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09 - Auditor Communication Letter Audit Costa Mesa Sanitary District …an Independent Special District Protecting our community’s health and the environment by providing solid waste and sewer collection services. www.cmsdca.gov Memorandum To: Board of Directors Via: Scott Carroll, General Manager From: Wendy Davis, Interim Finance Manager Date: June 26, 2014 Subject: Auditor Communication Letter Audit FY 2013-14 Summary On May 22, 2014, the Board approved the second one-year extension of the professional services agreement for independent audit services to White Nelson Diehl Evans, LLP for the fiscal year 2013-2014. In preparation of the start of the June 30, 2014 audit, the auditors have issued an Auditor Communication Letter (Attachment A) disclosing their responsibilities under U.S. Generally Accepted Auditing Standards and Government Auditing Standards. The audit is schedule to begin on September 29, 2014 and the report will be issued towards the end of the calendar year. Staff Recommendation That the Board of Directors approve and file this report. Analysis The District has contracted for annual audit services with the firm Diehl, Evans & Company, LLP since its separation from the City. Diehl Evans & Company, LLP merged on September 30, 2011 with another audit firm to form a combined firm now practicing as White Nelson Diehl Evans LLP. The first agreement covered the fiscal years ended June 30, 2005 through June 30, 2009. The current agreement covers the fiscal years ending June 30, 2010 through June 30, 2012, plus options for two one-year extensions. On January 24, 2013, the Board exercised option year one to extend the contract for the fiscal ITEM NO. 09 Board of Directors June 26, 2014 Page 2 of 2 year ended June 30, 2013 audit. On May 22, 2014, the Board approved the second option year to perform the audit of fiscal year ending June 30, 2014. The purpose of the Auditor Communication Letter is to define the auditor’s responsibility, as described by professional standards, which is to 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 Auditing Standards and Government Auditing Standards. The audit of our financial statements does not relieve you or management of your responsibilities as stated in our engagement letter dated June 11, 2014 (Attachment B). Strategic Element & Goal This item supports achieving Strategic Element No. 7.0, Finances and Strategic Goal No. 7.4, Develop a Comprehensive Annual Financial Report. Legal Review Not applicable. Environmental Review The consideration of annual audit information is not a disturbance of the environment similar to grading or construction and is not a project under CEQA or the District’s CEQA Guidelines. Financial Review Not applicable. Public Notice Process Copies of this report are on file and will be included with the entire agenda packet for the June 26, 2014 Board of Directors regular meeting at District Headquarters and on District website. Alternative Actions 1. Refer the matter back to staff for additional information. Attachments A: Auditor Communication Letter Attachments B: Audit Engagement Letter 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties June 13, 2014 Mr. Marc Davis Treasurer Costa Mesa Sanitary District 628 West 19th Street Costa Mesa, CA 92627 Dear Mr. Davis: Enclosed is the “Communication with Those Charged with Governance” during the planning phase of the audit. Please forward the letter to the Board of Directors. If you have any questions, please feel free to call me. Very truly yours, Nitin P. Patel, CPA 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties -1 - To the Board of Directors Costa Mesa Sanitary District Costa Mesa, California We are engaged to audit the financial statements of Costa Mesa Sanitary District (the District) for the year ending June 30,2014. Professional standards require that we provide you with the following information related to our audit. Our Responsibilities under U.S. Generally Accepted Auditing Standards and Government Auditing Standards As stated in our engagement letter dated June 11, 2014,our responsibility, as described by professional standards, is to 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. As part of our audit, we will consider the internal control of the District. Such considerations are solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will also perform tests of the District’s compliance with certain provisions of laws, regulations, contracts, and grants. However, providing an opinion on compliance with those provisions is not an objective of our audit. We are responsible for communicating significant matters related to the audit that are, in our professional judgment, relevant to your responsibilities in overseeing the financial reporting process. However, we are not required to design procedures specifically to identify such matters. Generally accepted accounting principles provide for certain required supplementary information (RSI) to supplement the basic financial statements. Our responsibility with respect to the Management Discussion and Analysis and the Schedule of Funding Progress for Other Post-Employment Benefit Plan, which supplement the basic financial statements, is to apply certain limited procedures in accordance with generally accepted auditing standards. However, the RSI will not be audited and, because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance, we will not express an opinion or provide any assurance on the RSI. -2 - Our Responsibilities under U.S. Generally Accepted Auditing Standards and Government Auditing Standards (Continued) We have not been engaged to report on the Introductory or Statistical Sections, which accompany the financial statements but are not RSI. Our responsibility with respect to this other information in documents containing the audited financial statements and auditors’ report does not extend beyond the financial information identified in the report. We have no responsibility for determining whether this information is properly stated. This other information will not be audited and we will not express an opinion or provide any assurance on it. Planned Scope and Timing of the Audit An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. Our audit will include obtaining an understanding of the District and its environment, including internal control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing and extent of further audit procedures. Material misstatements may result from (1)errors, (2)fraudulent financial reporting, (3)misappropriation of assets, or (4)violations of laws or governmental regulations that are attributable to the District or to acts by management or employees acting on behalf of the District. We will generally communicate our significant findings at the conclusion of the audit. However, some matters could be communicated sooner, particularly if significant difficulties are encountered during the audit where assistance is needed to overcome the difficulties or if the difficulties may lead to a modified opinion. We will also communicate any internal control related matters that are required to be communicated under professional standards. If a member of the Board is aware of matters that have a material bearing on the financial statements taken as a whole (such as those described above in items 1-4), please contact Nitin Patel at (714)978-1300 or by email at npatel@wndecpa.com by September 29, 2014. We expect to begin our audit on September 29, 2014 and issue our report on approximately December 15,2014. This information is intended solely for the use of the Board of Directors and management of the District and is not intended to be and should not be used by anyone other than these specified parties. Irvine, California June 13, 2014 2875 Michelle Drive, Suite 300, Irvine, CA 92606 • Tel: 714.978.1300 • Fax: 714.978.7893 Offices located in Orange and San Diego Counties June 11, 2014 Mr. Scott Carroll General Manager Costa Mesa Sanitary District 628 West 19th Street Costa Mesa, CA 92627 Dear Mr. Carroll: We are pleased to confirm our understanding of the services we are to provide Costa Mesa Sanitary District (the District) for the year ending June 30, 2014. We will audit the financial statements of the District, including the related notes to the financial statements, which collectively comprise the basic financial statements of the District as of and for the year ending June 30, 2014. Accounting standards generally accepted in the United States of America provide for certain required supplementary information (RSI), such as management’s discussion and analysis (MD&A) and the Other Post-Employment Benefit Plan schedule of funding progress to supplement the District’s basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. As part of our engagement, we will apply certain limited procedures to the District’s RSI in accordance with auditing standards generally accepted in the United States of America. These limited procedures will consist of inquiries of management regarding the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We will not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. The following RSI is required by generally accepted accounting principles and will be subjected to certain limited procedures, but will not be audited: 1) Management’s Discussion and Analysis. 2) District’s Schedule of Funding Progress - Other Post-Employment Benefit Plan. The following other information accompanying the financial statements will not be subjected to the auditing procedures applied in our audit of the financial statements, and our auditors’ report will not provide an opinion or any assurance on that other information: 1) Introductory Section. 2) Statistical Section Mr. Scott Carroll, General Manager Costa Mesa Sanitary District June 11, 2014 Page 2 Audit Objectives: The objective of our audit is the expression of an opinion as to whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles. Our audit will be conducted in accordance with auditing standards generally accepted in the United States of America and the standards for financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and will include tests of the accounting records of the District and other procedures we consider necessary to enable us to express an opinion. We will issue a written report upon completion of our audit of the District’s financial statements. Our report will be addressed to the Board of Directors of the District. We cannot provide assurance that an unmodified opinion will be expressed. Circumstances may arise in which it is necessary for us to modify our opinion or add emphasis-of-matter or other-matter paragraphs. If our opinion on the financial statements is other than unmodified, we will discuss the reasons with you in advance. If circumstances occur related to the condition of your records, the availability of sufficient, appropriate audit evidence, or the existence of a significant risk of material misstatement of the financial statements caused by error, fraudulent financial reporting, or misappropriation of assets, which in our professional judgment prevent us from completing the audit or forming an opinion on the financial statements, we retain the right to take any course of action permitted by professional standards, including declining to express an opinion or issue a report, or withdrawing from the engagement. We will also provide a report (that does not include an opinion) on internal control related to the financial statements and compliance with the provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a material effect on the financial statements as required by Government Auditing Standards. The report on internal control and on compliance and other matters will include a paragraph that states (1) that the purpose of the report is solely to describe the scope of testing of internal control and compliance, and the results of that testing, and not to provide an opinion on the effectiveness of the District’s internal control on compliance, and (2) that the report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the District’s internal control and compliance. The paragraph will also state that the report is not suitable for any other purpose. If during our audit we become aware that the District is subject to an audit requirement that is not encompassed in the terms of this engagement, we will communicate to management and those charged with governance that an audit in accordance with U.S. generally accepted auditing standards and the standards for financial audits contained in Government Auditing Standards may not satisfy the relevant legal, regulatory, or contractual requirements. Management Responsibilities: Management is responsible for the financial statements and all accompanying information as well as all representations contained therein. As part of the audit, we will assist with preparation of your financial statements and related notes. These nonaudit services do not constitute an audit under Government Auditing Standards and such services will not be conducted in accordance with Government Auditing Standards. You agree to assume all management responsibilities relating to the financial statements and related notes and any other nonaudit services we provide. You will be required to acknowledge in the management representation letter our assistance with preparation of the financial statements and related notes and that you have reviewed and approved the financial statements and related notes prior to their issuance and have accepted responsibility for them. Further, you agree to oversee the nonaudit services by designating an individual, preferably from senior management, who possesses suitable skill, knowledge, or experience; evaluate the adequacy and results of those services; and accept responsibility for them. Mr. Scott Carroll, General Manager Costa Mesa Sanitary District June 11, 2014 Page 3 Management Responsibilities (Continued): Management is responsible for establishing and maintaining effective internal controls, including evaluating and monitoring ongoing activities, to help ensure that appropriate goals and objectives are met; following laws and regulations; and ensuring that management is reliable and financial information is reliable and properly reported. Management is also responsible for implementing systems designed to achieve compliance with applicable laws, regulations, contracts, and grant agreements. You are also responsible for the selection and application of accounting principles; for the preparation and fair presentation of the financial statements in conformity with U.S. generally accepted accounting principles; and for compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is also responsible for making all financial records and related information available to us and for the accuracy and completeness of that information. You are also responsible for providing us with (1) access to all information which you are aware that is relevant to the preparation and fair presentation of the financial statements, (2) additional information that we may request for the purpose of the audit, and (3) unrestricted access to persons within the government from whom we determine it necessary to obtain audit evidence. Your responsibilities include adjusting the financial statements to correct material misstatements and for confirming to us in the written representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the government involving (1) management, (2) employees who have significant roles in internal control, and (3) others where the fraud could have a material effect on the financial statements. Your responsibilities include informing us of your knowledge of any allegations of fraud or suspected fraud affecting the government received in communications from employees, former employees, grantors, regulators, or others. In addition, you are responsible for identifying and ensuring that the District complies with applicable laws, regulations, contracts, agreements, and grants for taking timely and appropriate steps to remedy fraud and noncompliance with provisions of laws, regulations, contracts or grant agreements, or abuse that we report. Management is responsible for establishing and maintaining a process for tracking the status of audit findings and recommendations. Management is also responsible for identifying for us previous financial audits, attestation engagements, performance audits or other studies related to the objectives discussed in the Audit Objectives section of this letter. This responsibility includes relaying to us corrective actions taken to address significant findings and recommendations resulting from those audits, attestation engagements, performance audits, or other studies. You are also responsible for providing management’s views on our current findings, conclusions, and recommendations, as well as your planned corrective actions, for the report, and for the timing and format for providing that information. Mr. Scott Carroll, General Manager Costa Mesa Sanitary District June 11, 2014 Page 4 Management Responsibilities (Continued): With regard to the electronic dissemination of audited financial statements, including financial statements published electronically on your website, you understand that electronic sites are a means to distribute information and, therefore, we are not required to read the information contained in these sites or to consider the consistency of other information in the electronic site with the original document. Audit Procedures - General: An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We will plan and perform the audit to obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether from (1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or governmental regulations that are attributable to the District or to acts by management or employees acting on behalf of the District. Because the determination of abuse is subjective, Government Auditing Standards do not expect auditors to provide reasonable assurance of detecting abuse. Because of the inherent limitations of an audit, combined with the inherent limitations of internal control, and because we will not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us, even though the audit is properly planned and performed in accordance with U.S. generally accepted auditing standards and Government Auditing Standards. In addition, an audit is not designed to detect immaterial misstatements, or violations of laws or governmental regulations that do not have a direct and material effect on the financial statements. However, we will inform the appropriate level of management of any material errors or any fraudulent financial reporting or misappropriation of assets that come to our attention. We will also inform the appropriate level of management of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential, and of any material abuse that comes to our attention. Our responsibility as auditors is limited to the period covered by our audit and does not extend to later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts, and may include tests of physical existence of inventories, and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, funding sources, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will require certain written representations from you about your responsibilities for the financial statements; compliance with laws, regulations, contracts, and grant agreements; and other responsibilities required by generally accepted auditing standards. Mr. Scott Carroll, General Manager Costa Mesa Sanitary District June 11, 2014 Page 5 Audit Procedures - Internal Control: Our audit will include obtaining an understanding of the District and its environment, including internal control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures. Tests of controls may be performed to test the effectiveness of certain controls that we consider relevant to preventing and detecting errors and fraud that are material to the financial statements and to preventing and detecting misstatements resulting from illegal acts and other noncompliance matters that have a direct and material effect on the financial statements. Our tests, if performed, will be less in scope than would be necessary to render an opinion on internal control and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to Government Auditing Standards. An audit is not designed to provide assurance on internal control or to identify significant deficiencies or material weaknesses. However, during the audit, we will communicate to management and those charged with governance internal control related matters that are required to be communicated under AICPA professional standards and Government Auditing Standards. Audit Procedures - Compliance: As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we will perform tests of the District’s compliance with the provisions of applicable laws, regulations, contracts, agreements, and grants. However, the objective of our audit will not be to provide an opinion on overall compliance and we will not express such an opinion in our report on compliance issued pursuant to Government Auditing Standards. Audit Administration, Fees and Other: Noted below is a listing of work required by District staff to assist in the audit. 1. Preparation of trial balances, after posting of all year end journal entries. 2. Preparation of schedules supporting all major balance sheet accounts, and selected revenue and expense accounts. 3. Typing of all confirmation requests. 4. Preparation of the financial statements and notes to the financial statements. Mr. Nitin. P. Patel is the engagement partner and is responsible for supervising the engagement and signing the report or authorizing another individual to sign it. Our maximum annual fees for the year ending June 30, 2014 will be $9,525. The maximum annual fees stipulated herein contemplate that conditions satisfactory to the normal progress and completion of the examination will be encountered and the District’s accounting personnel will furnish the agreed upon assistance in connection with the audit. However, if unusual circumstances are encountered which make it necessary for us to do additional work; we shall report such conditions to the responsible District officials and provide the District with an estimate of the additional accounting fees involved. Mr. Scott Carroll, General Manager Costa Mesa Sanitary District June 11, 2014 Page 6 Audit Administration, Fees and Other (Continued): The audit documentation for this engagement is the property of White Nelson Diehl Evans LLP and constitutes confidential information. However, subject to applicable laws and regulations, audit documentation and appropriate individuals will be made available upon request and in a timely manner to grantor agencies or their designees, a federal agency providing direct or indirect funding, or the U.S. Government Accountability Office for purposes of a quality review of the audit, to resolve audit findings, or to carry out oversight responsibilities. We will notify you of any such request. If requested, access to such audit documentation will be provided under the supervision of White Nelson Diehl Evans LLP personnel. Furthermore, upon request, we may provide copies of selected audit documentation to the aforementioned parties. These parties may intend, or decide, to distribute the copies or information contained therein to others, including other governmental agencies. In accordance with our firm’s current record retention policy, all of your original records will be returned to you at the conclusion of this engagement. Our audit documentation files will be kept for a period of seven years after the issuance of the audit report. All other files will be kept for as long as you retain us as your accountants. However, upon termination of our service, all records will be destroyed after a period of seven years. Physical deterioration or catastrophic events may further shorten the life of these records. The audit documentation files of our firm are not a substitute for your original records. Government Auditing Standards require that we provide you with a copy of our most recent external peer review report and any letters of comment, and any subsequent peer review reports and letters of comment received during the period of the contract. Our 2012 peer review report accompanies this letter. We appreciate the opportunity to be of service to the Costa Mesa Sanitary District and believe this letter accurately summarizes the significant terms of our engagement. If you have questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Very truly yours, WHITE NELSON DIEHL EVANS LLP Nitin P. Patel, CPA Engagement Partner RESPONSE: This letter correctly sets forth the understanding of the Costa Mesa Sanitary District. By Title Date 10201 S. 51st Street, Suite #170  Phoenix, AZ 85044  (480)704‐6301 fax 785‐4619  System Review Report August 3, 2012 To the Owners of White Nelson Diehl Evans, LLP and the Peer Review Committee of the CA Society of CPAs We have reviewed the system of quality control for the accounting and auditing practice of White Nelson Diehl Evans, LLP (the firm) in effect for the year ended March 31, 2012. Our peer review was conducted in accordance with the Standards for Performing and Reporting on Peer Reviews established by the Peer Review Board of the American Institute of Certified Public Accountants. The firm is responsible for designing a system of quality control and complying with it to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Our responsibility is to express an opinion on the design of the system of quality control and the firm’s compliance therewith based on our review. The nature, objectives, scope, limitations of, and the procedures performed in a System Review are described in the standards at www.aicpa.org/prsummary. As required by the standards, engagements selected for review included engagements performed under the Government Auditing Standards and audits of employee benefit plans. In our opinion, the system of quality control for the accounting and auditing practice of White Nelson Diehl Evans, LLP in effect for the year ended March 31, 2012, has been suitably designed and complied with to provide the firm with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Firms can receive a rating of pass, pass with deficiency(ies) or fail. White Nelson Diehl Evans, LLP has received a peer review rating of pass. Heidenreich & Heidenreich Heidenreich & Heidenreich, CPAs, PLLC