Audit 411896

Criteria: The auditee is required to prepare a Schedule of Expenditures of Federal Awards (SEFA) for the period covered by its financial statements. The SEFA must include total federal awards expended, identified by federal agency and Assistance Listing number, and must include other required program and subrecipient information. Federal awards expended are determined in accordance with 2 CFR 200.502. Condition: During the audit, eight (8) adjustments were necessary to correct the Schedule of Expenditures of Federal Awards. Of the eight adjustments, only Adjustments #4 through #8, totaling $71,194.84, related to a federal program included in the current year Single Audit. These adjustments affected the reported expenditures for Water and Waste Disposal Systems for Rural Communities, Assistance Listing No. 10.760, which changed from $1,087,655.94 to $1,158,850.78. The other three adjustments, totaling ($261,728.73), related to federal awards not included in the current-year Single Audit/awards not subject to Single Audit testing/other programs. Those adjustments were nevertheless necessary to present the SEFA accurately. Management posted the necessary adjustments, and the final SEFA reflects the corrected amounts. Cause of Condition: The condition occurred because the entity’s year-end process did not include a sufficiently effective reconciliation and review of federal award expenditures reported on the SEFA. Specifically, the entity did not adequately reconcile the SEFA to grant reimbursement reports, federal financial reports, general ledgers, or other supporting records before issuing the schedule.Potential Effect of Condition: As initially prepared, the SEFA did not accurately present federal awards expended during the fiscal year. The error affecting the program included in the Single Audit resulted in five adjustments totaling $71,194.84 to the expenditures reported for Water and Waste Disposal Systems for Rural Communities. Although the other three adjustments did not affect federal programs selected for Single Audit testing, they demonstrate that the entity’s process for preparing and reviewing the SEFA was not sufficiently effective to prevent or detect material misstatements in the schedule.

Criteria: The USDA Rural Development loan documents and Letter of Conditions require the City to establish and maintain designated reserves for short-lived assets and debt service. Condition: The City did not establish and fund the reserves required by its USDA Rural Development loan documents and Letter of Conditions. Specifically, the City failed to: • Reserve $6,000 annually for short-lived asset replacement for the life of the loan; and • Reserve $988.31 per month for debt service, up to a maximum required reserve of $118,597. As a result, the City had not accumulated the required reserve balances as of fiscal year-end. Cause of Condition: The City did not have adequate procedures to monitor the reserve requirements contained in its USDA loan documents and to ensure that the required monthly and annual transfers were made to separate reserve accounts. Potential Effect of Condition: The City’s failure to establish and fund the required reserves resulted in noncompliance with the terms of its USDA Rural Development financing. The City may not have sufficient resources available for the replacement of short-lived assets or the payment of future debt service, and the condition could place the City at risk of violating its loan agreement and Letter of Conditions.