Audit 412758

Adjusting Journal Entries and Required Disclosures to the Financial Statements Condition and criteria: During the current year, adjusting journal entries, along with footnote disclosures were proposed by the auditors and accepted by the Water Authority to properly reflect the financial statements in accordance with generally accepted accounting principles. Some of the adjustments and footnotes were related to recording assets and liabilities on the accrual basis of accounting. In addition, a draft of the financial statements was prepared by the auditors. Cause: The Water Authority requires assistance for external financial reporting in accordance with accounting principles generally accepted in the United States of America. Effect: AU-C Section 265 entitled Communicated Internal Control Related Matters Identified in an Audit, issued by the American Institute of Certified Public Accountants (AICPA) considers the need for significant adjusting journal entries and assistance when preparing the financial statements to be indicative of an internal control deficiency. Without this assistance, the potential risk exists of the Water Authority’s financial statements not conforming with Generally Accepted Accounting Principles (GAAP). Auditor’s Recommendations: Although auditors may continue to provide such assistance both now and in the future, under the pronouncement, the Water Authority should continue to review and accept both proposed adjusting journal entries and footnote disclosures, along with the drafted financial statements. Water Authority’s Response: The Water Authority has received, reviewed and approved all journal entries, footnote disclosures and draft financial statements proposed for the current year audit. The Water Authority will continue to review and approve similar information in future years. Further, the Water Authority believes it has a thorough understanding of these financial statements and the ability to make informed judgments on those financial statements. Lastly, the Water Authority considers such assistance provided by the auditors to be the most cost effective manner to prepare such information.

Segregation of Duties Conditions and Criteria: The limited number of accounting staff prevents a proper segregation of accounting functions necessary to assure adequate internal control. It is difficult, if not impossible, to segregate duties of the general accounting, general ledger, and journal entry functions from custody of and control over assets such as cash. Cause: The Water Authority is a small government with a limited number of personnel. Effect: A fundamental element of an effective internal control system is the proper segregation of duties. Proper segregation of duties provides for a system of checks and balances and entails assigning responsibilities of authorizing and recording transactions among different people in the Water Authority. Auditor’s recommendation: Management should constantly be aware of this condition and realize that the concentration of duties and responsibilities in a limited number of individuals is not desirable. Under these conditions, the most effective controls lie in the Board's knowledge of matters relating to the Authority's operations. The Board's continued involvement in the Authority's operations is needed to mitigate the lack of segregated duties. The Authority could enhance its internal controls by having a member of the Board of Directors or someone independent of the preparer perform the following functions: review monthly bank reconciliations; review journal entries; review payroll journals that summarize employee compensation; and review check registers. Water Authority’s Response: Because of the limited number of personnel in the office, the Water Authority recognizes the limitations with regard to segregation of duties and therefore will consider mitigating controls. The Water Authority will continue to have a Supervisor review monthly bank reconciliations.