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HomeMy WebLinkAbout19-3 Audit Board CommunicationInternal Control Related Matters for Truckee Donner Public Utility District December 31, 2011 MOSS ADAMS LLP Certified Public Accountants I Business Consultants Acumen. Agility. Answers. WWW.MOSSADAMS.COM COMMUNICATION TO THOSE CHARGED WITH GOVERNANCE AND INTERNAL CONTROL RELATED MATTERS To the Board of Directors Truckee Donner Public Utility District We have audited the financial statements of Truckee Donner Public Utility District (the District) as of and for the year ended December 31, 2011, and have issued our report thereon dated June 6, 2012. Professional standards require that we provide you with the following information related to our audit. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA As stated in our engagement letter dated December 14, 2011, our responsibility, as described by professional standards, is to form and express an opinion about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit of the financial statements does not relieve you or management of your responsibilities. Our responsibility is to plan and perform the audit in accordance with generally accepted auditing standards and to design the audit to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control over financial reporting. Accordingly, we considered the District's internal control solely for the purposes of determining our audit procedures and not to provide assurance concerning such internal control. We are also responsible for communicating significant matters related to the financial statement audit that, in our professional judgment, are relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures for the purpose of identifying other matters to communicate to you. PLANNED SCOPE AND TIMING OF THE AUDIT We performed the audit according to the planned scope and timing previously communicated to you in the engagement letter. Praxitx�: MEW01 •' OL08AL ALLIANCE DF INDEPENDENT FIRMS WWW.MOSSAOAMS.CCM MOSS -ADAM►7 UP SIGNIFICANT AUDIT FINDINGS Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the District are described in notes to the financial statements. No new accounting policies were adopted and there were no changes in the application of existing policies during 2011. We noted no transactions entered into by the District during the year for which there is a lack of authoritative guidance or consensus. There are no significant transactions that have been recognized in the financial statements in a different period than when the transaction occurred. Significant Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most significant estimates affecting the financial statements include: Unbilled Revenue - Unbilled revenue is a measure of revenue earned through the end of the reporting period that has yet to be billed. This generally represents accounts with billing cycles that start in the reporting year and end in the subsequent year. We have evaluated the key factors and assumptions used to develop unbilled revenue in determining that it is reasonable in relation to the financial statements taken as a whole. Allowance for Doubtful Accounts - This represents an estimate of the amount of accounts receivable that will not be collected. We have evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole. Recovery Periods for the Cost of Plant - This represents the depreciation of plant assets. Management's estimate of the recovery periods for the cost of plant is based on regulatory -prescribed depreciation recovery periods. We have evaluated the key factors and assumptions used to develop the recovery periods in determining that they are reasonable in relation to the financial statements taken as a whole. Other Post -Employment Benefit Obligations - This represents the amount of annual expenses recognized for post -employment benefits. The amount is actuarially determined with management input. We have evaluated the key factors and assumptions used to develop the annual expenses in determining that it is reasonable in relation to the financial statements taken as a whole. WWW.MOSSAOAMS.CCM MOSS -ADAMS LLP Financial Statement Disclosures The disclosures in the financial statements are consistent, clear, and understandable. Certain financial statement disclosures are particularly sensitive because of their significance to financial statement users. Difficulties Encountered in Performing the Audit We encountered no difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to the appropriate level of management. For purposes of this letter, professional standards define an audit adjustment as a proposed correction of the financial statements made subsequent to the start of audit final fieldwork. An audit adjustment may or may not indicate matters that could have a significant effect on the District's financial reporting process (that is, cause future financial statements to be materially misstated). The adjustments made to the financial statements are as follows: To adjust construction work in process for projects that were completed but not closed to plant in service at December 31, 2011 for approximately $8.0 million (water operations) and $2.4 million (electric operations) To reclassify short-term investments of approximately $11.2 million from non -current to current assets The two audit adjustments noted above are reclassification to certain asset line items; however, they did not affect total assets. Passed adjustments are those entries found during the course of the audit that management has decided to not post to the financial statements. Management has concluded, and Moss Adams has agreed, that the adjustments are immaterial to the financial statements as a whole. Passed adjustments are as follows: To adjust depreciation expense and accumulated depreciation for work orders completed but not closed at year end of approximately $67,000 WWW.MOSSAOAMS.CCM MOSS -ADAM►7 UP Disagreements with Management For purposes of this letter, professional standards define a disagreement with management as a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated June 6, 2012. Management Consultation with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the District's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Other Significant Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the District's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. COMMUNICATION OF INTERNAL CONTROL RELATED MATTERS In planning and performing our audit of the financial statements of the District as of and for the year ended December 31, 2011, in accordance with auditing standards generally accepted in the United States of America, we considered the District's internal control over financial reporting (internal control) as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District's internal control. Accordingly, we do not express an opinion on the effectiveness of the District's internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. 4 WWW.MOSSAOAMS.CCM MOSS -ADAM►7 UP Our consideration of internal control was for the limited purpose described in the first paragraph and was not designed to identify all deficiencies in internal control that might be deficiencies, significant deficiencies, or material weaknesses. We did not note any material weaknesses through our audit procedures. The other matters listed below are not considered material weaknesses or significant deficiencies, but are considerations to enhance the control structure of the District. Other Matters Adjustments to Customer Accounts - During our testing of the billing cycle, we noted that adjustments to customer accounts are typically made by the Billing Clerk and reviewed by the Billing Supervisor or the Customer Service Manager. However, per discussion with the Customer Service Manager, adjustments are reviewed only if they are larger (> $100). In 2011, we found that no written policy exists that explicitly states when adjustments should be reviewed and approved. In discussions with management, we have noted that management updated and implemented additional procedures in early 2012. Work Order Documentation and Close - During our review of the work order cycle, we noted that the process to close work orders is often a verbal communication between the Project Manager / Engineer and the Work Order Specialist. Although we were able to verify verbally with the Engineers that the work orders selected for testing were approved to be closed, implementing a close out form or other documentation that is signed by the Project Manager / Engineer once the work order is in service and ready to be closed would improve the audit trail and would evidence that the work order was in fact complete and ready to close. We also noted that 8 out of 12 work orders selected for testing were in fact complete and in service at December 31, 2011. The result of this was an adjustment of $8.0 million and $2.4 million for water and electric operations, respectively, to close open work orders to plant in service. In addition, we noted that management identified 5 of these work orders as being complete at year end and a resulting entry of $352,000 was recorded to accrue depreciation on these work orders. The remaining 3 open work orders were not identified by management as being complete at year end and therefore we proposed an adjustment for approximately $67,000 to accrue depreciation expense on those work orders. We recommend that management ensure that a thorough review of open work orders is performed on a periodic basis to ensure that all work orders in commercial operation are appropriately closed to plant in service in a timely manner. In discussions with management, we have noted improved procedures in early 2012 that should improve communication and ensure that work orders are closed to plant in a timely manner. WWW.MOSSAOAMS.CCM MOSS -ADAMS LLP Inventory Cycle Counts - During our review of the inventory cycle, we discussed the inventory cycle count procedures and noted that cycle counts are performed each month for a different portion of the warehouse. However, since the busiest construction time is typically in the summer, it may be helpful to ensure that all of the significant inventory items be counted after the construction season. With all of the activity in the summer, this may improve the accuracy of the inventory balance at year end. In discussions with management, we have noted that the 2012 significant inventory cycles counts are scheduled to take place after the construction season. This communication is intended solely for the information and use of management and the Board of Commissioners and is not intended to be and should not be used by anyone other than these specified parties. Portland, Oregon June 6, 2012 2