HOPE HOUSE DAY CARE CENTER, INC. FINANCIAL STATEMENTS

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1 HOPE HOUSE DAY CARE CENTER, INC. FINANCIAL STATEMENTS June 30, 2016 (with Comparative Totals for 2015)

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 17 Notes to Schedule of Expenditures of Federal Awards 18 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 19 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE 21 SCHEDULE OF FINDINGS AND QUESTIONED COSTS 23

3 INDEPENDENT AUDITOR S REPORT To the Board of Directors Hope House Day Care Center, Inc. Memphis, Tennessee 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, 2016, 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 misstatements. 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, 2016, 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 19, 2016, 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 2015 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated September 29, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2015, is consistent, in all material respects, with the audited financial statements from which it has been derived. Memphis, Tennessee October 19,

5 HOPE HOUSE DAY CARE CENTER, INC. STATEMENT OF FINANCIAL POSITION June 30, 2016 (with Comparative Totals for 2015) Assets Current Assets Cash and cash equivalents $ 133,614 $ 100,162 Grants receivable 186,393 67,263 Other receivables 2,742 2,337 Pledges receivable 5,000 21,765 Investments 630, ,209 Prepaid expenses 4,562 34,267 Total current assets 962, ,003 Property and equipment, net of accumulated depreciation 626, ,386 Total assets $ 1,588,799 $ 1,544,389 Liabilities and Net Assets Current Liabilities Accounts payable $ 15,140 $ 12,480 Accrued expenses 26,413 3,123 Total current liabilities 41,553 15,603 Net Assets Unrestricted Operating 280, ,490 Board-designated endowment fund 130, ,080 Property and equipment 626, ,386 Total unrestricted net assets 1,037, ,956 Temporarily restricted 509, ,830 Total net assets 1,547,246 1,528,786 Total liabilities and net assets $ 1,588,799 $ 1,544,389 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, 2016 (with Comparative Totals for 2015) Temporarily Total Total Unrestricted Restricted Revenues Donations $ 428,381 $ 5,000 $ 433,381 $ 383,732 Special events revenue 34,570-34,570 54,686 Less: Costs of direct benefits to donors (28,381) - (28,381) (21,133) Net revenues from special events 6,189-6,189 33,553 Private grants 126,412 11, , ,760 Public grants 1,042,850-1,042, ,612 Change in market value of investments 2,428-2,428 (546) Interest and dividend income 18,595-18,595 24,002 Miscellaneous income 1,426-1,426 2,065 Net assets released from restrictions 68,891 (68,891) - - Total revenues 1,695,172 (52,069) 1,643,103 1,076,178 Expenses Program services 1,278,608-1,278, ,542 Management and general 177, ,955 68,801 Fundraising 168, , ,459 Total expenses 1,624,643-1,624,643 1,073,802 Change in net assets 70,529 (52,069) 18,460 2,376 Net assets, beginning of year 966, ,830 1,528,786 1,526,410 Net assets, end of year $ 1,037,485 $ 509,761 $ 1,547,246 $ 1,528,786 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, 2016 (with Comparative Totals for 2015) Program Management Total Total Services and General Fundraising Automobile and van $ 11,773 $ - $ - $ 11,773 $ 12,958 Client services 469, , ,700 Depreciation 28,965 6,053 2,997 38,015 36,220 Direct fundraising ,730 Dues and subscriptions ,433 2,350 Event promotion ,261 Insurance - general 6,329 2,940 2,940 12,209 10,748 Other 6,010 15,458 4,002 25,470 26,472 Postage 2,346 5,492 12,050 19,888 23,061 Professional fees 1,874 64,002 1,023 66,899 75,487 Repairs and maintenance 8,472 8,167 1,131 17,770 21,527 Salaries and benefits 583,208 61, , , ,169 Supplies 98, , ,688 66,269 Taxes - payroll 39,750 4,206 8,192 52,148 37,259 Telephone 6,173 2,403 2,212 10,788 7,887 Training and seminars 1, ,862 6,785 Travel 4,364 3, ,438 2,238 Utilities 8,448 3,793 2,226 14,467 10,681 $ 1,278,608 $ 177,955 $ 168,080 $ 1,624,643 $ 1,073,802 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, 2016 (with Comparative Totals for 2015) Cash Flows Provided By (Used For) Operating Activities: Change in net assets $ 18,460 $ 2,376 Adjustments to Reconcile Change in Net Assets to Net Cash Provided By (Used For) Operating Activities: Depreciation 38,015 36,220 Change in market value of investments (2,428) 546 Changes in Operating Assets and Liabilities: Increase (Decrease) in Cash and Cash Equivalents: Grants receivable (119,130) (34,695) Other receivables (405) 12,338 Pledges receivable 16,765 11,175 Prepaid expenses 29,705 (7,475) Accounts payable 2,660 7,914 Accrued expenses 23,290 (9,553) Total adjustments (11,528) 16,470 Net cash provided by operating activities 6,932 18,846 Cash Flows From (Used For) Investing Activities: Purchases of investments (118,595) (79,016) Sales of investments 154,808 58,727 Purchases of property and equipment (9,693) (12,797) Net cash from (used for) investing activities 26,520 (33,086) Net increase (decrease) in cash and cash equivalents 33,452 (14,240) Cash and cash equivalents at beginning of the year 100, ,402 Cash and cash equivalents at end of the year $ 133,614 $ 100,162 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, 2016 and 2015 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 purpose of the Organization is to provide day care and short-term respite care for children infected with and affected by HIV/AIDS. The mission is to address the medical and psychological needs of HIV affected children as well as the complicated social issues often challenging their families. 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, 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. 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. 7

10 Donated Services 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. In- Kind donations were $32,975 and $5,994 for the year ended June 30, 2016 and 2015, respectively. 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. Use of Estimates The preparation of the Organization s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. 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 and receivables. 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 donations and grants received from donors. The Organization received 45% of its contributions from one donor and 39% of its contributions from two donors for the years ended June 30, 2016 and 2015, 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. 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 $500 are capitalized. Depreciation is computed over the estimated useful lives of five to ten 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. Financial Statement Presentation 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 generally accepted accounting principles. Accordingly, such information should be read in conjunction with the organization s financial statements for the year ended June 30, 2015, from which the summarized information was derived. Date of Management s Review The Organization evaluated their June 30, 2016 financial statements for subsequent events through October 19, 2016, the date the financial statements were available to be issued. Other than the event described in Note 11, the Organization is not aware of any subsequent events which would require recognition or disclosure in the financial statements. NOTE 2 PLEDGES RECEIVABLE Pledges receivable consisted of the following at June 30: Due in less than one year $ 5,000 $ 21,565 Due in one to five years $ 5,000 $ 21,765 9

12 NOTE 3 INVESTMENTS Investments consisted of the following at June 30: Cash and cash equivalents $ 7,242 $ 9,002 Equity mutual funds 350, ,204 Fixed income mutual funds 272, ,003 $ 630,424 $ 664,209 Investments have been designated by the Board and donors as an endowment fund. See Note 9 for further details. NOTE 4 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: 2017 $ 2, , $ 334 4,342 NOTE 5 FAIR VALUE MEASUREMENTS Generally accepted accounting principles establish 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 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Organization has the ability to access. Level 2 Inputs to the valuation methodology include: 1. Quoted prices for similar assets or liabilities in active markets; 2. Quoted prices for identical or similar assets or liabilities in active markets; 3. Inputs other than quoted prices that are observable for the assets or liability; 4. Inputs that are derived principally from or corroborated by observable market data by correlation or other means 10

13 Level 3 Inputs to the valuation methodology are unobservable and significant to the fair value measurement. 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, 2016 and 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 Assets at Fair Value as of June 30, 2015 Level 1 Level 2 Level 3 Total Cash and Cash Equivalents $ 9,001 $ - $ - $ 9,001 Mutual Funds Equities 360, ,205 Fixed Income 295, ,003 Total mutual funds 655, ,208 Total investments at fair value $ 664,209 $ - $ - $ 664,209 11

14 NOTE 6 PROPERTY AND EQUIPMENT Property and equipment consisted of the following at June 30: Land $ 28,000 $ 28,000 Building and improvements 993, ,785 Leasehold improvements 43,484 43,484 Furniture and equipment 160, ,393 Vehicles 86,444 86,444 1,311,799 1,302,106 Less accumulated depreciation (685,735) (647,720) $ 626,064 $ 654,386 NOTE 7 LINE OF CREDIT The Organization holds a line of credit with a financial institution with a credit limit of $350,000. Regular monthly payments of all accrued unpaid interest are due as of each payment date, beginning July 15, 2016, with all subsequent interest payments to be due on the same day of each month thereafter. The line of credit matures on June 14, 2017, with all outstanding principal plus all accrued unpaid interest due on that date. Interest rate is currently 3.5%.The note is unsecured. As of June 30, 2016, there were no draws on this line of credit. NOTE 8 TEMPORARILY RESTRICTED NET ASSETS Net assets were temporarily restricted as follows at June 30: Time restrictions - pledges receivable $ 5,000 $ 2,200 Education 504, ,630 $ 509,761 $ 561,830 Time restricted pledges of $2,200 and purpose restricted pledges of $66,691 were released during the year ending June 30, NOTE 9 ENDOWMENT FUND The 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 12

15 Board of Directors. As the temporarily restricted endowment fund balance increases over the $500,000 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 2016, $40,000 of the temporarily restricted investments was appropriated for the purpose of paying an additional daycare teacher. The endowment net asset composition by type of fund is as follows for the years ended June 30: A reconciliation of the endowment fund s beginning and ending balances is as follows for the years ended June 30: 2016 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) - (114,808) (40,000) (154,808) Release of Restriction 10,129 (10,129) - Endowment net assets, end of year $ 130,424 $ 500,000 $ 630,424 13

16 2015 Temporarily Unrestricted Restricted Total Endowment net assets, beginning of year $ 71,877 $ 572,589 $ 644,466 Contributions 6,136 48,878 55,014 Investment Return Dividends and interest 2,677 21,325 24,002 Change in market value (61) (485) (546) Total investment return 2,616 20,840 23,456 Appropriations for Expenditure Withdrawal (5,576) (44,424) (50,000) Investment management fees (973) (7,754) (8,727) Daycare teacher 40,000 (40,000) - Endowment net assets, end of year $ 114,080 $ 550,129 $ 664,209 The fundamental guiding principle of the Organization s investment policy for the endowment fund is an emphasis on long term growth, with income production as a secondary emphasis. 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 Acts ( UPMIFA ) as enacted by the State of Tennessee applies to all of the 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 10 RETIREMENT PLAN The Organization has a 403(b) retirement plan. The Organization contributes up to 2% of employee s salary to the plan annually. The Organization made contributions of $8,977 and $6,849 for the years ended June 30, 2016 and 2015, respectively. 14

17 NOTE 11 SUBSEQUENT EVENT During June 2016, the Organization was notified of an alleged HIPPA violation with their grantor for the Ryan White A Program, which resulted in a loss of the awarded grant for the period March 1, 2016 February 28, 2017 in the amount of $148,350. Management has contacted an attorney to assist in resolving this allegation. As of October 19, 2016, the issue has been resolved and the Organization has been notified they can apply for the Ryan White A program again for the grant year beginning March 1,

18 SUPPLEMENTAL INFORMATION

19 HOPE HOUSE DAY CARE CENTER, INC. SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the Year Ended June 30, 2016 Federal CDFA Grant Federal Federal/Pass-Through Agency/Program Number Number Expenditures U.S. Department of Agriculture State of TN/Child and Adult Care Food Program $ 20,382 U.S. Department of Housing and Urban Development City of Memphis/Division of Housing and Community Development/Community Development Block Grant/ Entitlement Grants ,054 City of Memphis/Division of Housing and Community Development/Housing Opportunities for Persons with Aids ,979 City of Memphis/Division of Housing and Community Development/Housing Opportunities for Persons with Aids , ,697 Total U. S. Department of Housing and Urban Development 741,751 U.S. Department of Health and Human Services Le Bonheur/Coordinated Services and Access to Research for Women, Infants, Children, and Youth N/A 47,190 Shelby County Government/HIV Emergency Relief Project Grants CA ,641 Shelby County Government/HIV Emergency Relief Project Grants CA , ,187 Total U.S. Department of Health and Human Services 197,377 Total Federal Awards $ 959,510 17

20 HOPE HOUSE DAY CARE CENTER, INC. NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the Year Ended June 30, 2016 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 OMB Circular A-122, Cost Principles for Non-Profit Organizations, or the Uniform Guidance, as applicable, wherein certain types of expenditures are not allowable or are limited as to reimbursement. Pass-through entity identifying numbers are presented where available. Hope House Day Care Center, Inc. has elected not to use the de minimis indirect cost rate as described in the Uniform Guidance. 18

21 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. Memphis, Tennessee We have audited, 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, the financial statements of Hope House Day Care Center, Inc. (the Organization) in Tennessee (a nonprofit organization), which comprise the statement of financial position as of June 30, 2016, 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 19, Internal Control over Financial Reporting In planning and performing our audit of the consolidated 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. 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. 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. Our consideration of internal control was for the limited purpose described in the first paragraph of this section 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. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. We did identify a deficiency in internal control that we consider to be a significant deficiency. We consider the deficiency listed as item in the accompanying schedule of findings and questioned costs to be a significant deficiency. 19

22 Compliance and Other Matters As part of obtaining reasonable assurance about whether the Organization s financial statements are free of 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. The Organization s Responses to Findings The Organization s responses to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. The Organization s responses were not subject to the auditing procedures applied in the audit of the financial statements and, accordingly, we express no opinion on them. 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 19,

23 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. Memphis, Tennessee Report on Compliance for Each Major Federal Program We have audited Hope House Day Care Center, Inc. s (the Organization ) 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 the requirements of laws, regulations, contracts, and grants 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. 21

24 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, REPORTING 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 a 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 19,

25 HOPE HOUSE DAY CARE CENTER, INC. SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the Year ended June 30, 2016 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 GAAP. 2. One significant deficiency disclosed during 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 the Uniform Guidance. 7. The program tested as a major program was Housing Opportunities for Persons with AIDS (HOPWA) (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 SIGNIFICANT DEFICIENCIES Condition: Expenses are not properly coded to program expense in the same manner in which they were charged to the grant, which was in accordance with GAAP. Criteria: Internal controls should be in place to ensure expenses are charged to the function in the same manner they are charged to grantors and in accordance with GAAP. Cause: There has been a lack of review subsequent to the grant reimbursement requests being submitted. Effect: Financial presentation does not properly reflect the expenses reimbursed related to the program expenses. Recommendation: We recommend that the client keep separate general ledger accounts for grant funds to ensure that expenses are being properly allocated. 23

26 HOPE HOUSE DAY CARE CENTER, INC. SCHEDULE OF FINDINGS AND QUESTIONED COSTS (CONTINUED) For the Year ended June 30, 2016 Views of Responsible Officials and Planned Corrective Actions: Management agrees with the finding and will create separate general ledger accounts for the grants. C. FINDINGS AND QUESTIONED COSTS MAJOR FEDERAL AWARD PROGRAMS AUDIT None. 24