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Home My WebLink About2019-08-20; City Council; ; City of Carlsbad Annual Financial Audit and Internal Audit ProgramThe role of the external auditors is to express an opinion on the city's financial statements on whether they are materially misstated or not. The focus of the audit is on large transactions, not on every transaction that has been recorded by the city. The external auditors follow Government Auditing Standards that have been created by the American Institute of Certified Public Accountants. Some common procedures performed by the external auditors during the audit may include: • Third party verification of all investments and debt • Testing for proper cutoff of receivables and payables • Testing of pension and other post-employment (OPEB) balances • Analytical testing of revenues and expenditures • Sampling of cash disbursements The audit begins every May with the external auditors conducting interim fieldwork, which includes the planning, scoping and assessment of internal controls of the city (for the purpose of determining audit risk). This phase includes procedures such as gaining an understanding of the city and its activities (things that have occurred during the past fiscal year that could have an impact on the financial statements), making risk and materiality assessments, and determining audit strategy. Unlike the audits of publicly traded companies, the city's external auditors do not issue an opinion on internal controls of the city. While the auditors perform certain procedures every year, they also modify their audit procedures each year to allow for an element of unpredictability. During the interim period, the auditors also meet with key staff members to gain a better understanding of the city's internal controls. At the conclusion of the audit, the auditors will make recommendations on how the city can improve their internal controls through a separately issued report. The auditors will also review any audit reports generated by the city's internal auditor and any other audits that the city has undergone during the year, to further access any potential areas of risk. Independent fraud questionnaires are annually sent out to randomly selected city staff members and City Council at this time. During the months of July through September, finance staff is busy closing out the fiscal year and preparing schedules and draft financial statements for the financial audit. During this time, the auditors will notify the City Council of the status of the audit, ask the individual City Council members if they have any knowledge of any matters that may affect the auditor's risk assessment, notify the City Council of the timing of the audit, and address the planned scope bf the audit. By September, the city is actively engaged in the year-end audit, which typically lasts for about a month. During this time, finance staff will finalize the city's financial statements and related reports, and research, answer and address any items brought up by the audit. Once onsite fieldwork has been completed by the auditors, additional audit work is performed at the office of the auditors. Additional analysis, analytical review, and inquiries of the city are made during this period of 30 to 60 days. At the same time, the workpapers and financial statements of the city are put through a series of quality control measures at the office of the auditors. By the end of November/beginning of December, the final financial statements, including the Comprehensive Annual Financial Report (CAFR), are ready for final review by City of Carlsbad finance staff prior to issuance. The reports issued include: August 20, 2019 Item #12 Page 2 of 4 • Auditor opinion • Comprehensive Annual Financial Report (CAFR) • Report on significant audit findings (SAS 114 report) • Communications regarding internal control report • Single audit report • Agreed-upon procedures applied to appropriations limit worksheets • Data collection form In addition to having an annual financial audit done by an independent external auditing firm, the City of Carlsbad has an internal auditor. The role of the internal auditor is to assess risk areas, create an annual audit plan, perform audits that may result in findings and recommendations, and provide other advisory services as requested by management. This position resides in administrative services, reports directly to the deputy city manager of administrative services, and is independent of all city departments, including finance. This independence is crucial to ensure that the work performed by the internal auditor is not directly influenced by any one department but rather acts separately from all departments within the city. Although the role of internal auditor is separate from the role of the city's external auditors, the work performed by the internal auditor is used by the external auditors to help assess areas in the city that could be more at risk and require additional auditing by the firm. The city's external auditors focus more on verification of accuracy and completeness of the city's financial information while the internal auditor's role is to add value and improve operations by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, internal control, and governance processes. There are other audits and agreed upon procedures (AUPs) performed by external organizations on a periodic basis. These audits and AUPs are conducted to determine whether funding provided by the organizations to the city complies with their funding requirements. Some examples include: • Annual TransNet AUP coordinated through SAN DAG • Transportation Development Act (TOA) audits performed when the city utilizes TOA funds in a fiscal year • Section 8 audits conducted by the federal government • Periodic sales tax audits performed by the State of California • Periodic Internal Revenue Service (IRS) audits performed by the IRS All of these external audits, internal audits and AUPs comprise the City of Carlsbad's audit program and all are vital in ensuring that proper stewardship of the city's assets is maintained. Fiscal Analysis This is an informational item with no fiscal impact. Next Steps Receive and accept staff presentation. August 20, 2019 Item #12 Page 3 of 4 Environmental Evaluation (CEQA) Pursuant to Public Resources Code Section 21065, receiving this annual report does not constitute a "project" within the meaning of CEQA in that is has no potential to cause either a direct or indirect physical change in the environment, or a reasonable foreseeable indirect physical change in the environment and, therefore, does not require environmental review. Public Notification This item was noticed in accordance with the Ralph M. Brown Act and was available for public viewing and review at least 72 hours prior to the scheduled meeting date. Exhibit None. August 20, 2019 Item #12 Page 4 of 4 Kevin Branca, Finance Director Jennifer Farr, Partner, Davis Farr LLP Brigid Okyere, Internal Auditor August 20, 2019 Carlsbad’s Financial Audit and Internal Audit Programs Agenda •Why do a financial audit? •Selection of the audit firm •Rotation of auditors •Audit process and timing •Reports generated •Additional audits •Role of our Internal Auditor 2 Why Do a Financial Audit? •Help to ensure proper stewardship of city assets and liabilities •Provide timely information so that the best and effective financial decisions can be made •Required by the State of California 3 Selection of the Audit Firm •In early 2017, Davis Farr LLP was selected from 13 proposals based on: Services provided to other agencies Quality of professional personnel Experience in auditing federal programs Experience in meeting GFOA award Ability to access firm resources Overall cost 4 Rotation of Auditors The California State Controller amended the state law requiring all agencies to rotate partners on their audits every six years beginning in FY2013-14. This will occur in Carlsbad in FY20-21. 5 Financial Statement Audit •Purpose is to express an opinion that the financial statements are not materially misstated •Focus is on large transactions •Auditors follow Government Auditing Standards 6 Common Audit Procedures •3rd party verification of all investments and debt •Testing for proper cutoff of receivables and payables •Testing of pension and OPEB balances •Analytical testing of revenues and expenditures •Sampling of cash disbursements 7 Audit Plan for FY18-19 •Interim procedures in May, Single Audit testing in August, final audit in September, finalize in December •Audit team of six people spend approx. 800 hours •Special focus on the Golf Course because there is a new management company, Section 8 grant compliance, and data mining for payroll anomalies 8 Internal Controls and Fraud •Evaluated for the purpose of determining audit risk •Fraud inquiries of city staff and City Council •Unlike audits of publicly traded companies, auditors do not issue an opinion on internal controls for governments Will report significant deficiencies, material weaknesses, and material noncompliance to Council 9 Reports Issued •Auditor opinion •Comprehensive Annual Financial Report (CAFR) •Report on significant audit findings •Communications regarding internal control report •Single audit report •Agreed-upon procedures applied to appropriations limit worksheets •Data collection form 10 Other Audits and AUPs •Annual TransNet AUP coordinated through SANDAG •Transportation Development Act (TDA) audits (only done when TDA funds are utilized) •Section 8 federal audits •Periodic sales tax audits (State of California) •Periodic IRS audits •Periodic CalPERS audits 11 Internal Auditing •Responsibilities: Provide audit and consulting services, develop a risk-based audit approach, report on significant issues, make recommendations •Will: Work as a team with city employees to improve processes •Won’t: Direct activities of employees, prepare or approve accounting transactions 12 Questions 13