Finding 1165803 (2024-002)

Finding 2024-002 – Material Weakness Condition: During the audit of capital assets, it was noted that the Town did not establish a complete reconciliation process between (1) governmental fund capital outlay postings, (2) government-wide fixed-asset adjustments, and (3) the detailed construction in progress and capital assets tracking schedules. - Prior-year audit adjustments related to capital assets were not fully recorded in the Town’s books, which caused beginning balances and current-year additions not to agree to prior audited amounts. - Several governmental fund and government-wide adjustments were required during the current audit to correct these variances, including entries to recognize completed projects, true up construction in progress and capital asset balances, correct capital asset classifications and record depreciation expense. - Finance Department does not reconcile capital outlay expenditures to project tracking information from other departments and the amounts recorded as construction in progress on the capital assets schedule. The Town did not complete the capital asset reconciliation to the general ledger until fourteen months after the fiscal year-end. Criteria: U.S. generally accepted accounting principles (GAAP) require that capital assets be recorded when acquired or constructed and depreciated once placed into service. Internal controls should ensure that additions, disposals, and depreciation are accurately captured in the general ledger and that detailed capital asset records reconcile to financial statement balances. Government-wide and fund-level reporting should be supported by timely and complete reconciliations between the general ledger, construction-in-progress schedules, and fixed-asset tracking reports maintained by departments. Cause: The Town lacks a documented and coordinated reconciliation process between the fixed asset system and the general ledger. Current internal control structure does not require periodic reconciliation to ensure that construction in progress and capital assets schedules agree and capital assts adjustments are incorporated into current-year balances. Effect: The absence of an effective reconciliation and monitoring process resulted in material misstatements of capital asset and construction in progress balances that required audit-proposed adjustments to conform to GAAP. This weakness increases the risk that capital assets, accumulated depreciation, and related expenses may be misstated in future financial statements without detection. Recommendation: We recommend that the Town implement formal policies and procedures requiring regular (at least quarterly) reconciliations between the general ledger and the detailed fixedasset tracking schedules. Project information maintained by the Public Works Department should be used to ensure construction in process expenditures are properly recorded in the general ledger. Management should ensure that prior-year audit adjustments are reviewed and incorporated at the start of each fiscal year and that all completed projects are timely transferred from construction in progress to capital assets in service. Views of Responsible Officials and Planned Corrective Action: We agree with the finding and will implement a formalized, multi-layer reconciliation process that ensures capital activity is consistently captured, reviewed, and aligned across all reporting levels.