HOPE HOUSE DAY CARE CENTER, INC. FINANCIAL STATEMENTS. June 30, 2017 (with Comparative Totals for 2016)

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1 HOPE HOUSE DAY CARE CENTER, INC. FINANCIAL STATEMENTS June 30, 2017 (with Comparative Totals for 2016)

2 TABLE OF CONTENTS INDEPENDENT AUDITOR S REPORT 1 FINANCIAL STATEMENTS Statement of Financial Position 3 Statement of Activities 4 Statement of Functional Expenses 5 Statement of Cash Flows 6 Notes to Financial Statements 7 SUPPLEMENTAL INFORMATION Schedule of Expenditures of Federal Awards 15 Notes to Schedule of Expenditures of Federal Awards 16 Page INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS 17 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE 19 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 21 SUMMARY SCHEDULE OF PRIOR YEAR FIDINGS 22

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors Hope House Day Care Center, Inc. We have audited the accompanying financial statements of Hope House Day Care Center, Inc. (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017, and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hope House Day Care Center, Inc. as of June 30, 2017, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Supplemental Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The accompanying schedule of expenditures of federal awards, as required by Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 17, 2017, on our consideration of Hope House Day Care Center Inc. s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Hope House Day Care Center, Inc. s internal control over financial reporting and compliance. Report on Summarized Comparative Information We have previously audited the Hope House Day Care Center, Inc. s 2016 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated October 19, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2016, is consistent, in all material respects, with the audited financial statements from which it has been derived. Memphis, Tennessee October 17,

5 HOPE HOUSE DAY CARE CENTER, INC. STATEMENT OF FINANCIAL POSITION June 30, 2017 (with Comparative Totals for 2016) Assets Cash and cash equivalents $ 33,757 $ 133,614 Grants receivable 168, ,393 Other receivables 1,946 2,742 Pledges receivable 5,000 5,000 Prepaid expenses 20,730 4,562 Investments 745, ,424 Property and equipment, net of accumulated depreciation 598, ,064 Total assets $ 1,574,565 $ 1,588,799 Liabilities and Net Assets Liabilities Accounts payable $ 1,799 $ 15,140 Accrued expenses 27,195 26,413 Line of credit 50,000 - Total liabilities 78,994 41,553 Net Assets Unrestricted Operating 151, ,997 Board-designated endowment fund 245, ,424 Property and equipment 598, ,064 Total unrestricted net assets 995,571 1,037,485 Temporarily restricted 500, ,761 Total net assets 1,495,571 1,547,246 Total liabilities and net assets $ 1,574,565 $ 1,588,799 The accompanying notes are an integral part of the financial statements. 3

6 HOPE HOUSE DAY CARE CENTER, INC. STATEMENT OF ACTIVITIES For the Year Ended June 30, 2017 (with Comparative Totals for 2016) Temporarily Total Total Unrestricted Restricted Revenues Donations $ 307,773 $ - $ 307,773 $ 433,381 Special events revenue 41,960-41,960 34,570 Less: Costs of direct benefits to donors (13,027) - (13,027) (7,521) Net revenues from special events 28,933-28,933 27,049 Private grants 169, , ,234 Public grants 1,254,978-1,254,978 1,042,850 Change in market value of investments 35,417-35,417 2,428 Interest and dividend income 20,136-20,136 18,595 Miscellaneous income 3-3 1,426 Net assets released from restrictions 9,761 (9,761) - - Total revenues 1,826,301 (9,761) 1,816,540 1,663,963 Expenses Program services 1,521,105-1,521,105 1,277,045 Management and general 153, , ,353 Fundraising 193, , ,105 Total expenses 1,868,215-1,868,215 1,645,503 Change in net assets (41,914) (9,761) (51,675) 18,460 Net assets, beginning of year 1,037, ,761 1,547,246 1,528,786 Net assets, end of year $ 995,571 $ 500,000 $ 1,495,571 $ 1,547,246 The accompanying notes are an integral part of the financial statements. 4

7 HOPE HOUSE DAY CARE CENTER, INC. STATEMENT OF FUNCTIONAL EXPENSES For the Year Ended June 30, 2017 (with Comparative Totals for 2016) Program Management Total Total Services and General Fundraising Automobile and van $ 4,873 $ - $ - $ 4,873 $ 7,772 Client services 649, , ,878 Depreciation 28,829 5,775 2,756 37,360 38,015 Dues and subscriptions ,746 1,433 Food 24,696 3,489 1,832 30,017 26,470 Fundraising events - - 7,888 7,888 20,860 Insurance - general 19,467 2,974 4,649 27,090 22,669 Occupancy 16,846 3,556 2,593 22,995 14,467 Other 2,108 3, ,227 20,538 Printing and postage 2, ,927 12,463 19,888 Professional fees 17,338 65, ,228 66,899 Repairs and maintenance 5,560 10,691 3,106 19,357 17,770 Salaries and benefits 612,600 47, , , ,658 Supplies 61,894 3,905 13,108 78,907 88,016 Taxes - payroll 41,614 3,576 9,937 55,127 52,148 Telephone 6,611 2,508 2,565 11,684 10,788 Training and seminars 15, ,954 1,862 Travel 10, ,510 4,372 $ 1,521,105 $ 153,835 $ 193,275 $ 1,868,215 $ 1,645,503 The accompanying notes are an integral part of the financial statements. 5

8 HOPE HOUSE DAY CARE CENTER, INC. STATEMENT OF CASH FLOWS For the Year Ended June 30, 2017 (with Comparative Totals for 2016) Cash Flows Provided By (Used For) Operating Activities: Change in net assets $ (51,675) $ 18,460 Adjustments to Reconcile Change in Net Assets to Net Cash Provided By (Used For) Operating Activities: Depreciation 37,360 38,015 Change in market value of investments (35,417) (2,428) Changes in Operating Assets and Liabilities: Increase (Decrease) in Cash and Cash Equivalents: Grants receivable 17,442 (119,130) Other receivables 796 (405) Pledges receivable - 16,765 Prepaid expenses (16,168) 29,705 Accounts payable (13,341) 2,660 Accrued expenses ,290 Total adjustments (8,546) (11,528) Net cash provided by (used for) operating activities (60,221) 6,932 Cash Flows From (Used For) Investing Activities: Purchases of investments (60,000) (118,595) Sales of investments - 154,808 Investment income reinvested (20,136) - Purchases of property and equipment (9,500) (9,693) Net cash from (used for) investing activities (89,636) 26,520 Cash Flows From Financing Activities: Net advances on line of credit 50,000 - Increase (decrease) in cash and cash equivalents (99,857) 33,452 Cash and cash equivalents at beginning of the year 133, ,162 Cash and cash equivalents at end of the year $ 33,757 $ 133,614 The accompanying notes are an integral part of the financial statements. 6

9 HOPE HOUSE DAY CARE CENTER, INC. NOTES TO FINANCIAL STATEMENTS June 30, 2017 and 2016 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Hope House Day Care Center, Inc. (the Organization ) was incorporated on June 17, 1994, as a nonprofit organization tax exempt as a public charity under Internal Revenue Code Section 501(c)(3). The mission of Hope House is to improve the quality of life of HIV-affected individuals and their families by providing high quality early childhood education and social services. Hope House provides services to children and adults affected by HIV and poverty in the Memphis community through a myriad of social services that includes housing and psychosocial services along with early childhood education. Basis of Accounting and Financial Statement Presentation The financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ( U.S. GAAP ). Under the accrual basis of accounting, revenues are recorded as earned and expenses are recorded at the time liabilities are incurred. The Organization is required to report information regarding its financial position and activities according to three classes of net assets. Accordingly, net assets of the Organization and changes therein are classified and reported as follows: Unrestricted Net Assets Net assets that are not subject to donor-imposed stipulations. Temporarily Restricted Net Assets Net assets subject to donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. Permanently Restricted Net Assets Net assets subject to donor-imposed stipulations that they be maintained permanently by the Foundation. There were no permanently restricted net assets at June 30, Use of Estimates The preparation of the Organization s financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Contributions Contributions are recognized as revenues when they are received or unconditionally pledged. The Organization reports gifts of cash and other assets as restricted support if they are received with donor stipulations that limit the use of the donated assets. When a donor restriction expires, that is, when a stipulated time restriction ends or purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. When a donor restriction expires in the same year received, revenue is recognized as unrestricted net assets. 7

10 The Organization reports gifts of equipment or materials as unrestricted support unless donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how the assets are to be used and gifts of cash and other assets are reported as restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Organization reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Gifts In-Kind Contributions of donated goods and services that create or enhance non-financial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, are recorded at their fair market value in the period received. The Organization received in-kind donations of $20,506 and $32,975 for the years ended June 30, 2017 and 2016, respectively. These donations consisted of clothes, toys, and other goods. In addition, a substantial number of volunteers have donated significant time to the Organization. No amounts have been recognized in the accompanying financial statements for these services because the criteria for recognition of such volunteer efforts have not been satisfied. Functional Expense Allocation The cost of providing various programs and supporting services have been reported on a functional basis in the statement of functional expenses. Accordingly, certain costs have been allocated among the programs and supporting services based on estimates made by management. Concentrations and Credit Risks The Organization s credit risks relate primarily to cash and cash equivalents. The Organization s cash balances at a bank are insured by the FDIC up to an aggregate of $250,000. Revenues are comprised primarily of government grants and private donations. The Organization received 64% and 58% of its revenues from federal awards for the years ended June 30, 2017 and 2016, respectively. Cash and Cash Equivalents The Organization considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Organization has excluded cash and cash equivalents held in investment accounts. Accounts and Pledges Receivable It is the policy of the Organization to report accounts and pledges receivable at net realizable value. Management closely monitors outstanding accounts receivable and establishes an allowance based on the collectability of each individual account, and has determined that no allowance is necessary at June 30, 2017 and Fair Value Measurement The Organization applies U.S. GAAP for fair value measurements of financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 8

11 Investments Investments in marketable securities with readily determinable fair values are reported at fair value based on quoted market prices. Donated investments are recorded at the average fair market value at the date of transfer. Gains and losses are reported in the statement of activities as increases or decreases in unrestricted net assets, unless temporarily or permanently restricted by the donor or by law. Property and Equipment Property and equipment are stated at cost or fair market value at the date of donation. Purchases in excess of $5,000 are capitalized. Depreciation is computed over the estimated useful lives of five to thirty-nine years using the straight-line method. Income Taxes The Organization is exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code. Accordingly, no provision for income taxes is included in the financial statements. The Organization files an exempt organization return in the United States federal jurisdiction. Summarized Comparative Information The financial statements include certain prior year summarized comparative information in total but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with U.S. GAAP. Accordingly, such information should be read in conjunction with the organization s financial statements for the year ended June 30, 2016, from which the summarized information was derived. Additionally, certain prior year amounts have been reclassified to conform with the current year presentation. Date of Management s Review The Organization evaluated their June 30, 2017 financial statements for subsequent events through October 17, 2017, the date the financial statements were available to be issued. The Organization is not aware of any subsequent events which would require recognition or disclosure in the financial statements. NOTE 2 FAIR VALUE MEASUREMENTS AND INVESTMENTS U.S. GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under generally accepted accounting principles are described below: Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities the Organization has the ability to access. Level 2 Inputs (other than quoted prices within level 1) such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that can be corroborated by observable market data. 9

12 Level 3 Inputs which are unobservable for the asset or liability and rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. The asset s or liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. There have been no changes in the methodologies used at June 30, The following is a description of the valuation methodologies used for assets measured at fair value. Mutual funds: Valued at the net asset value of units or shares held by the Organization at year end. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Organization believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. The following tables set forth by level, within the fair value hierarchy, the Organization s assets at fair value as of June 30, 2017 and Assets at Fair Value as of June 30, 2017 Level 1 Level 2 Level 3 Total Cash and Cash Equivalents $ 16,041 $ - $ - $ 16,041 Mutual Funds Equities 414, ,008 Fixed Income 315, ,928 Total mutual funds 729, ,936 Total investments at fair value $ 745,977 $ - $ - $ 745,977 Assets at Fair Value as of June 30, 2016 Level 1 Level 2 Level 3 Total Cash and Cash Equivalents $ 7,242 $ - $ - $ 7,242 Mutual Funds Equities 350, ,626 Fixed Income 272, ,556 Total mutual funds 623, ,182 Total investments at fair value $ 630,424 $ - $ - $ 630,424 Investments have been designated by the Board and donors as an endowment fund. See Note 7 for further details. NOTE 3 PLEDGES RECEIVABLE For the years ended June 30, 2017 and 2016, pledges receivable consisted of one $5,000 pledge. Although it is past due, management still considers it collectible within the next year. 10

13 NOTE 4 PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30: Land $ 28,000 $ 28,000 Building and improvements 1,001, ,784 Leasehold improvements 43,484 43,484 Furniture and equipment 162, ,087 Vehicles 86,444 86,444 1,321,299 1,311,799 Less accumulated depreciation (723,095) (685,735) $ 598,204 $ 626,064 NOTE 5 LINE OF CREDIT The Organization holds an unsecured line of credit with a financial institution with a credit limit of $350,000. Regular payments of all accrued unpaid interest are due monthly. The line of credit matures on June 13, 2018, with all outstanding principal plus all accrued unpaid interest due on that date. Interest is based on the prime rate with a floor of 4.00%, and was 4.25% at June 30, At June 30, 2017 and 2016, the outstanding balance was $50,000 and $0, respectively. NOTE 6 TEMPORARILY RESTRICTED NET ASSETS Net assets were temporarily restricted as follows at June 30: Education $ 500,000 $ 504,761 Time restrictions on pledges receivable - 5,000 $ 500,000 $ 509,761 Purpose restrictions of $4,761 and time restrictions of $5,000 were released during the year ended June 30, NOTE 7 TERM ENDOWMENT FUND The term endowment fund was established to assist with the financial security of the Organization. It is the intent of the Board of Directors and the staff of the Organization to allow this fund to grow without encroaching on either income or principal until the fund reaches a total value of $1,000,000. The fund is available, however, if a financial emergency arises and money from this fund is needed for operational or capital expenses. Any emergency encroachment would be made only after approval by the Executive Director along with two members of the Board of Directors. Also included in the endowment is temporarily restricted investments donated for the purpose of hiring an additional teacher for the daycare. Beginning on January 1, 2014, $40,000 adjusted for inflation annually based upon the Consumer Price Index, will be available for distribution per the Organization s education distribution plan. After the initial funding, if the income of the endowment is insufficient to cover the $40,000 needed, principal can be used to cover the shortfall subject to approval by the Organization s Board of Directors. As the temporarily restricted endowment fund balance increases over the $500,000 11

14 initial funding, the Organization shall be permitted to draw additional amounts from the endowment fund. In no event shall any annual distribution exceed 8% of the then current principal balance of the endowment fund. During 2017, $41,148 of the temporarily restricted investments was appropriated for the purpose of paying an additional daycare teacher. A reconciliation of the endowment fund s beginning and ending balances is as follows for the years ended June 30: 2017 Temporarily Unrestricted Restricted Total Endowment net assets, beginning of year $ 130,424 $ 500,000 $ 630,424 Contributions 60,000-60,000 Investment Return Dividends and interest 20,136-20,136 Change in market value 35,417-35,417 Total investment return 55,553-55,553 Endowment net assets, end of year $ 245,977 $ 500,000 $ 745, Temporarily Unrestricted Restricted Total Endowment net assets, beginning of year $ 114,080 $ 550,129 $ 664,209 Contributions 100, ,000 Investment Return Dividends and interest 18,595-18,595 Change in market value 2,428-2,428 Total investment return 21,023-21,023 Appropriations for Expenditure Withdrawal (149,570) - (149,570) Investment management fees (5,238) - (5,238) Daycare teacher 40,000 (40,000) - Release of Restriction 10,129 (10,129) - Endowment net assets, end of year $ 130,424 $ 500,000 $ 630,424 The fundamental guiding principle of the Organization s investment policy for the term endowment fund is an emphasis on long term growth, with income production as a secondary emphasis. 12

15 The asset allocation guidelines for the endowment fund are as follows: Asset Class Minimum Maximum Equities 40% 70% Fixed income 30% 60% Cash and cash equivalents 0% 10% Interpretation of Relevant Law The Uniform Prudent Management of Institutional Funds Act ( UPMIFA ) as enacted by the State of Tennessee applies to all of the term endowment funds of the Organization unless the donor has specifically directed otherwise. Management interprets UPMIFA as requiring the preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds absent explicit donor restrictions to the contrary. NOTE 8 RETIREMENT PLAN The Organization has a 403(b) retirement plan. Full-time employees who have worked for the Organization for at least one year are eligible to participate in the plan. The Organization contributes 2% of each eligible employee s salary to the plan annually. The Organization made contributions of $9,315 and $8,977 for the years ended June 30, 2017 and 2016, respectively. NOTE 9 COMMITMENTS AND CONTINGENCIES The Organization leases a printer under an operating lease. Rent expense was $2,002 for the year ended June 30, Future minimum lease payments under the non-cancelable operating lease are as follows for the years ending June 30: 2018 $ 2, $ 2,338 13

16 SUPPLEMENTAL INFORMATION

17 HOPE HOUSE DAY CARE CENTER, INC. SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the Year Ended June 30, 2017 Federal CDFA Grant Federal Federal/Pass-Through Agency/Program Number Number Expenditures U.S. Department of Agriculture State of Tennessee/Child and Adult Care Food Program n/a $ 21,958 U.S. Department of Housing and Urban Development City of Memphis/Community Development Block Grant ,561 City of Memphis/Housing Opportunities for Persons with AIDS ,003,274 Total U.S. Department of Housing and Urban Development 1,027,835 U.S. Department of Health and Human Services Le Bonheur/Coordinated Services and Access to Research for Women, Infants, Children, and Youth n/a 89,584 Shelby County Government/ HIV Emergency Relief Project Grants n/a 27,921 Total U.S. Department of Health and Human Services 117,505 Total Federal Awards $ 1,167,298 15

18 HOPE HOUSE DAY CARE CENTER, INC. NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the Year Ended June 30, 2017 NOTE A BASIS OF PRESENTATION The accompanying schedule of expenditures of federal awards includes the federal grant activity of Hope House Day Care Center, Inc. under programs of the federal government for the year ended June 30, The information in this schedule is presented in accordance with the requirements of Title 2 U.S. Code of Federal Regulations Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the schedule presents only a selected portion of the operations for Hope House Day Care Center, Inc., it is not intended to and does not present the financial position, changes in net assets, or cash flows of Hope House Day Care Center, Inc. NOTE B SUMMARY OF SIGNIFICANT ACOCUNTING POLICICES Expenditures reported on the schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in the Uniform Guidance, wherein certain types of expenditures are not allowable or are limited as to reimbursement. NOTE C INDIRECT COST RATE Hope House Day Care Center, Inc. has elected not to use the de minimis indirect cost rate as described in the Uniform Guidance. NOTE D SUBRECIPIENTS Hope House Day Care Center, Inc. did not pass any awards through to subrecipients for the year ended June 30,

19 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors Hope House Day Care Center, Inc. We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Hope House Day Care Center, Inc. (a nonprofit organization), which comprise the statement of financial position as of June 30, 2017 and the related statements of activities, functional expenses, and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated October 17, Internal Control over Financial Reporting In planning and performing our audit of the financial statements, we considered the Organization s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Organization s internal control. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were not identified. However, as described in the accompanying schedule of findings and questioned costs, we identified a certain deficiency in internal control that we consider to be a material weakness. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. We consider the deficiency described in the accompanying schedule of findings and questioned costs to be a material weakness: A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 17

20 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards. Hope House Day Care Center, Inc. s Response to Findings Hope House Day Care Center, Inc. s response to the findings identified in our audit is described in the accompanying schedule of findings and questioned costs. The Organization s response was not subjected to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on it. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Organization s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Organization s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. Memphis, Tennessee October 17,

21 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE To the Board of Directors Hope House Day Care Center, Inc. Report on Compliance for Each Major Federal Program We have audited Hope House Day Care Center, Inc. s compliance with the types of compliance requirements described in the OMB Compliance Supplement that could have a direct and material effect on each of the Organization s major federal programs for the year ended June 30, The Organization s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the Organization s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards ( Uniform Guidance ). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the Organization s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the Organization s compliance. Opinion on Each Major Federal Program In our opinion, the Organization complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30,

22 Report on Internal Control Over Compliance Management of the Organization is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit, we considered the Organization s internal control over compliance with the requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Organization s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. Memphis, Tennessee October 17,

23 HOPE HOUSE DAY CARE CENTER, INC. SCHEDULE OF FINDINGS AND QUESTIONED COSTS June 30, 2017 A. SUMMARY OF AUDIT RESULTS 1. The auditor s report expresses an unmodified opinion on the whether the financial statements of Hope House Day Care Center, Inc. were prepared in accordance with U.S. GAAP. 2. One material weaknesses relating to the audit of the financial statements is reported in the Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards. 3. No instances of noncompliance material to the financial statements of Hope House Day Care Center, Inc. were disclosed during the audit. 4. No significant deficiencies or material weaknesses relating to the audit of the major federal awards programs are reported in the Independent Auditor s Report on Compliance for Each Major Program and on Internal Control Over Compliance Required by the Uniform Guidance. 5. The auditor s report on compliance for the major federal award programs for Hope House Day Care Center, Inc. expresses an unmodified opinion on all major federal programs. 6. There were no audit findings required to be reported in accordance with 2 CFR section (a). 7. The program tested as a major program was Housing Opportunities for Persons with AIDS (CFDA No ). 8. The threshold for distinguishing Type A and B programs was $750, Hope House Day Care Center, Inc. did not qualify as a low-risk auditee. B. FINDINGS FINANCIAL STATEMENTS AUDIT Condition: Payroll expense relating to June but paid in July were not properly accrued. Criteria: The accrual basis of accounting requires expenses to be recognized in the period when they are incurred. Cause: The necessary accrual was not identified in the year-end close procedures. Effect: Liabilities and expenses were materially understated. Recommendation: We recommend that year-end close procedures include a review of July payments to ensure that any payments relating to June expenses are accrued. C. FINDINGS AND QUESTIONED COSTS MAJOR FEDERAL AWARD PROGRAMS AUDIT None 21

24 HOPE HOUSE DAY CARE CENTER, INC. SUMMARY SCHEDULE OF PRIOR YEAR FINDINGS June 30, 2017 FINANCIAL STATEMENTS AUDIT SIGNIFICANT DEFICIENCIES Condition: Expenses were not properly coded to program expense in the same manner they were charged to the grant, which was in accordance with GAAP Recommendation: We recommend that the client keep separate general ledger accounts for grant funds to ensure that expenses are being properly allocated Current Status: This was not a finding in the current year. MAJOR FEDERAL AWARD PROGRAMS AUDIT None 22