL CONTROLS Finding -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. 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 ' . Recommendation - We recommend the City establish written internal control policies and procedures for the City's internal control processes. ' Management Response -There is no disagreement with the audit finding. ' -7- r 1 CITY OF MONTICELLO Schedule of Findings and Responses (continued) Year Ended December 31, 2007 A. FINDINGS -INTERNAL CONTROL OVER FINANCIAL REPORTING (CONTINUED) 2007-8 DEFICIENCIES IN THE ENTITY-LEVEL COMPONENTS OF INTERNAL CONTROLS Finding -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. 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. Recommendation - We recommend 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. The City should also address the potential need for personnel or consultants with appropriate information technology skills. Management Response -There is no disagreement with the audit finding. B. FINDINGS -MINNESOTA LEGAL COMPLIANCE AUDIT 2007-9 ASSIGNMENT OF COLLATERAL Finding -Minnesota Statute § 118A.03 requires that if the City desires to deposit amounts exceeding depository insurance coverage, then the excess deposits must be covered by corporate surety bonds or collateral. This statute only allows certain forms of collateral to be assigned. One of the allowed forms of collateral are general obligation state or local government securities which are rated "A" or better by a national bond rating service. One of the collateral items assigned to the City to cover excess deposits was a state or local government security that did not have an adequate rating. Recommendation - We recommend the City review all future assignments of collateral to verify they meet state statutes. Management Response -There is no disagreement with the audit finding. The City will work with the depository to have new collateral assigned that complies with state statutes. -8- CITY OF MONTICELLO Schedule of Findings and Responses (continued) Year Ended December 31, 2007 B. FINDINGS -MINNESOTA LEGAL COMPLIANCE AUDIT (CONTINUED) 2007-10 CONTRACT LANGUAGE -PAYMENT OF SUBCONTRACTORS Finding -Per Minnesota Statute § 471.425, Subd. 4a, 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. Recommendation - We recommend that the City include this required language in all future contracts. Management Response -There is no disagreement with the audit finding. The City will incorporate this requirement into all future contracts. -9-