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2016 Monticello Auditor's Special Purpose Report CITY OF MONTICELLO WRIGHT COUNTY, MINNESOTA Special Purpose Audit Reports on Single Audit, Internal Controls, and Compliance With Laws and Regulations Year Ended December 31, 2016 THIS PAGE INTENTIONALLY LEFT BLANK Page Schedule of Expenditures of Federal Awards 1 Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 2–3 Independent Auditor’s Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on the Schedule of Expenditures of Federal Awards Required by the Uniform Guidance 4–6 Independent Auditor’s Report on Minnesota Legal Compliance 7 Schedule of Findings and Questioned Costs 8–11 CITY OF MONTICELLO WRIGHT COUNTY, MINNESOTA Table of Contents THIS PAGE INTENTIONALLY LEFT BLANK Federal Federal CFDA No.Expenditures U.S. Environmental Protection Agency Passed through Minnesota Public Facilities Authority Capitalization Grants for Clean Water State Revolving Funds 66.458 1,413,064$ U.S. Department of Transportation Passed through Minnesota Department of Transportation Highway Planning and Construction 20.205 579,445 Total federal awards 1,992,509$ Note 1: Note 2: Note 3: The City did not elect to use the 10 percent de minimus indirect cost rate. The Schedule of Expenditures of Federal Awards is prepared on the accrual basis of accounting.The information in this schedule is presented in accordance with both OMB Circular A-133,Audits of States,Local Governments, and Nonprofit Organizations and the OMB’s Uniform Administrative Requirements,Cost Principles,and Audit Requirements for Federal Awards,when applicable.Therefore,some amounts presented in this schedule may differ from the amounts presented in, or used in the preparation of, the City’s basic financial statements. CITY OF MONTICELLO All pass-through entities listed above use the same CFDA numbers as the federal grantors to identify these grants, and have not assigned any additional identifying numbers. Year Ended December 31, 2016 Federal Grantor/Pass-Through Grantor/Program Title Schedule of Expenditures of Federal Awards -1- THIS PAGE INTENTIONALLY LEFT BLANK -2- INDEPENDENT AUDITOR’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the City Council and Management City of Monticello, Minnesota We have audited, 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, 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, 2016, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 20, 2017. INTERNAL CONTROL OVER FINANCIAL REPORTING In planning and performing our audit of the financial statements, we considered the City’s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City’s internal control. Accordingly, we do not express an opinion on the effectiveness of the City’s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the City’s financial statements will not be prevented, or detected and corrected, on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. (continued) -3- COMPLIANCE AND OTHER MATTERS As part of obtaining reasonable assurance about whether the City’s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the City’s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the City’s internal control and compliance. Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota June 20, 2017 -4- INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; REPORT ON INTERNAL CONTROL OVER COMPLIANCE; AND REPORT ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE To the City Council and Management City of Monticello, Minnesota REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM We have audited the City of Monticello, Minnesota’s (the City) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget Compliance Supplement that could have a direct and material effect on each of the City’s major federal programs for the year ended December 31, 2016. The City’s major federal programs are identified in the summary of auditor’s results section of the accompanying Schedule of Findings and Questioned Costs. MANAGEMENT’S RESPONSIBILITY Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on compliance for each of the City’s major federal programs based on our audit of the types of compliance requirements referred to above. 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 the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance 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 on compliance for each major federal program. However, our audit does not provide a legal determination of the City’s compliance. (continued) -5- BASIS FOR QUALIFIED OPINION ON THE CAPITALIZATION GRANTS FOR CLEAN WATER STATE REVOLVING FUNDS As described in the accompanying Schedule of Findings and Questioned Costs, the City did not comply with requirements regarding Capitalization Grants for Clean Water State Revolving Funds procurement requirements, reported as finding 2016-001. Compliance with such requirements is necessary, in our opinion, for the City to comply with the requirements applicable to that program. QUALIFIED OPINION ON THE CAPITALIZATION GRANTS FOR CLEAN WATER STATE REVOLVING FUNDS In our opinion, except for the noncompliance described in the Basis for Qualified Opinion paragraph, the City complied, in all material respects, with the types of compliance requirements referred to on the previous page that could have a direct and material effect on the Capitalization Grants for the Clean Water State Revolving Funds Program for the year ended December 31, 2016. CITY’S RESPONSE TO QUALIFIED OPINION The City’s response to the noncompliance finding identified in our audit is described in the accompanying Schedule of Findings and Questioned Costs. The City’s response was not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on it. REPORT ON INTERNAL CONTROL OVER COMPLIANCE Management of the City is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the City’s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, 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 deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, we identified two deficiencies in internal control over compliance, as described in the accompanying Schedule of Findings and Questioned Costs as items 2016-001 and 2016-002, that we consider to be significant deficiencies. (continued) -6- CITY’S RESPONSES TO FINDINGS The City’s responses to the internal control over compliance findings identified in our audit are described in the accompanying Schedule of Findings and Questioned Costs. The City’s responses were not subjected to the auditing procedures applied in the audit of compliance and, accordingly, we express no opinion on the responses. PURPOSE OF THIS REPORT The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. REPORT ON SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS REQUIRED BY THE UNIFORM GUIDANCE 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 as of and for the year ended December 31, 2016, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements. We issued our report thereon dated June 20, 2017, which contained unmodified opinions on those financial statements. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the basic financial statements. The accompanying Schedule of Expenditures of Federal Awards is presented for purposes of additional analysis as required by the Uniform Guidance and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the basic financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the Schedule of Expenditures of Federal Awards is fairly stated, in all material respects, in relation to the basic financial statements as a whole. Minneapolis, Minnesota June 20, 2017 THIS PAGE INTENTIONALLY LEFT BLANK -7- INDEPENDENT AUDITOR’S REPORT ON MINNESOTA LEGAL COMPLIANCE To the City Council and Management City of Monticello, Minnesota We have audited, 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, 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, 2016, and the related notes to the financial statements, which collectively comprise the City’s basic financial statements, and have issued our report thereon dated June 20, 2017. MINNESOTA LEGAL COMPLIANCE The Minnesota Legal Compliance Audit Guide for Cities, promulgated by the State Auditor pursuant to Minnesota Statutes § 6.65, contains seven 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 audit considered all of the listed categories. In connection with our audit, nothing came to our attention that caused us to believe that the City failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Cities. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding the City’s noncompliance with the above referenced provisions. PURPOSE OF THIS REPORT The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. Accordingly, this report is not suitable for any other purpose. Minneapolis, Minnesota June 20, 2017 THIS PAGE INTENTIONALLY LEFT BLANK CITY OF MONTICELLO Schedule of Findings and Questioned Costs Year Ended December 31, 2016 -8- A. SUMMARY OF AUDIT RESULTS This summary is formatted to provide federal granting agencies and pass-through agencies answers to specific questions regarding the audit of federal awards. Financial Statements What type of auditor’s report is issued?X Unmodified Qualified Adverse Disclaimer Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None reported Noncompliance material to the financial statements noted? Yes X No Federal Awards Internal controls over major federal award programs: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified?X Yes None reported Type of auditor’s report issued on compliance for major programs? Unmodified X Qualified Adverse Disclaimer Any audit findings disclosed that are required to be reported in accordance with the Uniform Guidance?X Yes No Programs tested as major programs: Program or Cluster U.S. Environment Protection Agency Capitalization Grants for Clean Water State Revolving Funds 66.458 Threshold for distinguishing between type A and B programs Does the auditee qualify as a low-risk auditee? Yes X No CFDA No. 750,000$ CITY OF MONTICELLO Schedule of Findings and Questioned Costs (continued) Year Ended December 31, 2016 -9- B. FINANCIAL STATEMENT FINDINGS None. C. FEDERAL AWARD FINDINGS AND QUESTIONED COSTS SIGNIFICANT DEFICIENCY IN INTERNAL CONTROL OVER COMPLIANCE AND NONCOMPLIANCE – CAPITALIZATION GRANTS FOR CLEAN WATER STATE REVOLVING FUNDS – CFDA NO. 66.458 2016-001 Internal Controls Over Compliance With Procurement Requirements Criteria – 2 CFR § 1500.10 requires that if the City of Monticello, Minnesota (the City) is satisfied with the qualifications and performance of the architect or engineer who provided any or all of the facilities planning or design services for the Wastewater Treatment Works Project, and wishes to retain that firm or individual during construction of the project, the City may do so without further public notice and evaluation of qualifications, provided the City follows one of three acceptable exceptions. Condition – During our audit, we noted that the City did not obtain the necessary Environment Protection Agency exception documentation in order to continue using the same architect or engineer during construction under the Capitalization Grants for Clean Water State Revolving Funds agreement. Questioned Costs – None. Context – The lack of exception documentation pertains to the Capitalization Grants for Clean Water State Revolving Funds. This was not a statistically valid sample. Repeat Finding – This is a current year finding only. Cause – The City did not adequately document one of the acceptable exceptions for choosing to use the same architect or engineer who provided facilities planning or design services and for construction under the Capitalization Grants for Clean Water State Revolving Funds. Effect – This could be viewed as a violation of the award agreement. Recommendation – We recommend that the City review its internal control procedures relating to procurement for the Capitalization Grants for Clean Water State Revolving Funds to ensure proper compliance with this requirement in the future. View of Responsible Official and Planned Corrective Actions – The City agrees with the finding. The City is in the process of reviewing internal controls in place for procurement requirements to ensure compliance with Uniform Guidance in the future. The City has separately issued a Corrective Action Plan related to this finding. CITY OF MONTICELLO Schedule of Findings and Questioned Costs (continued) Year Ended December 31, 2016 -10- C. FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (CONTINUED) SIGNIFICANT DEFICIENCY IN INTERNAL CONTROL OVER COMPLIANCE – CAPITALIZATION GRANTS FOR CLEAN WATER STATE REVOLVING FUNDS – CFDA NO. 66.458 2016-002 Internal Controls Over Compliance With Cash Management, Allowable Costs, Procurement Standards, and Standards of Conduct for Conflicts of Interest Criteria – 2 CFR § 200.302(b)(6) and (7) requires the City to have written cash management procedures, which includes procedures for determining the allowability of costs in accordance with 2 CFR 200 Subpart E – Cost Principles. 2 CFR § 200.318(a) requires the City to have written procurement procedures which reflect applicable federal law. 2 CFR § 200.318(c) and 48 CFR § 52.203-13 requires the City to have written standards of conduct that cover conflicts of interest and govern the performance of its employees in the selection, award, and administration of contracts. Condition – During our audit, we noted that the City did not have documented written controls to ensure compliance with the U.S. Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) cash management, allowable costs, procurement standards, and standards of conduct covering conflicts of interest. Questioned Costs – None. Our testing did not indicate any instances of noncompliance. Context – The lack of written controls pertains to the Capitalization Grants for Clean Water State Revolving Funds. This was not a statistically valid sample. Repeat Finding – This is a current year finding only. Cause – This is the first year of implementation of the new Uniform Guidance requirements for federal awards, and some internal control policies, including cash management, allowable costs, procurement, and conflicts of interest were not updated to reflect the necessary changes. Effect – This could be viewed as a violation of the award agreement. Recommendation – We recommend that the City review its internal control procedures relating to cash management, allowable costs, procurement, and conflicts of interest for the Capitalization Grants for Clean Water State Revolving Funds. The City should review the new Uniform Guidance to obtain a better understanding of the new requirements and identify any needed policy and procedure changes, in addition to those already referenced above. We also recommend the City adopt written policies pertaining to cash management, allowable costs, procurement, and conflicts of interest for the Capitalization Grants for Clean Water State Revolving Funds. CITY OF MONTICELLO Schedule of Findings and Questioned Costs (continued) Year Ended December 31, 2016 -11- C. FEDERAL AWARD FINDINGS AND QUESTIONED COSTS (CONTINUED) SIGNIFICANT DEFICIENCY IN INTERNAL CONTROL OVER COMPLIANCE – CAPITALIZATION GRANTS FOR CLEAN WATER STATE REVOLVING FUNDS – CFDA NO. 66.458 (CONTINUED) 2016-002 Internal Controls Over Compliance With Cash Management, Allowable Costs, Procurement Standards, and Standards of Conduct for Conflicts of Interest (continued) View of Responsible Official and Planned Corrective Actions – The City agrees with the finding. The City is in the process of reviewing and updating its written policies and procedures relating to cash management, allowable costs, procurement, and conflict of interest standards for its federal programs to ensure compliance with Uniform Guidance in the future. The City has separately issued a Corrective Action Plan related to this finding. D. MINNESOTA LEGAL COMPLIANCE FINDINGS None.