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09 Auditor RecommendationMEMO TO: MICHAEL E. MALONE, CITY MANAGER FROM: GENE ANDERSON, FINANCE DIRECTOR SUBJECT: INDEPENDENT AUDIT FOR YEAR ENDING 9-30-2001 Attached is a proposal by McClanahan & Holmes, PLLC to perform the independent audit of city accounts as required by city charter. Notices were sent out to four local firms, but only McClanahan & Holmes submitted a proposal. They continue to be the only firm sufficiently staffed to perfom~ this audit. It is recommended that their proposal be accepted. CITY OF PARIS, TEXAS PROPOSAL LETTER YEAR ENDING SEPTEMBER 30, 2001 R. FRANK RAY, CPA R. E. ROSTWICK, CPA STEVEN W. MOHUNDRO, CPA JACQUELYNE :5. SHELTON, CPA GEORGE H. STRUVE, CPA ANDREW B. REICH, CPA McCLANAHAN AND HOLMES, PLLC CERTIFIED PUBLIC ACCOUNTANTS 228 SIXTH STREET, S.E. PARIS, TEXAS 75460 903-784-4316 FAX 903-784-4310 304 WEST CHESTNUT DENISON, TEXAS 75020 903-465-6070 FAX 903-465-6093 1400 WEST RUSSELL BONHAM. TEXAS 75418 903-583-5574 FAX 903-583-9453 Paris, Texas August 7, 2001 Honorable Mayor and Members of the City Council City of Faris ?a~is, Texas In response to your request for a proposal for the audit of the general purpose financial statements of the City of Paris, Texas (the City), for the year ending September 30, 2001, we shall appreciate your consideration of McClanahan and Holmes, PLLC, for the performance of the engagement. This proposal is based on a report format substantially the same as the one at September 30, 2000, which is in accordance with the financial reporting model in effect prior to that described in the GASB Statement No. 34. If engaged, we will audit the general purpose financial statements of the City as of and for the year ending September 30, 2001. Also, the document we submit to you will include the following additional information that will be subjected to the auditing procedures applied in our audit of the general purpose financial statements: combining and individual fund and account group financial statements and schedules; supplemental data; and the schedule of expenditures of federal awards. The document will also include statistical data that will not be subject to the auditing procedures applied in our audit of the general purpose financial statements and for which our auditors' report will disclaim an opinion. Audit Objectives The objective of our audit will be the expression of an opinion about whether your general purpose financial statements are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America and to report on the fairness of the additional information referred to in the first paragraph when considered in relation to the general purpose financial statements taken as a whole. The objective will also include reporting on: AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS City of Paris August 7, 2001 Page 2 Audit Objectives (Continued) Internal control related to the financial statements and compliance with taws, regulations, and the provisions of contracts or grant agreements, noncompliance with which could have a material effect on the financial statements in accordance with Government Auditing Standards. Internal control related to major programs and an opinion (or disclaimer of opinion) on compliance with laws, regulations, and the provisions of contracts or grant agreements that could have a direct and material effect on each major program in accordance with the Single Audit Act Araendments of 1996 and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The reports on internal control and compliance will each include a statement that the report is intended for the information and use of management, specific legislative or regulatory bodies, federal awarding agencies, and if applicable, pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. IX enqaged, our audit will be conducted in accordance with auditing standards generally accepted in the United States of A~erica; the standards foe financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; the Single Audit Act 7kmendments of 1996; and the provisions of Circular A-133 and will include tests of accounting records, a determination of major program(s) in accordance with Circular A-133, and other procedures we consider necessary to enable us to express such an opinion and to render the required reports. If our opinion on the general purpose financial statements or the Single Audit compliance opinion is other than unqualified, we will fully discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or to issue a report as a result of the engagement. Manaqement Responsibilities Management is responsible for establishing and maintaining internal control and for compliance with the provisions of contracts, agreements, and grants. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of the controls. The objectives of internal control are to provide management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, that transactions are executed in accordance with manage- ment's authorizations and recorded properly to permit the preparation of general purpose financial statements in accordance with generally accepted accounting principles, and that federal award programs are managed in compliance with applicable laws and regulations and the provisions of contracts and grant agreements. Management is responsible for making all financial records and related information available to us. We understand that you will provide us with such information =equired for our audit and that you are responsible for the accuracy and completeness of that information. We will advise you about appropriate accounting principles and their application and will assist in the preparation of your financial statements, including the schedule of expenditures of federal McCLANAHAN AND HOLMES, PLLC City of Paris August 7, 2001 Page 3 Management Responsibilities (Continued) awards, but the responsibility for the financial statements remains with you. That responsibility includes the establishment and maintenance of adequate records and effective internal control over financial reporting and compliance, the selection and application of accounting principles, and the safeguarding of assets. Management is responsible for adjusting the financial statements to correct material misstatements and for confirming to us in the representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are in~aterial, both individually and in the aggregate, to the financial statements taken as a whole. Additionally, as required by OMB Circular A-133, it is management's responsibility to follow up and take corrective action on reported audit findings and to prepare a summary schedule of prior audit findings and a corrective action plan. The summary schedule of prior audit findings should be available for our review prior to issuing our tentative dxaft. Audit Procedures - General An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; thezefore, our audit will involve judgment about the number of transactions to be exarmined and the areas to be tested. 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 caused by error or fraud. As required by the Single Audit Act Amendments of 1996 and OMB Circular A-133, our audit will include tests of transactions related to major federal award programs for compliance with applica- ble laws and regulations and the provisions of contracts and grant agreements. Because an audit is designed to provide reasonable, but not absolute assurance and because we will not perform a detailed examination of all transactions, there is a risk that material errors, fraud, other illegal acts, or noncompliance may exist and not be detected by us. In addition, an audit is not designed to detect i~naterial errors, fraud, or other illegal acts or illegal acts that do not have a direct effect on the general purpose financial statements or to major programs. However, we will inform the appropriate level of management of any material fraud that comes to our attention. Any fraud that involves senior management or is material to the financial statements that comes to our attention will be reported directly to the City Council. We will also inform you of any other illegal acts that come to our attention, unless clearly inconsequential. We will include such matters in the reports required for a Single Audit. Our responsibility as auditors is limited to the period covered by our audit and does not extend to any later periods for which we are not engaged as auditors. Our procedures will include tests of documentary evidence supporting the transac- tions recorded in the accounts and may include tests of the physical existence of inventories and direct confirmation of receivables and certain other assets and liabilities by correspondence with selected individuals, creditors, and financial institutions. We will request written representations from your attorneys as part of the engagements, and they may bill you for responding to this inquiry. At the conclusion of our audit, we will also request certain written representations from you about the financial statements and related matters. Audit Procedures - Internal Controls If engaged, in planning and performing our audit, we will consider the internal control sufficient to plan the audit in order to determine the nature, timing, City of Paris August 7, 2001 Page 4 Audit Procedures - Internal Controls (Continued) and extent of our auditing procedures for the purpose of expressing our opinions on the City's general purpose financial statements and on its compliance with requirements applicable to major programs. We will obtain an understanding of the design of the relevant controls and whether they have been placed in operation, and we will assess control risk. 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 general purpose 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 general purpose financial statements. Tests of controls relative to the general purpose financial state- ments are required only if control risk is assessed below the maximum level. 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. As required by OMB Circular A-133, we will perform tests of controls to evaluate the effectiveness of the design and operation of controls that we consider relevant to preventing or detecting material noncompliance with compliance requirements applicable to each major federal award program. However, our tests will be less in scope than would be necessary to render an opinion on those controls and, accordingly, no opinion will be expressed in our report on internal control issued pursuant to OMB Circular A-133. ~ audit is not designed to provide assurance on internal control or to identify reportable conditions. However, we will inform you of any matters involving internal control and its operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of the internal control that, in our judgment, could adversely affect the entity's ability to record, process, suramarize, and report financial data consistent with the assertions of acLm/nistration in the general purpose financial statements. We will also inform you of any nonreportable conditions or other matters involving internal control, if any, as required by OMB Circulars A-133. Audit Procedures - Compliance If engaged, our audit will be conducted in accordance with the standards referred to in the section titled Audit Objectives. As part of obtaining reasonable assurance about whether the general purpose financial statements are free of material misstatement, we will perform tests of the City's compliance with applicable laws and regulations and the provisions of contracts and agreements, including grant agreements. However, the objective of those procedures 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. OMB Circular A-133 requires that we also plan and perform the audit to obtain reasonable assurance about whether the City has complied with applicable laws and regulations and the provisions of contracts and grant agreements applicable to major programs. Our procedures will consist of the applicable procedures MCCLANAHAN AND HOLMES. PLLC City of Paris August 7, 2001 Page 5 Audit Procedures - Compliance (Continued) described in the OMB Circular A-133 Compliance Supplement for the types of compliance requirements that could have a direct and material effect on each of the City's major programs. The purpose of those procedures will be to express an opinion on the City's compliance with requirements applicable to each of its major programs in our report on compliance issued pursuant to OMB Circular A-133. Audit Administration, Fees, and Other We encourage our clients to adopt the procedure of having their personnel prepare working papers and analyses for use during the audit in order to minimize the clerical activities of our professional staff and resulting added cost. If engaged, a list of workpapers will be furnished which can be prepared by your personnel prior to the final field work. At the conclusion of the engagement, we will complete the appropriate sections of and sign the Data Collection Form that surmnarizes our audit findings. We will provide copies of our reports to the City; however, it is management's responsi- bility to subrait the reporting package (including financial statements, schedule of expenditures of federal awards, summary schedule of prior audit findings, auditors' reports, and a corrective action plan) along with the Data Collection Form to the designated federal clearinghouse and, if appropriate, to pass-through entities. The Data Collection Form and the reporting package must be submitted within the earlier of 30 days after receipt of the auditors' reports or nine months after the end of the audit period, unless a longer period is agreed to in advance by the cognizant or oversight agency for audit. At the conclusion of the engagement, we will provide information to management as to where the reporting packages should be submitted and the number to submit. The workpapers for this engagement are the property of McClanahan and Holmes, PLLC, and will constitute confidential information. However, pursuant to authority given by law or regulation, we may be requested to make certain workpapers available to a federal or state agency providing direct or indirect funding, or the United States General Accounting 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 requests. If requested, access to such workpapers will be provided under the supervision of McClanahan and Holmes, PLLC personnel. Furthermore, upon request, we may provide photocopies of selected workpapers to the aforementioned parties. These parties may intend, or decide, to distribute the photocopies or information contained therein to others, including other governmental agencies. The workpapers for this engagement will be retained for a minimum of three years after the date the auditors' report is issued or for any additional period ~equested by the cognizant or oversight agency for audit or pass-through entity. If we are aware that a federal awarding agency, pass-through entity, or auditee is contesting an audit finding, we will contact the party(ies) contesting the audit finding for guidance prior to destroying the workpapers. McClanahan and Holmes, PLLC originated from the public accounting practice opened in Paris in 1952 by Mr. F. I. McClanahan. The firm has grown to a six officer p~ofessional limited liability company with operating offices in Paris, Bonham, and Denison. Our firm consists of ten certified public accountants, seven professional personnel, and several para-professionals and clerical personnel who MCCLANAHAN AND HOLMES, PLLC August 7, 2001 Page 6 Audit Administration, Fees, and Other (Continued) ~ 07 %~ have extensive expesience. Attachments list current clients for(~~de similar audit services and provide the education and experience~l~°~°nal audit personnel most likely to be assigned to the audit. Based on our understanding of the audit work required and our evaluation of your books and records, we would estimate that the fee for the engagement would not exceed $35,000 plus out-of-pocket expenses (such as report reproduction costs, postage, etc). As competitive bidding by licensed certified public accountants is not permitted by state law, this is considered a fee estimate and as such, we will not be bound to provide the proposed services for the estimated amount. Our estimated fee for these services is based on the following rates and estimated hours of professional time. It should be noted that this fee is an estimate and the actual fee billed will be based on our standard billing rates and the number of hours necessary to complete the required scope of work. Position Rate Hours Officer $ 120 30 In-Charge $ 92 150 Staff $ 48 - 72 450 Clerical $ 32 170 Total _. 80~0 If the City requests additional work or services not within the general scope of this proposal, that work would be billed at our normal rates. Requests for additional work or services beyond the general scope of this proposal must be made in writing before the beginning of field work, and appropriate rates would be negotiated. If engaged, we would expect our preliminary work to begin prior to year end and our final field work to begin shortly after your records are closed out for the year. We would expect to deliver our report within ninety days after Septe~er 30, 2001, and would bill for the entire engagement after the report is delivered. We would provide as many copies of the report as needed. Government Auditing Standards require that we provide you with a copy of our most recent quality control review report~ Our 2000 peer review report accompanies this letter. Should you want additional information or should you want us to appear before the City Council, please let us know. If you agree with the terms of the engagement as described in this proposal, please sign the second copy and return it to us. McClanahan and Holmes, PLLC Certified Public Accountants MCCLANAHAN AND HOLMES, PLLC Page 7 RESPONSE: This letter correctly sets forth the understanding of the City of Paris, Texas. By: Signature Title: McCLANAHAN AND HOLMES, PLLC Following is a brief resume of our professional personnel most likely to be assigned to the engagement. Ail Certified Public Accountants in the firm are members of the A/nerican Institute of Certified Public Accountants, the Texas Society of Certified Public Accountants, and the Dallas Chapter of the TSCPA. The firm is also a men, er of the Texas Management Group, a consortium of public accounting firms organized for the purpose of sharing expertise and ideas with like-minded firms. Jackie Shelton graduated from East Texas State University (B.B.A.- Accounting 1980). She was employed by the firm in 1978, received her certificate in 1981, and became an officer in 1986. She practices primarily in the audit area of ou~ firm and has over twenty years of governmental audit experience. Jackie would serve as engagement officer for this audit. Thomas Hensel graduated from Midwestern University (B.B.A.-Accounting 1966). He received his certificate in 1969, was employed by the firm in 1976, and was an office~ from 1979 through 1996. From 1966 until 1976 he was employed by Peat, Marwick, Mitchell, & Co., Certified Public Accoun- tants, in their Fort Worth and Austin offices in the audit area. He practices primarily in the audit area of the firm and has significant experience in governmental auditing, including formerly serving as engagement officer on the majority of our governmental audits. Tom would continue to serve as in-charge auditor for this audit. Elaine Wroten graduated from Baylor University (B.B.A.-Accounting 1979). She received her certificate in 1981 and was employed by the firm in 1998. From 1979 through 1994 she was employed by other certified public accountants, and she worked in private industry from 1994 to 1998. Rebecca L. Rose graduated from Texas A & M University - Commerce (B.B.A.- Accounting 2000) and has been employed by our firm since July 2000. Nathan D. Anderson graduated from Southeastern Oklahoma State University (B.B.A.-Accounting 2001) and was employed by the firm in July 2001. MCCLANAHAN AND HOLMES, PLLC City of Paris August 7, 2001 Supplemental Information We currently provide auditing services for the following governmental entities, most of which require special reports because of federally financed programs. Bonham Independent School District Commerce Independent School District Paris Independent School District Prairiland Independent School District Paris Junior College City of Bailey City of Bonham City of Denison City of Deport City of Detroit City of Dodd City City of Ector City of Honey Grove City of Leonard City of Paris City of Savoy City of Trenton Bois d' Arc Municipal Utility District Lamar County Water Supply District Lannius Municipal Utility District Texoma Council of Governments Other audit clients include financial institutions, manufacturing companies, cooperatives, escrow funds of title companies, non-profit organizations, and other types of entities. McCLANAHAN AND HOLMES, PLLC G RI ER REEVES & LAWLEY, RC. CERTIFIED PUBLIC ACCOUNTANTS J. Marshall Gri;r (1914- 1978) William L. Ree,,es (1926 - 1997) Mark H. tawley. CPA David B. Waddle. Jr.. CPA William C. Kirby, CPA Phillip L Jimrnersorl, CPA Rick Lindsey, CPA Belinda K. Raker. CPA To the Officers McClanahan and Holmes, PLLC We have reviewed the system of quality control for the accounting and auditing practice of McClanahan and Holmes, PLLC (the firm) in effect for the year ended March 31, 2000. A system of quality control encompasses the firm's organizational structure and the policies adopted and procedures established to provide it with reasonable assurance of complying with professional, standards. The elements of quality control are described in the Statements on Quality Control Standards issued by the American Institute of Certified Public Accountants (AICPA). The design of the system and compliance with it are the responsibility of the firm. Our responsibility is to express an opinion on the design of the system, and the firm's compliance with the system based on our review. Our review was conducted in accordance with standards established by the Peer Review Board of the AICPA. In performing our review, we obtained an understanding ofthe system of quality control for the firm's accounting and auditing practice. In addition, we tested compliance with the firm's quality control policies and procedures to the extent we considered appropriate. These tests covered the application of the firm's policies and procedures on selected engagements. Because our review was based on selective tests, it would not necessarily disclose all weaknesses in the system of quality control or all instances of lack of compliance with it. Because there are inherent limitations in the effectiveness of any system of quality control, departures from the system m~y occur and not be detected. Also, projection of any evaluation of a system of quality control to future periods is subject to the risk that the system of quality control may become inadequate because of changes in conditions, or because the degree of compliance with the policies or procedures may deteriorate. In our opinion, the system of quality control for the accounting and auditing practice of McClanahan and Holmes, PLLC, in effect for the year ended March 31,2000, has been designed to meet the requirements of the quatity control standards for an accounting and auditing practice established by the AICPA and was complied with during the year then ended to provide the firm with i'easonable assurance of complying with professional standards. August 30, 2000 (903) 793-5695 fAX (903) 794-2112 3424 Texas Boulevard · Texarkana, Texas 75503 MEMI~ERS OF THE AMERICAN INSTITUTE C~ CERTIFIED PUBLIC ACCO~JNTANT$