City of Lemon Grove Presentation to The City Council March 1 st, 2016 Presented by: Ahmed Badawi, CPA Partner

Badawi & Associates Audit of the City of Lemon Grove 1

Agenda Engagement Team Deliverables and Scope of the Audit Areas of Primary Emphasis Auditors Report and Financial Statements Required Communications New Accounting Standards Conclusion & Discussion/Questions 2

Engagement Team 3

Engagement Partner Ahmed Badawi, CPA Engagement Partner Ahmed Badawi, CPA Quality Control Partner Jessie Powell, CPA Quality Control Partner Jessie Powell, CPA Staff Crystal Duan Staff Crystal Duan Senior Lionel Sanchez, CPA Senior Lionel Sanchez, CPA Manager Mitesh Desai, CPA Manager Mitesh Desai, CPA Information Technology Robert Wucher CISA, CISM, CRISC Information Technology Robert Wucher CISA, CISM, CRISC 4

Deliverables and Scope of the Audit Report of Independent Auditors on City of Lemon Grove Basic Financial Statements (BFS). Report on Internal Control Over Financial Reporting and on Compliance and Other Matters. Agreed-Upon Procedures Report on Appropriation Limit Schedule. Report on Compilation of the City’s financial statements with respect to street related activities Report on Compilation of financial statements of the City, Lemon Grove Sanitation District, and Lemon Grove Landscape & Lighting District, in the prescribed forms developed by State of California State Controller’s Office Communications With Those Charged With Governance. Letter used to summarize communication of various significant matters to those charged with governance. 5

Areas of Primary Audit Emphasis Revenues & Receivables (Tax, Grants, Notes and Others): Improper revenue recognitions Governmental Funds: Confirm/validate property taxes, sales taxes, franchise taxes & other significant revenues/receivables. Proprietary Funds: Confirm/validate amounts collected and remitted to the City by the County of San Diego Pension: Implementation of GASB 68 Review management’s journal entries for implementing GASB 68 Agreed amounts recorded to reports provided by CalPERS and their auditors 6

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Auditors Report Unmodified opinion Audit performed in accordance with Generally Accepted Auditing Standards, and Government Auditing Standards Financial statements are fairly presented in all material respects Significant accounting policies have been consistently applied Estimates are reasonable Disclosures are properly reflected in the financial statements 8

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Government-Wide Financial Statements 10

Government-Wide Financial Statements 11

Government-Wide Financial Statements 12

Government-Wide Financial Statements 13

Government-Wide Financial Statements 14

General Fund Expenditure Coverage 15

Other Financial Information City’s Annual Pension Cost (in thousands) 16

Other Financial Information 17

Other Financial Information 18

Other Financial Information 19

Other Financial Information 20

Other Financial Information 21

Other Financial Information City’s Annual OPEB Cost (in thousands) 22

Other Financial Information 23

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Required Communications Our Responsibility Under U.S GAAS Expression of an opinion on whether financial statements are fairly stated in accordance with U.S GAAP Evaluate internal control over financial reporting Evaluate compliance with laws, contract and grants Evaluate the tone at the top Ensure financial statements are clear and transparent Communicate with the governing body 25

Required Communications Management Responsibility Management is responsible for the financial statements Establish and maintain internal control over financial reporting Making all financial records available to us Adjust the financial statements to correct material misstatements Establish internal control to prevent and detect fraud Inform us of all known and suspected fraud Comply with laws and regulations Take correction action on audit findings 26

Required Communications Independence Timing of the Audit It is our responsibility to maintain independence We will maintain our independence by strict adherence to the AICPA and the Board of Accountancy rules and regulations No other services performed that could affect our independence Audit was performed in the time frame communicated to the City in our engagement letters 27

Required Communications Significant Accounting Policies and Unusual Transactions Management Judgment and Accounting Estimates The City adopted the following new pronouncements during the year: GABB Statement No.68 Accounting and Financial Reporting for Pensions –An Amendment of GASB Statement No. 27 GASB Statement No. 69 Government Combinations and Disposals of Government Operations. GASB Statement No. 71 Pension Transition for the Contributions Made Subsequent to the Measurement Date – An Amendment of GASB Statement No. 68 Significant management estimates impacting the financial statements include the following: Investment Valuation Allowance for uncollectable accounts Useful lives of Capital Assets Pension Plans OPEB Obligation Self-insurance liabilities 28

Required Communications Required Communications Sensitive Disclosures Difficulties Encountered in Performing the Audit The most sensitive disclosures affecting the City’s financial statements are as follow: Summary of Significant Accounting Policies Cash and Investments Capital Assets Defined Benefit Pension Plan Other Post Employment Benefits Successor Agency Private Purpose Trust For Assets of Former Redevelopment Agency Fund Deficits Excess of Expenditures over Appropriations Prior Period Adjustments No difficulties were encountered during our audits 29

Required Communications Required Communications Significant Audit Adjustments and Unadjusted Differences Considered by Management to be Immaterial Potential Effect on the Financial Statements of Any Significant Risks and Exposures There were adjustments and reclassifying entries during the course of the audit. Management has posted all proposed audit adjustments No significant risks or exposures were identified. Legal matters and potential liabilities are disclosed in the financial statements 30

Required Communications Required Communications Disagreement with Management Deficiencies in Internal Control over Financial Reporting We are pleased to report that there were no disagreements with management No material weaknesses identified during our audits We identified the following significant deficiencies: - Restatement of previously issued financial statements - Grant Management and Deficit Fund Balances 31

Required Communications Required Communications Representations Requested of Management Management Consultation with Other Accountants We have requested certain representations from management that are included in the management representation letters dated February 01, 2016 We are not aware of any significant accounting or auditing matters for which management consulted with other accountants 32

Required Communications Required Communications Other Material Written Communications Material Uncertainties Related to Events and Conditions Fraud and Illegal Acts Other than the engagement letters and management representation letters, there have been no other significant communications There were no material uncertainties relating to events and conditions We have not become aware of any instances of fraud or illegal acts, which was not disclosed by the City 33

New Accounting Standards 2016 Statement 72- Fair Value Measurement and Application Statement 73- Accounting and Financial Reporting for Pensions and Related Assets That Are not within the Scope of GASB Statement 68, and Amendments to Certain Provisions of GASB Statements 67 and 68 Statement 76 – The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments Statement 79 – Certain External Investment Pools and Pool Participants, effective for reporting period beginning after June 15, Statement 74 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans Statement 77 – Tax Abatement Disclosures Statement 78- Pensions Provided through Certain Multiple-Employer Defined Benefit Pension Plans 2018 Statement 75 – Accounting and Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans 34

Thank You For Allowing Us to Provide Audit Services to the City of Lemon Grove 35