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R-03-05-22-11C6 - 5/22/2003t ,I Gentlemen: We are pleased to confirm our understanding of the services we are to provide the City of Round Rock for the year ending September 30, 2003. We will audit the City's financial statements of the governmental activities, the business activities, each major fund, and the aggregate remaining fund information including combining statements as of and for the year ending September 30, 2003. We understand that financial statements will be presented in accordance with the financial reporting model described in GASB Statement No. 34. Also, the document we submit to you will include the following additional information that will be subjected to the audit procedures applied in our audit of the financial statements. The document we submit to you will include a "Statistical Section" that will not be subjected to the audit procedures applied in our audit of the financial statements, and for which our accountant's report will disclaim an opinion. ,e- 03- 05 -Z -I C6 PE NA SWAYZE & CO., L.L.P. CER11F1ED PUBLIC ACCOUNTANTS Honorable Nyle Maxwell, Mayor Mr. James R. Nuse, City Manager Mr. David Kautz, Assistant City Manager Cindy Demers, Finance Director City of Round Rock Round Rock, Texas 1. Management's Discussion and Analysis In addition to the financial statements, we will: May 22, 2003 2. General Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances — Budget and Actual 3. Schedule of Expenditures of Federal Awards. Steve D. Pena, C.P.A. R. Michael Swayze, C.P.A. Mary H. Bott, C.PA. Connie S. Bradley, C.P.A. Stacie A. Carter, C.P.A. Pam Oakes, C.P.A. Shelly L. Humphries, C.P.A. Assist in the preparation of the City's Comprehensive Annual Financial Report for submission to the Government Finance Officers Association under its voluntary program for a Certificate of Achievement for Excellence in Financial Reporting. Provide additional services relative to the Implementation of Government Accounting Standards Board Statement 34. The conditions of that engagement are included under the caption "Additional Agreed Upon Procedures." MEMBER AMERICAN INSTMUTE AND TEXAS SOCIETY OF CERINED PUBLIC ACCOUNTANTS P.O. BOX 250 ROUND ROCK TEXAS 78680 512 -255 -2165 FAX 512-255-2466 WEBSTIE www.psco- cpa.com City of Round Rock Page 2 May 22, 2003 Audit Objectives The objective of our audit is the expression of an opinion as to whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the financial statements taken as a whole. The objectives also include reporting on— • Internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. • Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and OMB Circular A- 133, Audits of States, Local Governments, and Non - Profit Organizations. The reports on internal control and compliance will each include a statement that the report is intended for the information and use of management, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass - through entities and is not intended to be and should not be used by anyone other than these specified parties. Our audit will be conducted in accordance with U.S. generally accepted auditing standards; the standards for financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; the Single Audit Act Amendments of 1996; and the provisions of OMB Circular A -133, and will include tests of accounting records, a determination of major program(s) in accordance with Circular A -133, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the financial statements or the Single Audit compliance opinion is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. Management Responsibilities The management of the City is responsible for establishing and maintaining internal control and for compliance with the provisions of contracts, agreements, and grants. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of the controls. City of Round Rock Page 3 May 22, 2003 The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorizations and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that federal award programs are managed in compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, including the schedule of expenditures of federal awards, but the responsibility for the financial statements remains with you. This responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting and compliance, the selection and application of accounting principles, and the safeguarding of assets. Management is responsible for adjusting the financial statements to correct material misstatements and for confirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the government involving (a) management, (b) employees who have significant roles in intemal control, and (c) others where the fraud could have a material effect on the financial statements. You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud affecting the govemment received in communications from employees, regulators, or others. In addition, you are responsible for identifying and ensuring that the entity complies with applicable laws and regulations. Additionally, as required by OMB Circular A -133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. Audit Procedures—General An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether from errors, fraudulent financial reporting, misappropriations of assets, or violations of laws or governmental regulations that are attributable to the entity or to acts by management or employees acting on behalf of the entity. As required by the Single Audit Act Amendments of 1996 and OMB Circular A -133, our audit will include tests of transactions related to major federal award programs for compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material City of Round Rock Page 4 May 22, 2003 misstatements or noncompliance may exist and not be detected by us. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct affect on the financial statements or major programs. However, we will inform you of any material errors and any fraudulent financial reporting or misappropriation of assets that comes to our attention. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. We will include such matters in the reports required for a Single Audit. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also require certain written representations from you about the financial statements and related matters. Auditing Procedures — Internal Controls In planning and performing our audit, we will consider the internal control sufficient to plan the audit in order to determine the nature, timing, and extent of our auditing procedures for the purpose of expressing our opinions on the City's financial statements and on its compliance with requirements applicable to major programs. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. Tests of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to the financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct effect and material effect on the financial statements. Tests of controls relative to the financial statements are required only if control risk is assessed below the maximum level. Our tests, if performed, will be less in scope than would be necessary to render an opinion on internal control and accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. As required by OMB Circular A -133, we will perform tests of controls to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance with compliance requirements applicable to each major federal award program. However, our tests will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on intemal control issued pursuant to OMB Circular A -I33. City of Round Rock Page 5 May 22, 2003 An audit is not designed to provide assurance on internal control or to identify reportable conditions. However, we will inform you of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the City's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. We will also inform you of any nonreportable conditions or other matters involving internal control, if any, as required by OMB Circular A -133. Audit Procedures—Compliance Our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of the City's compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures will not be to provide an opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. OMB Circular A -133 requires that we also plan and perform the audit to obtain reasonable assurance about whether the City has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of the applicable procedures described in the OMB Circular A -133 Compliance Supplement for the types of compliance requirements that could have a direct and material effect on each of the City's major programs. The purpose of those procedures will be to express an opinion on the City's compliance with requirements applicable to major programs in our report on compliance issued pursuant to OMB Circular A -I33. Audit Administration, Fees and Other At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection Form that summarizes our audit findings. We will provide copies of our reports to the City; however, it is the City's responsibility to submit the reporting package (including financial statements, schedule of expenditures of federal awards, summary schedule of prior audit findings, auditors' reports, and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass- through entities. The Data Collection Form and the reporting package must be submitted within the earlier of 30 days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audits. City of Round Rock Page 6 May 22, 2003 The workpapers for this engagement are the property of Pena Swayze & Co., L.L.P. and constitute confidential information. However, we may be requested to make certain work papers available to the City's Cognizant Agency pursuant to authority given to it by law or regulation. If requested, access to such work papers will be provided under the supervision of Pena Swayze & Co., L.L.P. personnel. Furthermore, upon request, we may provide photocopies of selected work papers to the City's Cognizant Agency. The Agency may intend, or decide, to distribute the photocopies or information contained therein to others, including other governmental agencies. The work papers for this engagement will be retained for a minimum of three years after the date the auditor's report is issued or for any additional period requested by the cognizant agency. If we are aware that a federal awarding agency is contesting an audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the work papers. In order for our firm to complete our work in a timely manner and to maintain the level of fees we propose, our firm and the City must closely coordinate the audit work so that City staff disruption is minimized, and we receive timely City prepared reports, information and support. Pena Swayze & Co., L.L.P. intends to begin work upon approval of the engagement letter. The City is to furnish the necessary and customary clerical staff to assist us in preparing detail trial balances and supporting schedules. We also understand that City staff will assist us by locating and submitting to us invoices, cancelled checks and other documents and records which we request. We will utilize City staff in the preparation of certain detailed audit schedules which we would format. We will try to initiate ideas or observations that we believe will help achieve the objectives of the City. We will also be pleased to respond to inquiries you might have about financial or other business matters. Our fees for the audit are based on the time our personnel require to complete the engagement plus direct expenses. Individual hourly rates vary in accordance with the degree of responsibility and skill of those assigned to the audit. Our estimated fee for this engagement, assuming completion of the agreed upon procedures as outlined below, is as follows: - Audit of financial statements - Preparation of the draft of the comprehensive annual financial report - Compliance with the audit requirements as directed by the Single Audit Act $ 45,000 $ 14,000 $ 7,800 City of Round Rock Page 7 May 22, 2003 City staff will be responsible for the completion of the report after delivery of the first draft. We will make our typist available to City staff. Our fee estimate includes all typing. We estimate our examination will take approximately 900 staff hours to complete. If unforeseen complications arise during the audit making it likely that the fee will exceed this amount, we will discuss the increase before proceeding. If you intend to publish or otherwise reproduce the financial statements and make reference to our firm name, you agree to provide us with printers' proofs or masters for our review and approval before printing. You also agree to provide us with a copy of the final reproduced material for our approval before it is distributed. Government Auditing Standards require that we provide you with a copy of our most recent quality control review report. Our 2000 peer review accompanies this letter. Additional Agreed -Upon Procedures In addition to our audit services, you have requested assistance in the implementation of the financial reporting model described in the Government Auditing Standards Board Statement No. 34 (GASBS 34). With respect to this additional procedure, this engagement is solely to assist the City with its implementation of the new reporting standard. Our engagement to apply agreed upon procedures will be performed in accordance with the standards established by the American Institute of Certified Public Accountants. As auditors of the City's Comprehensive Annual Financial Report (CAFR), our involvement will be limited by independence standards established by the US General Accounting Office in its Government Auditing Standards. In our opinion, the tasks detailed below do not impair the independence for audit purposes. Specifically, the City has indicated that our assistance is requested for the following: GASES 34 Implementation Team Pena Swayze & Co., LLP can act as an advisory member to the GASBS 34 implementation team. In our role on this team we will be available to answer technical questions, reference comparable GASBS 34 implementation examples, or provide other services requested by the team. The aforementioned Independence standards dictate that we cannot make management decisions, but can provide technical assistance. The attached implementation work program will begin upon the team's establishment. A timetable will be established in the initial team meeting for suggested completion dates for the individual tasks. Pena Swayze & Co., LLP will attend the scheduled meetings of that team as requested by City staff and provide answers to technical inquiries. A project status report will follow the format of the attached work program and be presented to the City's Finance Director by the 10th of each month for the preceding month. City of Round Rock Page 8 May 22, 2003 Reformatted 09/30/2002 Comprehensive Annual Financial Report To identify additional implementation issues that will arise during this transition year, it is necessary to convert the previous year's financial report to the new standard. This task entails: 3 Adjusting the 09/30/2002 final trial balance to the government -wide financial statement basis 4 Creating the new government -wide Report Format :• Preparing reconciliations between government -wide and fund financial statements :• Preparing revised notes to the financial statements :• Completion of a disclosure checklist for financial reporting to ensure that all necessary disclosures are present • Completion of a Government Finance Officers Association (GFOA) disclosure checklist for GASBS 34 statements to determine that their standards have been addressed. Although implementation issues will be presented to the team as they arise, the reformatted CAFR and completed checklists will be presented to the implementation team by August 31, 2003. The City is responsible for the substantive outcome of the implementation project and must make an informed judgment on the results of the engagement. To this end, the City will: • Designate a management -level staff person to be responsible and accountable for overseeing this agreed -upon procedure. • Establish and monitor the performance of this agreed -upon procedure to ensure that it meets the City's objectives. • Make any decisions that involve management functions related to the agreed - upon procedures and accept responsibility for those decisions. • Evaluate the adequacy of these procedures performed and the reports presented by Pena Swayze & Co., LLP The reports that we prepare for the agreed upon procedures engagement are intended solely for the information of, and are not intended to be used by, anyone other than the City of Round Rock. Our reports will contain a paragraph indicating that had we performed additional procedures, other matters might have come to our attention that would have been reported to you. We plan to begin our agreed -upon procedures immediately and, unless unforeseeable problems are encountered, the procedures should be completed by September 30, 2003. Our fees for these agreed upon procedures will be based upon the amount of time required at our standard billing rates for personnel working on the engagement. City of Round Rock Page 9 May 22, 2003 Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. The following are ranges of hourly rates for our professional staff: Mayor David Kautz, Assistant ity Manager Date 5 as -03 Partner $125 - $172 Manager $ 90 - $100 Staff $ 50 - $ 80 We estimate that these procedures will require 200 — 250 hours to complete. If unforeseen complication arise during the audit making it likely that the hours will exceed this, we will discuss the increase before proceeding. If the need for additional services arises, our agreement with you will need to be revised. It is customary for us to enumerate these revisions in an addendum to this letter. We appreciate the opportunity to be of service to the City of Round Rock and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Sin erely, e u4 PERA SWA E & CO., L.L.P. Attachment RESPONSE: This letter correctly sets forth the understanding of the City of Round Rock. A Cindy De rs, Finance Director es R. Nuse, City Manager LOTT, VERNON & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS September 20, 2000 To the Partners Pena Swayze & Co., L.L.P. We have reviewed the system of quality control for the accounting and auditing practice of Peiia Swayze & Co., L.L.P. in effect for the year ended April 30, 2000. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide it with reasonable assurance of complying with professional standards. The elements of quality control are described in the Statements on Quality Control Standards issued by the American Institute of Certified Public Accountants (AICPA). The design of the system and compliance with it are the responsibility of the firm. Our responsibility is to express an opinion on the design of the system, and the firm's compliance with the system based on our review. Our review was conducted in accordance with standards established by the Peer Review Board of the AICPA In performing our review, we obtained an understanding of the system of quality control for the firm's accounting and auditing practice. In addition, we tested compliance with the firm's quality control policies and procedures to the extent we considered appropriate. These tests covered the application of the finn's policies and procedures on selected engagements. Because our review was based on selective tests, it would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it. Because there are inherent limitations in the effectiveness of any system of quality control, departures from the system may occur and not be detected. Also, projection of any evaluation of a system of quality control to future periods is subject to the risk that the system of quality control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. In our opinion, the system of quality control for the accounting and auditing practice of Pena Swayze & Co., L.L.P. in effect for the year ended April 30, 2000, has been designed to meet the requirements of the quality control standards for an accounting and auditing practice established by the AICPA and was complied with during the year then ended to provide the firm with reasonable assurance of complying with professional standards. KILLEEN • COPPERAS COVE • TEMPLE ott, Vernon & Company, P.C. 109 EAST AVENUE B 254/526/0571 POST OFFICE BOX 935 800/460/0571 KILLEEN, TEXAS 76540 FAX 254/526/7667 Member of Am .r I &Ti:n , Sorin u. Cerfi(ml Pyb(ie Accolirifmol. Completion Date Target Completion Assigned To Procedure PLANNING Read the statement & Implementation guides Discuss implications of GASBS 34 with appropriate management staff. Form GASB 34 team & plan regular meetings. Develop the implementation plan, including a detailed listing of tasks and a timetable for implementation. FUND REVIEW & ACCOUNTING ISSUES Determine the proper fund categories for each of the funds based on the new & revised fund definitions and prepare a listing showing classifications before and after implementation of GASBS 34. Identify major funds. Read and consider th effect of implementing new accounting pronouncements (those issued after GASBS 34 and those applicable to governmental activities for the first time.) Determine which one of the optional formats to use for presenting the statement of net assets, statement of activities, and proprietary fund statements. Review current policies and procedures for capitalizing fixed assets and consider the need for new policies & procedures. Review infrastructure asset records and develop a plan to gather the information necessary to report general infrastructure assets in the financial statements. GASB 34 Implementation Work Program Completion Date Target Completion Assigned To Procedure Determine whether "modified approach" will be used for reporting infrastructure assets. Determine how to assign revenues and expenses to the government -wide statement of activities. Identify assets and liabilities with current & long term portions and determine how current amounts will be calculated.. Identify assets with restrictions and reserved fund balance. Identify how depreciation expense will be assigned or allocated to functions or presented in the statement of activities. Identify any limited situations in which interest or general long -term debt may be allocated to functions rather than being reported as interest on long -term debt. Identify how revenues and expenses will be assigned or allocated to functions or presented in the statement of activities. GASB 34 Implementation Work Program Mayor Nyle Maxwell Mayor Pro -tem Tom Nielson Council Members Alan McGraw Carrie Pitt Scot Knight Isabel Gallahan Gary Coe City Manager Jim Nuse City Attorney Stephan L. Sheets ROUND ROCK, TEXAS PURPOSE. PASSION. PROSPERITY. May 28, 2003 Pena Swayze & Company P.O. Box 250 Round Rock, TX 78680 Dear Gentlemen: The Round Rock City Council approved Resolution No. R- 03- 05 -22- 1106 at their regularly scheduled meeting on May 22, 2003. This resolution approves the agreement to conduct an annual audit for the fiscal year ending September 30, 2003. Enclosed is a copy of the resolution and original agreement for your files. If you have any questions, please do not hesitate to David Kautz at 218 -5401. Sincerely, hnstine R. Martinez City Secretary Enclosure CITY OF ROUND ROCK Administrative Dept., 221 East Main Street • Round Rock, Texas 78664 Phone: 512.218.540o • Fax: 512,zi8.7097 • www.ci.round-rock.tx.us r WHEREAS, it is necessary for the City of Round Rock to conduct an annual audit, and WHEREAS, the accounting firm of Pena Swayze & Company has submitted an agreement to provide said audit for the fiscal year ending September 30, 2003, and WHEREAS, the City Council wishes to enter into said agreement, Now Therefore BE IT RESOLVED BY THE COUNCIL OF THE CITY OF ROUND ROCK, TEXAS, That the Mayor is hereby authorized and directed to execute on behalf of the City an agreement with Pena Swayze & Company to conduct said audit, a copy of said agreement being attached hereto as Exhibit "A" and incorporated herein for all purposes. The City Council hereby finds and declares that written notice of the date, hour, place and subject of the meeting at which this Resolution was adopted was posted and that such meeting was open to the public as required by law at all times during which this Resolution and the subject matter hereof were discussed, considered and formally acted upon, all as required by the Open Meetings Act, Chapter 551, Texas Government Code, as amended. RESOLVED this 22nd day of May, 2003. ST: 2 CHRISTINE R. MARTINEZ, City Secre B PFOesktop\:: ODMA/ WORLDOX/ O: /wDOx /RESOLIIII /R30523c6.WPD /sc RESOLUTION NO. R- 03- 05- 22 -1106 NY ,AVWEL , - or City of Round Rock, Texas I � PENA SWAYZE & CO., L.L.P. CERTIFIED PUBLIC ACCOUNTANT Honorable Nyle Maxwell, Mayor Mr. James R. Nuse, City Manager Mr. David Kautz, Assistant City Manager Cindy Demers, Finance Director City of Round Rock Round Rock, Texas Gentlemen: 1. Management's Discussion and Analysis May 22, 2003 2. General Fund Schedule of Revenues, Expenditures, and Changes in Fund Balances — Budget and Actual 3. Schedule of Expenditures of Federal Awards. Steve D. Pena, C.P.A. R Michael Swayze, C.P.A. Mary H. Bott, C.P.A. Connie S. Bradley, C.P.A. Stacie A. Carter, C.P.A. Pam Oakes, C.P.A. Shelly L. Humphries, C.P.A. We are pleased to confirm our understanding of the services we are to provide the City of Round Rock for the year ending September 30, 2003. We will audit the City's financial statements of the governmental activities, the business activities, each major fund, and the aggregate remaining fund information including combining statements as of and for the year ending September 30, 2003. We understand that financial statements will be presented in accordance with the financial reporting model described in GASB Statement No. 34. Also, the document we submit to you will include the following additional information that will be subjected to the audit procedures applied in our audit of the financial statements. The document we submit to you will include a "Statistical Section" that will not be subjected to the audit procedures applied in our audit of the financial statements, and for which our accountant's report will disclaim an opinion. In addition to the financial statements, we will: Assist in the preparation of the City's Comprehensive Annual Financial Report for submission to the Government Finance Officers Association under its voluntary program for a Certificate of Achievement for Excellence in Financial Reporting. Provide additional services relative to the Implementation of Government Accounting Standards Board Statement 34. The conditions of that engagement are included under the caption "Additional Agreed Upon Procedures." MEMBER AMERICAN INSm'UTE AND TEXAS SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS P.O. BOX 250 ROUND ROCK, TEXAS 78680 512 -255 -2165 FAX 512- 255 -2466 WEBSITE www,psco - cpa.com EXHIBIT a City of Round Rock Page 2 May 22, 2003 Audit Objectives The objective of our audit is the expression of an opinion as to whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the financial statements taken as a whole. The objectives also include reporting on— • Internal control related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. • Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major program in accordance with the Single Audit Act Amendments of 1996 and OMB Circular A- 133, Audits of States, Local Governments, and Non - Profit Organizations. The reports on internal control and compliance will each include a statement that the report is intended for the information and use of management, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass - through entities and is not intended to be and should not be used by anyone other than these specified parties. Our audit will be conducted in accordance with U.S, generally accepted auditing standards; the standards for financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States; the Single Audit Act Amendments of 1996; and the provisions of OMB Circular A -133, and will include tests of accounting records, a determination of major program(s) in accordance with Circular A -133, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the financial statements or the Single Audit compliance opinion is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of this engagement. Management Responsibilities The management of the City is responsible for establishing and maintaining internal control and for compliance with the provisions of contracts, agreements, and grants. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of the controls. City of Round Rock Page 3 May 22, 2003 The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with management's authorizations and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that federal award programs are managed in compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information required for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, including the schedule of expenditures of federal awards, but the responsibility for the financial statements remains with you. This responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting and compliance, the selection and application of accounting principles, and the safeguarding of assets. Management is responsible for adjusting the financial statements to correct material misstatements and for confirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the government involving (a) management, (b) employees who have significant roles in internal control, and (c) others where the fraud could have a material effect on the financial statements. You are also responsible for informing us of your knowledge of any allegations of fraud or suspected fraud affecting the government received in communications from employees, regulators, or others. In addition, you are responsible for identifying and ensuring that the entity complies with applicable laws and regulations. Additionally, as required by OMB Circular A- 133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. Audit Procedures - General An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. We will plan and perform the audit to obtain reasonable rather than absolute assurance about w -ther the financial statements are free of material misstatement, whether from errors, fr .udulent financial reporting, misappropriations of assets, or violations of laws or governmental regulations that are attributable to the entity or to acts by management or employees acting on behalf of the entity. As required by the Single Audit Act Amendments of 1996 and OMB Circular A -133, our audit will include tests of transactions related to major federal award programs for compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material City of Round Rock Page 4 May 22, 2003 misstatements or noncompliance may exist and not be detected by us. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct affect on the financial statements or major programs. However, we will inform you of any material errors and any fraudulent financial reporting or misappropriation of assets that comes to our attention. We will also inform you of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential. We will include such matters in the reports required for a Single Audit. Our responsibility as auditors is limited to the period covered by our audit and does not extend to matters that might arise during any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and may include tests of the physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also require certain written representations from you about the financial statements and related matters. Auditing Procedures — Internal Controls In planning and performing our audit, we will consider the internal control sufficient to plan the audit in order to determine the nature, timing, and extent of our auditing procedures for the purpose of expressing our opinions on the City's financial statements and on its compliance with requirements applicable to major programs. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. Tests of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to the financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct effect and material effect on, the financial statements. Tests of controls relative to the financial statements are required only if control risk is assessed below the maximum level. Our tests, if performed, will be less in scope than would be necessary to render an opinion on internal control and accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. As required by OMB Circular A -133, we will perform tests of controls to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance with compliance requirements applicable to each major federal award program. However, our tests will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to OMB Circular A -133. City of Round Rock Page 5 May 22, 2003 An audit is not designed to provide assurance on internal control or to identify reportable conditions. However, we will inform you of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the City's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. We will also inform you of any nonreportable conditions or other matters involving internal control, if any, as required by OMB Circular A -133. Audit Procedures—Compliance Our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of the City's compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures will not be to provide an opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. OMB Circular A -133 requires that we also plan and perform the audit to obtain reasonable assurance about whether the City has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of the applicable procedures described in the OMB Circular A -I33 Compliance Supplement for the types of compliance requirements that could have a direct and material effect on each of the City's major programs. The purpose of those procedures will be to express an opinion on the City's compliance with requirements applicable to major programs in our report on compliance issued pursuant to OMB Circular A -133. Audit Administration, Fees and Other At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection Form that summarizes our audit findings. We will provide copies of our reports to the City; however, it is the City's responsibility to submit the reporting package (including financial statements, schedule of expenditures of federal awards, summary schedule of prior audit findings, auditors' reports, and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass - through entities. The Data Collection Form and the reporting package must be submitted within the earlier of 30 days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audits. City of Round Rock Page 6 May 22, 2003 The workpapers for this engagement are the property of Pena Swayze & Co., L.L.P. and constitute confidential information. However, we may be requested to make certain work papers available to the City's Cognizant Agency pursuant to authority given to it by law or regulation. If requested, access to such work papers will be provided under the supervision of Pena Swayze & Co., L.L.P. personnel. Furthermore, upon request, we may provide photocopies of selected work papers to the City's Cognizant Agency. The Agency may intend, or decide, to distribute the photocopies or information contained therein to others, including other governmental agencies. The work papers for this engagement will be retained for a minimum of three years after the date the auditor's report is issued or for any additional period requested by the cognizant agency. If we are aware that a federal awarding agency is contesting an audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the work papers. In order for our firm to complete our work in a timely manner and to maintain the level of fees we propose, our firm and the City must closely coordinate the audit work so that City staff disruption is minimized, and we receive timely City prepared reports, information and support. Pena Swayze & Co., L.L.P. intends to begin work upon approval of the engagement letter. The City is to famish the necessary and customary clerical staff to assist us in preparing detail trial balances and supporting schedules. We also understand that City staff will assist us by locating and submitting to us invoices, cancelled checks and other documents and records which we request. We will utilize City staff in the preparation of certain detailed audit schedules which we would format. We will try to initiate ideas or observations that we believe will help achieve the objectives of the City. We will also be pleased to respond to inquiries you might have about financial or other business matters. Our fees for the audit are based on the time our personnel require to complete the engagement plus direct expenses. Individual hourly rates vary in accordance with the degree of responsibility and skill of those assigned to the audit. Our estimated fee for this engagement, assuming completion of the agreed upon procedures as outlined below, is as follows: - Audit of financial statements - Preparation of the draft of the comprehensive annual financial report - Compliance with the audit requirements as directed by the Single Audit Act $ 45,000 $ I4,000 $ 7,800 City of Round Rock Page 7 May 22, 2003 City staff will be responsible for the completion of the report after delivery of the first draft. We will make our typist available to City staff. Our fee estimate includes all typing. We estimate our examination will take approximately 900 staff hours to complete. If unforeseen complications arise during the audit making it likely that the fee will exceed this amount, we will discuss the increase before proceeding. If you intend to publish or otherwise reproduce the financial statements and make reference to our firm name, you agree to provide us with printers' proofs or masters for our review and approval before printing. You also agree to provide us with a copy of the final reproduced material for our approval before it is distributed. Government Auditing Standards require that we provide you with a copy of our most recent quality control review report. Our 2000 peer review accompanies this letter. Additional Agreed -Upon Procedures In addition to our audit services, you have requested assistance in the implementation of the financial reporting model described in the Government Auditing Standards Board Statement No. 34 (GASBS 34). With respect to this additional procedure, this engagement is solely to assist the City with its implementation of the new reporting standard. Our engagement to apply agreed upon procedures will be performed in accordance with the standards established by the American Institute of Certified Public Accountants. As auditors of the City's Comprehensive Annual Financial Report (CAFR), our involvement will be limited by independence standards established by the US General Accounting Office in its Government Auditing Standards. In our opinion, the tasks detailed below do not impair the independence for audit purposes. Specifically, the City has indicated that our assistance is requested for the following: GASBS 34 Implementation Team Pena Swayze & Co., LLP can act as an advisory member to the GASBS 34 implementation team. In our role on this team we will be available to answer technical questions, reference comparable GASBS 34 implementation examples, or provide other services requested by the team. The aforementioned Independence standards dictate that we cannot make management decisions, but can provide technical assistance. The attached implementation work program will begin upon the team's establishment. A timetable will be established in the initial team meeting for suggested completion dates for the individual tasks. Pena Swayze & Co., LLP will attend the scheduled meetings of that team as requested by City staff and provide answers to technical inquiries. A project status report will follow the format of the attached work program and be presented to the City's Finance Director by the 10th of each month for the preceding month. City of Round Rock Page 8 May 22, 2003 Reformatted 09/30/2002 Comprehensive Annual Financial Report To identify additional implementation issues that will arise during this transition year, it is necessary to convert the previous year's financial report to the new standard. This task entails: • Adjusting the 09/30/2002 final trial balance to the government -wide financial statement basis • Creating the new government -wide Report Format • Preparing reconciliations between government -wide and fund financial statements • Preparing revised notes to the financial statements • Completion of a disclosure checklist for financial reporting to ensure that all necessary disclosures are present • Completion of a Government Finance Officers Association (GFOA) disclosure checklist for GASES 34 statements to determine that their standards have been addressed. Although implementation issues will be presented to the team as they arise, the reformatted CAFR and completed checklists will be presented to the implementation team by August 31, 2003. The City is responsible for the substantive outcome of the implementation project and must make an informed judgment on the results of the engagement. To this end, the City will: • Designate a management -level staff person to be responsible and accountable for overseeing this agreed -upon procedure. • Establish and monitor the performance of this agreed -upon procedure to ensure that it meets the City's objectives. • Make any decisions that involve management functions related to the agreed - upon procedures and accept responsibility for those decisions. • Evaluate the adequacy of these procedures performed and the reports presented by Pena Swayze & Co., LLP The reports that we prepare for the agreed upon procedures engagement are intended solely for the information of, and are not intended to be used by, anyone other than the City of Round Rock. Our reports will contain a paragraph indicating that had we performed additional procedures, other matters might have come to our attention that would have been reported to you. We plan to begin our agreed -upon procedures immediately and, unless unforeseeable problems are encountered, the procedures should be completed by September 30, 2003. Our fees for these agreed upon procedures will be based upon the amount of time required at our standard billing rates for personnel working on the engagement. City of Round Rock Page 9 May 22, 2003 Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. The following are ranges of hourly rates for our professional staff: Partner $125 - $172 Manager $ 90 - $100 Staff $ 50 - $ 80 We estimate that these procedures will require 200 — 250 hours to complete. If unforeseen complication arise during the audit making it likely that the hours will exceed this, we will discuss the increase before proceeding. If the need for additional services arises, our agreement with you will need to be revised. It is customary for us to enumerate these revisions in an addendum to this letter. We appreciate the opportunity to be of service to the City of Round Rock and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Sincerely, PEAIASWA E &CO,LLP Attachment RESPONSE: This letter correctly sets forth the understanding of the City of Round Rock. Nyle Maxwell, Mayor James R. Nuse, City Manager David Kautz, Assistant City Manager Cindy Demers, Finance Director Date LOTT, VERNON & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS KILLEEN • COPPERAS COVE • TEMPLE September 20, 2000 To the Partners Pena Swayze & Co., L.L.P. 109 EAST AVENUE B 254/526/0571 POST OFFICE BOX 935 600/460/0571 KILLEE!V, TEXAS 76540 FAX 254/526/7667 Me, of A,nerr n Institute &Tex. Society of Cerliflot Public Arnurnma, We have reviewed the system of quality control for the accounting and auditing practice of Pena Swayze & Co., L.L.P, in effect for the year ended April 30, 2000. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide it with reasonable assurance of complying with professional standards. The elements of quality control are described in the Statements on Quality Control Standards issued by the American Institute of Certified Public Accountants (AICPA). The design of the system and compliance with it are the responsibility of the firm. Our responsibility is to express an opinion on the design of the system, and the firm's compliance with the system based on our review. Our review was conducted in accordance with standards established by the Peer Review Board of the AICPA. In performing our review, we obtained an understanding of the system of quality control for the firm's accounting and auditing practice. In addition, we tested compliance with the firm's quality control policies and procedures to the extent we considered appropriate. These tests covered the application of the firm's policies and procedures on selected engagements. Because our review was based on selective tests, it would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it. Because there are inherent limitations in the effectiveness of any system of quality control, departures from the system may occur and not be detected. Also, projection of any evaluation of a system of quality control to future periods is subject to the risk that the system of quality control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. In our opinion, the system of quality control for the accounting and auditing practice of Pena Swayze & Co., L.L.P. in effect for the year ended April 30, 2000, has been designed to meet the requirements of the quality control standards for an accounting and auditing practice established by the AICPA and was complied with during the year then ended to provide the firm with reasonable assurance of complying with professional standards. ott, Vernon & Company, P.C. Completion Date Target Completion Assigned To Procedure PLANNING Read the statement & Implementation guides Discuss implications of GASBS 34 with appropriate management staff. Form GASB 34 team & plan regular meetings. Develop the implementation plan, including a detailed listing of tasks and a timetable for implementation. FUND REVIEW & ACCOUNTING ISSUES Determine the proper fund categories for each of the funds based on the new & revised fund definitions and prepare a listing showing classifications before and after implementation of GASBS 34. Identify major funds. Read and consider th effect of implementing new accounting pronouncements (those issued after GASBS 34 and those applicable to governmental activities for the first time.) Determine which one of the optional formats to use for presenting the statement of net assets, statement of activities, and proprietary fund statements. Review current policies and procedures for capitalizing fixed assets and consider the need for new policies & procedures. Review infrastructure asset records and develop a plan to gather the information necessary to report general infrastructure assets in the financial statements. GASB 34 Implementation Work Program Completion Date Target Completion Assigned To Procedure Determine whether "modified approach" will be used for reporting infrastructure assets. Determine how to assign revenues and expenses to the government -wide statement of activities. Identify assets and liabilities with current & long term portions and determine how current amounts will be calculated.. Identify assets with restrictions and reserved fund balance. Identify how depreciation expense will be assigned or allocated to functions or presented in the statement of activities. Identify any limited situations in which interest or general long -term debt may be allocated to functions rather than being reported as interest on long -term debt. Identify how revenues and expenses will be assigned or allocated to functions or presented in the statement of activities. GASB 34 Implementation Work Program DATE: May 15, 2003 SUBJECT: City Council Meeting — May 22, 2003 ITEM: 11.C.6. Consider a resolution authorizing the Mayor to execute an agreement with Pena Swayze & Co., L.L.P. for the annual audit for the fiscal year ended September 30, 2003. Resource: David Kautz, Assistant City Manager Cindy Demers, Finance Director History: Funding: Cost: $ 66,800 + GASB 34 cost Source of Funds: The General Fund and Water/Wastewater Utility Fund Outside Resources: N/A Impact/Benefit: The audit provides an independent examination of financial records, activities and operations to assess internal control practices, compliance with regulations, grant terms, bond covenants, contractual requirements and fairness of presentations of financial information. The recommended firm also provides valuable ideas and observations intended to help achieve the City's objectives in maintaining adequate financial controls, policies, and procedures. Public Comment: N/A Sponsor: Finance Department The City's Charter requires an annual audit of the financial records to be performed by an independent certified public accountant. The objective of the audit is the expression of an opinion as to whether the City's general - purpose financial statements are fairly presented in conformity with generally accepted accounting principles. Other objectives include reporting on internal controls related to the financial statements and compliance with laws, regulations, and the provisions of contracts or grant agreements in accordance with Government Auditing Standards and Single Audit Act requirements. The local firm has a history of providing the City with outstanding audit service and has exhibited a high level of quality control and professional standards as shown in the attached peer review document. Additionally this year, the firm will be a valuable resource serving as an advisor to the required new financial reporting model implementation team.