HomeMy WebLinkAbout3/17/2020 Item 14, Elke
Council Agenda Correspondence
City of San Luis Obispo, Council Memorandum
DATE:March 13, 2020
TO:City Council
FROM: Brigitte Elke,Finance Director
Prepared by: Debbie Malicoat, Accounting Manager/Controller
VIA:Derek Johnson, City Manager DJ
SUBJECT:ITEM 14-ACCEPTANCE OF THE COMPREHENSIVE ANNUAL
FINANCIAL REPORT, SINGLE AUDIT REPORT, AND ANNUAL AUDIT OF
TRANSPORTATION DEVELOPMENT ACT FUNDS FOR 2018-19
As referenced in the Council Agenda Report, the Single Audit Report and Annual Audit of
Transportation Development Act (TDA) Funds for fiscal year 2018-19 documents were not
available at the time of the Council Agenda Report publication. The Single Audit Report is
attached here for reference(Attachment A).The Single Audit Report includes findings related to
the audit as well as the City’s response to those findings.
Since posting of the Council Agenda on March 10, 2020, which included the final draft of the
Comprehensive Annual Financial Report,threeadditional transactions have been identified that
will be reflected inthe final numbers onthe financial statements.There is no net impact to the
overall financial condition of the Cityand in itselfthe transactions are considered immaterial.
However, since the changes are known, the auditors will adjust the financial statements in order to
present the most accurate information possible.These include:
1.A reclassification of $373,058 in the Transit Fund. This has no net impact on fund balance,
as the transaction was originally recorded as a reduction in revenue, however the correct
treatment is to reflect these as expenditures.
2.A reclassification of $121,932, increasing General Fund planning and engineering services
revenues and decreasing Agency Fund liabilities.
3.A reclassification of $71,950 in SB1 funding that was originally recorded as Gas Tax
revenue in the General Fund.
Attachment A–Single Audit Report
City of San Luis
Obispo
San Luis Obispo, California
Single Audit Reports
For the year ended June 30, 2019
City of San Luis Obispo
Single Audit Reports
For the year ended June 30, 2019
Table of Contents
Page
Independent AuditorÔs 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 .................................................................... 1
Independent AuditorÔs Report on Compliance for Each Major Program and on
Internal Control over Compliance Required by the Uniform Guidance ......................................................... 3
Schedule of Expenditures of Federal Awards ..................................................................................................... 7
Notes to the Schedule of Expenditures of Federal Awards .............................................................................. 8
Schedule of Findings and Questioned Costs ....................................................................................................... 9
INDEPENDENT AUDITORÔS 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 Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
We have audited, in accordance with the 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 San
Luis Obispo, California (City), as of and for the year ended June 30, 2019, and the related notes to the
financial statements, which collectively comprise the CityÔs basic financial statements and have issued our
report thereon dated January 10, 2020.
Internal Control Over Financial Reporting
In planning and performing our audit of the financial statements, we considered the CityÔs 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 CityÔs internal control. Accordingly, we do not
express an opinion on the effectiveness of the CityÔs internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and
was not designed to identify all deficiencies in internal control that might be material weaknesses or
significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that have
not been identified. However, as described in the accompanying schedule of findings and questioned costs,
we did identify certain deficiencies in internal control that we consider to be material weaknesses and
significant deficiencies.
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 a combination of deficiencies, in
internal control such that there is a reasonable possibility that a material misstatement of the entityÔs
financial statements will not be prevented, or detected and corrected on a timely basis. We consider the
deficiencies described in the accompanying schedule of findings and questioned costs as items 2019-001,
2019-002, 2019-003 and 2019-004 to be material weaknesses.
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
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. We
consider the deficiencies described in the accompany schedule of findings and questioned costs as items
2019-005 to be significant deficiencies.
Compliance and Other Matters
As part of obtaining reasonable assurance about whether the CityÔs 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.
City of San Luis ObispoÔs Response to Findings
CityÔs response to the findings identified in our audit is described in the accompanying schedule of findings
and questioned costs. CityÔs response was not subjected to the auditing procedures applied in the audit of
the financial statements and, accordingly, we express no opinion on it.
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 entityÔs internal
control or on compliance. This report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering the entityÔs internal control and compliance. Accordingly, this
communication is not suitable for any other purpose.
Badawi & Associates
Certified Public Accountants
Berkeley, CA
March XX, 2020
2
INDEPENDENT AUDITORÔS REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND
ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE
AND ON THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
Union City, California
Report on Compliance for Each Major Federal Program
We have audited the City of San Luis Obispo, CaliforniaÔs (City) compliance with the types of compliance
requirements described in the OMB Compliance Supplement that could have a direct and material effect on
each of the CityÔs major federal programs for the year ended June 30, 2019. The CityÔs major federal
programs are identified in the summary of auditorÔs results section of the accompanying schedule of
findings and questioned costs.
ManagementÔs Responsibility
Management is responsible for compliance with federal statutes, regulations, and the terms and conditions
of its federal awards applicable to its federal programs.
AuditorÔs Responsibility
Our responsibility is to express an opinion on compliance for each of the CityÔs 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 CityÔs 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 CityÔs compliance.
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 2
Opinion on Each Major Federal Program
In our opinion, the City, complied, in all material respects, with the types of compliance requirements
referred to above that could have a direct and material effect on each of its major federal programs for the
year ended June 30, 2019.
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 CityÔs 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 CityÔs 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,
material weaknesses may exist that have not been identified.
4
To the Honorable Mayor and Members of City Council
of the City of San Luis Obispo
San Luis Obispo, California
Page 3
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 June 30,
2019, and the related notes to the financial statements, which collectively comprise the CityÔs basic financial
statements. We issued our report thereon dated March XX, 2020, 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.
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.
Badawi and Associates
Certified Public Accountants
Berkeley, California
March XX, 2020
5
This page intentionally left blank
6
City of San Luis Obispo
Schedule of Expenditures of Federal Awards
For the year ended June 30, 2019
FederalState
CatalogPass-throughProgramSubrecipient
Grantor Agency and Grant TitleNumberNumberExpendituresPayments
U.S. Department of Transportation
Highway Planning and Construction Cluster
Passed Through the State of California Department of Transportation
BRLS-5016(050)
Highway Planning and Construction20.205$ 43,195$ -
HSIPL-5016(053)
Highway Planning and Construction20.205 2,812 -
Subtotal Highway Planning and Construction Cluster46,007 -
Federal Transit Cluster
Direct Program:
Federal Transit Formula Grants20.6001,367,409 -
Subtotal Federal Transit Cluster1,367,409 -
Total U.S. Department of Transportation -1,413,416
U.S. Department of Justice
Direct Programs
Edward Bryne Memorial Justice Assistance Grant Program16.738 12,008 -
Total U.S. Department of Justice 12,008 -
U.S. Department of Housing and Urban Development
CDBG-Entitlement Grants Cluster
Passed Through County of San Luis Obispo
Community Development Block Grants/Entitlement Grants14.218B-16-UC-06-0508 36,960 -
Subtotal CDBG-Entitlement Grants Cluster36,960 -
Total U.S. Department of Housing and Urban Development 36,960 -
Total Expenditures of Federal Awards$ 1,462,384$ -
See accompanying Notes to Schedule of Expenditures of Federal Awards.
7
City of San Luis Obispo
Notes to the Schedule of Expenditures of Federal Awards
For the year ended June 30, 2019
A.Reporting Entity
The City is a California charter city. It was incorporated on February 19, 1856 and chartered on May 1,
1876. It is organized in accordance with the Council-Mayor-City Manager form of government. With a
population of approximately 46,802, the City provides a broad range of municipal services, including
police and fire protection, parks and recreation, water and sewer utilities, street maintenance, public
transportation, parking, planning, and building and safety.
B.Basis of Accounting
Funds received under the various grant programs have been recorded within the special revenue funds
of the City. The City utilizes the modified accrual method of accounting for the special revenue funds.
Modified accrual accounting recognizes revenues when they become available and measurable and,
with a few exceptions, recognizes expenditures when liabilities are incurred. The accompanying
Schedule of Expenditures of Federal Awards (Schedule) has been prepared on the modified accrual
basis of accounting.
C.Relationship of Schedule of Expenditures of Federal Awards to Financial Statements
The accompanying Schedule presents the activity of all federal financial assistance programs of the City.
Federal financial assistance received directly from federal agencies as well as federal financial assistance
passed through the State of California is included in the Schedule.
The Schedule was prepared only from the accounts of various grant programs and, therefore, does not
present the financial position or results of operations of the City.
D.Pass-Through EntitiesÔ Identifying Number
When federal awards were received from a pass-through entity, the Schedule shows, if available, the
identifying number assigned by the pass-through entity. When no identifying number is shown, the
City determined that no identifying number is assigned for the program or the City was unable to
obtain an identifying number from the pass-through entity.
E.Indirect Costs
The City did not elect to use the 10% de minimis indirect cost rate.
8
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section I - Summary of AuditorÔs Results
Financial Statements
Types of auditorÔs report issued: Unmodified
Internal control over financial reporting:
Material weakness(es) identified?Yes
Significant deficiency(ies) identified?Yes
Any noncompliance material to the financial statements noted? No
Federal Awards
Internal control over major programs:
Material weakness(es) identified?No
Significant deficiency(ies) identified? None noted
Type of auditorÔs report issued on compliance for major programs Unmodified
Any audit findings disclosed that are required to be reported in
Accordance with section 200.516(a) No
Identification of major programs:
CFDA Number(s)Name of Federal Program or ClusterExpenditures
20.600Federal Transit Formula Grants$ 1,367,409
Total Expenditures of All Major Federal Programs$ 1,367,409
Total Expenditures of Federal Awards$ 1,462,384
Percentage of Total Expenditures of Federal Awards 93.5%
Dollar threshold used to distinguish between type A and type B program $750,000
Auditee qualified as low-risk auditee under
section 200.520? No
9
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section II Ï Current Year Findings
A.Financial Statement Audit Finding
2019-001 Year-End Close and Balance Sheet Account Reconciliations (Material Weakness)
Criteria: The City is responsible for fair presentation of the financial statements in conformity with
accounting principles generally accepted in the United States of America. In addition, an effective internal
control system over financial closing and reporting provides reasonable assurance for the safeguarding of
assets, the reliability of financial information, and compliance with laws and regulations.
Condition: During the performance of the audit, we noted that the CityÔs closing process have not
identified that several closing journal entries were not prepared and recorded which caused several account
balances to be misstated. Example of these closing entries are interest revenue allocation, interest payable
accrual, pool-cash fund cleanup and long-term debt activities.
In addition, the City had to record a large number of adjusting entries after the closing process was
complete to record transactions not previously recorded or to correct transactions or balances previously
recorded in error. Those adjusting entries should have been part of the closing process and the timing of
recording those adjusting entries have caused some delays and added complexity in the audit
Finally, we noted that the City did not perform reconciliations over capital assets and long-term debt
accounts causing large variances to not be identified between the subsidiary ledgers and the CityÔs general
ledger prior to the start of the audit.
Effect: The CityÔs accounting records needed significant adjustments after the closing of the books and the
start of the audit which caused delays in the audit and added more complexity in dealing with the large
volume of adjustments.
Cause: The CityÔs closing process was not comprehensive enough to identify timely all the journal entries
and adjustments needed to ensure the accuracy of the various account balances. The closing process did
not include reconciliations of the subsidiary ledgers to the general ledgers to ensure that variances are
identified and timely addressed.
The City implemented a new financial software, however formally written accounting policies and
procedures related to the system were not developed.
Recommendation:
We recommend that the City update its closing process to ensure all transactions and adjustments are
accounted for. The City should provide cross training of finance staff to ensure continuity during the
financial reporting process and audit in case the City experience turnover in key finance positions.
10
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
The City should furthermore develop formal written policies over significant accounts that include the
timely reconciling of accounts to activity reported in related subsidiary ledgers. Also, the City should
develop a checklist for year-end closing procedures.
ManagementÔs response:
The City implemented a new financial management software in the prior fiscal year and has experienced
staff turnover, which has delayed the development of procedures and protocols for closing each month and
reconciling the general ledger and subledgers. Formally written accounting policies and procedures will be
developed immediately for month-end and year-end closing that will address these issues. In addition, the
City will develop a year-end checklist to ensure all appropriate reconciliations are performed.
11
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section II Ï Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-002 Capital Assets Reconciliation (Material Weakness)
Criteria: A good internal control reporting system over capital assets requires the maintenance of detail
records of all capital assets to be able to support amounts reported on the financial statements and to ensure
safeguarding of assets.
Condition: The City has established basic procedures to ensure that capital asset additions are properly
capitalized, capital asset disposals are properly recorded, and current year depreciation expense for capital
assets are recorded at the fund-financial statement level for proprietary funds and at the government-wide
financial statement level for governmental funds.
However, reconciliations among the CityÔs fixed asset module (sub-ledger), manually generated roll-
forward schedules and general ledger were not performed causing large variances to not be identified by
City staff prior to year-end audit procedures.
The City had also not performed a physical inventory of assets to determine whether they were still in the
CityÔs possession at the end of the fiscal year.
Cause: Procedures are not in place to reconcile the general ledger capital asset balances to the CityÔs capital
asset module as well as to reconcile the general ledger capital asset balances to the CityÔs manually
generated roll-forward schedules.
Effect: While not resulting in any current adjustment in the capital assets, numerous capital assets were
misclassified in the sub-ledgers, which cannot be reconciled to the general ledgers by each category of
capital assets.
Recommendation: We recommend that the capital asset subsidiary ledgers to be maintained and reviewed
by management on a timely basis and any discrepancies between the subsidiary ledgers and the CityÔs
general ledger are reconciled in order to accurately capture capital activity in the current period. In
addition, the CityÔs manually generated capital asset roll-forward schedules should be reconciled to the
general ledger to verify accuracy in calculations and current year journal entries to record capital asset
activity. We also recommend that the City perform a physical inventory of all capital assets to ensure the
completeness and accuracy of the subsidiary ledgers and general ledger.
ManagementÔs Response:
The rollout of the new Oracle ERP system introduced significant challenges for the City this year. The new
ERP system went live 3-month into FY2018-19 during the month of October. This project involved
converting significant amounts of data from the old system to Oracle including supplier information,
vendor information, historical trial balances and general ledger activity. In addition, the City updated and
significantly changed its chart of accounts, introduced a new purchase requisition system and spent
significant resources in preparing for the payroll implementation which occurred in the month of July 2019.
12
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Despite this significant amount of resources spent on the implementation in other areas, the City was still
able to migrate its Capital asset information into the new system, which contains many data points on the
CityÔs fixed assets. However, there were discrepancies between the general ledger totals and the subledger
that remained and which the City was not able to reconcile before year end. The City is confident that the
general leger is presented correctly and that what is needed is identifying discrepancies that exist in the
subledger on individual assets. The City plans to conduct a full internal audit of fixed assets to properly
reconcile all GL balances and to identify and correct any discrepancies during FY2019-20. These corrections
may include corrections to fixed asset classifications, useful life, accumulated depreciation etc. In addition,
the City plans to enhance its work papers including a full reconciliation for all CityÔs assets.
13
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section II Ï Current Year Findings, continued
A.Financial Statement Audit Finding, continued
2019-003 Journal Entries Posting and Numbering (Material Weakness)
Criteria: Journal entries should be independently prepared, reviewed, and posted to the general ledger
with unique identification number. In addition, journal entries should be adequately documented to
support its accuracy and purpose.
Condition: During the performance of the audit, we noted the following regarding the CityÔs journal entry
process:
The City was unable to provide us with documentation or documentation was insufficient for
journal entries selected for review.
The City uses various numbering schemes (a date and time format, a subsidiary ledger-month
format, other) that makes it difficult to determine the number of journal entries recorded and the
sequence of entries.
The City does not maintain a log of manual journal entries to document the accountability of all
journal entries, the preparer, the approver, and the purpose of why the entry was recorded.
Journal entries can be prepared and posted without system restriction, and no controls in place to
ensure the journal entries are approved before posted.
Cause: The City does not have formal written procedures for journal entries.
Effect: Journal entries recorded in the CityÔs accounting system may be inaccurate, unapproved or
unsupported.
Recommendation: We recommend that the City implement formal written procedures and policies over
journal entries to ensure only accurately prepared and supported journal entries are recorded to the general
ledger.
ManagementÔs Response:
With the implementation of the Oracle financial management software, a protocol was put in place to
provide a unique identification number for each journal entry. However, the City did not maintain a log of
all journal entries entered into the system. The City will revise the journal entry numbering system such
that sequential numbers are automatically assigned to manual journal entries. In addition, the City will
create written procedures for journal entries that includes how the supporting documentation and
appropriate approvals are to be verified.
14
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section II Ï Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-004 Subsidiary ledger Reconciliation (Material Weakness)
Criteria: An effective internal control system over financial reporting requires the maintenance of all
subsidiary ledgers to be reconciled to the general ledger and be able to support amounts reported on the
financial statements. An effective internal control system over financial reporting provides reasonable
assurance for the safeguarding of assets, the reliability of financial information, and compliance with laws
and regulations.
Condition: During the performance of the audit, we noted the following subsidiary ledgers are in different
systems than the general ledger, and the transactions were captured in the general ledger by posting
manual journal entries:
Payroll
Utility Billings
However, no reconciliation were performed between these subsidiary ledgers and general ledger to ensure
the journal entries posted correctly.
Cause: The City does not have formal written procedures for subsidiary ledgers reconciliation.
Effect: Considering the City doesnÔt have a regular bank reconciliation process in place, lack of
reconciliation between subsidiary ledgers and general ledger could potentially result in undetected errors
or unauthorized transactions.
Recommendation: We recommend the City perform regular reconciliation between the general ledger and
subsidiary ledgers.
ManagementÔs Response:
During this fiscal year the City has implemented the payroll module of the Oracle system, which will
automatically integrate the payroll subledger with the general ledger. This will aid in ensuring that the
subledgers are reconciled to the general ledger. In addition, the City will perform regular and timely
reconciliations between the subledger and general ledgers and will develop written procedures for such
reconciliations
15
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section II Ï Current Year Findings, continued
A. Financial Statement Audit Finding, continued
2019-005 Bank Reconciliation (Significant Deficiency)
Criteria: An effective internal control system over cash and investments includes frequent and timely
reconciling of account balances to information provided by the bank and custodians.
Condition: During the performance of the audit, we noted that bank reconciliations were not performed
until the start of the engagement. As a result, we noted that the total cash and investments represented in
the general ledger did not agree to the bank confirmations total by around $25,000.
Cause: During the fiscal year under audit, the City experienced turnover in positions with significant roles
in the CityÔs financial reporting and closing process. The City was not able to perform the bank
reconciliations timely as there was not sufficient cross training in place to ensure continuity of the process.
Effect: Errors and fraud can go undetected without frequent and timely bank reconciliation.
Recommendation: We recommend the City develop formal written policies over cash and investments that
include the timely reconciling of accounts and include cash and investment accounts reported in each fund.
ManagementÔs Response:
2019-005:
The City will develop formal written policies over cash and investments that include the timely and regular
reconciliation of accounts for each fund and integration into its Revenue Management Manual. In addition,
the City will cross train staff such that this function is able to be performed in a timely manner.
16
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section II Ï Current Year Findings, continued
B. Federal Award Program Audit Finding
No findings or questioned costs were noted in the current year.
17
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section III - Prior Year Findings
A. Financial Statement Audit Finding
Finding 2018.100: Year-End Close and Balance Sheet Account Reconciliations (Material Weakness)
Criteria: The City should have policies and procedures in place to reconcile year-end balance sheet accounts
to ensure they are properly stated in accordance with generally accepted accounting principles. Those
policies and procedures should require the City staff to perform reconciliation and analysis procedures to
identify and record year-end closing entries.
Condition: During audit testwork, we noted that year-end reconciliation and analysis procedures were not
performed on numerous balance sheet accounts at June 30, 2018. Therefore, we identified numerous
material year-end closing entries at the fund level that had not been recorded by the City or were recorded
incorrectly, including: accruals for receivables that were accounted for in the incorrect fiscal year or not
relieved when the cash was received; accruals for payroll due to incorrect reversals of prior year journal
entries; and accruals for compensated absences due to incorrect postings of current year journal entries and
incorrectly double or triple accruing for employees who work under various funds. In addition, we
identified numerous instances of current year transactions that were recorded in incorrect funds or
accounts, which attributed to some of the aforementioned stale accrual balances.
Cause: Policies and procedures are not in place to ensure that balance sheet accounts are reconciled and
year-end closing entries are identified and recorded.
Effect: Numerous year-end balance sheet items were stated incorrectly. Material audit adjustments were
posted to the audited financial statements at the fund level to correct these issues.
Recommendation: We recommend that the City evaluate and update a documented periodic and year-end
closing process, including the reconciliation of balance sheet accounts to identify and record month and
year-end closing entries so they are properly stated in accordance with generally accepted accounting
principles.
Status: See current year finding 2019-001
18
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
Finding 2018.200: Cash Receipts and Revenue Recognition (Material Weakness)
Criteria: Under generally accepted accounting principles, revenue should be recognized in the proper
period and with the correct amounts. In addition, the City should have procedures in place to ensure that
cash receipts are consistently processed and reconciled in a manner that facilitates this recognition.
Condition: During audit testwork, we identified multiples instances where revenue was double-counted
due to the correct recording of an accrual in the prior year, but the incorrect recording of related cash
receipts as new revenue in the current year. We identified another instance where property tax revenue for
the next fiscal year was incorrectly accrued in the current year causing property tax revenue to be
overstated. We identified a third instance in which cash receipts for property tax revenue were recorded to
the incorrect revenue account or incorrect period, leaving the related revenue and receivables outstanding
to be in disagreement with the actual property tax amounts in the current year.
Cause: Procedures are not in place to ensure that cash receipts are consistently processed and reconciled in
the proper period.
Effect: Revenue was overstated in some instances and understated in others. Material audit adjustments
were posted to the audited financial statements at the fund level to correct these issues.
Recommendation: We recommend that the City evaluate and document the cash receipts process,
communicate to staff the principles of proper revenue recognition under governmental accounting, and
implement procedures to link the cash receipts process to the process for recording revenue. We also
recommend that the City utilize third-party reconciliations and reports when verifying the proper recording
of cash receipts and revenue.
Status: None noted in current year
19
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
Finding 2018.300: Capital Assets (Material Weakness)
Criteria: Generally accepted accounting principles for state and local governments require governments to
report capital assets, related accumulated depreciation and depreciation expense at the fund-financial level
for proprietary funds and at the government-wide financial statement level for governmental funds.
Condition: The City has established basic procedures to ensure that capital asset additions are properly
capitalized, capital asset disposals are properly recorded, and current year depreciation expense for capital
assets are recorded at the fund-financial statement level for proprietary funds and at the government-wide
financial statement level for governmental funds. However, testwork discovered that current year activity
and balances for both governmental and proprietary funds were incorrectly reported in the CityÔs financial
statements due to improper manual reconciliations and journal entry posting procedures. In addition,
reconciliations between the CityÔs fixed asset module and general ledger were not performed causing large
variances to not be identified by City staff prior to year-end audit procedures. Finally, it was noted that the
CityÔs capital asset module is not properly rolling forward beginning balances as of July 1, 2017, causing
reports to be unreliable for reconciliation purposes.
Cause: Procedures are not in place to reconcile the general ledger capital asset balances to the CityÔs capital
asset module as well as to reconcile the general ledger capital asset balances to the CityÔs manually
generated roll-forward schedules.
Effect: Current year depreciation expense for the Water and Sewer Funds were recorded incorrectly
resulting in material adjusting journal entries to the CityÔs general ledger for these funds. In addition, while
not resulting in a current year adjustment, various additions were incorrectly recorded in the CityÔs capital
asset module, causing unreconciled differences to the general ledger. Finally, not all current year addition
activity for governmental funds was included on the CityÔs manual workbook causing material adjustments
to the capital asset GASB conversion entry during financial statement reporting procedures.
Recommendation: We recommend that the capital asset software continue to be maintained and reviewed
by management on a timely basis and any discrepancies between the software and the CityÔs general ledger
are reconciled in order to accurately capture depreciation expense and capital activity in the current period.
In addition, the CityÔs manually generated capital asset roll-forward schedules should be reconciled to the
general ledger to verify accuracy in calculations and current year journal entries to record capital asset
activity.
Status: See current year finding 2019-002
20
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section III - Prior Year Findings, continued
A. Financial Statement Audit Finding, continued
Finding 2018.400: Recording Investment Activity (Significant Deficiency)
Condition: During the audit, we noted several instances where investment activity was not recorded or
improperly recorded. In some instances, the recorded investment balances did not agree to the investment
statements. In another instance, interest earned on some investment accounts in the last quarter of the fiscal
year was not recorded. We also noted for one investment account, investment income was recorded net of
fees.
Criteria: Under generally accepted accounting principles, governments are generally required to present
investments at fair value and to report investment income for the period. While the standards do not
specify how fees related to investments should be reported in general, recording investment fees separate
from investment income adds transparency and allows users of the financial statements to better identify
investment performance and associated costs.
Cause: Procedures are not in place to ensure that investment activity is recorded completely in a period, or
that investment balances are reported at their fair value as of the period end date.
Effect: Several year-end investment balances were stated incorrectly, and investment activity recorded
during the year was incomplete. Investment income recorded net of fees created a lack of transparency.
Though not material, several audit adjustments were posted to the general ledger at the fund level to
correct these issues.
Recommendation: We recommend that the City evaluate and update a documented periodic and year-end
closing process, including the reconciliation of investment balances and activity to identify and record
month and year-end closing entries so they are properly stated in accordance with generally accepted
accounting principles.
Status: See current year finding 2019-001
21
City of San Luis Obispo
Single Audit Reports
Schedule of Findings and Questioned Costs
For the year ended June 30, 2019
Section III - Prior Year Findings, continued
B. Federal Award Audit Finding
No findings or questioned costs were noted in the prior year.
22